Before the 1980s airlines were typically controlled by the government, now due to deregulation, governments do not dictate airfares or routes etc and thus leave an open market for new competitors. As there is more competition for market share, airlines are forced to become efficient and competitive therefore driving prices down. Deregulation is said to have caused an estimated 20% in air fares (Dayao, et al. , 2009). In 1979 the “open skies” act was introduced. This refers to an international deregulation policy to ‘liberalize the rules and regulations and minimize government intervention’ (USLegal, n. d. One recent act is the open skies policy between the US and Europe, ‘allowing airlines based in the United States and Europe to fly across the Atlantic between any two airports in each region’ (New York Times, 2008). Although airline deregulation is not a recent concept, ‘its effects are still being felt today’ (Smith and Cox, n. d. ) through the emergence of threatening low cost carriers such as Easyjet in the UK. However, although deregulation exists, it is not as simple as it sounds. Infrastructure is a factor that almost counteracts the deregulation movement as governments still have a control over airports for example.
Due to the demand of travel to and from the UK, Heathrow airport was expected to build a third runway, yet due to the threat of losing vital political marginal seats in the surroundings of Heathrow, the UK government made a naked political decision to not pursue this venture, therefore limiting the potential for more flights. Virgin Atlantic has tried to overcome this issue by expanding its services from Gatwick and Manchester, and is active members in the slot trading market. Virgin aim to tackle this is by buying British airline BMI as it ‘has 8. % of the landing slots at Heathrow, the UK’s busiest airport, which are seen as the main attraction of a purchase. ’(BBC, 2011) If successful, this will not only increase flight capacity, but also create a more efficient service. There are three key economic factors that affect the airline industry these are competition, rising fuel prices and the business cycle. In order to analyse competition affecting Virgin Atlantic, Porter’s 5 force model can be used (Diagram 1). Diagram 1: Porter’s 5 forces (Investopedia, n. d. , edited by Boulter, 2011)
With such a high level of competition and pricing freedom due to deregulation, the airline industry went from a moderately oligopolistic market, with around 9 major airlines, to a much more competitive market. Due to the now lower barriers to entry new airlines, especially low cost carriers (e. g. Ryanair and Easyjet) are entering the market and taking market share. Because of these new entrants being able to offer much lower prices for travel, established carriers such as Virgin experience a constraint on profitability and are therefore disadvantaged (Dayao, et al. , 2009).
It is because of this reason that Virgin are now changing their market strategy and concentrating on defining themselves from their competitors by focussing on innovation and improving customer service. Global airline alliances in another issue included in Virgin’s external environment. Alliances benefit airlines in many ways as they enable them more market access, convergence of technologies and even help overcome legal barriers (Anon. , 2009). One weakness for Virgin therefore is not being part of an alliance such as Oneworld Alliance (Anon. , 2009), in order to take ull advantage of its potential Virgin should look into adjusting their market strategy and look into joining an alliance, if not form its own. Rising fuel prices has a huge impact on the airline industry. In an article published by the New York Times in 2007, oil prices were hovering ‘near $100 a barrel’ which caused the International Air Transport Association (IATA) to ‘slash’ their predicted profits for 2008 from ‘$7. 8 billion to $5 billion’ (Clark, 2007). In 2008 high fuel prices were ‘dominant factor’ in the losses that faced the industry, and continued to same effect in 2009 (Dunn, 2009).