The Strategy of Low-Cost Carrier-Virgin Blue, Australia

Virgin Blue's objective has been established itself as Australia's leading low-fares scheduled passenger airline through continued improvements and expanding offerings of its low-cost service.

Virgin Blue uses a formula pioneered by airlines such as Southwest Airlines and Ryanair eliminating costs such as included in-flight meals and printed tickets in favor of selling food on-board and using telephone and internet booking systems.

It has also cut costs by limiting the number of airports serviced and by operating one type of aircraft, the Boeing 737. It also pays its employees less than its major rival Qantas. A continuous focus on cost-containment and operating efficiencies is a critical aspect of the Virgin Blue's modus operandi.

Here are the main components which make up Virgin Blue's strategy:

1)Low fares
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These are used to boot-up demand, they target fare conscious leisure or business travelers who might otherwise not traveled at all or user other modes of transport such as car, train, bus. Virgin Blue sells its seats on a one-way basis unlike most traditional full service airlines. Virgin Blue sets its fares on the basis of the demand for particular flights and by reference to the period remaining to the schedules date of departure. 75% of seats on a flight are sold at the minimum available fare assigned for the route, once these are filled the price per seat rises.

2)Frequent Point-to Point Flights on Short-Haul Route
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Virgin Blue offers frequent point-to-point service on short-haul routes to secondary and regional airports in and around major population centers and travel destinations. The choice of only flying short-haul routes enable Virgin Blue to offer frequent service, while eliminating the necessity to provide frill services otherwise expected by customers on longer flights. Point-to-point flying (as contrast to hub-and-spoke service used by the traditional carriers) allows Virgin Blue to avoid the costs of providing through service for connecting passengers, including baggage transfer and transit passenger assistance costs. This is one of the key differences between Virgin Blue and traditional carriers.

3)Low Operating Costs
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Top management thinks that Virgin Blue's operating costs are among the lowest of ant Australian scheduled passenger airline. There are four key expenses which Virgin Blue is able to control and or reduce:
o Aircraft Equipment Costs: Virgin Blue's strategy for controlling aircraft acquisition costs is to use a single type of aircraft which is Boeing 737. Its strategy of limiting its fleet mainly to minimize the costs associated with personnel training, maintenance and the purchase and storage of spare parts, as well as affording greater flexibility in the scheduling of crews and equipment.

o Personnel Expenses: Virgin Blue controls its labor costs by continually improving the productivity of its already highly-productive work force. Remuneration for employees emphasizes productivity-based pay incentives, including commissions for on board sales of products for flight attendants and payments based on the number of hours or sectors flown by pilots and cabin crew personnel within limits set by industry standards or regulations fixing maximum working hours, as well as participation in Virgin Blue's valuable stock option programs.

o Customer Service Costs: Virgin Blue has entered into agreements on competitive terms with third party contractors at certain airport for passenger and aircraft handling, ticketing and other services that management believe can be more cost efficiently provided by third party contractors. Management attempts to obtain competitive rates for such services by negotiating multi-year contracts at prices that are fixed or subject only to periodic increases linked to inflation. The development of its own reservations centre and internet booking facility has allowed Virgin Blue to eliminate travel agent commissions.

o Airport Access Fees. Virgin Blue attempts to control airport access and service charges by focusing on airports that offer competitive cost terms. Management believes that Virgin's Blue record of delivering a consistently high volume of passenger traffic growth at many of these airports has allowed it to negotiate favorable contracts with such airports for access to their facilities.

4)Internet Booking
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The Virgin Blue's online ticket booking system allows internet users to access its host reservation system and to make and pay for confirmed reservation in real-time through Virgin Blue's website: www.virginblue.com.au. Virgin Blue has substantially promoted its website through radio station, newspaper and television advertising. As a result, internet bookings have increased drastically, accounting for in excess of 90% of all reservation on a daily basis.

5)Commitment to Safety and Quality Maintenance
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Virgin Blue's commitment to safety regulation is a primary focus of the company and its management. This commitment begins with the recruiting and training of Virgin Blue's pilots, cabin crews and maintenance personnel and included a policy of maintaining its aircraft in accordance with the highest International airline industry standards. Virgin Blue had kept a clean record which had not had a single incident involving major injury to passengers or flight crew in its 5 years of operation. Although Virgin Blue seeks to operate its fleet in a cost-effective manner, management does not seek to extend Virgin Blue's low cost operating strategy to the areas of safety, maintenance, training or quality assurance.

The key success factors of Virgin Blue are:
? Low Cost
? point-to-point service
? homogeneous aircraft fleets
? simple business processes
? lean and mean workforces

From the analysis, based on Porter’s Generic Strategies, Virgin Blue obviously has chosen “Low-Cost” strategy.