It was a classic Pincer Move, otherwise known as an encirclement strategy, that Qantas used to render its rival Virgin Blue’s market positioning as useless.
From its beginnings as the mums-and-dads airline, Virgin has been left the no-one-in-particular airline. And this is how it all happened.
How New Entrants Tackle Australia.
Australia is a difficult market to service. It is geographically-widespread with its largest concentration of its population on the eastern seaboard, and with a major city in the south (Adelaide) and over in the west (Perth).
For national carriers (such as Qantas, Australia Post or telecommunications giant Telstra) it is expensive to service regional centres – but service them they must do. (In Telstra’s case it is a regulatory obligation for it to be the carrier of last resort.) Typically, these carriers use the highly populous areas to subsidize the cost of servicing the regions.
When it came to airlines, the market was attractive for another entrant. Ansett had met its demise, shut up shop, leaving Qantas in virtually a monopoly position.
For Virgin Blue, the strategy was straightforward. Choose profitable routes (predominantly Eastern seaboard and popular destinations) that Qantas was using to subsidize the cost of flying to non-profitable centres, offer flights at discounted fares, and take market share.
If the market share really started to bite, Qantas would be forced to slash its prices to compete even though it was still burdened with the cost of servicing its less profitable routes. (It isn’t a unique strategy. The telecommunications industry is peppered with entrants that attempt the same thing.)
For awhile Virgin Blue was very successful. The consumer was rewarded by competition and benefited from the pricing pressure applied to Qantas. Then Virgin made a strategic blunder.
The Virgin Blue Blunder: Changing Market Position.
Although Virgin Blue started as the mums-and-dads airline brand, it made the decision to try to attract the business traveler. In other words, it launched a direct attack on Qantas heartland. To move towards the business traveler, it abandoned its original position as the family airline.
It was exactly the opening Qantas needed.
Qantas launched Jetstar to take Virgin’s vacated mums-and-dads market position, and it turned its Qantas brand to fight Virgin head-on in the business travel market. Virgin Blue was never going to win.
Jetstar took the mums-and-dads since Virgin Blue wasn’t there to defend the territory, having moved itself away. Qantas was too strong in the business market for Virgin to compete.
Had Virgin stayed small, cheap and focussed on the market that built its brand, it might have be able to own a territory in Australia. Because it didn’t stick to its original game plan, it now owns nothing.
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