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    Forecasting: Seeking Financial Altitude in a Cloudy Sky

    LEAD STORY-DATELINE: The Australian Financial Review, May 17, 2002.

    Qantas has a lot riding on remaining dominant and profitable in the Australian
    domestic market for air travel and freight, as well as remaining profitable
    on its overseas routes-particularly the "Kangaroo" route to and from
    the United Kingdom. It has reported expansion plans involving $A13 billion that
    it intends to spend over a ten-year period on a range of upgrades to planes
    and lounge facilities, as well as on new aircraft.

    The marketing environment for airlines is volatile at the best of times, and
    from money-man Warren Buffet's (Berkshire Hathaway) viewpoint, nobody ever made
    money from investing in an airline over the long term. However, Qantas CEO Geoff
    Dixon aims to prove this wrong. How can this be done in such a volatile market?
    How can Qantas continue to generate revenue and earnings equal to or greater than
    those in 2000, 2001, and as forecast for 2002?

    The domestic market is relatively stable since the final demise of Ansett Airlines
    in April 2002. The new competitor, Virgin Blue, is a single-class operator and
    as anxious as Qantas to keep the public flying with realistically low pricing,
    but also wants to ensure profitability and ultimately, survival. However, Virgin
    Blue is not backward in making its views heard by the Australian Competition
    and Consumer Commission (ACCC) when it believes that its larger competitor has
    overstepped the (legal) mark, and possibly engaged in unfair practices (under
    the Trade Practices Act) that might hurt its market position and financial position.

    The international market is far more volatile, particularly since the terrorist
    activities of September 11, 2001. Qantas and its part-owner British Airways
    (BA) have maintained a strong alliance in the face of turmoil in the aviation
    industry generally. While BA has become cash strapped, Qantas has remained cash
    positive and profitable. How has this been done? Qantas's strategy is to remain
    flexible-not only by ensuring that its fleet can operate as a single-class carrier
    or be quickly converted to a mix of business and economy class, but also by
    cutting costs. More importantly it plans to ensure that its non-airline businesses
    stay profitable. These businesses accounted for 30 percent of the company's
    profits in the six months to December 2001, and include Qantas Flight Catering
    Ltd, Qantas Holidays, Qantas Defence Systems, Australian Air Express, Qantas
    Business Travel and also includes its frequent flyer programs and co-branded
    credit card operations.

    It can be seen from the Qantas company structure that it has remained an integrated
    airline, while many of its international rivals have sold off such operations
    when seeking capital to either build their airline business, or to stay profitable,
    or simply to remain airborne.

    In this section, we consider questions concerning strategy development and
    demand forecasting in volatile marketing environments:

    Provide a definition of market demand.

    How are market demand, market potential and sales forecasting related to each other?

    The fertility rate in Australia is declining and immigration levels are
    not yet set at levels that might lead to population growth (at the time of
    writing). Might this influence the revenue and earnings that Qantas could
    achieve in the future?

    How might Qantas employ such a tool as the Ansoff product/market expansion
    grid in developing its growth strategies? (Click here www.buseco.monash.edu.au/depts/mkt/mtp_online.com for more details about the grid.)

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    Solution Preview

    Market demand for a product is the total volume that would be bought by a defined consumer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing program.
    It is not a fixed number but rather a function of stated conditions. Therefore it is called market demand function.
    Market forecast: Only one level of industry marketing expenditure will actually occur. The marketing demand corresponding to this level is called market forecast.
    Market Potential: is the limit approached by the market demand as industry marketing expenditure approaches infinity, for a given environment. The phrase for a given environment is crucial in the concept of marketing potential. Consider the market potential for the airlines in the period of recession versus a period of prosperity. In the prosperity the market potential is higher.

    Total Market Potential = Number of buyers in the specific market under the given assumptions * quantity purchased by an average buyer * price of an average unit.

    Company Sales Forecast: is the expected ...

    Solution Summary

    This explains the concept of Ansoff product/market expansion grid with the help of a case study