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 for more details about the grid.)
MARKET DEMAND DEFINITION
The relationship between the total quantity of a good demanded and its price. Total volume purchased in a specific geographic area by a specific customer group in a specified time period under a specified marketing program. Demand for a good by all buyers, including the private sector and the government. The total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands.
INTERELATION AMONG MARKET DEMAND, MARKET POTENTIAL AND SALES FORECASTING
Market potential refers to the maximum achievable combined sales volume for all sellers of a specific product during a specific time period, in a specific market. The maximum achievable combined sales volume for all sellers of a specific product during a specific time period, in a specific market. The total amount of a product that customers will purchase within a specified period of time at a specific level of industry-wide marketing activity
Procedure for developing interrelationship is
· Use Porter's Five Forces to understand the attractiveness of an industry
· Gather and interpret data from various sources to conduct an industry/competitive analysis
· Describe how political, economic, social, and technical issues in the macro-environment impact marketing planning
· Explain the difference between market potential and market demand
· Describe the factors affecting new product forecasting accuracy
When the business and the market have been analyzed, the probable sales volume of the business can be forecast. This forecast should be a simple projection of the business involved; it should not be an attempt to forecast or project the total state of the market. The variables that influence the market are too vast and complex for a small businessman to do anything about. It will have to be assumed that what has happened to establish the condition of the market as it is, will continue to have the same general effect, at least for the period just ahead.
This is a dangerous assumption - markets and the economy are dynamic, not static - but from the practical point of view, there is little choice. In any case, it is usually over longer periods of time that changing market factors make themselves felt.
Sales Forecast vs. Sales Potential
A distinction is necessary here between making a sales forecast and estimating sales potential. A sales forecast is based on past sales performance and a reckoning of known and anticipated market conditions.
From these, the expected sales level is determined.
Sales potential, on the other hand, is a measure of the capacity of the business to reach a certain volume of sales. It is based on knowledge of the total market and the extent of competitive influence, and it involves the use of strategy through sales effort. Past sales performance may bear little or no resemblance ...