A business overview of British airways and issues they face
British Airways (BA) is one the worlds largest scheduled airlines. Its principal place of business is Heathrow International, London, which is considered one of the largest airport locations in the world. BA’s primary business is the provision of international and domestic flights. Operating one of the most extensive international scheduled route networks and facilitated by code share and franchises arrangements, BA services more than three hundred destinations world wide. Annual Report 2008/2009
In addition, BA operates a worldwide air cargo business, largely in conjunction with its scheduled passenger services.
2.0 History
British Airways is one of the best examples of the evolution of the international commercial airline industry. As a pioneer in the commercial airline industry British Airways can trace its ninety years history back to the birth of civil aviation, the pioneering days following World War I. www.ba.com
In 1919, British Airways’ predecessor AT&T [1] launched the first daily international scheduled service between London and Paris. By 1924, the airline industry now included eight companies all servicing the UK and European markets. These companies later merged to form the Imperial Airways Ltd. and British Airways Ltd. In 1939 the UK government nationalized the two companies to form the BOAC [2] . With IA resources focused on the UK and European destinations and BA serviced long haul routes, i.e. South America and environs.
From the 1940’s through the 1970’s the airline industry continued its trend of mergers and alliances of which industry leaders BOAC and BEA were an integral part. By 1974, UK airline companies’ BOAC and BEA completed the merger that would form one of the world’s largest airline companies, British Airways Ltd.
The UK government, with the passage of the Civil Aviation Act 1980 sold off its shares in British Airways and mandated that the company prepare for privatization. Lord King was appointed Chairman in 1981 and charged by the UK Secretary of State for Trade to take all necessary steps to restore the company to profitability and prepare it for privatization.
The main reasons were to enable the British owned companies to compete with the American airline industry, expand is operations through the acquisition of more aircrafts and develop additional routes, while offsetting its debt for capitalization.
British Airways performance prior to the 2008 world economic downturn and the continued pressure from volatile fuel prices and the availability of substitutes has managed to report profit margins within expectations. Refer Appendix Figure I – Key Performance Indicators 2007 – 2009.
British Airway, like other players in all industries has shifted their focus to surviving this current global recession while preparing the company for operations in a post recessionary environment.
So the question is whether British Airways is equipped to ride out the global economic recession? This offering will critically analyze BA situation with that aspect in view.
3.0 Corporate objectives
While noting the global economic downturn BA has not diverted its vision of becoming the world’s premium airline. It has sought to minimize the downturn’s overall effect on the Company, while preparing it for the onset of better economic times. To enable this BA must define its corporate deliverables. That will communicate to its stakeholders the company’s performance criteria.
3.1 Financial
To achieve a 10 percent operating margin through the economic cycle
Provide the airline with protection against the volatility of oil price fluctuations
Reduce foreign exchange exposures arising from transaction in various currencies
To foster sustainable high performance from employees through BA’s monetary Employee Reward Plan (ERP)
3.2 Non Financial
To reduce carbon emissions from operations that will enable the company make a contribution in the global reduction of green house gas emissions.
To maximize the facilities at Heathrow’s Terminal 5 for the provision of higher operational performance and customer service.
To deliver outstanding service for all customers at every touch point
Develop better and more sustainable relationships with a network of key stakeholders, internal and external
Increase employees’ direct involvement in the business of BA.
Core Competencies
It has been put forward that an organisation’s competitive advantage is as a result of its unique mix of skills and resources. This mix, form the basis of the organization ability to attain its objectives. The resource based view highlighting BA’s core competencies are presented hereunder:
Tangibles
Intangibles
Operates the largest fleet of commercial aircrafts in the world
Offers the most extensive global availability of flights ( using strategic alliances to add capacity)
Exclusive access to Terminal 5, Heathrow, London
Offers ancillary services , e.g. air freight services
Cash
Borrowing Capacity
Reserves
Ability to transport passengers and freight safely to an extensive quantity of destinations
Positive and sustained brand image. BA is recognized, internationally as a provider of high quality services that are underpinned by its safety record.
BA is the first UK airline to obtain certification by the City and Guilds. Effective February 2008 all entrant cabin crew will be certified with NVQ Level 2 qualification on successful completion of training.
Critical Success Factors (CSFs)
It is important to identify and critically analyze the key factors of an organization that will influence its competitive advantage. It will form the basis for assessing those resources available and factor in what additional resources are necessary to impact competitive advantage.
Critical Success Factors for British Airways
Success Criteria
Potential Benefit
Approach
Consumer Loyalty
Repeat client demand
Loyalty programs and frequent flyer miles
Willingness to form inter company coalitions
Reduced competition and access to additional routes with less capital outlay
Form alliances and/ or partnerships and ONE
Strong brand image and awareness
Increase demand for repeat and new customers
Innovative advertising campaign while incorporating new deliverables in response to evolving needs and value changes ie increased awareness of environmental issues
Sensitivity to changing market needs
Maintain and develop passenger demand
Use customer surveys to assess customer requirements both in flight and on the ground
High quality product
Safety and consistency of travel
Ensure proper maintaince of fleet and ensuring the acquisition of new equipment that provides quality service and addresses environmental issues.
Develop human resources
High quality consistent services in flight and on the ground
Recruitment of qualified personnel, after initial training, continued developmental training and competitive compensation packages.
Reduction in operating costs
Implementation of progressive IT application, in reservation, flight information and coordination.
Management ability and experience
Ensure the most effective and efficient delivery of BA’s corporate objectives
Recruit and maintain top level management. Compensate above industry standards and effect executive training programs.
6.0 Strategic Capabilities
6.1 SWOT Analysis
To ascertain the capabilities of BA it is important to define the company’s strengths and weakness relative to its industry competitors and that the opportunities and threats presented by its external environment.
S
Internal Strengths
Brand reputation
First rate, new fleet of aircrafts
Exclusive access to Heathrow’s Terminal 5
Route capacity – over 300 destinations available
Ba.com online portal
Financial size and stability
Partnerships and alliances
Accredited high quality training programs
W
Internal Weaknesses
Large unionized workforce and poor employees relations history
Key supplier risk
Safety and security issues
Flight scheduling and connections
O
External Opportunities
Competitors forced exit
Emergence of new markets
Expansion of training facilities
Development of the price conscious customer segment
Innovative in flight services
T
External Threats
EU-US Open Skies liberalization
Mergers and acquisitions amongst competitors
Strong growth of low cost airlines
Financial market conditions
Fuel price volatility
Currency fluctuations
Terrorism
Substitutes
7.0 Sustainable Competitive Advantage
To gain sustainable competitive advantage an organization must have an awareness of the external environment to highlight the industry’s position, in particular the performance of its competitors and assess the company’s capability to meet current and future challenges.
7.1 PESTEL Analysis
PESTEL Elements
Key Factors
Political
Increased governmental regulations
Intensification of security measures
Deregulation as a result of market expansion
Liberalization of the industry
Economic
Global economic crisis
High volatility in the price of oil and gas
Capacity exceeds demand which leads to rate wars
Decrease in passenger demand
Several airlines in serious financial crisis
Industry suppliers also in serious financial crisis
Social
Increased unemployment and reduction of disposable
income
Coming out of the event of September 11 and following
potential customers are reluctant to fly
Technological
Online booking services and check-in becoming
increasingly used by the airline industry
Development of internet capabilities i.e. web and video
conferencing
Enviromental/Ethical
Carbon emissions, noise pollution and energy consumption
controls
Increased awareness of ‘green” issues
Legal
Regulations on employee and customer rights
Establishment of environmental guidelines
Recognition of representative trade unions
Industry deregulation i.e. Open Skies Agreement
7.2 Competitor Analysis
To determine BA’s position in the market place an analysis of its relevant competition is useful. The Porter’s Five Forces will be applied to evaluate BA’s competitive capacity in relation to its adversaries.
Force
Strength
Buyer Power
Customers options have increased as a result of excess supply, internet usage and low cost alternate airlines.
High
Supplier Power
Two aircraft manufacturers equates high bargaining leverage
BA restricted by sole supplier of fuel at its primary hub Heathrow and in most of its international destinations
BA employees well development unionized structure increases their power during negotiations
High
Threat of New Entrants
Increased governmental regulations
High capital cost requirements
Weakening of the airline industry that has manifested in the failures of several airlines
Low
Threat of Substitute Products
Long haul flights: no notable substitutes
Short haul flights: domestic and European market, the Eurostar, rail, bus and private automobiles and ferry services, bus
Cargo Services: sea freight
Low
Competitive Rivalry
Consolidation of competitors has increased competition
Price competition mainly from the low cost, no frills carriers
Increased competition for destination slots , primarily at the major international hubs
Industry deregulation has increased BA’s competition in Europe
High
Market Share do a pie chart of number of passengers carried for the major carriers
7.4 The Marketing mix for British Airways. An analysis of BA current marketing mix will showcase the variables that could be utilized to enhance competitive advantage. Because BA is primarily a service based organization the framework will be presented through the application of the extended marketing mix marketing strategy tool.
THE EXTENDED MARKETING MIX
Categories
Key Controllable Variables
Product
Service style
Baggage policy
BA World Cargo
Club World
ba.com
Terminal 5
Price
British Airways sets their pricing strategies in a way that customers can chose how much from the extras the company providing they want
The majority of government have deregulated air fares as such, the airline responds competitively to market conditions
BA has a three tiered customer pricing system, the variation in price is dictated by the level of services the customer is willingly to pay for
Place
BA flies to 148 destinations (AR 2008/2009), to the best located airports
Through code share and strategic alliances BA has access to more than 300 additional destinations.
Promotion {Communication Channels}
Above the line
BA emphasizes its establish brand to promote quality, safety and service delivery superiority.
Internet – BA home page, Google gadget, social networking.
Traditional routes includes ads in financial news papers and websites, this caters to BA’s primary target customers the business traveler
Below the line
Incentives targeting the business traveler: Co-sponsored credit cards, frequent flier miles that can be redeemed for flights and hotel discounts.
Significant activity in social programmes that enhances BA’s image as a company that gives back.
Physical Layout
Application of the hub and spoke layout at strategically located destinations
Terminal 5 superiority in layout for all stakeholder
Refurbishment of BA long haul aircrafts to provide sleeping accommodations for customers
People
Customer services
In flight and ground staff are trained to deliver high quality services
Implementation of Terminal 5 has provided improved punctuality, shorter check in times and an overall smoother travel experience
Onboard experience has been inproved by the new Club World cabin layout on aircrafts servicing long haul routes
An analysis of how BA is being operated will be presented y the application of the &-S Framework of McKinsey. Comprised of seven distinct factors that describes how a company has been organised.
Hard Elements
Soft Elements
Strategy:
Shared Values:
Structure:
Skills:
Systems:
Style:
Staff:
8.0 INDUSTRY AND ENVIROMENTAL ANALYSIS
Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries (Airline Industry, 2000). In Globalization era, Airplane industries are really important to move people to another place. It’s really reliable and secure. Compare with five decades ago. Airplane was frightening and costly. People try to find new technological innovation in airplane industry to devoted passenger more cheaply and safely. It proved that each generation of new plane such as Boeing and airbus has been more reliable carried the passenger. In Malaysia, there are two well-known Airline company. They are Malaysia Airline and Airasia. They divide by the service that they provide. For example, Air Asia Provides no-frill airline and low-cost. On the other hand, Malaysia Airline emphasis in luxurious travel and provide good service to their customer. Airline industry in Malaysia is really important to expand their tourism.
8.1 The analysis of the external business environment is designed to identify the opportunities and threats faced by BA. Any amendments to these key factors are likely to result in procedural changes either positively by presenting new strategic opportunities for growth or negatively by highlighting threats to the continuation of current strategies.
The PESTEL analytical model will be used to decipher what external factors can impact of BA.
PESTEL Analysis of the airline industry
PESTEL Elements
Key Factors
Political
Deregulation: in its aftermath, the airline industry
experienced significant expansion, mainly in the low cost
airline category
Terrorism: post September 11, 2001 and other incidents
continue to have a negative impact on personal air travel.
It has also resulted in an intensification of security
measures. This has affected operational costs, increased
waiting times and made air travel more arduous than ever.
Economic
Global economic crisis
High volatility in the price of oil and gas
Decrease in passenger demand
Several airlines in serious financial crisis
Industry suppliers also in serious financial crisis
Social
Increased unemployment and reduction of disposable
income
Coming out of the event of September 11 and following
potential customers are reluctant to fly
Technological
Online booking services and check-in becoming
increasingly used by the airline industry
Development of internet capabilities i.e. web and video
conferencing
Enviromental/Ethical
Carbon emissions, noise pollution and energy consumption
controls
Increased awareness of ‘green” issues
Legal
Regulations on employee and customer rights
Establishment of environmental guidelines
Recognition of representative trade unions
Industry deregulation i.e. Open Skies Agreement
SPICC Analysis
Sector Trends
The airline industry is facing one of its most challenging environments in history. A global economic recession coupled with the terrorist attacks which started with the September 11, 2001 action have led to:-
a decrease in passenger traffic
reduction in revenue per mile flown
rising labor costs
the collapse in pricing power and
a shift in the buying behavior of business travelers
In addition, the industry has felt the impact of deregularisation with the increased competition from low cost airlines, so much so, that major airlines have had to restructure their operations or face the prospect of going out of business.
The airline industry has responded to this difficult environment by taking measures to reduce their costs. Airlines announced layoffs involving more than 100,000 employees immediately following the attacks. To make matters worse for the industry, the Federal Aviation Administration (FAA) predicts only a gradual recovery in passenger traffic during the coming years.
Porter’s five forces
Key Drivers of Change
Competitor Analysis
Major Players
The commercial air travel industry is dominated by the European airline giants. British Airways reported annual revenues of GBP 9.0 billion in 2008/2009. Lufthansa reported annual revenues of EUR 24.7 billion in 2009. Qantas, Australia’s largest airline, reported annual revenues of AUD 14.5billion for 2009. The other major passenger airlines include Cathay Pacific, the Emirates, US Airways, Japan Airlines, Air France-KLM and Southwest Airlines. Cathay Pacific won the 2009 Airline of the Year title in the famous World Airline Awards, replacing Singapore Airlines as the ‘world’s best airline.’
Major Airports across the world include:
London’s Heathrow Airport
Los Angeles International Airport
Frankfurt International Airport
Tokyo International Airport
The global aviation sector generated revenues of $430 billion in 2007, with over 2,076 million
passengers traveling by air. According to the US Bureau of Labor Statistics, the airline industry
provided employment to around 487,000 people in 2006 in America alone.
According to the An analy For BA those factors will be accessed with an application of three oIn 2007/2008 BA earned approximately 9 billion pounds in revenue, up 2.7 percent on the previous year. Passenger revenue accounted for 87.1 percent of total revenue, while 7.5 percent came from cargo and 5.4 percent from other ancillary services.
In the first six months of 2009 BA reported an operating profit of 140 million pounds on up 6.4 percent from the corresponding period in 2008. At the close of financial 2009 BA had experienced a significant decline in its primary revenue bas, the premium traffic of 13 percent and coupled with the record oil prices of 2008, adverse currency movements and other repercussions of the global recession BA has recorded a pretax loss of 401 million pounds.
SWOT ANALYSIS OF BRITISH AIRWAYS POST THE ECONOMIC DOWTURN
The economic indicators have projected that the world is emerging from the most recent economic crisis . Most have indicated that business operations will not or cannot return to their previous models. The downturn exposed certain vagaries within several major industries the Real Estate and Financial Services Sectors at the forefront of the situation.
Marketing Opportunity
BA is positioned at the mature phase of its industrial life cycle as the situation implies the company is in a position to diversify its portfolio, expand its homogenous profile or assume a reactionary position in response to the varied airline competitors.
New marketing Objective
Hub expansion to strategic locations out of the UK
Reasons to consider: Increasing cost of airplane slots in the UK and Europe
Set up regional HUB offer jobs, training, sponsorship, expand previously unexplored markset,,Latin America using alliances with the cruise industry, Retool the offering anticipate technology will curb business travel, other considerations include security, medical, internet andincrease government regulations, primary client within the financial sector cutting back oversaes travel.
This forward expansion was summarily curtailed for revaluation upon the collapse of the world wide economy in 2008. In its 2007/2008 annual report the Chairman of British Airways acknowledged the effects of the economic crisis in the context of its profitability margin. He went on to describe the vulnerability faced by British Airways in an industry targeting two primary segments of the market. British has traditionally targeted in order of importance: the high end traveler both on business and for leisure.
What or how can BA do this?
Financial Analysis
The company recorded revenues of £8,992 million ($15,481.2 million) during the financial year ended March 2009 (FY2009), an increase of 2.7% over FY2008. The operating loss of the company was £220 million ($378.8 million) during FY2009, when compared to an operating profit of £878 million ($1,762.7 million) in FY2008. The net loss was £375 million ($645.6 million) in FY2009, when compared to a net profit of £712 million ($1,429.4 million) in FY2008.
Order Now