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Factors affecting the airline industry

British Airways is the airline company of the United Kingdom. It has its headquarters in Waterside which is nearby its main hub at London Heathrow Airport and as set up it is the biggest airline of UK on the basis of number of international flights and international destinations it has. It has its second hub which is London Gatwick Airport. As per the research it was found that The British Airways Group was shaped on 1 September 1974. British Airways was formed by the fusion of two large London-based airlines, British Overseas Airways Corporation (BOAC) and British European Airways Corporation (BEA), and two smaller airlines, Cambrian Airways Cardiff and North-east Airlines Newcastle upon Tyne. BA according to the study was found as the only two airlines to operate the supersonic Aerospatiale-BAC Concorde inaugurating the world's first supersonic passenger service in January 1976. BA became the world's most commercial airline following its strategies under the slogan "The World's Favorite Airline". The main activities of British Airways Plc and its subsidiary undertakings are the method of international and domestic planned air services for the deportment of passengers, freight and mail and the facility of ancillary amenities. (uk.reuters.com 2011)


Franchisees

 Comair: based in South Africa, franchisee since 1996.

 Sun Air: based in Denmark, franchisee since 1 August 1996.

(uk.reuters.com 2011)

Virgin Atlantic Airways- Competitor Company Profile

Virgin Atlantic Airways Limited is a British airline owned by Sir Richard Branson's Virgin Group (51%) and Singapore Airlines (49%). It is has its headquartered in Crawley, West Sussex, England, near London Gatwick Airport. It runs between the United Kingdom and North America, the Caribbean, Africa, the Middle East, Asia, and Australia from main bases at Gatwick and London Heathrow Airport, using a mixed fleet of Airbus and Boeing wide-body aircraft (innovationaleaders, 2011).

Lufthanza

Germany's air ambassador, Deutsche Lufthansa competitors the world's largest airline companies. It functions more than 530 aircraft from centres in Frankfurt, Zurich and Munich. It soars passengers to about 250 destinations global, not including those attended by code-sharing partner. Lufthansa's partners comprise of associated followers of the Star Alliance, like United Continental's United Airlines and Mainland. The company's Lufthansa Cargo component is a main global airfreight transporter; Lufthansa also has benefits in aircraft preservation, cuisine, and information technology productions. ( Biz, 2011)

Factors Affecting Airline Industry: Emerging concerns

As the carriers have strained to keep up with fast growing oil prices .The airlines have also raised some of their fees, executed summer peak-time surcharges and added hefty fuel surcharges on international flights.

While as a result of the improbability in the oil markets, airline stocks protracted their losses the increasing ticket prices have matched the steady increase in fuel costs in contemporary time period.

The rise in the fuel price has affected the smooth functioning of British Airways and its major competitors like virgin airlines and Lufthansa in several ways.

Impact of Rise in Fuel Prices and Strike

From the research it was founded that British Airways has a loss before tax of £410m for the year to 31 march, after finding out its results which were hit by higher fuel costs .In the previous year, British Airways has made a revised profit of £922m.Due to the rise in prices of fuel British Airways offered its staff members with the option of taking unpaid leave or ask them to work with part time. Even the finance director of British Airways had also forgo his pay for a month. As the impact was very much on British Airways it had to cut more than 2500 jobs since last summer. British Airways has been trailing £7 every second since last year, which is pretty unattractive and affecting the company a lot. The Shares in the airline were down from 4.5% to 155 pence.

However, British Airways believed that it had seen a "significantly better" effective performance, and that it had recognised customer fulfilment ratings. The total number of passengers conceded demolish from 4.3% to 33.1m.( BA, 2011)

The impact of recession has been drastic on British Airways, it got revenue decreased by 11.1% to £7994 million. As reported there was a loss in operating, which was of 3231 million including £ 85 million for the business reconstruction. There was a decline in the revenue of passengers by £856 million, which means a decline of 10.9% as compared to last year.

British Airways added that it had to take "substantial pricing actions" to encourage non-premium sales, which were mostly unchanged on the previous year. British Airways stated that the point of outlook for the airline business was hard-hitting and it would not be recompensing a dividend this year as there has been a lot loss has faced by the industry. So British Airways strategic to decrease the capacity by 4% around winter by not flying up to 16 aircraft.

British Airways was not the only airline distress in the global recession, as greater fuel prices and a fall in request for air travel have posh the whole airline industry .BA's upsurge means that economy passengers on long-haul flights of less than nine hours will see their surcharge going up from £75 to £85.The surcharge on economy flights of more than nine hours will rise from £88 to £98.

The number of passengers carried by British Airways in May were demolish by 14.2% from a year ago, as the impact of strike caused by the cabin crew members which effect the airline drastic way.( BBC, 2011)

External Analysis of British Airways

Political and Legal Factors

Air Passenger Tax

Recent rise in air passenger tax by the government in November 2010 has led to hike in prices of air travel. This substantial rise in prices may discourage passengers opting for air travel, directly affecting the airline industry. ( Fulton.J, 2010)

Fuel Policies

As the sole most important cost, policies affecting both fuel supply and price greatly affect airline sustainability. These include supply decisions by oil suppliers, refinery expansion by oil companies and government, which leads in rise of fuel prices affecting the airline sector. .( Fulton.J, 2010)

Global Aspects

Some governments provide subsidies that provide an unfair advantage and prices lower than market conditions which affects the functioning of airline industries directly and Global environmental policies regarding emissions and international route deregulation may affect airline operations in present as well as in future.( Fulton.J, 2010)

Economical Factors

Airline Revenue Sources

Airlines make money by transporting people and goods from one place to another. All of the revenue generated by airlines is caused for transportation purposes. Airlines sell their services rather than a physical product.( Davis.J, 2011)

Airline Expenses

All airlines have expenditures that are associated with the industry. Expenses include the cost of airplanes and related equipment, member of staff salaries, hiring of business locations inside airports and insurance for both the passengers and goods that are conveyed. ( Davis.J, 2011)

Internal Economic Factors

Economic factors that affect airline profits comprises of internal features such as whether or not each flight is filled to size, how much passengers pay for their tickets and what services they are demanding such as complimentary food and drinks, are provided.( Davis.J, 2011)

External Economic Factors

Economic events that occur outside the airline industry can affect airline profits. Rising fuel costs due to political or economic events reduce airline profit. Weather conditions, such as snowstorms, can negatively affect air travel. Events such as airplane crashes can affect people's willingness to travel by air. All these may cause a temporary loss of profits.

( Davis.J, 2011)

Forecasting

Airlines have to be able to accurately predict travel demand several years into the future in order to be able to provide enough routes and airplanes to handle the needs of passengers. The economic success of an airline will in part depend on its ability to accurately make such predictions and plan accordingly.( Davis.J, 2011)

Social factors

Obesity

One controversy ambiances the issue of airline companies shrinking their seat restrictions for passengers who are overweight . Some firms have gone far-off to charge a passenger with overweight will cost of two seats because of their mass. This has formed a disturbance, as it raises the question of discernment .The airline businesses face that it basically costs more to fly those more overweight passengers.( Reilly.N.J, 2010)

Security

Airline industries have suffered an intense shift in the security measures. The increase in safety may, on some level, comfort the mind of the pilots, travellers and their families. As of the few successful obstacles in security that have happened over the past decade, airlines will certainly not have the frill of being so sloppy in terms of their security.( Reilly.N.J, 2010)

Ethnicity

Perception is a foremost factor in how we outlook the domain. It is also one of the eldest studies in psychology. How we observe society, as it transmits to air travel, has abundant to do with September 11, 2001. Subsequently then the judgments of the world have full-grown increasingly profound to the background of passengers traveling on planes. It has shaped something of a undesirable perception for particular competitions and beliefs which discourages people to travel with other passengers or airline which directly affects the airline industry.( Reilly.N.J, 2010)

Technological factors

A recent survey exposed that 34% of online customers plan to use price-comparison sites more in 2009 (NMA, 2009). Online booking services and check-in is becoming increasingly used by the airline industry.

Technology is vital for modest advantage and is a main driver of globalisation. A key issue will be technological advancements which can offset upward stresses on prices and costs. Online sales are highly important to BA and they are placing substantial trust in its website occurrence to boost online-sales which will decrease customer traffic through BA’s call centres but as there is rise in the fuel price now the Ba has increased the prices of online sales too. E-Tickets are now the standard ticket layout used by BA, building flight ticketing more, elastic and up-front.

BA emphasis on refining its customer service online with new technology and has released its major drive-through which deals in Wireless LAN systems and communicate over modern SMS messaging. A considerable long-term risk is the outcome of video-conferencing on the demand for air transport.(OUP, 2007)

Environmental Factors

Sir Rod Eddington , previous Chief Executive of BA specified “The whole aviation manufacturing must admit global warming as a truth, and electrify its efforts to maximum cohort of greenhouse gases”. Global Warming also interrupts the request for airline tourism as stove UK summers may attract individuals spending their breaks in the UK. There is also a risk of a contamination tax being forced on airlines from the administration.

This environment disturbs the organization directly. It includes of suppliers that deal straight or incidentally, clients and businesses and other native investors. (OUP, 2007)

Industry Analysis

“Michael Porter’s (1998) five forces analysis will permit an examination of the amount of power BA has in its immediate environment”.

Competitive Rivalry

This not only discusses the degree of competition, but also the kind of competition occurring. BA runs in two diverse markets which are long-haul and short-haul flights and thus experiences in both oppositions. The race in long-haul marketplace comes from other huge airlines such as Lufthansa, who endeavour on routes, facility, comfort and overall quality that are required. In short-haul, competition is determined by low-prices from airlines comprising Virgin. An growing number of tour operatives (like Thomas Cook and TUI) are also now advertising air only used seats to compact prices.(Mindtools, 2011)

Bargaining Power of Suppliers

This states the degree to which firms who supply a trade can command prices, agreement terms or transfer times. For BA this condition can be difficult. As acknowledged from the macro study BA’s prices depend on variations in oil prices that cannot governor. Deprived of flight fuel, planes do not soar and BA will not be able to make a profit. Although one may claim that BA has a high-quality as to which fuel dealer it uses, the petrol market is similar in terms of prices. In context of suppliers of the actual planes, the condition is different again. Airlines such as Airbus and Boeing with its Dream liner, are worried to safe long-term orders to improve expansion costs. (Mindtools, 2011)

Bargaining Power of Customers

As there is high grade of buyer control for BA. Consumers having capability to vote with their bases if they are not pleased with the product. Measures such as the check-in and luggage managers strike at Heathrow seriously affected BA’s revenue as consumers had to find substitute airlines to use. Buyer power plays crucial role particularly in the low-cost segment, as there has been little diversity between market offers and hence consumers look about for the cheapest price, reinforced by the accessibility of online-sales. These low switching costs reflects that customer loyalty is crucial. Customers are also been provided with the Civil Aviation Authority (CAA) on their side.(Mindtools, 2011)

Threat of new entrants

As British Airways being on prevailing place means that it would be hard for a firm to contest with the company on a comprehensive level. Nevertheless as obstacles of entry are flattering non-existent and new entrants are entering in the short-haul commerce and these low-cost operatives, such as virgin having steadily cut away at BA European supremacy. However, due to non-availability of tracks for take-off and landing makes it difficult for new airline to find suitable airports. Many investors have recommended that it is only a problem of time till a low-cost operator efforts a more severe transfer into long-haul market. Lufthansa has reacted primary to this conjecture by contribution of high-cost high-quality facility, comprising private limousine handovers to and from the airport, bodyworks and sparkling wine.(Mindtools, 2011)

Threat of substitutes

The threat of substitutes states the ability of buyers to switch to a substitute product, hence alternatives to air travel. However it is fair to recommend that there is no actual substitute to long haul air tourism in relations of time and cost, but there is alternatives for short-haul destinations differ from coach to wagon to rail. The real threat of such substitutes mainly depends upon aspects such as the effectiveness and the value of the rail or coach facility.(Mindtools, 2011)

Benchmarking

Virgin and British Airways

British Airways carries a strong brand name and image. It is the biggest airline and flag carrier of the United Kingdom and for sure the extent and scale of British Airways sets it in a competitive gain over its competitors such as Virgin Atlantic Airlines which is the second leading long haul airline in the United Kingdom. Virgin Atlantic is a successful challenger and it also holds a well-known and highly-recognisable brand image and brand reputation. Still, BA is an older and a superior organisation than Virgin Atlantic and it is still leading ahead of Virgin Atlantic in the airline industry.

The strong key messages which British Airways delivers are steadiness, quality and reliability. British Airways enjoys a good reputation and is prominent for the very high standards of customer facility and effectiveness. Virgin Atlantic distinction is based on three strong features: service, value and price, and recently Virgin Atlantics was voted No 1 for having the best online reputation (Creative Match, Undated). Even it was also nominated as the most child-friendly airline, where,as BA ranking in the 2nd place .

British Airways hosted its first fuel price in May 2004 by adding£2.50 to the value of long haul and short haul fares. The charge sustained to rise as BA and other airlines battled to protect profit margins. BA raised its surcharges twice in 2004, three times in 2005 and once last year for long haul. Airlines such as BA and Virgin Atlantic have disputed over the surcharges issue which show the passengers that how much fuel affects an airline's costs as well as the industry. Low-cost airlines reject to impose surcharges.( Milmo,D, 2007)

With the new tiered scheme for calculating charges that imposed on those travelling in the carrier's First Class, World Traveller Plus and Club World will be compensating up to £24 more than people travelling in economy class. This is not an astonishing move as almost all the airlines of the world are growing fuel surcharge due to increased costs of fuel and it is also anticipated that further increase is also possible due to the fact that oil prices are projected to grow further in future.( ebookers, 2011)

Financial Indicators

Comparing British Airways with virgin, BA has faced a dark phase of recession for a long time which was followed by the rising fuel prices, which led BA to face a loss per share of 38.5 pence, whereas it was 32.6 pence per share in 2009. However, the pre-tax profit of virgin, which was £68.4 million in last 12months and the revenues grew by 8.4 % to 2.5 billion and profit of 10% shared among 8500 company staff.

The Total Capital Expenditure of BA was £567m, which declined to £145m in comparison of previous year. Followed over a total of 5.7 m passengers flew with virgin last year. This shows the development in the business of Virgin.

There was a loss in operating of BA which was £231 m whereas, Virgin operating profit fell from £44.4 m to 25.9 m. This shows that Virgin holds a strong position in the market as compared to BA.( sundaytimes , 2009)

Lufthansa and British airways

Worldwide events such as the Gulf war, recession now followed by the rise in the fuel prices has put a burden on the airline industry such as British Airways and Lufthansa as a company.

These type of events has caused major loss to British Airways as well as Lufthansa and lead a decrease in the amount of seats to be filled in the airline industry.

As due to the fact of rise in oil prices, people start avoiding travelling in such situation, as of the fear of rise in prices of travelling fares too .British Airways had an decrease of passengers number by 11% where, as Lufthansa did not have suffered that much like BA , it had a decrease of only 5.4% .( Centreforaviation , 2011).

Lufthansa also reported an increase in traffic in 2010 focused around key growth markets with growth of 17.9% year on year to 91.2 m passengers. The carrier added that it shows that Lufthansa holds strong position on long haul routes pay off in 2010 due to the increase in demand and yields for first and business class fares where, as British Airways was still in the dark phase of fare prices. BA was still facing the losses as it holds the strongest position on long haul routes but due the rise in the prices of fuel it has to increase its fares more as compared to Lufthansa , which affected BA directly and encourage passengers to travel through other airlines other than British Airways .( Centreforaviation , 2011).

Financial indicators

Both British Airways and Lufthansa faced lots of loss due the recession. The total revenue of BA was reduced by 11.1% to £7994 million whereas, compared to Lufthansa group generated total revenue of 27.3 billion euros with an increase of 22.6%. This shows that British Airways is lacking behind Lufthansa in terms of revenue. BA should try to focus on its fare prices and more and more services should be provided to the passengers in order to remain in the competition.(Cision , 2011)

The Total Capital Expenditure of BA was £567m, which was declined to £145m whereas, in case of Lufthansa its Total Capital Expenditure for the year was 2.3 billion euros. This reflects that the utilisation of capital in BA is more than its production. BA should use estimated capital in working in order for better production and gaining profits.(Cision , 2011)

There is loss in BA operating income of £231 million whereas, compared with Lufthansa its operating increased by 20.4% to 30.1% billion euros. This shows that there is positive development in the business of Lufthansa as compared to BA. British Airways should adopt such policies which are helpful in developing of its business.(Cision , 2011)

Strategies Adopted

British Airways raise its fuel price on long haul flights as the high price of oil crushes European consumers stressed with growing rise and wage restrictions .This brought financial development to British airways whereas compared to Virgin Atlantic was competent to reduce the effects of the continuous rising oil prices because of the hedging strategy which it adopted, which means buying the oil when it is cheap. Whereas, Lufthansa adopted the strategy of low cost all costs of flights and services are very carefully observed and condensed to its minimum value, this include such as single fleet type, better-quality flight crew productivity, basic network aiding secondary cities, and the outsourcing of others activities such as maintenance, catering, etc.(BBC , 2011).

BA formed its new International Airlines Group (IAG) and it merged with Spain's Iberia last year, which would add 10 pounds ($16.12) to the cost of an economy flight and 20 pounds to a first-class ticket. Whereas, To overcome the crunch Virgin Atlantic began with Group sales, which comprise of sales from tour worker Virgin Holidays, which was enlarged by 8.4% to £2.579bn from £2.38bn . Whereas, Lufthansa adopted policy of ‘No Frills’ focused on the inflight service which is virtually non-existent, therefore, the number of flight entourages on board agrees to the minimum regulatory obligation.(BBC , 2011).

British Airways executive had a personal talk with its cabin crew members and try to rebuild their trust and made them work together and avoid the strikes as soon as possible. British Airways solved this issue within the time period of a week. Whereas, to avoid the strike Virgin Atlantic agreed to the demands of the pilots and fulfilled them. In case of Lufthansa adopted this policy of low costs which enable the carrier to compromise with very low fares with a very simplified pricing arrangement.( reuters , 2011).

British airways, IAG have enlarged the number of seats presented to passengers by 2.7% , which added lot of profit to accounts of British Airways. Revenues rose to 13.4% to €3.8bn. Within the period of that fares appear to have risen intensely, with profits from sales of ticket which is increased by more than 15%. (guardian, 2011).

British Airways to overcome the losses due the rise in fuel prices, launched its Open skies subsidiary flying direct from Paris to New York ,anticipated that it will cut capacity of the passengers, taking the opportunity to ground some of its old aeroplane which are least fuel efficient. First-class traffic is where BA makes most of its profits. In the phase of oil prices many specialists have said that the record profits of £883 million in 2007-08 could be wiped out but after launching this subsidiary there is improvement in the economy of British airways.( Jamseon,A, 2008).

Recommendations

It is essential for British Airways to have a good employee relations as to avoid industrial disputes and interrupted actions.

BA need to develop upon its interaction with its passengers across all classes in order to perform better than its competitors.

BA should have lower cost competition.

BA as an employer should increase its barging power.

There should be an opportunity for BA and its competitors to transport aircraft freely between the EU and USA.

BA needs to improve its online services by providing extra services.

BA should emphasis on the quality of its customer service delivery at all stages, which it has lacked in the past.

Conclusion

Airline industry in U.K is overwhelmed with several problems. This includes recession, high rise in fuel prices, rising labour cost, disputes between the employees of the industry.

British Airways remains cautiously confident about its future visions. However, it is

convinced that considerably more work lies ahead if British airways has to succeed.

However, there were three most important external factor that has effected BA a lot that are recession, rise in price of fuel and disputes within the industry causing strike . Fuel prices are enduring to grow and this is likely to reduce profits and raise prices for BA. Rising prices and disputes within BA placed it in a disadvantageous position. To overcome these situations BA has adopted several strategies. Such as opening new subsidiaries to gain new position in market. BA also concentrate on business class passenger, offering them the best customer package and maintain good customer relations leading them to gain huge profit in return.

BA always watch out for ways to minimize their expenditures and get a value for their money and stockholder money. This leads BA to cost savings, and in conclusion making them to stay on top in an increasingly competitive airline environment.


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