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BA Plc is the UK's largest international scheduled airline operating out of Heathrow airport. BA flies to more than 300 international destinations, and carried more than 33 million passengers, with an employee headcount of 42,377 as of March 2008. (British Airways Strategic Report 2009)
British Airways is customer centric organisation, without the customer base, a service airline like British Airways will cease to exist. This also applies across board within the airline industry. There is constant pressure from both internal (management) and external (competitors) sources in any industry, whether service or product oriented. This been said, BA as a well known airline is under constant pressure from other competing airlines, either by bidding for customers by lower flight prices (as the case maybe), technological advancements, flight packages that might give other airline companies an edge over BA etc.
British Airways is in a fight for survival since recording annual loss of £ 401million due to decreased numbers of passengers and increasing oil prices. It is also losing £1.5million per day. As a result of the current financial crisis, the top management at BA went through and is working through a number of strategies and proposals which include the discharged of over 2,500 jobs since last summer (i.e. summer 2008), which also includes 780 management posts. Furthermore, BA boss Willie Walsh urged 40,000 staff to volunteer for unpaid work.
Since the terrorist attacks and war on terror, airports introduced newer and harsher security regulations and systems across Europe and the US. The British Government is in increasing regulation (March 2009) on the airline industry with respect to punctuality, customer service and other key areas. There is the open skies agreement in which gives the opportunity of BA and others to travel freely globally. (Body Scanner, January 2010)
A significant legal factor affecting BA is the power of trade Unions over the employee and customer rights, also on environmental issues. BA has suffered many strike actions (August 2004 and August 2005) and also the ongoing strike at hand (starting 20 March 2010).
The war on terror influenced oil prices to record highs which added £100 million to BA costs. There is also increased competition with low cost carriers such as Ryan air and easy jet. BA is way lagging behind with its competitors, see table below;
Technology, innovation and improving customer service is fundamental towards creating competitive advantage. Online sales are important for BA and BA are relying on their website to boost online-sales which will reduce customer traffic via BA's call centres. Also, E-tickets are the standard ticket format used by most (if not all) of the airlines today including BA, this makes flight ticketing more straightforward, flexible and secure.
BA has been investing heavily in next generation business and first class cabins to become the top universal premium airline. Also, since 2007 BA ordered 12 Airbus A380 aircraft and 24 Boeing 787 aircraft. (2008/09 Annual Report and Accounts - Who We Are)
Global warming would have an adverse effect on the demand for new exciting holidays as the UK summers would become warmer, customers would tend to remain at home and cut off on holiday expenses as well due to the financial crisis.
BA was the world's first airline to reduce greenhouse gas emissions in 2002. BA boss wants a global tax on carbon to help fight climate change and limit greenhouse gases. There are also threats from pollution and noise taxes being imposed by the UK government (Adam and Gow, 2005).
Impact of the external environment (pressures) on BA
Meeting current challenges would be inevitable for BA and how they pull themselves through every challenge at every stage is also very important as this will help to determine how they will perform in the future with more troubling challenges.
The knowledge of the external environment is particularly important to any company, should be especially important for BA because they operate in a very competitive industry and other organization are becoming very creative and innovative at a very quick pace. It will be important to analyse the competitive nature of the airline industry in order to assess BA's position within the market.
We will be adopting the porter's 5 forces model to analyse the external environmental factors that impact BA's competitive advantage. This model was adopted because it touches on most of the external factors (old and new competition, suppliers, customers etc) which seem inevitable to the airline industry as a whole.
There is a lot of competition in the airline industry; so many airlines cater for both long haul and short haul flights. With regards to price and service offered within the airline industry, there is little or no differentiation between airlines. For the short haul flights, we tend to see more competition in this region because customers tend to look for cheap flights to closer destinations; hence the low budget airlines (Ryan Air, Easy Jet etc) play a significant role in this part of the airline industry.
You can also see direct competitive rivalry in the airline industry, for example is you see the Virgin Atlantic Airways advert "25 Years, Still Red Hot", we can see fierce rivalry by Virgin Airline taking the bull by the horn and portraying their company as a very good airline that is at the top of their game so to say. Also, Virgin has website that is opposing the proposed strategic alliance between BA and AA "No Way BA/AA". (Virgin Atlantic - N0 Way BA & AA) http://www.virgin-atlantic.com/en/us/nowaybaaa/index.jsp
Power of suppliers
The employees of BA use a collective bargaining via trade unions to increase their bargaining power. Also, because of the airports sole supplier of aviation fuel, BA's bargaining power has been reduced and more or less the bargaining chips are in the hands of the supplier of the aviation fuel.
Impact of the fuel bill of the global airline industry for the year 2010
Source: IATA Jet Fuel Price Monitor
New fuel price average for 2010
Impact on 2010 fuel bill
This table simply shows the financial impact on the consumption of jet fuel for the year 2010. With the increasing price of aviation fuel, the supplier(s) of jet fuel have the upper hand on the bargaining front. The airlines need to jet fuel in order to transport customers; the customers generate the revenue which in turn generates the profit for the organization, and therefore, the supplier get to call the shots with the prices of jet fuel. (IATA - Jet Fuel Price Monitor) http://www.iata.org/whatwedo/economics/fuel_monitor/index.htm
Boeing and Airbus respectively have high bargaining power because they are the sole manufacturers of aircrafts. In this case again, because they are the 2 manufacturers of aircrafts, the less the suppliers of a certain product or service, the higher bargaining power they actually have.
Power of buyers
Due to the increased use of the internet and the mediums via which the internet can be accessed, i.e. mobile phones, PDA's, laptops etc has enabled the buyer to have a higher stake with regards to the impact of external environment on competitiveness. The ability of customers to access the internet just at the click of a button has opened up gateways to an entirely limitless world of relentless offers when it's pertaining to the airline industry.
Almost, if not all, airlines have websites from low budget airlines (example Easy Jet, Ryan Air) to well known airlines (example BA, Virgin Atlantic etc). These websites also offer online deals that are otherwise not available in store, so this gives the customer more variation on what airline to choose when flying. Also with quite a few travel agencies around, this has helped to give the customer/buyer an edge, the more options available within a certain industry, the weaker the bargaining power of the company offering the product or service becomes. Also, when the concentration of the buyers to suppliers is low, they have little bargaining power.(NO REFERENCE)
Threat of new entrants
The airline industry is a very competitive environment, with high capital cost requirements and high regulatory requirements. Sources reported the failure of recent airlines such as XL and Zoom (Times Online, 2008).XL air-ways fly's to 50+ destinations; it sells holidays under different brands including Kosmar, XL.com, freedom flights and travel city direct. The pulling of financial aid by Barclays that was associated with fuel-hedging position contributed to the failure of XL air-ways. http://www.scribd.com/doc/23329171/British-Airways-Strategic-Plan
The surging prices of oil and the unstable customer demand curve has made it a tough year for airlines reports The Sunday Times. Zoom, a low cost transatlantic airline founded by Scottish entrepreneurs (Hugh and John Boyle), reported to be going into administration. They have been talks of Zoom receiving funds from an association of investors. (The Sunday Times: XL Leisure Group enters crisis funding talks. 31 August 2008)
Threat of substitutes
There are not a lot of options when it comes to substitutes when it comes to land and sea transportation. There are only a few direct substitutes for short haul flights like the Eurostar or taking a ferry, and for the long haul flights, there are no notable substitutes for this sector.
It is essential to analyse the internal environment of BA before we can start to recommend strategies to suit and support the organization through future environmental and economic turbulence.
It is important that strategic development is reflective of BA's strengths and weakness relative to competitors and the opportunities and threats presented by its external environment (Pitts & Lei, 2003).
We would be using SWOT analysis to investigate the internal factors that impacts BA's competitive advantage in the external environment.
BA engages in different international and local air and ground services for the transportation of passengers and also freight and mail. The increase in fuel prices (including aviation fuel) could also adversely impact the company's profit. (Data Monitor - British Airways Plc, February 2008)
High influence at Heathrow airport
Heathrow airport constitutes one of the world's busiest international airports with is geographic location of London serving as a gateway to other continents (more of the European continent), this aids in strengthening Heathrow's position as a major international flight hub. Heathrow serves as BA's home base, and BA occupies an estimated 41% of the slots at Heathrow.
Productivity of employees
The revenue per employee of BA stood at approximately $388,200.9, higher than some its competitors such as Lufthansa (stood at $263,915.5) and Continental Airlines (which stood at $299,931.5, for the year 2006), both standing significantly lower than that of the revenue per employee of BA. For the year ended March 31, 2007, BA recorded total revenues of £8,492 million with a total of 42, 755 employees.
The revenue per employee for BA shows the company's ability in employing competent, effective and efficient people for their operations, which could aid in growing the overall profit of the company in the future.
BA has a network route of about 147 destinations in 75 countries. In 2007, BA transported around 33 million passengers. BA operates one of the world's largest cargo businesses now and transported around 762,000 tons of cargo in 2007. BA's geographic division and revenue generated are shown in the table below;
Revenue generated (in percentages)
Far East and Australia
The diverse international operational base enables BA to dramatically reduce business risk by not having to rely on any one market alone for the generation of its revenues.
Decline in profit
The operating profit margin of BA declined from 8.4% in 2006 to 7.1% in 2007. Also, the net profit margin declined to 3.4% in 2007 from 5.4% in 2006. BA's cash from operations declined from £1,339 million in 2006 to "756 million in 2007.
The decline in profitability was primarily instigated by the cancellations of 1,300 flights in January 2007 as a result of a strike by the cabin crew.
BA faced 2 penalty claims in 2007;
In August 2007, BA announced involvement over price of long haul passenger fuel surcharges and will pay a penalty of £121.5 million. BA admitted that between August 2004 and January 2006, it colluded with Virgin Atlantic over the surcharges which added to ticket prices in response to rising oil prices.
Within the same month of August 2007, BA pleaded guilty in a transatlantic price fixing act and was fined $300 million. They admitted to colluding with rivals on surcharges on passenger fares and cargo between 2002 and 2006 to help mellow the impact of increasing fuel prices. They finally reached an agreement with the British authorities to a $247 million fine.
These claims not only damage the reputation of the company but also drain the financial capital from the company, which in turn will lead to the decline of the company's business in general. (Office of Fair Trading, BA's Price Fixing Investigation - August 2007)
Travel and tourist industry
Travel and tourism have adverse effects on the airline industries, a total of 842 million international tourist arrivals were recorded globally in 2006, with an average year by year increase of 4.5%, according to the World Tourism Organization. World travel and tourism is expected to generate over $13 trillion for the period of 2008 - 2017, with an average growth rate of 4.3% per annum. These increases should earn returns on revenue and enhance the airline business.
Global passenger airline market
Between the years 2002 - 2006, passenger transportation witnessed very strong growth, with further passenger volume to reach 2.9 billion people by 2011 from a volume of 2 billion in 2006. When put into consideration, BA is planning to expand its global fleet size. With such an expansion the company stands to benefit from the growing airline industry.
Rising fuel prices
Source: IMF 2008
The price of aviation fuel has gone up dramatically due to the rising oil prices in general. Air Transport Association (ATA) averaged the cost of aviation fuel at $70/barrel ($1.67/gallon) in 2006, a 90% increase from 2001 ($0.77/gallon in 2001 - $2.07/gallon in 2007). The rising costs of fuel are bound to have a direct impact on net and profit margins, as this could cause an increase in running expenses.
Competition from low cost airlines
Ryanair, Easy Jet, Flybe in the European markets; Southwest Airlines, American Trans Air in the USA; and China Airlines, Hong Kong and Japan Flights, Air Asia in the East Asian region, has increased the rate of competition within the airline industry.
Within the long-haul market, BA is faced with local operators in different geographical areas (Middle Eastern Airlines, China and India). In the medium-haul market, we have low-cost airlines representing 30% of the European market in 2006 (UK - 50%, Germany - 37%, Spain - 10%, France - 5%).
Source: Datamonitor, 2009 (Travel expenditure by region)
The continually growing number of low cost, low fare airlines and also the increasing number of privately owned jets contributes to BA's market share across all regions. This increase is as a result of increasing business travel, customers looking for other travel options which enable them minimise cost, time spent flying, and also time wasted during baggage handling and refuelling.
Economic crisis in Europe and USA
BA's largest revenue generator is from the USA and European market, £1,731.0 million and £5,316.0 million (62.6% of its total revenue) respectively. During the economic meltdown in 2008, the IMF world economy outlook forecasted a slowdown from 3.3% in 2006 - 2.8% in 2008 (USA) and 2.6% in 2006 - 2.3% in 2008 (Europe).
The economic crisis in 2008 has had an impact on the revenue generated from its 2 strong regions (USA and Europe), and this in turn would put pressure on the overall revenue of the company.
Future strategic recommendation for future growth within British Airways
Improved customer service
British Airways has to improve on the overall service quality of the company. Compared to other airlines recently flown by a colleague in our group, apparently, BA's overall services have gone down dramatically; from onboard services to ground services (the latter is better off at T5) are no more up to standard.
Create presence in key cities
If British Airways were to create more awareness in other capital cities like they have in London with the launch of T5, this should be a good tactic to enable BA get a stronger hold on the customer's attention. This is already in effect with flights from London City to JFK, and also with more flights to Dubai and Johannesburg.
Manage the excessive strikes that eat into company's profit
The continuous striking with British Airways does not leave an impressive brand image in the mind of every customer. We have never heard of Virgin Atlantic, KLM, Lufthansa etc going on strikes, it's always British Airways. In 2007/08 there was a strike, recently and ongoing now, they are on a 12 day strike (Started Saturday 20th March). Apart from damaging the brand reputation, they also lose a lot of revenue during these periods of strike (approximated at £30 million per day); this needs to be sorted out, either by reshuffling management or paying staff better.
Stop relying on revenue generation from premium passengers and try to focus on more short-haul flights
BA seems to focus on premium passenger travel on most of their scheduled international and regional flights for most of their revenue, this strategy needs to change. As seen with the economic factors statistics as concerns the overall airline industry (refer to table above - Economic Factors), if BA was to compete more within the short-haul flights with other airlines (like EasyJet and RyanAir that seem to be doing better than BA), they stand a better chance of generating better revenue into the company. And also, the brand image already created, BA, will definitely give them an edge within this market, that is if they improve on their current management standards.
Build on some key strengths like employee productivity, international operations, high influence at Heathrow airport etc
Continuous employee training and innovation within BA would always have a positive and profitable impact on the company as a whole. Expanding on the international operations, touching on new destinations, would aid in expanding their services globally. In addition to this, BA should build on the influence they command at Heathrow Airport. Overall, they need to capitalise on continuous innovation and creativity over other airlines.
Learn to cope with the open market
BA should try to provide better quality services to the customers as well as slashing of prices. The slashing of prices would pull the customers, and then work on keeping the customers. This they can do by been friendly and ready to help customers at every point, be punctual with flights, improve the in-flight services and entertainment, baggage handling has to be spot on, and other extra support services available.