British Airways And Their Financial Loss 2009 Commerce Essay

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In June 2009, responding to a record loss in its recent financial year, British Airways was seeking its 40,000 workforce to work for free for one month in a bid to help the airline slash costs.

Adam Smith, (2009) suggested that thumped by a global depression, firms has just about everything in terms of lowering staff costs, from salary cuts to enforced unpaid leaves. However British Airways (BA) has taken a step further by asking the workforce to volunteer in forgoing between a week and one month's worth of salary, or to take a reduced wage for three to six months.

Based on CNN, (2009) reports, the demand for BA airline's passenger seats and cargo holds fell by 4.3% to 33.1 million during the last financial year. According to Business Times (2009) report, BA also made a £401 million loss in 2008 which was its biggest in 300 months, while its fuel bill increased to about £3 billion.

There was also the issue of the strong dollar that would increase costs overseas. Based on Proinvestor.co.uk (2009) reports, the company also had to deal with a massive pension deficit of £3.7 billion, with £150 million to service the workforce pension commitments, excluding its interest payments. The year before, BA made £1.5 billion.

Based on the prolonged nature of the global downturn, there seems to be no sign for recovery in the industry as people are not keen to spend.

Coaxing staff to work for free is the airline's latest option to reduce costs. BA planes to cut capacity by 4% in parking up to 16 aircraft which adds to cost reduction and would mean a surplus in pilots. Management bonuses have been shelved and talks with unions were in the pipeline on how to reduce manpower costs as the airline is losing cash at a rate of £3 million per day.

"In 30 years in this business and I've never seen anything like this. This is the biggest crisis the industry has faced," said Willie Walsh, BA chief executive. He conceded that unpaid work would be that which amounts to as much to accepting a cut in pay, which Willie Walsh is eager to discuss across the company in what he describes as the "fight for survival"

He also added that the survival of BA depends on everyone contributing to changes that permanently remove costs from every part of the business as indicated by CNN (2009) reports.

"Of the 40,000-strong workforce, 6,940 employees had sign up for unpaid leave, part-time or unpaid work, which would translate up to 10 million pounds in savings for the airline as indicated by Allvoices.Inc, (2009).

Based on the research done by Helen Pidd, (2009). It is more surprising to know that many of BA staff have already volunteered and there are only 2 reasons for this, according to David Guest, professor in organisational psychology at King's College London."Either they have high levels of commitment to the firm," he said, "or they have high levels of insecurity."As Walsh has refused to rule out compulsory redundancies at the airline, you don't need paying to work out which of the above is the most likely motivator.

Based on BBC (2009) reports, hundreds of staff had responded in a positive light to the request made by Walsh. However some of the workforce has condemned the plan, saying there should be more focus on improvements in the management of the airline and are rejecting Walsh's request.

"Everyone is up in arms. We're not taking it. I'd love to take a month's unpaid leave but I can't afford to do that," the British Broadcasting Corporation quoted an unnamed baggage handler at London's Heathrow airport based on reports by CBC News,(2009).

Post event analysis of issues

What happened after the request was made?

According to research done by Chris Marsden (2009), there were numerous reports that BA staff were angry by this arrangement and it was made worse by Walsh and his Chief Financial Officer, Keith Williams when they announced that they would work for free as well. Walsh earns £735,000 a year, while Williams earns £440,000 a year. Forgoing a month's salary would cost Walsh £61,000, leaving him to get by on £674,000. Most BA workers earn less than £19,000 a year. The best paid, cabin staff earns an average of £29,900.

One airline worker said," The bosses are millionaires and a month without pay means nothing to them. But it's everything for the majority of us." One of the trade union leaders complained that even through it is a good thing that Walsh is willing to work for free, he earns 4 times more in a month to what the majority do in a year." Even the media mentioned that this is the management task to look at ways through the problem. If reducing payroll cost is the only way, then a proper proposal should be drafted. Later, it was found that negotiations with the trade unions on a "proper proposal" had already borne fruit for BA.

The British Airline Pilots' Association (BALPA), representing by 95 % of BA's 3,200 pilots, accepted pay cuts of about £4,000 a year, 78 voluntary redundancies, and cut-backs on allowances and perks amounting to an annual saving of £26 million. In exchange, the pilots will be given a worthless promise of a £13 million shareholder stake in the company, a stake that will only be offered in 2011 and only if "certain company targets" are met. This would based on a pioneering scheme called "shares for pay cuts" deal to help the struggling airline cope with the economic downturn, which was exemplified by the research from Messy. R (2009)

The campaign, which has the backing of the government and the Trades Union Congress, claims that to save jobs half of all respondents would accept short-time working, 29% would accept a pay cut without any reduction in working hours, 31% would lose benefits, 6% would accept a 3-month unpaid sabbatical, and 19 % accept a sabbatical on 30% pay.

Keep Britain Working was set up to advocate such sacrifices by workers of their wages, so its figures should not be taken as it is however they cannot be dismissed either. BALPA then declared that as a union they would share the pain if their members shared in the gain.

When talks between BA and the union broke down, 81% of the union who were willing to go for a 10 day strike during the Easter holidays, which could have halted many flights and cause huge disruptions in its operations. This was exemplified by the research from Allen. M (2010)

TNE, (2009) indicated BA saw its shares rise by 5.3 pence to 131.8 pence after making known publicly, that 7,000 of its workforce have agreed to take voluntary pay cuts. This is a positive outcome as shareholders are finding this move that Walsh made very positive, judging by the increase in share price.

Ethical/governance application and analysis

Based on the Lecture notes by Dr. Mario Fernando from the University of Wollongong, since the key driver of Rawlsian Ethics is fairness, the CEO had treated his employees fairly and has looked at everyone equally not individually by making that decision of forgoing his monthly pay packet.

Walsh contended that his decision ought to be made in such as a way to maintain BA as a business. Hence based on Rawlsian theory (2008), he satisfied the principle that is derived from the veil of ignorance that benefits and burdens of a society should generally be distributed equally. His rational to the economic pain must involve sharing it out equally even through the sacrifice is hard to pull off effectively because of the economic downturn that has strained the social fabric of Britain. He feels that this policy is not aiming at a small social, economic or a political minority but across BA.

He felt that he was not morally wrong and was fair as he conceded, unpaid work would be that which amounts to as much to accepting a cut in pay.

However from the employees of BA perspective, it makes them even more furious and less encouraged than in their current position as the vast majority of the staff is intelligent and is up-to-date in current affairs. They felt cheated because they felt used, abused, misused and ultimately discarded whenever they cease to be of any further value and also because of the poor decisions made by senior management who were not being able to manage the crisis well.

The workforce would find it fair if the entire senior management of BA volunteered to work for free for a month as their wages are far larger than the majority of the workforce and it would help the airline in a bigger way.

Furthermore there is no common interest between the working class and the investors. If sacrifices are called for, it will be beared by the workers alone. The concerns of shareholders is to maximise returns to equity whereas the working class interest lie in maintain secure personal employment. As a result, investors encourage Walsh to put their needs first, as defined by short term movements in the share prices, above the interests of the other stake holders such as the workforce of BA.

According to Jeffrey J Bailey (1998), based on the Kantian Ethics theory, it begins with obligation or duties to respect other persons and based on the focal point that one should always treat the humanity in a person as an end and never as means merely. However Walsh failed to recognise that what employees want most is the confidence and security that comes from a job well done.

According to Nichols M, (2009) reports, "The more desperate people get, they will do things like this to try and make themselves more appealing to an employer," she said. "The short-term future for most of the unemployed is very bad. They aren't going to be made much better by working off the books or working for nothing."

Walsh has failed to realise that as long as he provide jobs that provide a means of living to his workforce, he is contributing to the independence and thus to the self respect of the workforce and in a economic system, people achieve independence and satisfaction by using their wages which they earn as employees. Thus Walsh should pay his workforce their wages, sufficient to provide a certain amount of independence and satisfaction. He should have an obligation to provide employees with a wage and with security so that the workforce has the ability to pursue happiness in accordance with their aspirations.

Walsh has not respected the dignity of the workforce as a whole. As a CEO, he should help ensure that the basic rights of his workforce within his sphere of influence are protected. His decision of volunteering for unpaid work, did not respect the goals of his workforce, which is to make a living. But based on the Lecture notes from the University of Wollongong (2010), the deontological theory (Kantian Ethics), Walsh did not consider the rightness or wrongness of his actions but because he was fulfilling his duty as a CEO and also thought that the workforce would share his sentiments on doing their duty to save the company. On another aspect of Kantian theory, I feel that he was pressure to make this decision due to the financial crisis as well as other big companies finding ways to cut costs.

Based on the article by Jason C Porter, (2008), in the basis utilitarian framework, action is ethical depending on the consequences. An ethical decision making is one that maximizes the amount of good that benefits the greatest number of people while minimizing the negative outcomes.

Hence Walsh felt that it was a better option for BA staff to share the pain than punishing a luckless minority with outright unemployment. It also instil confidence among stake and shareholders in the company as it is shown that its share price has gone up after it was announced for the unpaid work would be introduced for that period of one month.

His decisions promotes the greater good of the company that the employees and he is trying to save the company and his employees as the employees are the company and has a obligation as a CEO to protect the employees and the company and as a result, costs were reduced by as much as 10% and this contributed towards a surprise operating profit based on Proinvestor.co.uk (2009) reports.

Thus Walsh might argue on Utilitarianism grounds, such drastic work practices are ethically permissible because they produce better overall consequences than the alternatives, which means that even though employees are earning lesser, it is vastly preferable to losing their jobs especially in the midst of a recession. An influential version of utilitarian policy from Walsh view is to salvage the situation and to maximize the overall good and even the government body was supportive of Walsh's idea.

According to the Telegraph, (2009) reports, however there are pitfalls to the Utilitarianism theory which is purely voluntary schemes can increase the normal paranoia that exists in an economic crisis. There is evidence where such schemes exist that people are scared that they will be blacklisted if they don't sign up voluntarily and making themselves a target for redundancy and they are worried about losing their jobs. Even if this is a case of Walsh to exploit loopholes in the system, utilitarianism would have to support these practices as it would increase the overall happiness. Therefore this is a consequence that is harmful to the employees of BA.

Recommendations for management and policy makers with justification

Physical, information and financial flow are important elements to improving the supply chain performance. These flows are developed to analyse the chain and without adequate sharing of information, firms would have to resort to other alternatives at an increased cost.

Until recently, information and financial flows were treated separately. Having both financial and information available can help in minimizing the cost of human errors, reduce reconciliation time, and create a more tightly integrated supply chain and would help companies in positioning themselves in terms of inventory and physical cost.

I recommend that Walsh salary and the shareholders should do a review of his salary as I find that he does not deserve to make 735,000 pounds per year. He is not 30 times as deserving as his employees. By removing Walsh from the director election process and to make meaningful investments for the airline, this will help to reduce the pay of the CEO.

Walsh should create policies of progressive reductions in salaries, encourage and assist employees in developing relevant and transferable skills and knowledge and be sensitive to the serious employment problems frequently associated with business decisions and work with governments, unions in addressing them.

I also feel that Walsh should have shown more leadership qualities as it is necessary for a leader in having a people orientation approach. His goal should not be not on job performance alone, but performance that is consistent with a set of ethical values and principles and should demonstrate more care and concern for his employees and external stakeholders in the process of requesting his people to work for free.

Latest development

According to Proinvestors.co.uk, (2010) reports, based on the following recent update, Standard & Poor's Ratings Services has downgraded BA further into junk territory as it expects only a small improvement in the aviation sector over the next 2 years, with continued labour issues and uncertainty dealing workers' pension. Standard & Poor's Ratings Services has rated BA poorly and the ratings outlook is not positive, which means that further downgrades are possible.

I feel that if BA continue to head in this direction, the future will look very bleak for them since competition in the airline industry is very competitive, BA may be lose business and be bankrupt.

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