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

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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.