Business, Government and Society: Case of British Airways

Subject: Case Studies
Pages: 10
Words: 3055
Reading time:
11 min
Study level: PhD

Introduction

British Airways is one of the leading global airlines in the international aviation industry. The 90 years old airline has its headquarters in London in the UK (British Airways, 2011). By market share, “British Airways is the largest airline in the UK” (British Airways, 2011). The core business of the company involves air transportation in terms of domestic and international passenger flights. The company also operates a cargo airline at the domestic and international levels. The company had 238 aircraft as of 31st March 2009 and transported over “32 million passengers in the 2009 financial year” (British Airways, 2011). The airline also managed to transport over “760,000 tones of cargo to various destinations” (British Airways, 2011) in the same financial year. Given a large number of aircraft, the airline is currently serving 300 routes at an international and local level.

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Even though the company is associated with a stable capital base, its financial performance is currently below the expectation of its shareholders. The company is currently grappling with a number of challenges such as increased competition, low demand for passenger flights, and employee strikes. These factors have had a negative impact on the growth of the company. In the 2009/2010 financial year, the company’s revenue totaled 8 billion pounds which were 11% less as compared to the results of the previous financial year (British Airways, 2011). The passenger airline segment of the business accounted for 87% of the total revenue (British Airways, 2011). The company realized a loss of 531 million pounds before tax (British Airways, 2011). This was 90 million pounds more than the loss that was realized in the previous financial year. The above trends indicate that the company is facing a difficult financial situation that calls for an immediate and effective restructuring plan. It is against this backdrop that the competitive environment of the company will be analyzed in order to shed light on the factors that contribute to its poor performance.

External or Non-market Environment Analysis

The non-market environment refers to the external factors that influence the operations of a company and its industry in general. The factors are considered to be external since the company has little or no control over them. The external factors can affect the company and the industry in a negative or a positive manner. The most common external environmental factors include legal, economic, political, social, technological, and environmental factors. These factors have affected British Airways and the global aviation industry as follows.

Political

The political factors are related to the governance of a country in which a business is operating. The political factors are reflected in the trade and development policies that are applicable in the country. During the 2008 to 2009 global financial crisis, most governments especially in the emerging economies protected their airlines from the effects of intense competition in order to improve their performance. This involved restricting the number of flights that foreign airlines were entitled to in such economies (Franke & John, 2010). While the move was meant to protect the local firms from the effects of the financial crisis, the foreign airlines suffered huge losses due to a reduction in sales (Franke & John, 2010). This contributed to the losses that British Airways sustained from the year 2008 to 2010. Wars and political unrest in parts of Asia, the Middle East, and Africa have also forced the firm to discontinue its flights to politically unstable economies. This translated into more losses due to a reduction in sales.

Environment

Environmental factors have always affected the performance of British Airways and the aviation industry in a negative manner. First, the UK and other developed countries are highly concerned with the pollution associated with aircraft emissions. Consequently, various airlines are charged high fees for the pollution caused by their aircraft (Trethway, 2004). Firms with financial challenges like British Airways have found it difficult to sustain such costs. Second, poor weather affects the operation of airlines. For instance, in the last quarter of the year 2010, the heavy snow that was experienced in Europe, the USA, and the UK led to the cancellation of flights to the affected routes. This led to huge losses as passengers opted for an alternative mode of transportations.

Social

Social factors refer to the various cultural practices associated with people from different parts of the world. It has had little impact on the performance of the aviation industry. The culture of leisure and tourism in Europe, the UK, and the USA has led to an increase in the demand for passenger flights in such areas. British Airways has also benefited from the culture of hard work that is associated with the citizens of the UK. This has led to a wealthy population that is able to afford passenger flights regularly.

Technology

Technology relates to the methods of producing goods or providing services. Technology is important in the aviation industry since it is responsible for the level of efficiency, safety, and quality of services. Airlines with great financial capabilities have been able to acquire new aircraft that are very efficient. They also have bigger capacity and high safety standards. For example, Lufthansa has been able to purchase 20 A 380 mega-liners in the last three years and this has immensely contributed to its profitability (Lufthansa, 2011). British Airways has not been able to achieve the same level of success as Lufthansa due to its limited financial resources.

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Economic

Economic factors refer to the effects of the performance of the domestic and global economy on the aviation industry. The recent global financial crisis adversely affected the global aviation industry in terms of a great reduction in demand for flights (Franke & John, 2010). “It led to the collapse of airlines such as Sky Europe and JAL” (Franke & John, 2010). Brussels and Australian airlines were purchased by Lufthansa since they could no longer sustain their losses (Lufthansa, 2011). Even though British Airways survived the effects of the crisis, it recorded a great reduction in revenue. The fluctuation of oil prices is another economic factor that influences the performance of the aviation industry. The oil prices keep rising and this makes it difficult for airlines to set consumer-friendly prices. British Airways, for instance, increased the price for its long-haul tickets by 10 pounds in 2010 due to the increase in oil prices (British Airways, 2011). This translated into a reduction in the company’s sales volume since it was charging higher prices.

Legal

Legal factors relate to the regulations that govern the operations of airlines both at domestic and international levels. The regulations relate to the number of trips that an airline can make over a period of time, the safety standards, the costs of using airports, and environmental pollution (Trethway, 2004). All these regulations are associated with charges that reduce the profits of airlines. Regulations on the partnerships between airlines have also made it difficult for firms such as British Airways that are seeking market consolidation to benefit from mergers and joint business deals.

Responses to the Effects of the Above Factors

The main challenges associated with the effects of the above factors include reduction in the market share, reduction in revenue, and increased competition. The industry has responded to these challenges by focusing on cost reduction measures. This has led to the introduction of airline alliances (Trethway, 2004). The member airlines of the alliances enjoy economies of scale as they share resources such as passenger launches. Besides, they are able to increase their sales by helping each other to connect passengers to different destinations at lower prices.

However, British Airways has not adopted this strategy. It has focused on internal restructuring which includes laying-off employees, reducing its route network, and minimizing sales promotional activities such as discounts (British Airways, 2011). The firm is not a member of an airline alliance. It has instead opted for “joint business agreements with US airlines” (British Airways, 2011) in order to expand its route network.

Market Environment Analysis

Market environment refers to the factors that affect the performance of a firm in the market. The factors relate to the competitiveness of a firm and this can be explained through porter’s five forces model and SWOT analysis

Power of the Supplier

The power of the supplier is high in the aviation industry due to the following reasons. First, there is a high concentration of suppliers as compared to the buyer’s industry. Second, there is low availability of substitutes for the suppliers’ products. This is because aircraft are more or less similar and thus can not substitute themselves. Third, the products of the supplier are highly differentiated in the market. However, the buyers (airlines) are very important to the suppliers since they are the main clients of the aircraft manufacturers. The high power of the supplier makes it difficult for airlines to negotiate for the supply of the aircraft at lower prices (Dess & Lumpkin, 2009). This has made it difficult for firms like British Airways to purchase modern aircraft.

The intensity of Competitive Rivalry

The intensity of competitive rivalry is high due to the following reasons. There are many airlines in the industry, especially from the emerging economies. Second, the recent financial crisis and fluctuations in oil prices have led to slow growth in the industry. The fixed costs are also very high since the industry is labor-intensive. This can be reflected in the worker strikes that are prevalent in the industry. However, there is a high level of product differentiation. High competitive rivalry is responsible for the slow growth rate in British Airways’ sales volume. Firms that have not been able to withstand the rivalry have either been sold or closed.

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The Threat of Substitute Products

The threat of substitutes is high particularly in the domestic market of developed economies. The introduction of electric trains has increased competition in the transport sector. In 2009 the passenger train industry recorded a growth rate of up to 12% in the UK and France while airlines recorded negative growth rates (British Airways, 2011). At the international level, the threat of substitutes is moderately felt in the cargo airline segment. Traders are opting for sea transportation since it is cheaper. The threat of substitutes is very low in the intercontinental passenger airline segment. This is because there are no better substitutes for air transportation at the intercontinental level. Thus British Airlines and other players in the industry are focusing on long-haul flights in order to take advantage of the low threat of substitute products. The high threat of substitute products at the domestic level has reduced the sales volume of airlines and British Airways is not an exception.

The threat of New Entrants

The threat of new entrants is low in the market and this can be explained as follows. First, huge capital is required to join the industry. This has made it difficult for firms to invest in the industry. The incumbent firms are enjoying economies of scale through “joint business agreements and airline alliances” (Franke & John, 2010). Third, the level of product differentiation is very high in the industry. A low threat of new entrants means that British Airways and other incumbent firms can not easily lose their market shares to new entrants in the market (Dess & Lumpkin, 2009).

Power of the Buyer

The power of the buyer is low in the global aviation industry due to two reasons. First, there are many buyers (airlines) as compared to suppliers (aircraft manufacturers) in the industry. Second, the buyers’ switching costs are very high. However, the level of product differentiation is very high in the market. The low power of the buyer means that the airlines are price takers (Dess & Lumpkin, 2009). Thus the manufacturers of aircraft determine the price at which they supply their products. This means that airlines can be exploited through the high prices of aircraft.

SWOT Analysis

British Airways is associated with the following strengths in the airline industry. First, the company has an effective financial management strategy that has enabled it to survive the effects of the recent financial crisis and intense competition in the market. Second, the company has a global presence thus it is able to serve customers from different parts of the world in order to increase its revenues. Finally, the company has formed “joint business agreements with American airlines” (British Airways, 2011). This has enabled it to increase the number of its routes by five as of December 2010. Besides, the company has been able to reduce its prices due to the economies of scale that accrue from the agreement. The main weakness of the firm is its poor financial performance. This has undermined its ability to implement an effective growth plan. The company has also not cushioned its investments through diversification. Profitable airlines like Lufthansa owe their financial success to investments in other industries such as real estate, shipping, and oil drilling.

The world economy is steadily recovering from the last financial crisis. Most economies are recording positive growths (Bowen, 2002). This is the main opportunity that is available to British Airways. The firm can increase its route portfolio and benefit from the anticipated increase in demand for flights. The threats facing the firm include intense competition in the market, fluctuation of oil prices, strict regulation policies, and high power of the supplier in the industry. These factors undermine the firm’s efforts to grow as discussed above.

Industry Life Cycle Analysis

Industry Composition and Concentration

The global aviation industry is characterized by a large number of airlines. The main players in the industry include Lufthansa, Emirates, and Virgin Atlantic. A large number of airlines is attributed to the following factors. The emerging economies in Asia and Africa are recording high growth rates and this has increased the demand for flights. Consequently, more firms have joined the industry. Second, limited regulation at the international level has made the long-haul flights business to be more profitable. For example, the recent signing of the “free sky agreement between EU and US” (Trethway, 2004) has led to the introduction of more flights between Europe and the US. Given a large number of firms in the industry, the concentration of the global aviation industry is low. There is no single airline with a controlling stake in the market.

Geographical Dispersion and Industry Growth Rate

Geographically, the global aviation industry typically covers the whole world. The ability of a firm to fully serve the market depends on two factors namely availability of financial resources and competition. A firm’s financial capabilities will determine the number of routes that it can sustain. British Airways is currently not able to serve all the routes in the market due to its limited financial capabilities. Even though there are many airlines in the industry, they are evenly distributed in the market. Every country has only a small number of airlines. This encourages growth especially at the domestic level due to limited competition.

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The industry is characterized by a limited or a slow growth rate and this can be explained as follows. First, the recent economic crisis adversely affected the performance of the incumbent firms. This led to huge losses, the collapse of firms, and acquisitions. Second, the constant oil price fluctuations have increased the costs in the industry. For instance, Lufthansa witnessed a 47% increase in its expenses in the last financial year due to the increase in oil prices (Lufthansa, 2011). British Airways had to increase its prices due to the same reason. These factors are responsible for the slow growth rate in the industry. The growth rate has been on the decline since 2008 due to the effect of the recent recession. The growth is expected to be positive in the future since the global economy is steadily recovering from the crisis (Franke & John, 2010).

Competition within the Industry and Profitability Ranges

Analysis of the intensity of competitive rivalry indicates that there is a high level of competition in the industry. The intense competition is attributed to the presence of a large number of firms, deregulation at the international level, and positive economic growth in developed and emerging economies. Technological advancements have also led to the introduction of bigger aircrafts such as the A 380 which has improved the competitiveness of the firms that own them.

At the global level, there is a huge disparity in profitability. British Airways, for instance, recorded an 11% increase in losses in the last financial year (British Airways, 2011). On the other hand, Lufthansa recorded a 67% increase in revenue and recorded a profit of 288 million Euros over the same period (Lufthansa, 2011). Most airlines were not able to sustain their losses following the impacts of the recent financial crisis. Thus they were either closed or acquired by other firms. The firms that survived especially in emerging Asian economies and the US had benefited from government bail-outs. Other firms that recorded positive results in the last financial year include Asia’s Emirates Airline that realized a profit of AED 2 billion and Africa’s Kenya Airways which realized a profit of KSH 2.2 billion (Franke & John, 2010).

The above analyses show that the global aviation industry is associated with intense competition, slow market growth, high product differentiation, cost leadership strategies, and the availability of several segments. This means that the industry has reached the maturity stage of its life cycle.

Conclusion

The above analyses reveal the following about British Airways and the global aviation industry in general. First, the firm is facing difficult financial times even though it is still stable. The firm’s slow growth rate and overall dismal performance are largely attributed to its limited financial resources. Second, the global aviation market is highly competitive while growth remains to be slow due to market and non-market factors as discussed above. Third, the industry has reached its maturity stage and is thus experiencing slow growth. Finally, the market is recovering from the effects of the recent financial crisis (Franke & John, 2010). These trends indicate that opportunities still exist in the industry (Bowen, 2002). Given the fairly stable financial position of British Airways and the existing and expected opportunities in the industry, the firm can consider merging with another airline. This would enable it to obtain the financial resources that are needed to fund its growth plan.

References

Bowen, J. (2002). Network change, deregulation and accessing the global airline industry. Economic Geography,vol. 6 (4) , 102-320.

British Airways. (2011). Annual financial report: 2009. Web.

Dess, G., & Lumpkin, G. (2009). Strategic managemnt: creating competitive advantages. New York: McGraw-Hill.

Franke, M., & John, F. (2010). What comes next after recession? airline industry scenarios and potential end game. Journal of Air Transport Management, vol. 17 (1) , 19-26.

Lufthansa. (2011). Reports. Web.

Trethway, M. (2004). Distortions of airline revenues: why the network airline business model is broken. Journal of Transport Management, vol. 10 (1) , 3-14.