Industry Analysis on British Airways Enterprises - Research Paper Example

Table of Contents Introduction 2 Industry Size, Growth Rate and Sales Projection 3 Industry Characteristics 5 Industry Trends 7 Environmental trends 7 Business Trends 10 Long Term Prospects 12 References 14 Introduction The world in the 21st century is moving ahead into the future on the basis of continuous change and rapid development. The massive development in the communications arena in the form of mobile communications as well as high speed data connectivity has opened up new frontiers. It is important to highlight because of the rapid technological penetration as well as transformation, the world has become a well connected single entity. As a result, masses around the world have gained easy access to multiple knowledge sources and have become more aware as well as demanding in nature. The rising diverse needs of the masses present in various markets of the world, because of their increased awareness, have created a strong opportunity of business for firms present in various geographical locations. In order to tap the unique opportunity of growth, organizations with considerable human talent as well as financial firepower, are increasingly venturing into newer markets with new and customized business models, thereby creating the platform for global business. Because of the rise of opportunities related to global business along with other associated fields, the aviation sector around the world, owing to its fast and efficient service, has become a vital mode of transport for global travelers. In this particular assignment, the focus is on studying the scheduled air transportation industry of the United States from the aspect of the firm British Airways. The scheduled air transportation industry of the United States has the SIC code of 4512 (naics.com, n.d.). Also, the NAICS code for this US based industry is 481111 (naics-code-lookup.findthebest.com, n.d.). Industry Size, Growth Rate and Sales Projection Talking in regards to the size of the air transportation industry of the US, it as to be said that the aviation sector forms the backbone of the modern day American economy and acts as a catalyst by generating 1 trillion USD of economic activity (airlines.org -1, 2014). Data from a report of Federal Aviation Administration (FAA) Air Traffic Organization (ATO) revealed that the US aviation sector generated between 370-405 billion USD in annual personal earnings between 2006 and 2009. A new report released in May 2012 by International Air Transport Association (IATA) showed that the aviation sector of the US contributed around $669.5 billion in gross added value, which is roughly around 4.9% to the US economy (airlines.org -2, 2014). As per the estimates of the IATA, the international passenger demand grew by around 5.4 % and the domestic passenger demand by 4.9% in 2013 in all regions. However, the North American carriers which are the main players in the US scheduled air transportation sector received the slowest growth in regards to passenger traffic in the international front. The international passenger traffic for the US market increased by 3% on an annual basis. On the other hand, the domestic passenger traffic for the US market grew by around 1.9% in 2013, because of positive sentiments related to economic stability, growth in employment as well as increase in consumer spending (iata.org -1, 2014). For the purpose of projecting the future demand for the scheduled air transport sector of the US, attention has to be given on the global traffic forecast provided by the IATA. It is important to highlight that as per the IATA projections, the global air traffic, in terms of revenue passenger kilometers on a system wide basis will be growing at a rate of 6.4% between 2013 and 2017 (iata.org -2, 2014, p. 2). Source: iata.org -2, 2014, p. 2 Though the aviation sector of the US started in 2014 on a negative note and with a debt of 71.5 billion USD, the leading airlines belonging to this sector made significant returns, which helped them to make significant investments in the arenas of assets, technology as well as manpower (airlines.org -3, 2014). It is important to highlight that the revenue in the North American air transportation sector grew by over 5% in the 2013. Source: iata.org -2, 2014, p. 2 Industry Characteristics While discussing about industry characteristics, the structure of the scheduled air transport industry of the US needs to be considered. With regards to the revenue generated from operations, the US scheduled air transport industry is categorized into major and regional carriers. Generally, the major airlines generate operating revenue of over 1 billion USD on an annual basis. The regional carriers provide air services to limited regions of the country and their operating revenue ranges between 20 million to 100 million USD (avjobs.com, 2014). As of the year 2012, the US aviation sector included 15 scheduled mainline air carriers and around 70 regional carriers (Faa.gov, 2013, p. 15). The major players in the domestic arena of the US scheduled air transport sector are Delta Airlines, United Airlines, Southwest Airlines, American Airlines and US Airways. As of 2013, the top five players comprise over 68% of the market. The following table reveals the market share held by the leading five airline companies in the year 2013. Source: www.transtats.bts.gov, 2013 On the financial aspects, the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) revealed that the scheduled air transportation industry of the US attained a net profit of 3.2 billion USD in the third quarter of 2013. Talking on these regards, it has to be stated that the financial performance of airlines are best understood from the point of net income and operating profit/loss (www.rita.dot.gov, 2013). The following charts reveals the combined international and domestic quarterly net income as well as quarterly profit and loss of the top five airlines of the US airline sector. Domestic + International Quarterly Net Income: (Net Income in Millions of Dollars) Source: www.rita.dot.gov, 2013 Domestic + International Quarterly Operating Profit/ Loss: (Operating Profit/ Loss in Millions of Dollars) Source: www.rita.dot.gov, 2013 Industry Trends The industry trends for the scheduled air transport industry of the US can be analyzed by focusing the environmental trends and business trends. Environmental trends Environmental trends comprise of political, economic, social and technological which can create significant influence. In the airline industry, the political factors mainly comprise of various new regulations formed by the US government. It has to be highlighted that the Federal Aviation Administration (FAA) Reauthorization Act signed in early 2012, aims to build airline safety as well as bring into action, the Next Generation Air Transportation System. As per this new bill, there is a financial allocation of 63.6 billion USD for the next 4 years for various associated programs. Also, The National Space Policy designed by President Obama in 2010 provides a strong focus on usage of commercial space capacities and international cooperation for the purpose of achieving US Government’s mission based requirements. It is important to note that under this bill, US airline companies will have the opportunity to transport humans and cargo to the International Space Station, thereby providing a new opportunity of growth for the US aviation sector (selectusa.commerce.gov, n.d.). Talking about economic factors that can influence the US airline sector, focus has to be given on macro and micro indicators like industry restructuring, growth of US economy, employment levels as well as disposable income. The industry restructuring which started in the aftermath of terrorist attacks of 2001 continued its consolidating phase in the present times as well. Though there was a decline in capacity for the domestic markets because of the restructuring process, it increased by 2.4% in the period of 2007-2012 (Faa.gov, 2013, p. 16). The micro economic factors are also showing positive signs. The charts below provide insights on the quarterly performance of 2013 of the indicators like economic growth, rising employment and consumer income. Source: airlines.org -3, 2014, p. 10 Source: airlines.org -3, 2014, p. 10 Source: airlines.org -3, 2014, p. 10 The expansion of the US economy along with rising employment and consumers incomes is expected to contribute positively to the US airline sector. Because of the nature of the airline industry, the social factors lack any significant influence in regards to its growth prospects. However, since the customers in an improving economy is continuously looking for better value proposition, reports reveal that the airline transportation sector provides the best value for money on the lines of time as well as cost. The chart below provides a value comparison in regards to other modes of transport. Source: airlines.org -3, 2014, p. 4 Discussing in regards to technological influence, it has to be said that the evolution of aviation technology is bound to make a positive impact in the US airline industry. Also, the focus on fleet modernization by the US carriers will provide better prospects in regards to route planning as well as conduction of operations (Pwc.com, 2014). Business Trends In talking about business trends, it is important to consider the input costs, profit margins as well as potential increase in capacity. A significant portion of the input costs for the airline sector comprises of fuel charges. While fuel efficiency has increased over the years, yet there has been a steady increase in fuel prices. This is contributing to the rise of operating costs. The chart shows the yearly increase in fuel costs and their potential impacts on the input costs. Source: airlines.org -3, 2014, p.11 In regards to profit margins, it has to be highlighted that the global forecast for net profit is around 12.9 billion USD for the year 2013 (iata.org -3, 2013). In the US airline sector, the US airlines are expected to report a 3.6 billion USD in profit for the year 2013, which is better than the yearly projections (iata.org-4, 2013). This highlights that the profit margin for the US airline industry is expanding in the current times. In evaluating the capacity increase in the scheduled air transport sector of the US, it has to be stated that because of generation modern return on investments, it has been projected that there will be an increase in carrying capacity till the year 2014. The graph below provides a glimpse of the year on year change on the seating capacity in the US airline segment. Source: airlines.org -3, 2014, p. 14 Long Term Prospects After conducting an in-depth analysis of the scheduled air transport sector of the US, it can be said that the long term prospects for the sector looks quite promising in nature. The development of industry friendly policies by the government authorities along with the positive development in the economic factors like growing economy as well as rising employment and consumer income will trigger an upward growth for the US airline sector. Also, to generate long term gains increase the revenue per passenger, the airline sector has to opt for fleet modernization along with increase of carrying capacity. It can be expected that the capacity increase as well as opening up of new frontiers to space will create strong opportunities in the future. References naics.com. (n.d). Standard Industrial Code Divisions. Retrieved from: http://www.naics.com/free-code-search/siclist.html?sictwo=45 naics-code-lookup.findthebest.com. (n.d.) Compare Air transportation NAICS Codes. Retrieved from: http://naics-code-lookup.findthebest.com/d/e/Air-transportation airlines.org -1. (2014). Economics - Aviation & the Economy. Retrieved from: http://www.airlines.org/Pages/Econ_Aviation_Economy.aspx airlines.org -2. (2014). Economic Impact. Retrieved from: http://www.airlines.org/Pages/Economic-Impact.aspx iata.org -1. (2014). Passenger Demand Maintains Historic Growth Rates in 2013. Retrieved from: http://www.iata.org/pressroom/pr/Pages/2014-02-06-01.aspx iata.org -2. (2014). FACT SHEET: Industry Statistics. Retrieved from: http://www.iata.org/pressroom/facts_figures/fact_sheets/Documents/industry-facts.pdf airlines.org -3. (2014). Executive Summary. Retrieved from: http://www.slideshare.net/fullscreen/a4amediarelations/a4-a-indy-review-12884873/2 avjobs.com. (2014) Structure of the Airline Industry. Retrieved from: http://www.avjobs.com/history/structure-of-the-airline-industry.asp Pwc.com. (2014) Airlines: An evolving industry. Retrieved from: http://www.pwc.com/us/en/industrial-products/airlines-airports/index.jhtml www.transtats.bts.gov. (2013) Airline Domestic Market Share January - December 2013. Retrieved from: http://www.transtats.bts.gov/ www.rita.dot.gov. (2013) Scheduled Passenger Airlines Report Larger Net Profit in 3rd-Quarter of 2013. Retrieved from: http://www.rita.dot.gov/bts/press_releases/bts058_13 selectusa.commerce.gov. (n.d.) The Aerospace Industry in the United States. Retrieved from: http://selectusa.commerce.gov/industry-snapshots/aerospace-industry-united-states Faa.gov. (2013). FAA Aerospace Forecast Fiscal Years 2013-2033. Retrieved from: http://www.faa.gov/about/office_org/headquarters_offices/apl/aviation_forecasts/aerospace_forecasts/2013-2033/media/2013_Forecast.pdf iata.org -3. (2013) Airline Financial Outlook Strengthens. Retrieved from: http://www.iata.org/pressroom/pr/Pages/2013-12-12-01.aspx iata.org -4. (2013) Small Boost to Airline Profitability - Industry Profit Margin Improves to 1.6%. Retrieved from: https://www.iata.org/pressroom/pr/Pages/2013-03-20-01.aspx Read More