The impact of the external factors on the British Airways - Essay Example

IMPACT OF EXTERNAL ENVIRONMENT ON BRITISH AIRWAYS This section of the report assesses the impact of the external factors on the British Airways. The external environment shapes and impacts the business model of the organisation. IMPACT OF MARKET STRUCTURE ON PRICE AND OUTPUT DETERMINATION The price and output in every industry is determined on the basis of the market structure. Market structure of an industry, in turn, is determined by the number of players in the industry which results in the level of competition in that particular industry. Market structure of an industry is defined by four basic factors (Baye & Beil, 2006): 1- The characteristics of the products or services offered by an industry. 2- The level of production is another basic determinant of the economies of scale. When higher level of output is able to achieve the returns to scale is characterised by lower level of competition and vice versa. 3- The structure of the market is also determined by the number buyers for a product or service. 4- The level of the government policy. Impact of all these factors result in the market competition and the price is determined accordingly. Furthermore with the increasing level of competition, the output is determined for arriving at returns to scale with increasing efficiencies for profitability. Additionally, the differentiation is also attributed to product and service in order to refrain from price wars in competitive environment. The market structure and power are also affected by other factors such as ease and entry in the industry, the ease of substitute, and the sensitivity of the demand etc (Yun, 2002). IMPACT OF MARKET FORCES Similar to other industries, the airline industry is also driven by a pattern of competition that has defined the market structure in the global aviation and airline industry. Change in the factors of competition has changed the market structure of the Airline industry (Tabacco, 2011). For example Liang (2013), in a paper, has referred to the Airline Deregulation Act in 1978, control over the physical equipment, strengthened frequent flyer program etc still resist in transforming the airline industry into a perfect competition industry from the its oligopoly market structure. On the other hand, the impact of the low cost airline has further increased the heterogeneity in the market structure (Ciliberto & Tamer, 2009). Borenstein & Rose (2013), in a paper, have referred that with reduced entry barriers and increased government support to the industry, has led the many carrier to enter the industry and create challenging competitive environment. British Airways have taken into account the factors that have impacted the industry. For example, the annual report of 2013-2014 reports that BA has added to its fleet e Boeing 787 and Airbus A380 along with further addition to the level of distinguished services to the customers. Some of the services that have been planned to further ascertain the heterogeneity in the services include improved cabins, luxury lounges and innovative technologies to the customer. Also, BA has increased its services range of BA Executive Club and Avios to South Africa (British Airways, 2013). Hence, the profitability of the BA is determined by reduce cost and increased output that in turn generates the profitability. IMPACT OF ENVIRONMENTAL FACTORS Hence the impact of the environmental factors is evident from the above reflection of the market structure. This section of the analysis conducts the assessment of the airline industry in UK with the strategic tools of external and internal audit: PESTEL The PESTEL analysis is a tool that is aimed at the scanning of the external environment that impact the every company in the industry: POLITICAL The political uncertainties have direct impact on the airline industry. For instance, the current unstable environment in the middle east, Iraq war, Ukraine unrest all affects the schedule and routes of the airline. ECONOMICAL Most dominant impact on the airline industry results from the rising fuel prices that have an adverse impact on the profitability as follows: (Merket, 2010) Furthermore, the economics of the airline industry is also affected by the improving and declining economic growth: (Merket, 2010) SOCIAL Large part of the population of the UK is based on immigrants and so frequent and affordable flights have an impact (OEF, 2006). Similarly, consumers’ readiness to pay higher varies for different travelling purpose and time (Smyth and Pearce, 2008). Similarly, in flight food is also to be adjusted as halal etc when travelling in Muslim country TECHNOLOGICAL Constant technological developments are having an impact on the airline industry to improve its services to customers as well as processes for generating cost efficiencies. For example, BA encourages customers to provide online feedback via app (Kollau, 2013a). ENVIRONMENTAL Airlines across the world are making efforts to set their airline fleet that have low carbon emission as well as uses low fuel. LEGAL Under the threat of competition and the terrorism, the airlines are constantly facing legal implications. Further, taxation on vacation, tourism and other travelling also has direct impact. FIVE FORCES MODEL The five forces model provides assessment of the competitive landscape of the industry as follows: Competitive Rivalry: The competition is airline industry is intense that has led to the premium and low cost airlines at two extremes (Kollau, 2013b ). For example, to deal with the competition from the emirates in Indian market, BA localised its meal as well cabin crew uniform in its flights (Mayasandra, 2011). Power of Buyers: is considerably high as the wide range of airlines is present from the low cost to the exclusive and premium service providing airlines. BA has also expanded its services such as premium lounges for customers to attract customers. Power of Supplier: Is much higher as maintaining quality of services is critical. Fuel, airplane, maintenance services and other in-flights services are all critical and so cost high for a company to switch from one service provider to another. Substitute: The substitute for the air transport is by road and by sea. These are distant substitutes. Recently, the travelling cost, time and risk are being reduced by video conferencing which is a great threat to the industry (Biello, 2009). New Entrants: despite presumed low threat, the new entrants are entering in the market mainly in the form of the low cost carrier. Hence, the industry has reduced its attractiveness due to constantly increasing competition and pressure from all five forces. As a result, BA and other such industry are driving to differentiate their services to sustain. SWOT ANALYSIS Using SWOT analysis, the internal audit of the BA is conducted as follows: STRENGTH WEAKNESSES 1- Renowned airline with long established history and customer services (Winch, 2014). 2- Comprehensive strategic plan that account the importance of all stakeholders for organisational growth (British Airways, 2009). 3- Global partnerships and alliances with coverage of multiple locations. 4- Technologically adaptive. 1- Have failed in maintaining industrial relations. 2- Declining customer services those results in criticism and order compensation (CBC, 2014). 3- Failed in striking a right balance between its own profitability and customer right (CBC, 2014) OPPORTUNITIES THREATS 1- Exploration of the low cost market with sub-brand 2- Expansion towards new markets and additional alliances. 1- Uncertain fuel cost. 2- Threat of extremism 3- Regulatory threats such as taxes 4- Competitive pressure. Hence, British Airways has much potential to capitalise its well-developed brand with opportunities arising in the airline industry and overcoming weaknesses. SIGNIFICANCES OF THE INTERNATIONAL TRADE AND IMPACT UK business is highly dependent on the international trade. As evident from the graph given below, the balance of trade had hardly been able to strike a balance in past decade: (Trading Economics, 2014) As a matter of fact, UK has benefitted from being service industry, it has also faced challenges. However, UK with this high exports benefits from the comparative advantage by producing those products only that requires lower labour as blue collar labour is costly in UK. Hence, this dependence has benefitted UK with faster growth as a result of greater focus on services. With respect to the airline industry, increase in business increases travelling for business as well as other purpose like vacations etc as it increases the consumers’ disposable income. IMPACT OF GLOBAL FACTORS Global factors have direct impact on the UK business and most importantly airline industry. For example, growth of emerging markets has increased trade and other connections of UK with these countries. As a result growth in travelling has been reported. Similarly, the influx of the people to UK for London Olympic has provided BA to win the customers preference. Currently, the Japan has also allowed its national carrier to enter an agreement with BA (British Airways, 2013). Open skies have opened market for different airlines and most importantly as the low cost carrier. This has also increased challenge for BA to sustain its prices. IMPACT EU POLICIES EU, at one end, removed boundaries for its member countries while on the other hand has affected them adversely. For example, European Union Emissions Trading Scheme has resulted in additional taxes which have much potential bring beneficial impact to BA competitors (British Airways, 2013). Also European airlines have also been impacted negatively as a result of EU regulations. Contrary, the single market policy has considerably positive impact on the business travelling across EU countries. CONCLUSION The analysis revealed that competition and challenges are increasing at a much higher pace than the options to grow. The consolidated and concentrated industry has increased challenges for BA and the company has reached the right time improve its customers services to sustain customers’ loyalty. These aspects are also critical for the expansion in other markets and capitalisation of the fixed investments made by BA. LIST OF REFERENCES Baye, M. R., & Beil, R. O. (2006). Managerial economics and business strategy (Vol. 5). Boston, MA: McGraw-Hill Biello, D. (2009). Can Videoconferencing Replace Travel? Available from http://www.scientificamerican.com/article/can-videoconferencing-replace-travel/ [Accessed 10 June 2014] Borenstein, S., & Rose, N. L. (2013). How airline markets work… or do they? Regulatory reform in the airline industry. In Economic Regulation and Its Reform: What Have We Learned?. University of Chicago Press. British Airways. (2009). 2008/09 annual reports and accounts. Available from http://www.britishairways.com/cms/global/microsites/ba_reports0809/pdfs/Strategy.pdf [Accessed 10 June 2014] British Airways. (2013). British Airways Plc Annual Report and Accounts Year ended 31 December 2013. Available from http://www.iairgroup.com/phoenix.zhtml?c=240949&p=irol-reportsannual [Accessed 10 June 2014] CBC. (2014). Bumped British Airways passengers to get more money. Available from http://www.cbc.ca/news/canada/nova-scotia/bumped-british-airways-passengers-to-get-more-money-1.2504324 [Accessed 10 June 2014] Ciliberto, F., & Tamer, E. (2009). Market structure and multiple equilibria in airline markets. Econometrica, vol. 77, no. 6, pp. 1791-182 Kollau, R. (2013a). Airlines encourage passengers to provide service feedback via apps and cards. Available from http://www.airlinetrends.com/2013/11/17/rating-and-recognizing-airlinesservice-feedback-apps-cards/ [Accessed 10 June 2014] Kollau, R. (2013b). The best cabin interior launches of premium airlines and hybrid LCCs in 2013. Available from http://www.airlinetrends.com/category/industry-developments/ [Accessed 10 June 2014] Liang, J. (2013). An Econometric Analysis on Pricing and Market Structure in the US Airline Industry. The Macalester Review, vol. 3, no. 2, pp. 2. Mayasandra, V. (2011). How Lufthansa and British Airways are competing with Emirates on Indian routes. Available from http://www.airlinetrends.com/2011/10/13/lufthansa-britishairways-emirates-india/ [Accessed 10 June 2014] Merket, R. (2010). Managing airline survival in a highly competitive environment. Available from http://sydney.edu.au/business/__data/assets/pdf_file/0006/75147/ricom.pdf [Accessed 10 June 2014] OEF. (2006). The Economic Contribution of the Aviation Industry in the UK. Available from http://www.gacag.org/images/gacag/pdf/The%20Economic%20Contribution%20of%20the%20Aviation%20Industry%20in%20the%20UK.pdf [Accessed 10 June 2014] Smyth, M., and Pearce, B. (2008). Air travel demand. Available from http://www.iata.org/whatwedo/Documents/economics/air_travel_demand.pdf [Accessed 10 June 2014] Tabacco, G. (2011). What does market structure reveal? Empirical evidence from the US airline industry. Available from http://virgo.unive.it/seminari_economia/Tabacco.pdf [Accessed 10 June 2014] Trading Economics. (2014). United Kingdom Balance of Trade. Available from http://www.tradingeconomics.com/united-kingdom/balance-of-trade [Accessed 10 June 2014] Winch, J. (2014). British Airways tops UK brand rankings. Available from http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10656804/British-Airways-tops-UK-brand-rankings.html [Accessed 10 June 2014] Yun, M. (2002). Policies to improve monopolistic/oligopolistic market structure. Available from http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN014166.pdf [Accessed 10 June 2014] Read More