Business Environment Analysis of British Airways - Essay Example

INTRODUCTION Businesses in the modern world are faced with wide number of challenges that arise from the multiple aspects. The major sources from where the challenges arise include the external and internal environment of a business. Business in order to sustain its existence is required to constantly evaluate the changes taking place in the environment that is relevant to the respective business. Successful businesses are only those who adapt to the changing market pressures and generate opportunity from those evolving from environment. This report is aimed at the assessment of the environmental audit of the airline industry of UK. The assessment of the external environment is conducted in reference to its impact on British Airways. For the purpose, the range of strategic management tools has been employed. INTRODUCTION TO BRITISH AIRWAYS British Airways (BA) is a private limited company is renowned airline that has recently celebrated 90 years of existence in the year 2009. It is one the leading premium airlines of the world and the largest airline of UK and covers around 400 destinations across the world (British Airways, 2013). The business model of BA is based on the revenue generation from the passenger as well as cargo delivery services. With the long rich history and experience, BA has become one of the leading airlines that have extensive scheduled flights and network of airline. Additionally, it is a comprehensive list of joint agreements, franchise partners and other defined codes that enables it to service wide network of stations (airports). Importantly, in the year 2010, BA merged into Iberia which is the largest airline of Spain (British Airways, n.d.). British Airways generate its revenue from the two basic sources including passenger revenue and the cargo revenue. For the year 2013, BA generated revenue of around £ 10,129 million from the passenger revenue with the growth of 6.6% while the cargo revenue declined by 6.5% and generated £ 689 million in 2013 as compared to 2012. The year 2013 was driven by considerable investment in the airline with constant focus on expanding customer base along with the cost reduction measure at effect (British Airways, 2013). TASK 1 This section of the report will produce the information related to the British Airways. The information will be specific to the business direction and future vision of the business along with impact of the external environment on BA and its response. MISSION The mission of British Airways, as reported in the marketing in magazine, is “to serve” (Eleftheriou-Smith, 2011). Importantly, the British Airways often determines its mission as similar to vision is defined below. VISION British Airways is striving to become an airline that is most admired by customer (British Airways, 2013). For the purpose it is making constant efforts in expanding and improving its services along with generating cost efficiencies. SHORT TERM AND LONG TERM OBJECTIVES: The objectives to achieve vision of premium airline are: British airways have set its core objective in order to recognize as the world’s best global premium airline. The other related objectives include: To provide services to customers across the globe, regardless of any ethnic and geographic discrimination Ensure the provision of the world’s best and unique services to customers around the world. British Airlines’ services will worth every single penny the customers have paid. Maintain and improve core operations by keeping focus on people and cargo movement. Company will make continuous efforts to bring innovation in products and services. These core objectives are further breakdown into five short term goals. They are: Provide the premium facilities to premium customers in order to become first choice for customers. Introduce more comfortable onboard as well as lounge facilities for customers to create customer value. Facilitate customers with comforts and advance services by instructing colleagues. Outstanding services like checking-in from PDA or mobiles, introducing new flight on-board systems, and much more will be provided to customers at every point of contact. Develop the world’s best connectivity around the globe. To strengthen the services, company will increase number of flights to Dubai, Saudi Arabia, Johannesburg and all other major global cities in the world. To be recognized as the world’s finest and biggest aviation company. To maintain the leading position of Heathrow as the world’s premium hub, British Airlines provide the largest international long-haul markets. Company will develop support plans to improve terminal and baggage facilities, establish third runway and advance slots. Satisfying needs of customers by creating brand value. IMPACT OF ECONOMIC SYSTEM, FISCAL AND MONETARY POLICY ON BRITISH AIRWAYS IN LAST DECADE According to the British Airways, the aviation industry can also be taken as the economic barometer and as the economy faced shock in the year 2008 onwards, BA airways has also faced the economic shock of declining confidence level on the airlines (British Airways, 2009). Also the economic system is facing high level of competition that is has resulted in the consolidation of the industry such as around 35 carrier of cargo have merged into other airlines or have vanished as were unable to face the competitive pressures. Also the government is constantly increasing taxes on the industry (British Airways, 2009). The impact of the fiscal and monetary policy is also evident on BA. Taxation as a critical part of the fiscal policy which shifts demand with government spending, the BA will receive considerable positive impact as a result of tax reduction on corporate from 28% in 2010 to 20 percent by 2015 (Alom, 2014). Impact of monetary policy is also evident as interest rate and money supply impacts the demand and supply. Interest rate affects the prices of the product that in turn impacts the overall profitability of the airline (DI, 2013). Also interest rate affects the borrowing structure for airline. IMPACT OF COMPETITION, REGULATORY AND LEGAL CHANGES ON BRITISH AIRWAYS The impact of the competition originates from the consolidating status of the industry. Also the many of the markets for BA are still being regulated by the government which increases pressure in entry and maintain competitiveness (British Airways, 2010). Also the regulations related to cost structure and the government support affect the BA in adverse manner giving competitive edge to low cost operators (British Airways, 2010). The regulatory challenges not only rise from the government but also the other avenues such as agencies and partnership and safety regulators etc. For example, UK government is consistently increasing Air Passenger Duty and the European Union Emissions Trading Scheme are all creating challenges for the Airline (British Airways, 2013). IMPACT OF CHALLENGES ON BRITISH AIRWAYS’ STAKEHOLDERS AND RESPONSE OF BRITISH AIRWAYS According to the PwC report (2013), the airline industry is facing following challenges in successfully serving it stakeholders: (PwC, 2013a) Along with these challenge, BA is taking following measures to serve its customers in their wider interest as follows: 1. Recommended government to expand the infrastructure capacity which in turn would led growth of the aviation industry and consequently BA. 2. It has also recommended measures to the government for the rebalancing the trade and investment and the role of aviation industry including BA by transporting greater services and consequently higher investment in UK (Parliament.uk., 2012). 3. In order to deal with the challenges of the interest rate, BA has a comprehensive risk management committees that hedges the risk of interest rate change that have direct impact on raw material prices, prices to be charged from customers and long term borrowings for the investment purpose (British Airways, 2013). 4. Also BA enters into partnerships and agreements with different organizations in order to effectively deal with the challenges posed by external environment in order to improve its cost structure and customer services. 5. The research has also recommended for abolishing of the Air Passenger duty will increase the UKP 0.25 billion for the government exchequer (PwC, 2013b) 6. The above recommendations from the BA will not improve the competitive landscape with increased capacity, but also will improve the trade and other businesses in UK. Consequently, the jobs will be created giving rise to disposable income of locals and visitors to UK. Hence, benefiting the BA among all. With all these recommendations at work, British Airways intend to become the global premium airline in order to benefit the stakeholders. Stakeholders have been an integral part of the BA as evident from below image: (British Airways, 2009) TASK 2 PRICE AND OUTPUT DETERMINATION IN AN ORGANIZATION Organization in any industry determines its prices to be charged from the customer and output to be produced to serve the customers on the basis of the level of competition level in the industry. The competitive landscape of the industry that in turn determines the price and output for organization is subject to various factors which are as follows: 1- The total number of firm operating in an industry plays a defining role in the determination of the prices and output for an industry. Furthermore, impact of size of the organizations is also important in directing operating organizations in defining their respective output and price. 2- The market size in terms of consumers and their demand also determines the prices and output for an organization. This factor is also complimented by an impact from the sensitivities and substitutes for the product and service. 3- Higher the level of differentiation, higher the ability of the market to dictates prices and output level. 4- Ease of entering and exiting from an industry is another factor that determines the market prices of the product and services as well as the level of output in the industry. 5- The role of government and regulatory authority is also critical in defining the output and price structure of an organization. As a matter of fact, all these aspects have an impact on defining the future market structure for organizations operation in an industry. The primary objective of an organization in the business environment is generating profit which can only be achieved by arriving at the economies of scales. IMPACT OF MARKET FORCE The airline industry has also determined its competitive landscape on the basis of these factors. The competition in the airline industry was originally defined an oligopoly in nature. Oligopoly is a market structure limited number of firms in an industry determines the prices and output. However, evolution of the aviation industry has moved the competition in the airline industry towards the perfect competition. Therefore, the current competition and market structure has mix elements of oligopoly and perfect competition. For example, the demand of the airline service providers moved towards those service providers who take safety of passengers as the main objective. While the economic down turn created the market opportunity for the low cost airlines. Additionally, deregulations, control of organizations over the physical assets, cost efficiencies etc have played a critical role. IATA (2012), in a report, states that many countries treat airline industry as a cash cow business unit for an economy as it generates considerable tax for the exchequer. In the annual report of BA 2013, it has been mentioned that competition in the industry has increased massively having direct impact on the business margin of BA. IATA report has referred that business travel has increased considerably which has led to the growth of the premium seats (services) higher than economic growth. In the light of this aspect alongside the growing competition, BA has focussed on differentiating its services from competitors with an investment of £5 billion over a period of five years in aircrafts, improving services on ground as well as on flight, integrating the element of extravagance for those looking for premium services and range of technologies for cost effectiveness and customer services (British Airways, 2013) IMPACT OF ENVIRONMENTAL FACTORS The strategic audit of the external environment for an organization is required to be conducted in a systematic manner. For three layered strategic assessment, the PESTEL, competitive landscape and the SWOT analysis tools have been employed as follows: PESTEL The PESTEL tool takes into account the Political, Economic, Social, Technological, Environmental and Legal factors that have an impact on the business. PESTEL POLITICAL The political uncertainty mainly with respect to the Eurozone as a result of debt crises has led UK into recession (IATA, 2012). In addition, the referendum of Scotland to leave UK will has its own implications as UK will be forced to leave the EU which in turn will affect the free zones. ECONOMIC The unstable cost of oil which is the critical raw material for the airline industry is creating challenges. Rising demand for oil from the emerging countries and limited supply complimented with the limited inventories were big challenges (IATA, 2012). Despite pressures from the low cost airlines , the premium passenger growth is on rise a evident below: (IATA, 2012) Also, aviation industry has direct and indirect impact on the wider range of jobs and on GDP as can be depicted from the graph given below: (IATA, 2012) SOCIAL Customers with the growing options are increasing demands. Also the demand for the premium services and value based service is on rise giving high pressure of constant investment to the airline. TECHNOLOGICAL Technological adaption has become critical for the cost reduction as well as providing customers with improved services like on-flight internet etc. BA has signed Amadeus Passenger Revenue Accounting solution to integrate the technological prospects in the industry (Amadeus, 2012). ENVIRONMENTAL Carbon emission is the unified objective of the airline industry globally (IATA, 2012). Organizations in this prospect are required to invest heavily in their fleet t reduce the fuel usage. LEGAL Airlines are constantly affected by regulations. The various legal implications on the airlines range from the safety regulation such as IATA excellence circle as depicted below: (IATA, 2012) COMPETITIVE LANDSCAPE The competitive landscape of the airline industry is determined using porters five forces model. The model will determine the attractiveness of the industry. The assessment is as follows: Power of Buyers: The power of buyers is considerably high as range of airlines has entered in the industry. High competition is leading to the polarization of the industry towards low cost and premium service providers. BA is able to deal with this power by expanding its destination to around 400 stations. Power of Supplier: The power of suppliers is high. Power is high as few companies are making aircrafts and facilitating aircraft maintenance as well as limited options for oil is available. Also the food and other service providers have high power for its direct impact on the brand reputation. Threat of New Entrants: The pressure is high as new airlines with different models such as low cost are entering the market. Threat of Substitute: The substitute of the airline which includes land and railways are costly as well as requires much time. Also, there are places where land and other routes are not applicable. Online connectivity has increased the threat of substitute as email and other sources facilitate the close to personal presence of a person (Peterson, 2010). Industry Rivalry: The competition in the industry is immense. This has led airlines to offer the exclusive services such as Spa in JFK lounges in Heathrow Airport in 2013. Also airlines are making alliances such as Oneworld alliance (British Airways, 2013). The competitive landscape of the airline industry is becoming unattractive with every passing day. However, these are more challenging for the organizations that are new to the industry or have little experience to deal with. Owing to long experience and expertise of the BA, the organization has been successfully dealing with these rising pressures. INTERNAL AUDIT Sustainable performance in an industry also requires business to constantly assess its own position. For the purpose, the internal audit is conducted using SWOT analysis. The tool of SWOT analysis as presented below scans the internal environment for BA: STRENGTH WEAKNESSES 1- BA has won the award of 2014 Superbrand (Rao, 2014); hence, has strong brand position. 2- BA has strategically defined plan to become would premium airline while taking into account all stakeholders (British Airways, 2009). 3- Alliances, partnerships and memberships such as OneWorld (n.d.) and IATA (2012) increase its reach to wider customer base. 4- Comprehensive fleet base with constant innovation in services such as Spa in JFK lounges in Heathrow Airport etc. 1- BA has been facing challenges in dealing with the industrial relation constantly for three years. 2- In an attempt to innovate services, BA has sometime moved beyond limitations; hence, receiving criticism. 3- BA has recently faced severe criticism for its inflexible services that has badly affected the reputation (Scotsman, n.d ) OPPORTUNITIES THREATS 1- Entering the low cost airline section with the sub-brand. 2- Growing markets such as emerging ones offer opportunity to expand its network. 3- Acquisition of low cost brands 1- Pressure of cost of raw material that is fuel which is highly uncertain. 2- Rising challenges for safety, security and quality in addition to the regulations and competition. 3- Separation of Scotland would pressure UK’s separation from EU having impact on cost factor. BA in order to deal with these challenges BA has focussed on improving its quality of services with constant investment and development of alliances. Hence, with this adaption at work, the BA has much potential to exploit the opportunities. SIGNIFICANCES OF THE INTERNATIONAL TRADE AND IMPACT BA generates its revenue from the passenger as well as cargo; therefore, the international trade has an important impact BA. Currently being the part of EU, UK and its businesses had an advantage of tax etc. Moreover, the 70% of the cargo traffic is moving between the emerging countries. Furthermore, the cargo is moving its traffic from the developed countries to the developing countries as evident from the image below: (Airbus, 2013) These changing dimensions trends would requires BA to develop its routes accordingly having greater connection with the airports and businesses in the emerging markets as compared to developed countries. Also it will require BA to shuffle its carriers between routes. IMPACT OF GLOBAL FACTORS In the connect world, BA has already joined the one world alliance (British Airways, 2013). The move of economic growth from the developed countries to developing countries would require BA to adjust its services accordingly. The change in the status of Scotland from part of UK as an independent state would also require BA to meet the national standards of Scotland as new country. Currently, with the FIFA football world cup being held in Brazil, BA has to focus its services this specific global event. Hence, events across the world have its impact on the Airline industry. IMPACT OF EU POLICIES EU changed the European market considerably. The impact ranges from the taxation to the carbon emission factors. For example, EU has defined a policy to cap the carbon emission from the airlines that land into the EU boundaries (Solomon, 2011). Also EU has charged airlines for the carbon emission (Hale and Carrington, 2012). These rules in turn reduce the competitive pressure from BA as airline would reduce their travel on taxed land. CONCLUSION It is recommended to BA to improve its government lobbying for the expansion of the international gateways in England. Also, as recommended earlier, it must expand its presence and routes in the emerging markets which are the future drivers of trade. REFERENCES Airbus. (2013). Future payloads – freight forecast 2013-2032. Available from http://www.airbus.com/company/market/forecast/?eID=dam_frontend_push&docID=33976 [Accessed 18 June 2014] Alom, N. (2014). M2 analyse the effects of fiscal and monetary policies. Available from http://prezi.com/nqadt5-xobnq/m2-analyse-the-effects-of-fiscal-and-monetary-policies-for-a/ [Accessed 18 June 2014] Amadeus. (2012). British Airways becomes the first airline to sign for Amadeus’ new revenue accounting solution. 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