British Airways Analysis - Term Paper Example

British Airways Faculty Executive Summary This paper is a study on European Airline Industry and British Airways. European Airlines Industry has gone through number of uncertainties and tragic events in the past. During 1990’s it experienced changes in the political-legal scenario of its functions. The policies related to deregulations and opening of the internal European market for the international players posed challenge of survival for many big and small players. There have been other key factors like investments in IT and telecommunication. The political-legal, socio-cultural, economical and technological factors have impacted the industry as a whole. There are new opportunities and threats existing for the European players. Table of Contents Executive Summary I. Introduction II. European Airlines Industry and British Airways II.i. Key Issues II.ii. PEST Analysis II.iii. Porter’s 5 Forces Model II.iv. Opportunities and Threats in Next 5 Years III. Conclusion Reference I. Introduction European Airlines Industry has been experiencing changes from last few decades. These changes were results of various factors like political, social, technological and economical. The first section of the paper describes British Airways and European airlines industry. It discusses the key factors of the industry. It further explores the environmental factors by doing PEST analysis for the industry. Porter’s five forces model of industry competitiveness is discussed in the next sub section, followed by opportunity and threat analysis. II. European Airlines Industry and British Airways European Airlines Industry has gone through a tough phase just after the September 11 Twin Tower Tragedy of 2001. This has not only impacted the aviation industry across the globe but had greatest impact on the European Airlines Industry and American Airlines Industry. Air travel market has grown in last few years considerably with the growth of leisure industry and number of fliers for holiday destinations. The deregulations and other governmental policies have impacted the industry as well. There are various political, social, economical and technological factors which have impacted the industry and its structure. One of the largest players of the European Airlines Industry is British Airways. British Airways is ranked at 442 in the Fortune 500 companies with the revenues of $ 15,189 millions (as if March 2006). It is one of the world’s most successful airlines. British Airways is one of the worlds largest international airlines, carrying in the year to March 2005 almost 36 million passengers worldwide. Also, one of the worlds longest established airlines, it has always been regarded as an industry-leader. The airline’s two main operating bases are London’s two main airports, Heathrow (the world’s biggest international airport) and Gatwick. An average of 49,490 staff was employed by the Group worldwide in 2004-2005, 86 per cent of them based in the UK. Unlike some of the worlds other airlines, British Airways is owned entirely by private investors - with around 240,000 shareholders, including some 50 per cent of the Companys own employees. 1 II.i. Key Issues There are various key issues of operations of any airlines company. These issues are related to the load factors, government policies, technology, human resource management, customer relationship management and many others. Some of the important issues are discussed below. 1. Load factor Load Factor is percentage of seats offer filled by revenue passengers. The combined load factor of last five years of all the passengers from year 1999 to 2006 till October is presented in the chart for all the players of European Airlines Industry. As indicated in the graph from 1999 to 2005 the seats filled by revenue customers have increased. However at the end of year 2001 and through out 2002 the load factor have shown a great dip. This was due to the September 11, 2001 tragedy. This has impacted the revenues in the last quarter of year 2001 and for the year 2002. Graph 1: Industry Load Factor from 1999-2006 till Oct (Source: Association of European Airlines) The load factor of British Airways has shown similar growth patterns as the industry. As indicated in Graph 2 the growth has dipped down in the year 2002 while rest of the years it has shown a consistent growth. In 2005 the industry growth was lower than that of the year 2004 while there was considerable increase in the percentage of the revenue customers for British Airways from 2004 to 2005. Graph 2: Load Factor of British Airways During 2004/05 revenue passenger kilometres for the Group rose by 4.7 per cent, against a capacity increase of 2.1 per cent (measured in available tonne kilometres). This resulted in Group passenger load factor of 74.8 per cent, up from 73.0 per cent the previous year. The airline also carried 877,000 tonnes of cargo last year (up 10.2 per cent on the previous year). The revenue environment in 2006 remains challenging. Whilst turnover is up in the nine months to 31 December 2005 by 8.8%, market conditions remain broadly unchanged as significant promotional activity is required to maintain seat factors.2 2. Use of Information Technology The European Airlines Industry has been leader in the global aviation industry to use latest technological platforms. However the patterns of use of technology have also been different across the industry for the large and small players. One of the surveys by SITAs annual airline IT (information technology) trends survey reveals that out of 1 in four tickets are sold online. This means 25% of the total ticket selling is online. Company’s websites play important role in that as 85% of the tickets are sold through the website itself. 83% of the total players of European Airline Industry sell some tickets online and 35% of all tickets are fulfilled as e-tickets. The technology has provided aviation industry a low cost operating option. There are various complications attached to the online ticketing system. It has replaced the human option but not truly. In the online ticket booking company can not ensures the best prices offered and ensure best services to the online customer. This is probably one of the reasons 57% of the players of Airline industry cited pricing as a major complexity in online ticketing for their business. The use of kiosks has been increased n last few years as 31% of the total airlines companies have deployed their dedicated kiosk for check in. It is estimated that approximately sixty percent will use common‑use kiosks by 2007. However in the use of Bar Code boarding pass system only 17% of the total airlines are using it at present. This figure is much lower than the North American Airlines where 67% of the total airlines are using the same technology for the passes. 46% of total airlines have moved towards Internet Protocol setup while 11% have completely in place. In North American carriers this is 78%. It is expected that by 2007 20% of the total airlines will offer voice mobile telephony and 30% will offer minimum of one of the airborne data connecting options. The percentage of the revenue spent on the telecommunications and IT technologies are 1.9% of the total revenue at present for the industry. Majority of players which includes the largest ones have increased their IT budgets in last few years and expected to increase further. IT is offering better returns in terms of reducing the cost of operations which is one of the most crucial factors for any business. Out of total airlines surveyed, 40% believed that sort term IT projects have proven paybacks this is the reason various IT projects have been in their priorities. 20% of the total IT projects was for the customer service projects which are highest among all. As one can see IT sector have become a crucial part of the operations of Airlines Industry. It has provided a fast, reliable, flexible and consistent mode of communication. This is easily accessible by the consumers and ticket buyers to meet their various needs like information, ticket booking, customer service and others. For the airlines companies it offers a cheaper platform to reach their target audience and customer groups. The operating cost is low. Data can be fed any time; it can be updated time to time and retrieved by various stakeholders depending upon their rights. British Airways have also invested in the information technology. It has attractive website which offers information and e-ticket booking facility to the customers. Apart from that it has invested in the kiosks for the customer facilities. The airline has now installed over 227 kiosks in 39 airports across our network. British Airways is committed to moving to 100% eTicket, which delivers better customer service and reduces costs.3 The investments in the information technology have enabled British Airways to reach to its stakeholders more than that of traditional methods. On an average working day ba.com is visited by over 300,000 people – approximately three times the number who is travelling on a BA plane anywhere in the world. These visits will result in 12,000 bookings, 40,000 people servicing their bookings and 55,000 people accessing their Executive Club accounts. Email is our dominant communications channel to customers, both for marketing and servicing purposes.4 Graph 3: Pattern of IT Expenditure As evident from the graph the investment in the IT structure has been increasing over the last five years. At the same time the cost of running IT operations is decreasing. This is due to the expertise company has gained over these years. The compatibility with technology at all levels of its organisation has been increased. Regular investment in IT is with the objectives of the expansion plans, focused customer service approach and utilisation of technology to increase the quality of performance. II.ii. PEST Analysis PEST analysis provides a picture of the environment in which any industry operates. Below is the PEST analysis of the European Airlines Industry. II.ii.a. Political The political condition within which European Airline Industry is operating is considerably stable. However after the Twin Tower attack the threat of terrorist attacks has been one of the main areas of concerns in which Government and private agencies along with the airlines industry are trying to minimise. In 1992 the Ministry of EU had took initiatives to liberalise the internal markets of aviation transport. This has impacted the industry positively. In 2002 EU entered in a bilateral agreement with US where each side of the markets were open for each member and some restrictions over the foreign players and policies have been changed to allow them control and freedom to operate. This increased the competition for the companies of both the side and has impacted the small players more than the larger ones. Rapid growth in the no-frills sector in the UK was assisted by the favourable regulatory regime and ample slot availability at secondary airports such as Luton and Stansted. Further growth is expected as new operations start up, and new destinations are added to the existing carriers networks. However as the UK market becomes saturated, the no frills carriers are starting to focus increasingly on expansion at continental European hubs. There has also been some consolidation in the no-frills market, for instance with Ryanairs acquisition of Buzz, and easyJets assimilation of Go.5 II.ii.b. Economical The economical stability, high gross national product and high purchasing power parity of individuals are some of the factors of stable economical conditions of the European countries. The growths in the leisure and sports industry have proportionately impacted the European Airlines industry. The holiday makers and adventurer sports service provider offered new destinations and places for the holiday services. People have more purchasing power and interest towards leisure and sports activities which have benefited the airlines industry as well. II.ii.c. Social-Cultural The socio-cultural set up of European Union is somehow similar from each other with not very high variations. The dominating religion is Christianity. Major section of the society spends considerable amount of money, time and energy in leisure and sports activities. People use airlines services as one of the main means of transport. II.ii.d. Technological The technological requirements and setup for the aviation industry is complex and high. The new technologies like IT have enabled the airlines companies to lower their operating cost and hassles by integrating the services and improving coordination and efficiency. The technological investment requirements are high for the setup like airlines industry. British Airways has been one of the leaders in the industry to adopt new technological platforms to improve its services and operations. It has II.iii. Porter’s 5 Forces Model Porter’s 5 Forces model is one of the best tools of competitive analysis for any industry. It includes all the main factors which increase the rivalry within any industry. The Graph 4 is the Porter’s 5 Forces model. As one can see there are five main factors in the model. These are as follows: Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Substitute Rivalry among the existing firms Graph 4: Porter’s 5 Forces Model6 Threat of New Entrants The threat of new entrants for the industry like Airlines is very less as the investment requirements are very high. Apart from these government regulations and market attractiveness are other factors influencing the investment decisions of any new entrants. British Airways Group fleet as at 31 December 2005 comprised 289 aircraft - one of the largest fleets in Europe. The fleet currently includes 57 Boeing 747s, 43 Boeing 777s, 21 Boeing 767s, 13 Boeing 757s, 67 Airbus A319/320/321s, 33 Boeing 737s and 55 smaller aircraft used in the company’s regional business.7 The threats of new entrants are less for British Airways due to the high entry barriers to the industry. Bargaining Power of Suppliers Usually the bargaining power of suppliers for the aviation industry is low. The products are high margin products if these are highly technical and specialised like parts and components of airplane and the bargaining power of supplier may be high due to limited availability of suppliers where as the bargaining power of some of the suppliers will be less where the number of suppliers and products they offer are high. The bargaining power for the suppliers for British Airways is less as it is the largest and one of the oldest players in the market. The effective supplier relationship and low bargaining power of the suppliers have created comfortable situation for British Airways. Bargaining Power of Buyers Bargaining power of buyers is low as the buyers are fragmented and not concentrated. The number of services offered by the airlines, routes and companies offering service also impacts the bargaining power of buyers. The company may reduce price itself to allure customers in the case competition increases. Substitute The substitute available to the buyers are different other modes of transportations like railways, water, road and others. But each of the options has certain limitations if compared to the airlines services. In Europe airline services are quick and frequent. It is the fastest mode of transportation. This makes it difficult for the buyers to move on to the substitute unless and until the reason of opting for substitute is very complex. The same had happened after 2001 Twin tower tragedy when the transporters moved to substitute due to the threat of terrorism and their security. Rivalry among the existing firms After the de-regulation and liberalisation along with bilateral agreements between EU and US, the rivalries among various national and international companies have increased. On one hand where the companies have got opportunities to explore new markets, the strategies of foreign players become threat to them in the domestic markets. The industry concentration of airlines companies is high as compared to the size of European market. This resulted in immense competition within the industry. The fixed cost is high. The market growth is slow as it is a mature economy. The services offered by various players are almost similar with less differentiation. The exit barriers are high which makes it difficult for any player to move out and firm has to remain within the industry. All these factors intensify the rivalry among the firms. Graph 5: Number of revenue passenger kilometres (RPKs) flown8 Within national and international markets, British Airways has been able to maintain its ranking in the first 10 service providers. However performance in the international market has been much better as compared to other players from the European Airlines Industry. Lufthansa is leading in the revenue passenger kilometre international list with 103.8 billion followed by British Airways 102.8 billion Graph 6: Number of freight tonne-kilometres (FTKs) flown British Airways is known for its premium airlines services. The number of passengers and in the passenger services it is better than that of freight services. In the freight category it falls in the top ten list for international services while in the combined performance of national and international it does not come anywhere in the list of first ten airlines. II.iv. Opportunities and Threats in Next 5 Years The overall global market is growing for the airlines services. This has increased number of opportunities and threats for the existing players. Deregulation, privatisation and liberalisation have resulted in increased competitions which have wiped out some of the small players completely. The opportunities exist in exploring new markets and new customer group within various segments like price, leisure and others. The new markets destinations can be explored. The threat exists in the form of political, social, technological and economical threats. The terrorist activities top the list. Changes in economy are the other threat. Any kind of economic slowdown, regression will impact the purchasing power which will impact the travel industry indirectly. Since the airlines companies are operating in a global market economies of various countries will impact there strategic decisions for that country within the regulatory framework of the country. Any kind of technological change impacting the airlines industry will be another threat. The threat of data loss tops the list. The threat of political instability, new government rules and regulations, unfavourable policies etc pose threat to the bigger players like British Airways. III. Conclusion The airlines industry has been gone through various changes and situations in last few years. The decade of 1990’s was evidence of deregulatory policies, liberalisation and internationalisation. This has opened the protective airlines industry of Europe. The terrorist activities like September 11 attacks have adversely impacted the revenues, operations and employment generated by this sector. British Airways has been able to recover through these situations. This was due to the strong financial stability and hold in the market. The company is leader in investments in the information technologies and new technologies. Reference http://www.visaeurope.com/documents/vbv/verifiedbyvisa_britishairways.pdf Ellingsen et al (2002) European Airlines,Up and Away, Monitoring European Deregulation 3 Centre for Economic Policy Research 2002 Fortune 500 Companies retrieved on 1st November 2006 from http://money.cnn.com/magazines/fortune/global500/2006/industries/Airlines/1.html Investors Relations retrieved on 1st November 2006 from http://www.bashares.com/phoenix.zhtml?c=69499&p=irol-studentkit Fact Book retrieved on 1st November 2006 from http://media.corporate-ir.net/media_files/irol/69/69499/bafactbook/Fact_Book_2006.pdf Symonds, (2001), Airlines to embrace consolidation retrieved on 1st November 2006 from http://news.bbc.co.uk/1/hi/business/1665103.stm Airline IT Trend Survey retrieved on 1st November 2006 from http://www.sita.aero/NR/rdonlyres/08255EF6-383B-481F-9C82-560AEF7ACCEA/0/Airline_IT_TrendsSurvey_2005_report.pdf Diverse regional markets drive different airline IT strategy response (2005) retrieved on 1st November 2006 from http://www.sita.aero/News_Centre/Press_releases/Press_releases_2005/Diverse_regional_markets_drive_different_airline_it_strategy_response.htm Load Factor data retrieved on 1st November 2006 from http://www.aea.be/AEAWebsite/Presentation_Tier/Pr_GroupMenuItem.aspx?NodeID=rootMenu403 Read More