Analysis of the Systems and Performance of British Airways - Research Paper Example

ANALYSIS OF THE SYSTEMS & PERFORMANCE OF BRITISH AIRWAYS Company Summary British Airways Logo: Global Headquarters Address: Waterside, (HAA3) Harmondsworth UB7 0GB London ACCOUNTING SYSTEM Company Description British Airways is an international airline carrier. It is a public company registered in the United Kingdom. It is listed on the London Stock Exchange and therefore has several restrictions of a public limited company in the UK (British Airways – Note 1, 2011). British Airways operates globally through networks of subsidiaries and franchises in all the continents of the world. It owns several smaller airlines like Cathy Pacific & Iberian Airlines. Responsibility for Accounts The Accounts of British Airways is the responsibility for the Board of Directors who sign them. They are accountable to the shareholders directly and are therefore responsible for taking full control and charge over the financial reporting systems. Accounting Standards & System of Recording The Accounts are prepared to the year ended 31st March. The standards used for the preparation of the public accounts of British Airways is the International Financial Reporting Standards (IFRs) adopted by the European Union and the International Accounting Standards issued by the International Accounting Standards Board (IASB). The Accounts are prepared on the basis of the Historical Cost Convention. In that the elements of the financial statements are recognized on the basis of their original costs. However, Note 1of their accounts states that some items like derivatives and financial instruments are stated at fair value. The Group Accounts are based on the financial information of subsidiaries that are stated in proportion to British Airways stakes in them. Elements of Financial Statement Plant, Property & Equipment are stated at cost and depreciated according to the straight line methods. Inventory for the airline includes aircraft expendables. It is held at the lower of cost and net realizable value. The main source of revenue is what is stated as transport services which include revenue from passengers and cargo Intangible assets include goodwill, landing rights and software. They are amortized over the useful life. Employee benefits and fixed contributions of the staff members are recognized under IAS 19 Employee Benefits. Auditing & Remuneration Ernst & Young are the auditors of British Airways. They were approved by the Audit Committee of the Company on behalf of the Board of Directors. The Audit Committee also reviews the independence of other services performed by Ernst & Young for British Airways around the world for independence issues. The Remuneration of directors is fixed by the Remuneration Committee. They ensure that directors salaries are not excessive. Taxation British Airways recognizes tax in the current account, which is an estimation of how much they expect to pay. There is also a deferred tax account that seeks to take care of the variances between the estimated tax payments and the actual tax paid. Segmenting The company is segmented into two main units, consistent with internal reporting. There is the Airline Unit made up of passenger and cargo operations. There is also the Separate Operating Units which includes the operations of other airlines owned by British Airways like Open Skies SASU & BA Cityflyer ltd. Geographically, British Airways is segmented into: 1. Europe (UK & Continental Europe), 2. The Americas (USA & The Rest of America), 3. Africa, Middle East & Indian Subcontinent 4. Far East & Australasia Advantages & Disadvantages The accounting system of British Airways has the advantage of the adaptability to cover a global reach. This is because the use of International Accounting Standards makes it possible for the various branches to have similar accounting systems that are locally accepted and also accepted internationally. Secondly, the accounting and segment systems enables global control to be retained in all situations and conditions. This allows the top-level management to make decisions that can be transposed at all levels. The use of Ernst & Young as auditors enable them to get world-class auditing and monitoring services even in the most remote places in the world. The use of international standards enables consistency and comparability of the accounts of British Airways on a year-by-year basis and also with other companies. On the downside, it is very expensive to maintain this kind of accounting system. First of all, it is expensive to pay staff and maintain compliance systems to ensure that the accounts are prepared according the relevant standards. Secondly, most countries will have to maintain two reporting regimes; one based on local accounting standards and another based on international accounting standards. This means that there will be the duplication of efforts in most branches. The straight line method of depreciating fixed assets is quite problematic. This is because it might not reflect the true and fair view of the worth of an asset over different points in time. This can lead to differences that might be significant and material in affecting the accounts adversely. It would be more appropriate for the company to use reducing balance system of estimating depreciation. BUSINESS PERFORMANCE Nature of Business British Airways main revenue is earned from the transportation of passengers via its airliners. The main source of revenue is from the core operations of British Airways as well as smaller airlines that it owns. This revenue is supported by revenue from transportation viz cargo services. It also has smaller revenue sources from hotels, car rentals and holidays. In 2010, British Airways earned a total of £6,980 million from Passengers and £550m from Cargo (refer to Appendix 1 below). From other sources of revenue (hotels, car rentals and holidays), British Airways earned £468m. The main brands of British Airways are Brymon Airways, Oneworld, Speedywing International, BAH Ltd., Thomas Cook Holidays, British Regional Airlines Ltd, Manx Airlines & World Network Services (Plunkett, 2007: 231). Analysis of the 7Ps Product: British Airways provides transportation of passengers and services around the world. It also engages in other services like hotel services, car rentals and holidays. Price: The services British Airways renders are partitioned into four classes (OneWorld, 2011). There is the Economy, Premium Economy, Business/Club & First Class. The Economy is a cheap no-frills service. Economy Premium is an improved version of the Economy class with a few pecks and incentives like more meals for travelers. There is the Business/Club that targets businessmen and professionals. The First Class targets world-class business executives. Place: British Airways targets the best and most comfortable and easily locatable terminals in airports. The center of British Airways global operations is the Heathrow Airport where it has numerous terminals. Promotion: British Airways runs an affiliate program that enables travel agencies to book clients and take a commission. These agents are responsible for the promotion of the brand. Until 2001, British Airways had the phrase “The Worlds Favourite Airline”. However, it now uses “Upgrade to British Airways”. British airways also runs a very popular loyalty program that rewards its customers greatly. People: British Airways staff are recruited to become ambassadors of the brand. They give their services with courtesy and hospitality. Process: British Airways now promotes bookings online directly through its websites. It also has accredited agencies around the world that are responsible for taking orders from clients. Physical Evidence: They are always conspicuous in the airports with British Airways logos and comfortable white, blue and red logos reflecting the brand. British Airways also uses very comfortable airliners made by Boeing, which has the most comfortable interior fittings. British Airways Terminal at Heathrow comes with the most modern and most sophisticated systems. Revenue from the world were made at the following rate: This therefore shows that the most profitable region is in the UK. The company focuses more in developed countries than in developing countries. This is primarily due to the differences in the cultural and infrastructural trends in these different markets that British Airways operates in. There are no information about the various product and brand life cycles available online. EXTERNAL ENVIRONMENT ANALYSIS Competitors British Airways competitors vary around the globe, depending on the area under consideration. In the developing world, British Airways often competes with smaller national carriers. However, in Europe and North America, British Airways competes with major international airlines like European Airliners like Lufthansa, KLM and Air France. In the United States, it competes with Delta and American Airlines. In Britain, its major competitor is Virgin Airlines. Virgin Airlines focuses on providing a no-frills airline service between Europe and America. This enables them to capture a larger section of the market and also get an upper hand in taking advantage of competitive strengths that British Airways, a larger carrier cannot penetrate (BBC). Virgin Airlines also has a stronger presence on the Internet. Most of their promotions and sales are conducted online. This reduces their overheads and enables them to increase accessibility with their passengers (BBC). Virgin Airlines also tries to use more airports around the world that are less busy. This way, they are able to get customers to their destinations quicker than British Airways. This makes them a more preferred option for most business travelers. SWOT Analysis of British Airways From the strategic plan of British Airways, one can identify the following strengths, opportunities, weaknesses and threats. They include: Stengths 1. The merger with Iberian Air that makes it the third largest airliner 2. Healthy financial position and strong asset base. 3. A good reputation and solid history. 4. A high number of high quality airliners and standing contract with Boeing. 5. Good safety record. 6. International operations and global reach 7. Popularity of marketing and loyalty campaigns. Opportunities 1. Merger gives it a stronger bargaining power on the global level. 2. Financial strengths makes it attractive to investors. 3. Reputation comes with positive public image 4. The airline fleet gives BA a strong trading positioning 5. Customers prefer to fly BA because of the safety standards 6. The international reach makes it possible for BA to penetrate any market in the world. 7. Loyalty program enables BA to maintain its market share. Weaknesses 1. Falling profits 2. Issues with employee retirement benefits 3. Slow revenue growth in developing world and China 4. High penalty claims Threats 1. Loss in profits can lead to loss in investor confidence 2. Employee benefit issues can lead to employee loss of trust and motivation 3. Slow growth can lead to the loss in strategic market shares 4. Loss in revenue through penalty claims The PEST Analysis of British Airways Political 1. The War on Terrorism leads to safety and security concerns. 2. The Deregulation of the airline industry leads to the increase in new entrants and competitors. 3. Arab civil unrests leads to a closure of major Middle Eastern markets. Economic 1. The global financial crises led to a fall in income for BA. 2. The increases in fuel prices due to unrest in Arab world. 3. Credit crunch led to reduction in borrowing facilities available to BA Social 1. The development of democracy around the world leads to an increase in the customer base. 2. Opening up of China leads to a new customer base 3. The War on Terrorism makes BA a potential target for terrorist operations Technology 1. Continuous research by manufacturers like Boeing. 2. High rates of obsolescence in the industry due to improvement in technology 3. Increase in online booking due to the increased use of internet. Bibliography BBC – The Company File (2011) BA Faces Stiff Competition Available online at: http://news.bbc.co.uk/2/hi/business/509461.stm. Accessed: July, 1, 2011 British Airways – Account Note 1 (2011) Note 1: Authorisation of Financial Statements & Compliance with with IFRS Available Online at: http://www.britishairways.com/cms/global/microsites/ba_reports0910/financial/notes/note1.html Accessed: July 1, 2011 British Airways – Account Note 2 (2011) Note 2: Summary of Significant Accounting Policy Available online at: http://www.britishairways.com/cms/global/microsites/ba_reports0910/financial/notes/note2.html Accessed: July 1, 2011 British Airways – Account Note 3 (2011) Note 3: Segment Information Available online at: http://www.britishairways.com/cms/global/microsites/ba_reports0910/financial/notes/note3.html Accessed: July 1, 2011 British Airways – Strategy (2011) Our Strategy Available online at: http://www.britishairways.com/cms/global/microsites/ba_reports0910/our_business/strategy.html Accessed: July 1, 2011 British Airways – Products (2011) Flights, Hotels & Holidays Available online at: http://www.britishairways.com/travel/flights-and-holidays/public/en_gb?link=TOP_Flights Accessed: July 1, 2011 Goldmann, Geoff & Wieuwenhuizen, Cecile (2008) Strategy: Sustaining Competitive Advantage in Globalized Context Cape Town: Juta & Co Ltd OneWorld (2011) OneWorld – British Airways Available online at: http://www.oneworld.com/ow/member-airlines/british-airways Accessed: July 1, 2011 Plunkett, Jack (2007) Plunketts Airline, Hotel & Travel Industry Almanac, 2007 Plunkett Research Ltd. APPENDIX 1 BRITISH AIRWAYS GROUP CONSOLIDATED INCOME STATEMENT For the year ended 31 March 2010       Group £ million Note   2010 2009 Traffic revenue         Passenger     6,980 7,836 Cargo     550 673       7,530 8,509 Other revenue     464 483 Revenue 3   7,994 8,992 Employee costs 7   1,998 2,193 Restructuring 4   85 78 Depreciation, amortisation and impairment 4   732 694 Aircraft operating lease costs     69 73 Fuel and oil costs     2,372 2,969 Engineering and other aircraft costs     505 510 Landing fees and en-route charges     608 603 Handling charges, catering and other operating costs     997 1,021 Selling costs     290 369 Currency differences     (2) 117 Accommodation, ground equipment and IT costs     571 585 Total expenditure on operations     8,225 9,212 Operating loss 4   (231) (220) Fuel derivative gains/(losses)     15 (18) Finance costs 8   (157) (182) Finance income 8   20 95 Net financing expense relating to pensions 8   (116) (17) Retranslation charges on currency borrowings 8   (14) (59) (Loss)/profit on sale of property, plant and equipment and investments 9   (16) 8 Share of post-tax (losses)/profits in associates accounted for using the equity method 19   (32) 4 Net charge relating to available-for-sale financial assets 10     (12) Loss before tax     (531) (401) Tax 11   106 43 Loss after tax     (425) (358) Read More