Strategic Management of British Airways - Essay Example

? British Airways Table of Contents British Airways Table of Contents 2 Introduction: An Overview to the Company 3 Macro-Environment Analysis 4 Porter’s Five Force Analysis 4 PESTLE Analysis 6 Internal Analysis 9 Financial Analysis 9 SWOT Analysis 10 Framing up Future Strategies of BA: In the Light of Present Strategies 11 Recommendations 12 Conclusion 13 References 13 Bibliography 17 Introduction: An Overview to the Company British Airways Plc is one of the largest airlines in UK which caters to more than 330 destinations (Hoovers, 2011). Adding to the scheduled services British Airways deals with the operation of both international and domestic carriage of freight and mail services in more than 130 countries worldwide. The history traces back to 1924 when under the state guidance five small British independent airlines had merged to form Imperial Airways (Bizcovering, 2008). Till now, the organisation has more than 240 aircrafts serving over 33 million passengers (British Airways-a, 2009). In the 2009, the company has earned a revenue amount of ?8,992 million (British Airways-b, 2009). As in the year 2009, the company has employed more than 40000 people. Since its privatisation back in the year 1987, the company has experience a continual growth with intensified competition across the globe. The Airways Company has marked its significant presence through being the first airline to contribute to reduce the greenhouse emissions. The company has also been the first to allow its passengers to get the online boarding passes. In the recent downturn British Airways has experienced enough slowdown in the passenger traffic. Despite of the fact, it can be anticipated that British Airways would be able to grow with appropriate framing of strategies and required guidelines to move towards successful strategic direction. This report discusses both the macro and micro environments of British Airways. The internal analysis of the company includes an analysis of the company’s strengths, weaknesses, threats and opportunities with an insight into the financial analysis of the company. At the end, recommendations have been provided with a discussion of the present strategies. A conclusion has been inferred from the analysis with an effort to have a better idea of the strategic management of British Airways. Macro-Environment Analysis Porter’s Five Force Analysis “The economic structure of an industry is not an accident. Its complexities are the result of long-term social trends and economic forces” (Ehmke, Fulton & Akridge, n.d., p.1). “Porter’s Five Forces provides a convenient framework for exploring the economic factors that affect the pro?ts and prices of an industry” (Australian School of Business, n.d., p.1). Threat of New Entrants The Airline industry demands a considerable amount of capital as in set up and large investment. Till sometime back, the probability of new entrants used to be quite low. However, with the increased easiness in the loan and credit accessibility, it can be expected that an increasing number of companies may enter into the business. If the borrowing is cheap, this can pose as a major challenge for the existing airlines with intensified competition to make the market saturated (Investopedia, n.d.). However, that does not imply that the entry is going to be easy in this industry. As the industry demands huge investment in the fixed assets, there exists a considerable amount of exit barriers. Factors like competitive environment, high regulation requirements and high capital requirements are significant barriers to entry. The services in this industry considerably differentiated with increasing degrees of quality, customer service and convenience. The company is a famous airlines company which also operates in alliance in the international routes, which would be tough for the new entrants to be into international alliance. So, the entry barrier is high in this industry. Bargaining Power of the Suppliers The airline companies do not have enough choices in case of their suppliers. The supply side of this industry is dominated by two aircraft manufacturers. This displays the high bargaining power of the suppliers in this industry. Bargaining Power of the Buyers As most of the buyers do not exercise much choice based on the differentiating factors, passengers can incur considerable cost while switching from one airline to another one. However, with the increased internet usage, the passengers have become more aware than before. So, the bargaining power of the passengers is medium in this industry. Threat of Substitutes Airline has been the only medium offering the fastest way to travel from one region to another. It is pretty simple that there is no perfect substitute for the long haul carriers. However, superfast trains can be seen as serious substitute of the long haul flights. With the introduction of fats trains, an increasing number of the travellers prefer travelling by the trains. In most of the European countries, the vacations spots are pretty nearby. In such a situation people prefer to move out in their private costs. Rising fares of the airlines make the passengers consider other viable options. There is medium threat of substitutes; however, there are certain factors like time consumption, personal preference, money and convenience of the customers, which would be influential to define the intensity of this threat. Competitive Rivalry The organisation operates in two significant areas of long haul flights and short haul aircrafts. In the long haul there is nothing much to differentiate while in case of short haul prices, British Airways have to compete with other scheduled airlines, low cost airlines and other modes of transportation. So, in the short haul routes the organisation has to face intensive competitive rivalry in the form of cost differentiation. Moreover, for the last few years, certain factors like terrorist attack, recent recession and war in the Middle East have led to the slowdown in the industry growth rate. In the wake of all these events, the companies have experienced a tough time in the market. This has also led the companies to reduce their operational cost to compete on the basis of cost effectiveness. This has been intensified with the South West Airlines and several other low fare carriers operating in the industry (Gaskins, 1999). In the year 1999, there was an average decline of 25 % in the inflation adjusted airfares of these companies. The competition is quite intensified in this industry. PESTLE Analysis This segment deals with the macro environment analysis of the airline industry. PESTLE analysis is a significant tool to carry out the external environment analysis of this industry. This tool helps the organisations to frame the strategies by assisting them to understand the macro environment in which they operate in (Renewal Associates, n.d.) Political and Legal Factors Since the last several years liberalisation has been one of the significant factors in shaping the political environment of the airline industry. Adding to this, there is certain other factors like terrorist attack and political instability in some countries have also put an adverse affect on the industry performance. The CEAA is established in the year 1977. Since then, the international air transport has not faced much advancement towards the liberalisation. After 10 years the deregulation process was established in the US airline industry, UK experienced almost comparable circumstances. Due to this introduction, a number of operators can move from their home countries to several other regions. The ‘Open sky’ policy has intensified the liberalisation process further and at the same time it has triggered off competition in the international market. According to an agreement among EU and US, the European carriers can serve the routes from the EU member states to US. In September, 2001, the terrorist attack has been another influential factor to shape the consumer demand in the airline industry. The airlines have experienced considerable financial issues with the increased security concern among the consumers. Moreover, increased political instability in certain regions has posed enough threat to this industry. Iraq and Afghanistan war are some of the events leading to a slowdown in the number of passengers. Due to these wars, there has been a considerable rise in the oil and fuel prising, raising the cost further for the airways (Vedder, 2008). Overall, all these situations have led to the decline in the profit margins as the airline organisations have to spend on the security expenditures and increasing insurance cost. Certain other government decisions have been influential to bring in changes in the industry. In recent time, the government in Europe has been promoting more merges in the airlines sector. Although, consolidation of flag carriers like Air France and KLM have resulted in increased operating profit, still the industry has not experienced more of such mergers. Apart from this, there are certain other government decision like stopping aid to the ailing airline companies has put enough pressure on the industry performance Economic Factors In the wake of recent recession, consumer spending in the United Kingdom faced sharp decline. In such a situation, the companies have experienced tough competition to retain both their market share and profitability margin. With the emergence of low cost airlines, the competition has been further intensified. Moreover, other companies have also reduced their spending on business trips; rather they prefer telecommunication for effective communication. Adding to it the weakening of pound against the Euro has exposed the UK based airlines to poor exchange rates. Certain other factors like fluctuating oil prices have put further pressure on the airline companies. In the process, the airways have found it quite difficult to sustain their cost effectiveness to offer competitive airfares to their customers. Since the last few years, rapid growth and expansion in China and other Asian countries have emerged as significant determinants of the global macro economic developments. According to IATA, by the year 2011, these countries would emerge as most significant base for international air travel, which would surely affect the European carriers. Social Factors The UK has increased aging population which has raised potential opportunity for the airlines to grow further as the older generations would have considerable time to spend on international travelling. Although, in the wake of recent recession, the purchasing power of the consumers has declined to a certain level. “The pattern of demand with regard to price sensitivity has changed completely as a result of the economic downturn, previously listed crises and the emergence of low cost carriers at the beginning of 21st century” (Vedder, 2008). The significance of the leisure time and enjoyment is still with a promise to show a positive change in the industry demand in the coming years. Technological and Environmental Factors In the wake of increasing environment concerns among the passengers, the airline companies have realised the requirement of enhanced efficiency to align its operation with the environment regulations. Driven by such requirements, many technological developments have taken place since last few years. The airline companies have put their effort to explore various ways to reduce the amount of carbon emission. This has led to several technological innovations such as airframe, enhanced engine cleaner, renewable energy sources to curb out the carbon emission in the air. Many airways have adopted ‘green ideology’ to conserve fuel and effectively recycle the waste of the carriers. European Union has introduced a tool which has been primarily developed for the small airline companies to estimate the carbon emission level. This is expected to be helpful for the airline companies to comply with the EU Emissions Trading System. Internal Analysis Financial Analysis Due to the recession, the company is going through a difficult financial state with huge losses. The company does not have enough liquidity required to support the company in case of declining demand or financial downturn. The company is in deep trouble as it does not even have enough profit amounts to make the interest payments. In the absence of enough liquidity, huge losses incurred by the company can proved to be devastating for British Airways. The company has a considerable amount of debt on its accounting book posing a major area of concern for the company. In the year 2009, the company has financed its operation mostly with the borrowing fund, which accounted around 84 % of the total capital. In 2010, the company had decreased its debt amount; however it still remained at a high percentage as 82 %. The company has higher stock days, which means that considerable amount of money of the company is tied up in its stock. To analyse the dividend decision of the company, the payout ratio values for the last 5 years have been taken into consideration. The company has achieved a high amount of profit in the year 2008. It has been noticed that in the year 2008, the company has a payout ratio of 8.15 %. This is the only year in the five years period when the company has paid dividend to its shareholders. British Airways must introduce a well framed payout strategy to regain its shareholders’ confidence, which is significantly important in this capital intensive industry. SWOT Analysis “The SWOT analysis is an extremely useful tool for understanding and decision-making for all sorts of situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities, Threats” (ISTD, n.d., p.1). Strengths British Airways has an established brand image which helps it to attract more customers than most of other scheduled airlines in Europe. The company has been indulged into various partnerships and alliances which has helped BA to operate effectively in a cost effective way. This has also helped the company to operate internationally to a number of regions across the globe. The company has significant tangible and intangible resources like efficient and skilful employees to assist it to become the leading organisation in the entire region (Recreation Tourism Research Institute, n.d.). Weaknesses The financial condition of the company seems to be quite threatening with low liquidity ratios. Apart, the company’s poor relationship with its employees can emerge as weakness of the company. Opportunities With the high population growth rate, the company is supposed to have access to a larger customer base to carry out the operations. Moreover, with the increased amount of globalisation the company has got huge opportunity to extend its market further to more countries. As the economic condition is improving, British Airways is expected to experience a rise in the passenger traffic. Threats With the low cost airlines, competition is quite intensified in this industry specifically in case of the short hauled routes. Factors like increasing environment awareness among the passengers, global recession and cost competition have emerged as significant threats for British Airways. Framing up Future Strategies of BA: In the Light of Present Strategies According to the management of British Airways, “In an incredibly tough trading environment we have to focus hard on pulling ourselves through the immediate crisis, while preparing the business for better economic times. This year we have mapped out along-term vision for our business. It is to be the world’s leading global premium airline” (British Airways-c, 2009, p.1). The company has framed up strategies to upgrade the customer service, enhance the operations, put its effort to be cost effective and make the corporate responsibility to be a significant part of the company’s business. The company has put its effort to achieve operational performance and customer service to strengthen terminal 5. The company has also excelled in punctuality and achieved the baggage targets across the network with significant customer satisfaction scores. The company has also upgraded its service for premium customers. The service has been ungraded with the introduction of new Club World product; the company fitted the same to all Boeing 747 aircrafts and over half of Boeing 777 aircrafts. Gallery lounges in terminal 5 and terminal 3 have a lovely reception for the passengers (British Airways, n.d.). The company has strategies to use the same concept in other significant airports. With the increase in the fuel prices, the company has increased its efforts to be cost effective. Introduction of terminal 5 helps the company to control its cost in the Heathrow airport. Undoubtedly, the company has experienced a downturn in the recent recession. However, despite of this fact, the company is looking forward to further growth. The company has decided to continue its growth whenever the opportunity would make economic sense and meet the requirements of its customers. The company has continued its investment in efficient and flexible new aircrafts to satisfy the customer in a better way offering them security and efficiency. The company has aligned its strategies with its objectives to be the leading airline company across the globe. Recommendations Looking at the significant competition in the airline industry it is very much important to different oneself from its competitors. With the rising number of low cost airlines, it is very much important for British Airways to double its effort in cost control. As the main operation of the company is as scheduled airline, the company can use it for better service and customer satisfaction. BA has considerable access to the primary airports of Europe. So, it would be desirable for the company to serve all the significant destinations where one can achieve maximum passenger traffic. The company can also move into alliance with hotels and travel operators to offers its customers an entire travel and tourism package. This is expected to attract more number of customers. The company can sponsor some of the travel events to encourage more passengers to take the service of the organisation. The company is also required to enhance its financial position. British Airways can reduce the debt amount on its accounting back and increase the current asset amount to enhance its liquidity with more stability and less probability to default. So, overall the company is required to frame its strategies with more focus on its strengths to explore the opportunities in more intensive way. Conclusion British Airways is one of the leading airline companies in Europe with enhanced service and technological resources. The company has certain strengths to explore coming opportunities; however, at the same time, there are certain weaknesses which can emerge as threats for the company. In the recent times, the company has put more of its focus to attain cost effectiveness with enhanced customer satisfaction. It has framed a set of strategies which are expected to bring in sustainable growth rate for the company in its coming future. References Australian School of Business. No Date. Industry Analysis. [Pdf]. 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