The Impact of the Financial Crisis on the British Airways Company - Case Study Example

The Impact of the Financial Crisis on the British Airways Company Macro & Micro economics December 2, Contents Contents 2 1.0 Introduction 3 2.0 Impacts of Financial Crisis on British Airways Company 3 2.1 Airlines alliances break up and consolidation 3 2.2 Decrease in cargo traffic 5 2.3 Decrease in passengers travel 5 Fig 1. CAPA. “Ryanair and EasyJet continue strong growth, British Airways’ struggles continue in Sep-2009.” 8 October 2009. Web. 2 December 2012. 6 Traffic and capacity are very crucial to any airline, since they are equal determinants of the revenue generation and business existence. In a span of 5 years, 2005 to 2009, the airline progression in passenger and cargo traffic had picked up, only to be drastically pulled down after the recession. The passenger load factor and overall load factor dropped from 79.1 to 77.0 and 73.4 to 72.0 percent respectively, passengers and tones of cargo carried dropped from 34613 to 33117 and 805 to 777 (000s) respectively (“Operating and financial,” britishairways.com). 6 2.4 Profit downturn 7 Following the decline in travels and cargo flow, British Airways revenues dropped substantially, which was associated with the high reliant on the premium tickets. The shift of passenger demand to other airlines was because of the extra fuel surcharge, which the British Airways charged its customers after the fuel price increase; together with the 300 million euro fine in 2008, by the British department of justice, it was easy for the airline to slip into financial struggles. The trend of revenue generation in 2008 and the previous years to 2005, aimed at the 10 percent operating margin which was possible in the period of 2007/08; the only problem was that the growth in revenue generated come 2009 would be used to cover the increasing operational cost, hence profit turning into a loss (“Financial performance of British,” ukessays.co.uk). Comparing the total traffic revenue and total operating expenditure, the growth was parallel, hence reducing the profit margin of British Airways. Total traffic venue per RTK and ATK changed from 48.91 to 53.00 and 35.92 to 38.17, while the total operating expenditure per RTK and ATK moved from 46.91 to 57.38 and 34.45 to 41.32 respectively, between 2008 and 2009 (“Operating and financial,” britishairways.com). 7 As of 2009, the airline recorded a pre- tax loss of 401 million pounds, experiencing a negative growth of passengers by 4.4 percent, compared to 2008 profits of 922 million pounds, (Welham and Wang xinhuanet.com). A company with huge amount of stock, had to suffer loses again since the exchange rates of the stock market were altered to accommodate the economic situation in Europe and the rest of the world, where it is a share holder. The share price of British Airways was in its climax during between 2006 and 2007 in the last decade, which later declined to its lowest mark in 2009 in the event of the crisis. (See fig. 2) It was a period that the company took a strategic decision of selling some of its convertible shares to avoid going bankrupt. Each share was worth 6.60 Euros in 2007, but by 2009, it had declined to 1.34 Euros; however, it has survived through the difficult time to recover though in a slow development (“Financial performance of British,” ukessays.co.uk). 8 British Airways | IAG share prices 8 2.5 Employment issues 9 3.0 Conclusion 10 1.0 Introduction British Airways Company is one of the major European airline service providers, to the numerous numbers of the passengers within the local and international dimensions. It is a company that has long history since World War I, when air travelling was more of an adventure compared to the modern society. The company has evolved over time to meet customers’ demands and overcome the economic challenges that also change unexpectedly. It is a company known to have formed mergers with other companies and engaged in privatization to reach where it is today. However, the global financial crisis that began in late 2007 and strengthened in 2008 did not spare the company as a business. Among other European airlines, British Airways Company was hit by the crisis, to suffer a drastic loss in business which left some trails even as it continues to recover. The global financial downturn left Europe in a dept crisis, with most of its powerful nations having a huge dept to settle associated with their overspending. The financial crisis determined passengers travelling power, both locally and internationally, given that the income flow was affected. 2.0 Impacts of Financial Crisis on British Airways Company 2.1 Airlines alliances break up and consolidation The financial crisis that has now stretched to its fifth year has made the European airlines think of merging together to withstand the emerging competition. After the 2008/2009 period most of the airlines alliances had broken up, due to the impact of the crisis on the business. The British airways had alliances with Qantas airline, but the crisis deepened the loss of the airline business for Qantas to consider ending their former 17 year old deal with the British Airways (“RPT-UPDATE,” reuters.com). Every airline was struggling to maintain their former profits in business. Qantas airline dropped the deal for a transformational coalition with the Emirates hence shifting its hub airport from the previous, Singapore to Dubai, while connecting to London. According to the (IAG) International Airline Group, they were left with no option but to seek alternative airlines that would agree to enter into the deal after the Australian Qantas airline finally cleared from the partnership in march 2013 (“British airways seeks,” telegraph.co.uk). Although they confess to end the merge amicably, the financial crisis of British Airways must have affected the partnership adversely. Again, the world economy and business focus would be different based on their strategies. After the long discussions, British airways decided to seek partnership with other competitive alliances that had shown development in the airline industry. According to Broughton (6), British Airways finally did submit an application for operating in a joint business with the Iberia and American airlines. One world airline alliance had shown good progress even in the period of the financial crisis and in the event of recovery. The merge discussions with Iberian airways became a reality after signing a $25 million agreement for their future business (“Merge: A strategic plan,”degree-essays.com). The two airlines companies had been struggling differently, Iberian with declining air cost travel demand, while the British Airways had the issues with financial struggles after the recession and the huge business loses. British airways saw the need to unite with Iberian airways to come out of the credit crunch (“Merge: A strategic plan,”degree-essays.com). The consolidation came at a time when the two airlines needed to strengthen each other to recover financially and take back their business position that had now been dominated by other competitors. 2.2 Decrease in cargo traffic The cargo freight is always second to go down after the passengers flow, in the times of crisis. Even after forming the merge between Iberia and British airways, the slow down of economic recovery in European countries also contributed to the slow development of the BA. Iberian airline group been from Spain, who are currently experiencing an economic downturn, affected the general performance in cargo traffic income. The economic condition of Spain intensified to destabilize the number of long hauls out of London (“Euro zone crisis,” rte.ie). The effort of the British Airways in recovery of the cargo flow and its profits seems to be absorbed by its Iberian partner. The IAG revealed that the British Airways world cargo had risen by 6.3 percent, which covered up the Iberian loss of 10.2 percent; hence the general increase in cargo as of August 2012 was by 2.9 percent (“Air cargo carriers,” go2uti.co.il). 2.3 Decrease in passengers travel British airline long history in business show that it provided both economic and business classes of passengers travels. Passengers decline in the airline was experienced just like in other airlines, since the passengers income flow was also affected by the global recession. This group of passengers although more profitable, decreased in number, which the British Airways had considered replacing large business class seats, with the normal seats as a way of increasing profits by increasing the aircrafts capacities (“An overview of British,” ukessays.co.uk). Together with the increased fuel prices after the recession, passengers sort other alternative means of transport, both domestically and internationally. Decline in passengers demand could have been associated with economic and social constraints from an individual basis. Passengers demand in short hauls was substituted by the available trains now that the infrastructure is well developed connecting several accessible areas. The global premium travel in British Airways is said to have returned in a yearly growth in December 2009, 3 months after an upturn of the general global economic operations (“British Airways 2008/09 Annual,” 23). Since then, the airlines carriers have experienced a slow but positive recovery process. British airways experienced lower turn passenger demand compared to other airlines like Ryanair and Easyjet both in passenger and cargo traffic, according to statistics of August 2008 and September 2009 (CAPA, centreforaviation.com). (see fig.1) BA’s premium and non- premium passengers decline Fig 1. CAPA. “Ryanair and EasyJet continue strong growth, British Airways’ struggles continue in Sep-2009.” 8 October 2009. Web. 2 December 2012. Traffic and capacity are very crucial to any airline, since they are equal determinants of the revenue generation and business existence. In a span of 5 years, 2005 to 2009, the airline progression in passenger and cargo traffic had picked up, only to be drastically pulled down after the recession. The passenger load factor and overall load factor dropped from 79.1 to 77.0 and 73.4 to 72.0 percent respectively, passengers and tones of cargo carried dropped from 34613 to 33117 and 805 to 777 (000s) respectively (“Operating and financial,” britishairways.com). 2.4 Profit downturn Following the decline in travels and cargo flow, British Airways revenues dropped substantially, which was associated with the high reliant on the premium tickets. The shift of passenger demand to other airlines was because of the extra fuel surcharge, which the British Airways charged its customers after the fuel price increase; together with the 300 million euro fine in 2008, by the British department of justice, it was easy for the airline to slip into financial struggles. The trend of revenue generation in 2008 and the previous years to 2005, aimed at the 10 percent operating margin which was possible in the period of 2007/08; the only problem was that the growth in revenue generated come 2009 would be used to cover the increasing operational cost, hence profit turning into a loss (“Financial performance of British,” ukessays.co.uk). Comparing the total traffic revenue and total operating expenditure, the growth was parallel, hence reducing the profit margin of British Airways. Total traffic venue per RTK and ATK changed from 48.91 to 53.00 and 35.92 to 38.17, while the total operating expenditure per RTK and ATK moved from 46.91 to 57.38 and 34.45 to 41.32 respectively, between 2008 and 2009 (“Operating and financial,” britishairways.com). As of 2009, the airline recorded a pre- tax loss of 401 million pounds, experiencing a negative growth of passengers by 4.4 percent, compared to 2008 profits of 922 million pounds, (Welham and Wang xinhuanet.com). A company with huge amount of stock, had to suffer loses again since the exchange rates of the stock market were altered to accommodate the economic situation in Europe and the rest of the world, where it is a share holder. The share price of British Airways was in its climax during between 2006 and 2007 in the last decade, which later declined to its lowest mark in 2009 in the event of the crisis. (See fig. 2) It was a period that the company took a strategic decision of selling some of its convertible shares to avoid going bankrupt. Each share was worth 6.60 Euros in 2007, but by 2009, it had declined to 1.34 Euros; however, it has survived through the difficult time to recover though in a slow development (“Financial performance of British,” ukessays.co.uk). British Airways | IAG share prices Fig .2. “Spread bet on International Airlines Group | British Airways.” n.d. Web. 2 December 2012. British airways merge with Iberia airlines came to form IAG, and brought a positive change at the end of 2008, after which the shares began trading as an IAG package. The shock in the share prices was expected, especially with uncertainty in oil prices before global economic recession. 2.5 Employment issues The British Airways has been doing everything possible to reduce cost and enhance their profit margins. According to Oprea, the demand of air transport decline in British Airways, led to a job cut announcement of the 1,700 employees from the 14,000 cabin crew (57). The employees would thrive on a basic salary for a certain period, till profit flow returned normal, if not a pay freeze. The job loss occurrence was initiated by flight reduction in Gatwick hub, due to the decline of passengers’ demand, which resulted to ground operations and check in desk jobs cutback (Leach telegraph.co.uk). British airways had to make arrangements with labor unions of their staff, so as to avoid making hasty decisions without their knowledge. Harvey and Turnbull (10) mentioned that the British Airways and (BALPA) British Air Line Pilots Association consultation reached an agreement on how assist the airline recover, by efficient flow of 26 million Euros each year, when they remain committed in the cost reduction deal. Strike actions for the cabin crew, though limited after the recession, has been bubbling beneath the surface. They are part of the most affected group and that is why the British Airways has to come up with better proposals for its business transformation. Most of the jobs are thought of been outsourced, which may cause a further lay off of employees. 3.0 Conclusion It is clear that British Airways is working out to recover from the losses incurred after financial crisis. The crisis caused deal closure with Qantas airline, but later on British Airways rescue was the merge with Iberia airways, which led to British Airways shares value increase, shortly before the drastic fall under a new management by the IAG. British Airways expressed profit increase in 2009, but since the expenditure was also high, it had to incur loses generally. Some measures taken by the company in the event of increased fuel price caused an additional expense to its profit, before cargo and passenger traffic minimized, limiting company’s profits. The airlines consolidation has its benefit, preventing them from running bankrupt, but at any one point when the one’s performance is low or under stress, it will always pull the entire profit down. Just the exact situation British Airways and Iberia are going through. Despite the British Airways reducing jobs and payments to its employees, much more is expected concerning employment issues. Works cited “Air Cargo Carriers Feel the Heat in August.” go2uti.co.il. 17 September, 2012. Web. 2 December, 2012. “An Overview of British Airways.” ukessays.co.uk. n.d. Web. 2 December, 2012. “British Airways 2008/09 Annual Report and Accounts.” britishairways.com. n.d. Web. 2 December, 2012. “British Airways Seek New Strategic Partners after Qantas Signs Emirates Deal.” telegraph.co.uk. 6 September, 2012. Web. 2 December, 2012. Broughton, Martin. “British Airways 2008/09 Annual Report and Accounts.” britishairways.com. n.d. Web. 2 December, 2012. “Euro Zone Crisis Dents BAA Airport Traffic.” rte.ie.12 June, 2012. Web. 2 December, 2012. “Financial Performance of British Airways.” ukessays.co.uk. n.d. Web. 2 December, 2012. Harvey, Geraint and Turnbull Peter. “Sectoral Coverage of the Global Economic Crisis: The Impact of the Financial Crisis on Labour in the Civil Aviation Industry.” n.d. Web. 2 December, 2012. < http://www.ilo.org/wcmsp5/groups/public/---ed_dialogue/---sector/documents/publication/wcms_161566.pdf> Leach, Ben. “British Airways to Cut a Further100 Jobs.” telegraph.co.uk. 7 December, 2008. “Merge: A Strategic Plan.”degree-essays.com. n.d. Web. 2 December, 2012. “Operating and Financial Statistics.” britishairways.com. 31 March, 2009. Web. 2 December 2012. Opreas, Marius. G. “The Effects of Global Economic Crisis on the Air Transport of Passengersin Europe and in Romania.” Geojournal of Tourism and Geosites Year III, no. 1, vol. 5 (May 2010): 52-61. Web. 2 December. 2012. “RPT-UPDATE 2-Qantas Agrees Emirates Alliance after Ending BA Deal.” reuters.com. 6 September, 2012. Web. 2 December 2012. Welham, Rob and Wang Dongying. “Recession Incurs Record Losses for British Airways, ” xinhuanet.com. 23 May, 2009. Web. 2 December, 2012. Read More