Competitive Situation and Strategic Dilemmas Faced by British Airways - Report Example

MBA - MASTERS BUSINESS ADMINISTRATION STRATEGIC MANAGEMENT MODULE: BC415041S TUTOR: U. RAUT-ROY Will BA and Iberia’s merger strengthen and position the new IAG better within the European and global Airline business environment? John Mabhegede SID: 0814158 Anglia Ruskin University Lord Ashcroft International Business School Academic Year: 2011/12Semester: 2 Executive Summary This report is an application of concepts and exploration of conceptual frameworks like strategic plans which assist managers to analyze and gain insight to competitive situation and strategic dilemmas faced by British Airways. This will be achieved by identifying and critically utilizing relevant tools such as SWOT and PEST formulations for strategic analysis in order to understand the nature of strategic management and its competitive and institutional context (Adams, 1998, p. 13). The report also identifies and provides an appreciation of the strengths and limitations of strategic analysis and how it fits into the overall strategy process. Lastly the report designs a viable strategy for British Airways, which takes account of the reality of strategic decision making in the merger with Iberia. British Airways is the UK market leader in airline operations. However, the firm has faced increasing competition over the last decade resulting in a reduction in its market share. This report starts by analyzing BA’s current internal and external environment (Abeyratne, 2003, p. 116). A strategic analysis and evaluation will result in a recommendation that BA focuses on its fundamental service delivery so as to restore its competitive advantage within the airline industry. This will require a combination of two strategies including one strategy focusing on people process and the other focusing on technological advancement. The people processes strategy is derived from a number of industry sources that outline the decline in BA’s focus on customer satisfaction. The strategy on technological advancement coincides with the renewal of BA’s fleet of aircraft that aims at improving overall customer experience. In particular, this report will put emphasis on the application of concepts and conceptual frameworks such as SWOT analysis that assist managers in making decisions. The decision making is based on insights that managers gain about the competitive situation of the firm and its various strategic dilemmas (Becken, 2007, p. 29). Contents Page 1. Introduction and problem context...............................4 1.1. Company Overview..........................................................5 2. Environmental Analysis........................................................5 2.1. Macro / External analysis..........................................................6 2.2. Key Drivers for Change............................................................11 2.3. Applying Five forces analysis to global airline industry...................................................................................................13 3. Analyzing Intra-industry heterogeneity.................14 3.1. Market segmentation................................................................14 3.2. Intra-industry / Strategic grouping analysis..................16 3.4 Opportunities and threats Analysis....................................19 4. Micro / internal environment analysis.......................20 5. Value chain analysis..........................................................22 6. Critical success factors..................................................26 7. Evaluation of the competitive sustainability/ vulnerability of rival’s strategic positions......................27 8. Options available for BA...............................................28 9. Appreciation of the strengths and limitations of strategic analysis....................................................................30 10. Conclusions and recommendations...........................30 11. Bibliography.................................................................................31 1. Introduction and problem context “8am on 24 January 2012 the London Stock Exchange and its Madrid equivalent both started trading shares in a new company, the International Airlines Group (IAG). This was a significant event in the European and Global airline industry; it was start of business for the newly merged British Airways and Iberia” (Chan & Mak, 2005, p. 342) According to the BBC (2010), the British and Spanish flag carriers suffered heavy losses and struggled for survival after a fall in demand for air travel in the wake of the global credit crunch. In recent years BA has had to cope with continued structural and personal problems, for example in 2009, BA’s then CEO Willie Wash emailed employees asking them to work without pay for lengths of time between a week and a month in an attempt to cut costs and to show his commitment Willie Walsh forgo his July 2009 salary (Daley et al., 2008, p. 117). However this did not solve BA’s problems and as a result, in an effort to offset competition BA merged with Iberia to form AIG. From the onset BA and Iberia’s strategy to merge appears attractive. However (Gomes-Casseres, 1994, p. 76) argues that large horizontal mergers are often perceived as anticompetitive, however as discovered later in the competitive environment analysis the airline industry may be a completely unique case. Despite the goal of performance improvement (Daye, 2006, p. 238), (Duval, 2007, p. 109) also argues that results from mergers and acquisitions (M&A) are often disappointing, citing numerous empirical studies of high failure rates of M&A deals (Gomes-Casseres, 1996, p. 245). It is with the above reasons in mind that this report applies strategic concepts and explores conceptual frameworks in order to assist International Airlines Group (IAG) management to analyze and gain insight to the competitive situation and strategic dilemmas facing the organization (the firm’s strategic dilemma involves the decision to merge with Iberia). This will be achieved by identifying and critically utilizing relevant business performance tools for strategic analysis in order to understand the nature of IAG’s strategic management and its competitive and institutional context. The report also provides an appreciation of the strengths and limitations of strategic analysis and how it fits into the overall strategy process (Gomes-Casseres, 2003, p. 112). Lastly the report designs a viable strategy for IAG, which takes into account the reality of strategic decision making and makes appropriate recommendations for British Airways. In addition to following the planning model of strategic analysis in figure 1 below, the objectives and structure of this report will consist of four main sections which will be helpful in the strategic analysis of IAG. • A rigorous analysis of IAG’s external and internal environment. • To research in to the current strategic position of IAG. • To identify a selection of strategic options utilizing the internal and external analysis. • To design a viable strategy for IAG, this takes into account the reality of strategic decision making and aids in the formulation of appropriate recommendations. (Source) 1.1. Company Overview The merger of BA and Iberia has created Europes second-largest carrier after Air France-KLM (G¨ossling & Peeters, 2007, p. 119) and worlds sixth largest airline group by revenues (Gomes-Casseres, 2006, p. 189). 2. Environmental Analysis Considering the geographical reach of IAG and the extent to which international factors impact on airline industry irrespective of location (Hanlon, 2009, p. 167), this macro analysis has a European focus but incorporates a global perspective in order to help identify possible opportunities and threats to the airline industry as whole and IAG in particular. Airline travel within Europe has grown significantly in recent years, with a wealth of new airlines challenging established companies for passengers (Hitt et al., 2000, p. 117). To compete for a share of the European air travel market, each airline must exploit its probability at success. In addition to meeting operating and safety standards within the industry, airlines must operate efficiently in all areas from customer retention to management of employees (Holcomb, et al., 2007, p. 127). To begin with the most fascinating fact is that the industry is one of the least profitable industries (ref). 2.1. Macro / External analysis Table 1 PESTEL analysis PESTEL Factor Key points Implications for Aviation Industry and or IAG Political Liberalisation of skies Deregulation as the market increases in size High labour costs and tax increases disadvantages Europes emissions trading scheme (ETS) Increases the size of the market Rise in significance of economies of scale. While IAG is keen to develop Asia-Latin America connections when the time is right, its European hubs compared to Gulf hubs have not only a labour disadvantage but a tax disadvantage, especially in the UK with the ever-increasing Air Passenger Duty which may affect IAG’s ability to offer good connections within Europe, both for its own services and to cater to its partners. Halting in negotiations over new routes for member states airlines. Rise in airline fares Economic Rising oil prices Effects of economic crises i.e. job losses, reduction in disposable income Consolidation of industry with few global brands supported by regional and niche players as part of solution to structural financial problems Decrease in passenger numbers and Competition from low cost airlines. Consolidation leads to alliances rather than mergers where possible. Increase in cost i.e. Insurance Deregulation has exposed airlines, previously operating at inefficient cost levels but creates an opportunity for AIG to acquire at bargain prices. Supplies also experiencing sharp downturn, e.g. Rolls Royce Social Terror attacks on airlines Reluctance to fly Technological E-commerce method of selling tickets less infrastructure required, overhead savings Environmental Regulation of carbon emissions Increases the cost of implementing safety measures Legal Deregulation If airlines get the opportunity to merge across borders, evidence from other industries suggests they almost certainly will. In most parts of the world, airlines have been forbidden from merging with other companies across their borders. This is despite the fact that merging has the advantage of ensuring rationalization and improved economies of scale (Holden, 2006, p. 118).   In order to gain understanding about vital information regarding markets and potential impacts on the industry, Figure 2 below identifies air line industry geographical boundaries and regulatory trends broken down into six regions. Figure 1 Airline industry regions Region Regional Regulatory Trends Potential Impact on AIG N.America Canada USA Mexico Deregulation / Privatization privatisation of airlines, airports, ATC; rise of low-cost carrier rise of low-cost carrier; government control of airports; secondary airports; major airline debt; bankruptcies; mergers; stagnant domestic growth; increased international growth government controlled; bankruptcy; low-cost carrier to emerge Europe Liberalization / Privatization Liberalised environment (1997) – Third Package Privatisation of airlines and rise of low-cost carrier and Growth of alliances Competition with other modes of transport (high speed rail) Theme for future is ‘leadership’ in air transport regulation National pride still an issue Asia-Pacific Deregulation / Liberalization / Privatization Managed liberalization (slow to change) Strong growth (especially since 9/11)(i.e., China 8% PAX growth next 20 years; India growing domestically and internationally 20% per year) No regional organisation for Asia (unique) “Mega carriers” and small international carriers co-exist No interline agreements despite being Largest share of world economy Busiest international route in world (Hong Kong – Taipei) Growth of alliances Airport and airspace congestion, competition, need for advanced navigational equipment Middle East Limited Privatization / Liberalization Fairly stagnant in terms of growth with Rich and poor High cost airlines feeling pinch of 9/11 as a result Implementing low-cost strategies Safety and security? Africa Cautious Privatization / Some Liberalization Low standards (safety, environment) Airlines do not contribute to regional economy Slow growth but growing (i.e., N. Africa regional growth 4-6% per year 2000-2010) Propensity to fly variable limited but will increase over next 15 years Increased stability in the region Old aircraft fleet (i.e., B727)(Stage I and II)(average age is 18 years) Will need 1,000 new aircraft next 15 years to replace old technology Since 1992: airline integration; restructuring; commercialisation – positive ‘Flag carrier’ to self-reliance, privatization, less governmental control Need for new management who can work together as partners to cope with global trends Need autonomy in civil aviation authorities and infrastructure and personnel training Rise of LCC start-ups Latin America /Caribbean Deregulation /Privatization Moving toward liberalisation and Increased PAX growth and competition Increased alliances and development of corporate strategy and a competitive strategy to cope with competition Brand culture important but there is need for training and R&D Focus on safety (Data constructed from AITA 2011) There are three stages of developments impacting the Airline Industry namely, regulation, liberalization, deregulation and re-regulation. Deregulation and Liberalization have led to expansion, consolidation and concentration of firms in the airline industry. Over the years the industry has evolved through different phases as defined in diagram below; Figure 3 Phases in state of global Airline industry (Source: IATA 2011) To a greater extend the above developmental changes have been influenced by one of the following factors such as 9/11, ongoing wars, the financial crises however going forward issues like globalization, change in international political landscapes distribution natural resources such as oil, wars and terrorism have an important bearing to developments in the airline industry. 2.2. Key Drivers for Change In an effort to compact the impact recession, both airlines led to merger talks that started in 2009. The airline industry has been consolidating in efforts aimed at countering the impact of the global recession on the airline industry. In particular, US airlines are resurgent after their consolidations, and the Gulf-based carriers are focusing on US-Asia traffic at the expense of European carriers." In the case of the BA-Iberia merger, the main driver for change has been about both airlines strengthening their positions against the other big beasts of the airline industry. Better together than alone. (Hooper & Greenall, 2005, p. 110) concurs that the reduction of operational costs is also a major driver behind the merger: "In fact BA does admit that the revenue benefits of a merger are less. Theyve already taken them through the [BA-Iberia-American] immunized strategic alliance so that puts the focus on the cost side (Iatrou & Skourias, N, 2005, p. 121). Figure 4 below reflects the huge increase in Airline costs. Figure 2 Airline costs (Source: IATA 2011) Figure 3 Typical airline costs (Source: IATA 2011) 2.3. Applying Five forces analysis to global airline industry A PESTEL analysis identifies a combination of liberalization of skies and industry deregulation as the underlining forces that drive the BA’s competitive forces. According to (Ireland et al., 2002, p. 198) the industry with continue to consolidate. More and more airlines will seek to partner with each other and form alliances in an effort to strategically take positions and maximize them. Table 2 five forces implications and neutralisation analysis Force Key points Impact on Industry and IAG Threat level Neutralization Threat of new entry 1. Entrants have cost advantages 2. Low capital requirements 3. Little product differentiation 4. Deregulation of government barriers 5. Liberalized environment Low Erecting barriers (isolating mechanisms) create exploit economies of scale, aggressive deterrence, design in switching costs Threat of substitutes 1. Autos for short distance travel 2. Fast train linking busy European cities 3. Telecommunications 4. Video conferencing 5. High-speed railroads Low Improve attractiveness compared to substitutes: better service, more feature Supplier power 1. Strong labour unions 2. Concentrated aircraft makers Suppliers bargain most of profits. High Reduce supplier uniqueness: backward integrate, obtain minority position, second source Buyer power 1. Buyers extremely price sensitive 2. Good access to information 3. Low switching cost Increasing demand on low cost airline Medium Reduce buyer uniqueness: forward integrate, differentiate product, new customers Industry competitiveness 1. Many companies 2. Little product differentiation 3. Excess capacity 4. High fixed and variable cost 5. Cyclical fluctuation of demand Intense rivalry leads to price competition which reduces profits. High Compete on non price dimensions: cost leadership, differentiation, cooperation Adopted from http://www.scribd.com/doc/23329171/British-Airways-Strategic-Plan 3. Analyzing Intra-industry heterogeneity 3.1. Market segmentation With western airlines braced for losses in 2012 (Jones, 2002, p. 155) because of contagion from the euro zone crisis (Kraus & Koch, 2006, p. 289), (Luo, 2007, p. 200) supports that Asian carriers will provide some much needed cheer for the aviation industry. Asia’s developing economies are expecting strong demand for air travel, which should translate into profits for the region’s airlines (Lyall, 2008, p. 387). Furthermore, the rise of China and India as economic powerhouses means Asia is expected to become the most important sales region for Boeing and Airbus, worth an estimated $1.5tr over the next 20 years (Lazzarini, 2007, p. 233). Figure 4 Projected Top 10 Markets in 2014 by International Passengers (Source: IATA 2011) Some of the competitors’ business units are struggling but the situation has presented opportunities for IAG. For example, the Lufthansa Group accounts indicated a loss of EUR 154 million whereas IAG recorded a net profit of EUR 288 million (Lynes & Andrachuk, 2008, p. 199). This presented IAG with the opportunity to squeeze more growth from its constrained capacity in the Heathrow hub by expanding its services to emerging markets in Asia and Latin America (Lynes & Dredge, 2006, p. 295). 3.2. Intra-industry / Strategic grouping analysis According to Cool & Schendel (1987), strategic groups signify a collection of firms within the airline industry that have common characteristics in terms of their resources and scope of business. Identifying these strategic groups is highly desirable from both a qualitative and quantitative perspective (Mak & Chan, 2006, p. 300) as it makes it easier to understand the competitive dynamics of the industry rather than having to characterize each firm separately. Furthermore, by dividing the airline industry into meaningful groups, performance and operating statistics can be separated and analyzed more effectively. Specifically, this article seeks to identify strategic groups within the Global airline industry using the well-established competitive strategy model of Michael Porter. According to Porter (Mak et al., 2007, p. 288), a strategic group consists of rival firms that have similar competitive approaches and positions in the market. Since the introduction of deregulation in 1978 in the U.S. and the UK, the airline industry has undergone significant and often dynamic changes. As hypothesized by Caves and Porter (1977), the figure below confirms that the level of rivalry within the global airline industry is more intense among firms from different strategic groups as opposed to firms within the same strategic group. Company Passenger numbers Revenue European Ranking World Ranking Fleet / aircraft Destinations Market value  Delta Air Lines 1 Lufthansa 2 2 US$9.7 billion United Continental 3 Air France-KLM 70 million 4 US$5.6 billion AMR 5 BA and Iberia - IAG 58 million EUR14 billion 3 6 406 204 £6.1 billion (Data from Centre for Aviation 2011) As signified in the introduction part of this report, (Mascarenhas & Koza, 2008, p. 119) supports that the competitive dynamics in the airline industry is not simply about European carriers. The newly enlarged Delta Airlines and the cash-rich Middle Eastern carriers such Emirates Airways are also potent forces (McIntosh et al., 2003, p. 277). The oneworld airline alliance of which BA-Iberia is part of is significantly smaller than the Star and SkyTeam alliances. Star currently has 27 members and carries 623 million passengers whereas SkyTeam with 13 members (plus a further five pending) that carry 385 million passengers. Oneworld has 12 members and carries 335 million passengers. BA-Iberias big European and North American rivals are members of Star and SkyTeam. In such a case, the BA-Iberia merger can be considered as a step in bolstering oneworlds competitiveness in the global airline industry. Airlines have increased their cooperation in an effort to reduce cost and increase customer offering simultaneously. This has resulted in the formation of alliances in the airline industry as outlined below; Table 3 global Airline industry strategic alliances Alliance Members Star alliance Adria Air China Asiana Airlines bmi EgyptAir Lufthansa Spanair TAM United Airlines Aegean Air New Zealand Austrian Brussels Airlines Ethiopian Airlines SAS Scandinavian Airlines South African Airways TAP Portugal Thai Airways International Air Canada  ANA Blue1 Croatia Airlines OT Polish Airlines Singapore Airlines SWISS Turkish Airways US Airways SkyTeam Aeroflot Air France China Eastern Delta Air Lines Korean Air AeroMexico Air Europa Alitalia China Southern Kenya Airways TAROM China Airlines Czech Airlines KLM Vietnam Airlines One world American Airlines Finnair LAN Qantas British Airways Iberia Malev Hungarian Airlines Royal Jordanian Cathay Pacific  Japan Airlines Mexicana S7 Airlines (Data constructed from Aviation 2011) 3.4 Opportunities and threats Analysis Figure 5 Opportunities and threats analysis Opportunities • The merger will enable BA-Iberia to make €400 million in cost savings by 2016 (ref) • Potential for annual synergies of EUR400 million from year five, with 60% of these synergies arising from cost savings, and 40% from larger revenues. (CFA 2011) • Through coordination of services IAG is now better positioned to enhance value offering for example the Group will have more options for travel to Latin America, where Iberia is market leader operating from Madrid to 19 destinations. • The consolidated IAG group will help drive unit costs down and hopefully give the customer a more seamless product and experience. • It will be possible to combine fares of the two airlines. Threats • Labour relations look likely to be a key issue for IAG. • Considering that BA and Iberia have dissimilar ratings on the surveys undertaken by research consultancy Skytrax (2010), with BA being a four-star carrier and Iberia having three, the difficulty in managing the service differences between the two airlines will be a "key challenge" for IAG (Global aviation resource) • Fluctuating oil prices • Threats to security • Global environment awareness e.g. involvement of airline industry in the EU emissions trading. 4. Micro / internal environment analysis As proposed by (Murray et al., 2005, p. 118) this section of the analysis focuses on internal factors that give IAG advantages and disadvantages in meeting the needs of its target customers. Figure 8 Strengths and weaknesses analysis Strengths • BA and Iberia are well matched with complementary route networks seen as vital in airline mergers and alliances, the idea being that the traffic strengths of the respective airlines feed into the other. BA and Iberia do complement one another for example BAs strength is North America and Asia and Iberias in South America. • Passengers will have access to more than 120 VIP lounges in airports while frequent flyers will also gain from the coordination between Iberia Plus and BAs Executive Club organizations. Although the two will remain separate, benefits will be increased. • British Airways has a strong position on the North Atlantic, with New York well covered in its own name and a very valuable metal neutral status with American Airlines which gives the Group a competitive position in the American market. Weaknesses • Although Heathrow is the highest value hub of all, but it doesn’t give direct access to Europe for travellers coming from the east, something that is exploited by alliance members. oneworld partner Finnair for example promotes its speedy access from Asia to Europe while most airlines overfly Helsinkien route, then backhaul their passengers into Europe, as Qantas does. • Aside from BA’s minority investment in South African franchise Comair, IAG is relatively weak across the whole Middle East-Africa zone • The high value/high growth Gulf region is not IAG territory either. In order to identify ways in which IAG can create value for its customers, and help think through how it can maximize this value, Porter (1996) proposed the value chain analysis. 5. Value chain analysis Support Services Primary Services (Adapted from: Johnson et al., 2008, p110) Whilst the Value Chain above highlights the primary and support activities that add value to BA, there are a number of inefficiencies within these activities that arguably have reduce the amount of value provided (see table below). Table 4 Support activities value loss Support activity Issues Firm’s infrastructure Large bureaucratic infrastructure decreases effective communication and increase inertia HRM BA’s employee opinion surveys attracted a mere 35% response rate in 2007 (British Airways, 2008). Due to high collective bargaining capabilities, BA has contended a number of highly publicised employee relations issues (e.g. Cabin Crew strike over pay, sickness absence, and staffing in 2007 (BBC News, 2007). Technology development BA has failed to gain recognition for new innovation (Mutambirwa & Turton, 2000. 100) Table 5 Primary activities value loss Primary activity Issues Inbound logistics High solidarity between supplier and BA employees has created a history of negative industrial action. For example, in 2005, BA employees walked out for two days when Gate Gourmet employees were sacked (Paik, 2005, p. 290) Operations / outbound logistics TV documentary reported on terminal five operation difficulties, an emergency landing at LHR , poor baggage handling and flight cancellations (Parkhe, 1991, p. 118) Marketing and sales A lack of innovation in their marketing communications (e.g. Virgin gaining value over BA (Phillips, 2006, p. 211) (Diagram adapted fromhttp://www.scribd.com/doc/23329171/British-Airways-Strategic-Plan) It is suggested that an organisation’s competitive advantage and superior performance results from its distinctive capabilities (Johnson et al., 2008, p. 95). The table below outlines BA’s resource based view by identifying its resources and competencies. Resources Competencies Threshold capabilities Threshold resources Tangible Intangible 1. Partnerships and Alliances e.g. with Iberia. 2. International customer base Threshold competencies Capabilities for competitive advantage Unique resources Tangible Sole access to LHR terminal 5 (Rajasekar & Fouts, 2009, p. 288) 1. Complementary networks that operate from two of the biggest hubs in Europe.  Intangible Unique competencies Retrieved from http://www.scribd.com/doc/23329171/British-Airways-Strategic-Plan 6. Critical success factors A good safety record for an airline is a qualifying key success factor. Irrespective of cost, if there is a significant risk of crash customers will not want to fly as some things are just too important to save a little bit of money. Other important areas include: Attracting Customers Personnel Management Fleet management Route system Revenue/Cost Control Maximising revenue through competitive and innovative pricing schemes to attract and maintain a customer base is critical for success in airline industry. Just as important is cost management, notably fuel procurement and price hedging during volatile periods (Turton, 2004, p. 259). Financial Management Net-unit revenue is the measure of profitability, representing all revenues minus all costs divided by the total seats flown. Successful management of this key indicator enables airlines to tap investment for growth. Flight Management A high on time take-off and landing record is an order winning key success factor. People don’t fly because we want to fly but because it’s the best way of getting from point A to point B quickly (Saglietto, 2009, p. 118). Waiting around for hours in an airport or being stuck on the plane sitting on the tarmac will result in customers deserting an airline. 7. Evaluation of the competitive sustainability/ vulnerability of rivals strategic positions The merger between BA and Iberia has the advantage of ensuring the two firms sustain their operations in the competitive airline industry. This is because the two firms have been long time rivals in the airline industry and their merger will definitely result in the sharing of strategies that they have been adopting as individual firms. The two firms will be able to emerge out stronger than they would have had they remain as single entities. BA and Iberia will each share their different experiences in the airline industry hence improve their strategic positions. However, IAG’s strategic position is under threat because the firm has been exposed to a wider market that is occupied by bigger firms that have better strategies and resources. 8. Options available for BA There are two general options for BA including long haul and short haul strategies. The two strategies are analyzed below: The short-haul strategy There is an urgent need for IAG to adopt a lower cost short-haul operation in its European market. This will ensure that the firm secures a long term success in its future business operations. This will create a competitive advantage for the firm because most of the airline firms in Europe are operating a high short-haul cost base (Tsai & Hsu, 2008, p. 111). This can be illustrated in the figure below: Figure 6 Selected European Carriers RASK and CASK: Quarter ended 30-Sep-2011 (Source: CAPA – Centre for Aviation & airline reports 2012) The long-haul strategy IAG should consider acquiring bmi which has the largest operations at Heathrow. This will see the firm increasing its market share in the airline industry and strengthen its presence in the European airline industry. The merger would create Europe’s largest airline after Lufthansa and the sixth largest global carrier after Delta Air Lines, Lufthansa, United Continental, Air France-KLM and AMR. (Centre for Aviation 2011). IAG should also consider making changes in its operations and become more flexible by adopting one or more of the following strategies: Eliminate duplication Updating of airline systems Strengthening staff relations Improve organizational accountability 9. Appreciation of the strengths and limitations of strategic analysis The potential for some arrangement between IAG and a Gulf carrier remains a real prospect and Etihad is almost certainly an interested player in that respect. This is considering the fact that BA and Iberia have dissimilar ratings on the surveys undertaken by research consultancy Skytrax (2010). BA is a four-star carrier while Iberia is a three-star carrier. 10. Conclusions and recommendations Taking into account the potential benefits and opportunities that may result from industry consolidation, there is a possibility that the combination of BA and Iberia could see IAG become the most powerful merger in the world. However, the main challenge lies in the identification of the right balance of power in such a deal. An organic expansion into a well-defended territory is unlikely and AIG needs a north-western European partner (or two), with low costs and useful hubs. However it is to be noted that the merger will lead to annual synergies of EUR400 million from the fifth year of operations hence benefiting IAG shareholders. The merger will also benefit British Airways’ and Iberia’s customers and staff. IAG has no presence in Middle East and Africa and the purchase of bmi will create a competitive advantage for the firm, and according to Walsh (2011) a BMI purchase could be adding EUR1.5 billion to IAG’s group profits. 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