British Airways - Providing Quality Products while Reducing Airline Ticket Price - Case Study Example

British Airways pricing and financial analysis Competitors: Virgin Atlantic and British Midland Airways (bmi) Pricing British Airways which is an international company allot prices to its services with the general aim of maximizing profit. However, this mode of pricing to maximize price for the company that has global presence comes along with major factors that must be put in to consideration (Kotler 2002). Such factors for the prestigious airline company include the prices to the similar service from other airlines such as Virgin Atlantic as well as the pricing from American Express (Rodgers 2002). The company has developed the use of the theory of product strategy to earn respect at home and across borders. The fact that the airline industry has no single company that enjoys monopoly of business; it is an indication that the price discrimination of services is usually determined from the prices of other members in the industry (Kotler 2002). The fares paid by the passengers using the British airline are higher than those paid by the passengers using the other airlines though the difference is almost negligible (Bathgate 2003). British Airways using the pricing method known as the demand based pricing which is habitually determined by the consumer demands of the services offered by the airline. Destination of a particular route also dictates the pricing mode used by the British Airways (Bathgate 2003). The company nowadays determines its price for the airline tickets through the use of yield management which is a computerized system and makes the process of pricing more complicated though they have to keep at per with the evolving technology. The industry is very competitive and the companies need to ensure that they provide quality service to maintain their clients (Bathgate 2003). This is so because other competitors, for instance Virgin Atlantic use similar pricing methods as those used by the British Airways in determining the worth airline tickets (Rodgers 2002). The price differentiation of the British Airways to its different business segments which are closely related to those of its competitors, Virgin Atlantic and British Midland Airways, is chiefly dictated by the number of days to departure time, the day of departure as well as the prevailing force in the competitive market (Kotler 2002). Financial Analysis The financial statements for the year that ended March 2009 indicate that the financial performance of British Airways was not one of the best. In brief, the company had flown a total of 33,117,000 passengers (BA 2009). It also had a turn over of about 8,992 million pounds though it made a gross loss of close to 401 million pounds. The financial analysis of British Airways show that the company does not always make profit as expected due to several factors such as the fuel of the sector other than just the disposable income for customers. Even so, this did not significantly contribute to the loss in 2009 for the company since it was mainly due to the recession that was experienced across the globe (Rodgers 2002). The company has a good strategy in place of ensuring that it remains a profitable company despite the high operational costs in the industry. The analysis below shows one of the many financial statements of the company. Statements of changes in equity For the year ended March 31, 2009   Group £ million Issued capital Share premium Investment in own shares Other reserves Total shareholders’ equity Minority interest Total equity At April 1, 2008 288 937 (10) 1,818 3,033 200 3,233 Adoption of IFRIC 13       (206) (206)   (206) Adoption of IFRIC 14       235 235   235 At April 1, 2008 (Restated) 288 937 (10) 1,847 3,062 200 3,262 Loss for the year       (375) (375) 17 (358) Exchange differences and other movements       38 38   38 Net movement on cash flow hedges       (988) (988)   (988) Exercise of share options     2 (2)       Cost of share-based payment       1 1   1 Purchase of own shares     (1)   (1)   (1) Share of other movements in reserves of associates       (26) (26)   (26) Held-to-maturity investments marked-to-market       (5) (5)   (5) Available-for-sale financial assets – gains recycled to the income statement       (4) (4)   (4) Total income and expense for the year     1 (1,361) (1,360) 17 (1,343) Net dividends       (56) (56)   (56) Distributions made to holders of perpetual securities           (17) (17) At March 31, 2009 288 937 (9) 430 1,646 200 1,846 For the year ended March 31, 2009   Company £ million Issued capital Share premium Investment in own shares Other reserves Total equity At April 1, 2008 288 937 (10) 1,344 2,559 Adoption of IFRIC 13       (135) (135) Adoption of IFRIC 14       235 235 At April 1, 2008 (Restated) 288 937 (10) 1,444 2,659 Profit for the year       (389) (389) Exercise of share options     2 (2)   Cost of share-based payment       1 1 Purchase of own shares     (1)   (1) Net movement on cash flow hedges       (988) (988) Total income and expense for the year     1 (1,378) (1,377) Net dividends       (56) (56) At March 31, 2009 288 937 (9) 10 1,226  (BA.com 2009) The above results are an analysis of the British Airways company of statements in changes in equity which reflect the true picture of the company development. The high solvency of British Airways is evident through the acknowledgement of its working capital which is approximately more than 5.1 from its financial statements (BA 2003). The business sector has remained healthy due to it being a low-cost sector which has mainly dominated the short haul market. It has also been greatly remained on the go after several investments in other sector (Kotler 2002). The good by financial statement analysis are as a consequence of am experienced management of the company. The dividends of British Airways are higher than those of Virgin Atlantic as well as those of British Midland Airways (Bathgate 2003). Market share Despite the fact that the airline industry is a competitive business zone, British Airways continues to dominate the market due to its good market share plan that has been in place since 1999 (BA 2009). The three main carriers in the airline consumer market in Europe are the three competing airlines, British Airways, Virgin Atlantic and British Midland Airways (Rodgers 2002). The dominance of the British Airways in this consumer market which is very lucrative yet a low cost market is evident through the various developments in its main airport, London Heathrow. The competition for the market share is also shown by the manner in which the airlines have consolidated themselves in this sector through various expansions. To show its dominance in this consumer market, British Airways scaled the routes from London to the United States in which it has the great dominance. The British Airways commands about 80 percent market share between Heathrow and United States, with more than 200 aircrafts compared to 15 percent market share of Virgin Atlantic. The dominance of British Airways in market between Heathrow and Chicago was more than 50 percent and this forced Virgin Atlantic to pull out from operations in that particular route. The director of Virgin Atlantic notes than there could not be enough comparison between British Airways in terms of market share since it has competitively dominated the market. Loss British Airways made a notable loss in the year 2009 though the loss did not cripple the company as it has hope of making profits in future. The worst bit of the making of the loss is that there was reduced cost of operation which led to premiums revenues decline significantly (Rodgers 2002). The company that dominates the market made a loss of 292 million pounds before tax and this resulted to a decline in annual revenue of the country. The company has good marketing strategies in place and they are not necessary the reason as to the loss making. Willie Walsh, the chief executive officer of the company also notes that the loss is due to the various investments which the company has undertaken in the year 2009 to enhance its leisure destinations. The global recession that was felt in the year 2009 is one of the key things that made the British Airways alongside its competitors to make loss. Other factors included the high fuel cost as well as the maintenance cost. The analysis below shows the various operations of British Airways that is attributed to its loss from April 2009 to September 2009. There was 292 million pound loss before tax, there was revenue reduction of 13.7 percent, and an operating loss of 111 million pounds compared to a profit of 140 million in the year 2008. The unit costs went down to 5.2 percent (BA 2009). British Airways - Pricing Strategy The company has good strategies that it uses to price its services enabling the customers to freely choose from a variety of options (Rodgers 2002). The pricing depends on which class the customer wants, for instance, the economy class commonly referred to the class of blue members and free travelers, middle class usually known as the class of sliver members and finally the first class or the executive class for golden members. The price of each class is determined the same way through the application of cost estimation. The ticket cost is determined by the price of the service + (plus) the added value + the airport fees + the travel agents extra fees though such a cost attracts a discount if the ticket was bought online. For instance, the charges for domestic routes in Europe may be 135 pounds. The difference in cost of first class and economy class may be due to added services in the first class (Kotler 2002). If luggage in the first class is charged at 20 pounds if it exceeds 23 kg then it’s an extra cost for the first class (BA 2009). The economy class covers only the basic product. The example below shows how the first class air ticket would differ with that for the economy class. From London Heathrow to Brussels in Europe First class for the domestic route =135 pounds + 20 pounds = 155 pounds Economy class for the domestic route = 135 pounds The company has three main strategies that it uses to price its services; they include the Premium Strategy which mainly prices the services at a high note. This kind of strategy helps British Airways in targeting the business class (Rodgers 2002). This results in a competitive market with the competitors in overseas such as Virgin Atlantic. The other price strategy is the medium value which is used to price the services at a medium level (Bathgate 2003). The quality of services offered using this strategy is of less quality than those offered using the premium strategy. The economy strategy is used to give the basic product at a very low cost and this adds the brand image of British Airways on the right track. Future trends According to Kotler (2002) who contributed significantly to the theory of product strategy which is a key marketing mix, argues that if British Airways fully implements its current product strategy, it will command a big more share in the airline industry with increased volume of sales that it commands currently. The company has a good marketing strategy that is of great help in making profits in the future (Rodgers 2002). Therefore, the company will increase its territories which will result in bring more revenues for the company hence maximizing profit (Kotler 2002). The company has an innovative strategy in place which is used in creation of new products in the market or a new line of business. This kind of strategy will help in future trends of company in making more profits (Rodgers 2002). The company has also growth strategies in place such as diversification and vertical integration as well as horizontal integration. Such growth strategies if well implemented they will see the company command a big market share than it does to day and this will help it spread its basket wide. Conclusion of the learned The flying industry which has recently seen increased competition within different airlines, the consumers of their services anticipate they will be provided with less quality products with reduced costs. This expectation is commonly from the competitors who have a small market share in the industry. The assumption might not be true with British Airways which can chose to provide quality products but reduce its airline ticket. The consumer market is very competitive and air tickets can not be determined by just one airline, it has to put into consideration the pricing strategies of other companies. The industry is highly affected by any recession and this is true the losses incurred in 2009 after the global recession. The price of one class differs from that of another because of various privileges given to one class. The industry faces new innovations day in day out and therefore the future performance of the industry can not be predicted. References 1. Bathgate I. Designing pricing and strategies and programs, Lecture notes, University of East London. 2003. 2. Doyle P. Marketing Management and strategy (2nd edition), Building successful brands, Prentice Hall Europe. 1994 3. Kotler P. Marketing Management (3rd edition), Setting the product and branding strategy, Prentice Hall International edition. 2002 4. Kotler P. Marketing Management (3rd edition), Developing price strategies and programs, Prentice Hall International edition. 2002 5. Rogers, D. cheap flights or decent service? - Low-cost airlines have had their honeymoon and people are beginning to notice the service. How will budget carriers respond? Marketing, 22 August: Haymarket Publications Ltd. 2002 6. BA.com. British airways official web-page. 2003 (accessed 8 May 2010) 7. Marketing Teacher free lessons Pricing. 2002 (accessed 8 May 2010) Read More