Competitive Analysis of British Airline - Case Study Example

MASTER PROJECT REPORT British airways Table of Contents 1 British airways 1 Table of Contents 2 Porter’s Five-Forces 5 Competitive Analysis of British Airline British airline appears to be in a competitive environment. The company has struggled to keep its integrity and the top-notch performance in the aviation sector. In addition, the sector has experienced increased traffic of new entrants and increase in aircrafts in all major airports (Giorgi, Irukli, Natia & Sopo 2011, p. 6). The airline has remained successful by maintaining its niche market (Flottau 2011, p. 33). The airline has conducted many surveys to ensure customer preference and emerging trends are incorporated in their operations (British Airways Strategic Report 2009, p. 19). There survey has enabled them to segment their market to cater completely for all types of travellers under their carrier. In addition, mergers with other successful companies have been the norm for sufficiently increasing market share. Through these mergers, the airline has successfully cut down on competition between British Airline and its partners. In order to assess the outcome, the airline uses several analyses such as porter five-model forces theory and segmentation theory. The PESTEL analysis is carried out as the situational analysis (Shultz 2007, p. 295). The theory guides the company towards principled strategic direction of achievements. There are other alternative theories to Porter model that the airline has used to compare the strategic plans it has implemented so far. The GE matrix is utilised to assess the opportunity for growth through the market development and new market entries (British Airways Strategic Report 2009, p. 10). Background information British Airline is engaged in providing air services operation in various destinations in the world. It is the largest United Kingdom’s Airline. Its services range from commercial flights for passengers, cargo freights and mail series as well as other auxiliary services. The company has close to 42,755 employees in all its departments (British Airways Strategic Report 2009, p. 3). British Airways carries a total of 33milion passengers to more that 300 destinations annually. The cargo section of the company handles 800,000 tonnes of cargo every year Services such as flight reservations and booking have been incorporated online. This move is in a bid to embrace the competitive market. The company was privatised in 1987 to enable it grow within the competitive market. Situational analysis The success of the Airline in the industry is attributed to its awareness of the external environment. The company has managed to highlight and assess its competitor in the situational analysis. The tools used by the Airline stabilises the company’s capability in meeting current and future challenges (British Airways Strategic Report 2009, p. 6). This situation analysis depicts the steps taken to improve the competitive advantage for the company. The flow of the procedure is as shown below. Source: (British Airways Strategic Report 2009, p. 5) PESTEL analysis The PESTEL analysis framework shows how external factors influence the strategic plan for the company. The analysis assesses the macro environment of the company and its influence to the overall operation of the company (appendix 1). The analysis highlights the six main factors: Political Economic Sociological Technological Legal and Environmental BA PESTEL analysis PESTEL analysis is another basic tool the airline has used in order to understand the external environment and the substantial influence towards profitable operation (Pestle analysis 2011). BA has increased its success by adopting and manipulating the PESTEL factors to its advantage (British Airways Strategic Report 2009, p. 6). The factors have enabled the company to forecast the possible changes of these factors. The company has assessed the implication of the factors to its operation (appendix 2). This has enabled it to make drastic changes. Evaluation of strategic theories and action Similar to situational analysis, evaluation theories are essential in evaluating the competitive nature of the industry in order to assess position of the airline. In addition, it creates awareness of the external environment as well as assessing the capability of the industry to meet future challenges (Giorgi, Irukli, Natia & Sopo 2011, p. 6). The evaluation theories used in this analysis are Porters Five Model and Segmentation Theory. Porter’s Five-Forces British Airline uses the Porter’s Five-Force tool to enhance the competitive analysis (Hunt, 2011). This tool enables the company to make strategic decisions in order to increase profitability (Robin & Grazia Ietto-Gillies 1996, p. 199). The framework below shows the analysis. This model harnesses the competitive forces that emanate from within the company and task environment. The five forces include: I. Potential competitors/competitive rivalry II. Threats from new entrants and the competitiveness among industry incumbents (existing firms) III. The buyers/consumers influence IV. Suppliers influence V. Substitute products Porter’s Five-Forces (with regard to BA) Source: (Maxi Pedia, n.d.) The model above shows the concept of evaluating a company’s strategic position using the Porters five-force model (Hunt, 2011). The competitive position of BA is strongly determined an influenced by the stated forces. This model is mainly used since it provides a useful analysis of the external task environment for the company. Porter’s analysis of BA i. Potential competitors/competitive rivalry British Airline experiences a high force from the competitors. The company has ventured in both long haul and short haul flights. There is a small difference between its services and its competitors. The short haul market is saturated with small players with competitive prices. These players have held their position and discouraged the big players such as British Airline from venturing the market (British Airways - Five Forces Analysis n.d.). The big players are airline companies that have a wider coverage in terms of destination and command high market share. British faces direct competitive rivalry from other privatised airlines like virgin Atlantic Airline in the UK market. The small players also discourage merging induction. Small players in the aviation industries are airlines that only specialise in short haul flights. The strategic alliance between British Airline and American Airways was vehemently criticised by Virgin and the small-scale players. Virgin Atlantic is regarded as the main competitor to BA as it is the second largest long haul airline in the UK. The consolidation of the competitors in the market has led to an increase in competition. BA is still an older and bigger airline way ahead of virgin. BA is leading the competitive advantage over virgin Atlantic, which has only 38 aircrafts covering 30 destinations. In the international market, the airline has managed to remain relevant with mergers, which enable it to sustain the competition pressure. Competitors in the international market include; North West Airline, Lufthansa, KLM, Air France, among other major international flights. ii. Threat from new entrants The Airline faces a low force of new entrants in the market. This is due to the significant high regulations and requirement for establishing a new airline. The barriers to entry also stipulate high capital costs for those intending to make an entry in the market. This allows the airline to enjoy dominance in the market (British Airways - Five Forces Analysis n.d.). Barriers to exit are in place to deter new entrants. The low risk environment in the market allows the major airlines like BA to avoid direct competition. On the other hand, the existing incumbents pose a high force due to the slow growth rate of the industry. Failures of recent airlines such as XL and zoom have deterred new entrants in the market. iii. Buyers influence The airline faces a moderate force from the power of buyers. The low concentration of buyers to suppliers lowers the bargaining power of the customers (British Airways Strategic Report 2009, p. 9). The consumers have little influence in requesting for discounts on the services rendered. The increase use of internet has contributed to a moderate force from buyers. The increased request on better quality level of service has been intensified by the introduction of the online services. The airline has gone ahead to offer frequent flyer services for their esteemed customers hence reducing the force from the buyers (British Airways - Five Forces Analysis n.d.). The high cost of switching services to other airlines also contributes to the profitability of BA. Customers affiliated to BA risk loosing benefits they accumulated in the airline when they opt to switch from the airline. Raising the switching costs ensures brand loyalty is maintained among the customer. iv. Suppliers influence BA experiences a high force from the suppliers. This has been contributed by high prices of equipment. The suppliers have managed to control the quality and prices of raw materials in the industry. Currently the company has engaged two companies to supply it with aircrafts. These companies pose a high bargaining power to the airline. Moreover, the airline has restricted itself to contracting only one company to supply it with fuel. At the airport, the Airline has been oppressed by the regulations concerning landing slots. The policy set up by International Air Transport Association (IATA) stipulates that landing slots priority is issued to historic rights of existing users (International Airline Benchmarking Study 2011). This pressure on the airline leads to lose of revenue as well as potential customers. In addition, the few suppliers have made it difficult for the airline to switch suppliers. Other existing firms in the industry are competing for the same suppliers as BA (British Airways Strategic Report 2009). This intensifies the force of suppliers to dictate. On the other hand, the employees of the airline have used a collective bargaining force of the unions to push for their rights in the Airline. This puts the Airline to abide to terms presented by the Unions concerning working conditions for the employees (British Airways Strategic Report 2009, p. 9). The cost of acquiring customised equipment for the airline is quite high. The suppliers are quoting high prices for delivering much needed equipments and materials used by the airline. Such materials include aeroplane blankets, onboard foodstuff as well as serving utensils, cabin crew uniforms among other equipment. v. Threat of substitutes British Airline faces a rather medium force from substitute products. This is due to the few direct substitutes in short haul flights. Within the UK, the company faces little competition from long distance coaches, long-distance trains and the ferry. In the international market, there is no notable substitute challenging BA services BA (British Airways Strategic Report 2009, p. 9). The consumer behaviour among BA customers shows that their brand loyal is very strong hence, it is quite difficult for such loyal customers to seek substitute product. The trend of travelling by aeroplanes has increased hence other possible substitute like trains (bullet train) and ferries, including luxury cruise liners, and buses are slowly reducing the competitive power. The increased security and convenience of this mode of travel has also raised confidence of the potential consumers. To summarise the threat of substitute is medium due to the few direct substitutes. Segmentation Theory BA have realised that their target consumers are not alike hence there is a substantial need of segmenting the market (British Airways Strategic Report 2009, p. 27). The segmentation allows the company to deliver services and products that are within the needs and wants of targeted market. The airline has segmented its market into three segments: long haul customers, short haul customers and domestic travellers. The airline has developed a database marketing line through loyalty club cardholders. These cardholders will be segmented as business travellers. Another segment well defined is the leisure travellers who have been the main revenue generators for the company. The targeted customers will assist in increasing marketing relationship and operations of the Airline. This has enabled the airline to focus competitor analysis on other leading airlines in the industry (Field & Sobie 2007, p. 94). The period of implementing the segmentation theory was achieved though resource allocations since there were no threats from competitors (British Airways Strategic Report 2009, p. 27). British Airways Segmented market of UK Price Premium Medium Low Domestic Short-medium haul Long haul Source: (British Airways Strategic Report 2009, p. 49) The diagram shows the advantage BA enjoys in the UK market. BA managed to attract the market share of Virgin in the long haul, but failed to capture the short haul (British Airways Strategic Report 2009, p. 27). Ryan Air and Easy Jet have established their brand in the short haul. The low price air travel that easy Jet offers to the domestic market makes it a favourite brand for that market segment. BA also gets fierce competition from palm air Lufthansa and KLM-Air France in the long haul market segment (International Airline Benchmarking Study 2011). All these airlines are seeking similar strategies such as increasing breadth of service in the high price focused middle market hence the intense competition. However, BA has failed to increase the growth of business segment in the short haul as compared to the long haul. This is because the small local airlines have captured this segment very well in terms of customer loyalty and brand loyalty. The airline mandate of focusing on one segmentation BA has led to the airline losing its market advantage in other segments. This move has succeeded in reducing Virgins market share growth. Other airlines like American Airways have made head way in segmentation development (International Airline Benchmarking Study 2011). BA enjoys a strong brand reputation that assures the company success in its segmented market (British Airways Strategic Report 2009, p. 27). The segmentation ensures the Airline defends the current market position and introducing fundamental service quality. The segmentation is also essential for the airline in terms of sales oriented approach to all these segments. In the end, BA has achieved market advantage as well as increased profitability of the company (International Airline Benchmarking Study 2011). Segmentation model in the international market Price Price focused segment Middle market segment Premium Medium This segment Focuses on service offering Low Domestic Short-medium haul Long haul The segmented region is greatly by the level of price. The premium level is highly profitable to the airline. The middle market takes majority of the premium price customers. BA has little dominance in the premium priced customers. BA highly benefits from middle and the service focus segment. The medium priced customers are mainly concentrated at the middle market and the service focused segment. The low priced customers are concentrated in service oriented segment. In line with the porter five model the BA experiences massive competition in the middle class segment. Most of the competitors are offering medium price similar to BA in similar segments. Hence they intensify the fight for customers in the market. The buyers force relies majorly on the benefits of the different segment as well as the prices. The new entrants in the market are also increasing the competition in the segmented market (Field & Sobie 2007, p. 94). Suppliers force is crucial the segmented market. BA has sourced suppliers to supply the airline with aircrafts to cater to their diverse customers in the different segments. In the segmented market force of substitute services such as trains and ferry is still very low excluding the small luxury segment of the market . Conclusion Other Airlines in the industry mainly use The GE matrix as their competitive strategy. These airlines have strongly criticised BA for the strategic implementation especially the merger with American Airways. Virgin Atlantic came out strongly to oppose the merger terming it as being non-competitive. The upper advantage for BA lies with Porter’s Model. From the report above, it is vivid that the strategies implemented justify the success the Airline has experienced in the recent years. The report confines the crucial issues that the Airline considers particularly valuable for its operation. The report also has outlaid the benefit of the competitive strategy in upgrading customer experience and modernising aircrafts as well as services rendered. Appendix 1 PESTEL analysis Source: (Learn marketing.net, n.d.) Appendix 2 BA PESTEL analysis Factors Description in the market Implication for BA Political There is a heavy political regulation in the aviation industry. Politicians are formulating new policies that affect the operations of many Airlines. British Airline has no alternative option but to comply with all the regulations in order to continue operation. In addition, there is an increased security concern by most countries due to past terrorist threats. The sufficient security facility and measures in place increases the confidence of the consumers as well as the competitive advantage. Economic The Global economic crisis has influenced the strategic plans and decisions taken to increase the profitability of the company. Furthermore, world growth is projected to be 2%. However, the depreciating value of the pound against the Euro affects the operation cost of the Airline. The airline is strongly affected by the economic situation. BA experienced a reduction in amount of business travel as most potential customers were cutting down on costs and using alternative means of transport. In addition, the airline became vulnerable to poor exchange rate of the pound. The oil prices had subsided by 50% in the last two years from its peak in 2007. The decline in fuel price led to strengthening of the dollar. The fluctuating oil prices directly affect the revenue and cost of the airline. The consumer spending for BA went down between July and September 2008 This resulted to intense competition in the market. Social The characteristics of the UK demographic shows that the country constitute of majority aging population There is also increased unemployment. BA enjoys a Potential opportunity for growth. The older generations have more time to spend on leisure activities such as international travel. This old generation have an excellent brand loyalty toward BA. The increased unemployment issue has generated to increased bargaining power by the airline as an employer. Technological Recent survey indicates that 34% of online consumers use price comparison sites to make decision on the Airline to use. Online booking services have increased tremendously over the last few years. The increased customer awareness on their bargaining power threatens the profitability of the Airline. BA ought to remain up to date with the technological advances in order to avoid loosing its consumers to its competitor and becoming increasingly reliable. Environmental The aviation industry has been accused for being a major contributor of noise pollution. Hence environmental activists have slapped the industry with numerous noise pollutions control policies as well as energy consumption controls. The new legislation enforces tighter environmental regulation that increases the operational cost for BA. There is limited land for expanding airports. The limited airport lands limit the capacity and utilisation of capacity by Airlines. The consumers all over the world are embracing the green products and environmental friendly services. The airline has upped its game in initiating environmental strategy to maintain its reputation. Legal Several legal constraints affect the operations of airlines in the industry. The legal issues regulate mergers and price fixing. There are Legal regulations that recognise trade unions and industrial actions such as cabin crew strikes. The restriction on mergers has slowed down the efforts of BA to merge with airlines from other parts of the world. For instance, the alliance with American airways was strongly affected by the legal restrictions. The legal regulations led to good relationship between BA and the employees. This relationship is quite essential in ensuring the Airline avoids industrial action. Source: (British Airways Strategic Report 2009, p. 6) References British Airways - Five Forces Analysis n.d., viewed 22nd October 2012, http://www.wikiwealth.com/five-forces:british-airways British Airways Annual Report and Accounts 2008, pp. 1- 136, viewed 27th October 2012, http://www.scribd.com/doc/5004517/British-Airways-Annual-Report British Airways Strategic Report 2009, pp. 1-49, viewed 27th October 2012, http://www.scribd.com/doc/23329171/British-Airways-Strategic-Plan Field, D & Sobie, B 2007, Segmentation in the all-business sector, Airline Business, vol. 23 no.8, p. 94-94, viewed 29th October 2012, http://search.proquest.com/docview/204124715?accountid=2280 Flottau, J 2011, ‘Change of fortunes,’ Aviation Week & Space Technology, vol. 173 no. 3, p. 33. Giorgi, J, Irukli, B, Natia K & Sopo, Q 2011, British Airways: project in strategic management, pp. 1-52, viewed 22nd October 2012, http://www.slideshare.net/NKPworld/british-airways-11908773 Hunt, O 2011, Innovation and Porter’s Five Forces Theory, viewed 22nd October 2012, http://www.articlesbase.com/college-and-university-articles/innovation-and-porters-five-forces-theory-176856.html ‘International Airline Benchmarking Study - Summary of Findings’, 2011, viewed 22nd October 2012, www.ethos.ae/wp-content/uploads/2011/03/Airline-Benchmarking-Report.pdf Learn marketing.net n.d., Macro Environment and Pest Analysis viewed 27th October 2012, http://www.learnmarketing.net/pestanalysis.htm Maxi Pedia n.d., Five Forces Model by Michael Porter viewed 27th October 2012, http://www.maxi-pedia.com/Five+Forces+model+by+Michael+Porter Pestle analysis 2011, viewed 22nd October 2012, http://www.scribd.com/doc/59747690/Ba-Pestle-Analysis. Robin, J & Grazia Ietto-Gillies, R J 1996, Global Business Strategy: An Introduction, Cengage Learning EMEA, London. Shultz, C J II 2007, ‘Marketing as Constructive Engagement,’ Journal of Public Policy & Marketing, vol. 26 pp. 293-301. Read More