Company Overview of British Airways
British Airways the pioneer of the global airlines’ industry has been passing throw the hardest time of history. In 2008, the tremendously rising oil prices and the shock of global credit crush has seriously injured the national flag carrier of Great Britain, and still British Airways facing a recessionary impact. The Guardian (2009) reported that in the first quarter of 2009, the operating loss of British Airways has been estimated at £ 143 million to £ 221 million when as an FTSE 100 company it has been continuously losing its share price in most of the trading hours.
Macro Environment or PESTEL analysis of British Airways
The macro-environmental condition and the competitive forces of British Airways is required to analyse by PESTEL1 in the following ways-
The environment of business and the increase or decrease the business risk depends on political situation for example oil price has decreased to political chaos, which has an adverse effect on the operation of British Airways. It is bound to follow the rule sets by the CRB2. Additionally, the UK has signed up in the single European currency so it has a direct impact on its business such as British Airways will face the changes of the exchange rate. Thompson, A. et al (2007) argued that investment, investment policy, device supply, operation, and growth, as well as network development materials, can be an important topic of risk, over taxation, rate of exchange, savings of personal intelligence, recession, ups and downs of currencies and the other uncertainties.
Terminal 5 was created based on the concept of bespoke contract and on March 27, 2008, Heathrow Airport has opened to start its new operation, which will enhance the operation of British Airways.
The annual report 2007/08 reported that frequent changes of regulation to protect terrorism activities is helpful to minimize the external and internal risks but it should have its own security system. In addition, few markets are still regulated by the government, route flying rights, infrastructure aspects, environmental & security requirements are also regulated by the government and international route is regulated by the agreement of UK government & foreign state.
According to the annual report 2008 of British Airways, it can be found that British Airways is in the top five positions among all airlines and number one position in the UK market, which demonstrates its strong capabilities and market segments. The annual report 2008 also reveals that its total fixed assets are £7,975 million, total assets £11,123 million and BA has carried about 805,000 tons of cargo in 2007/2008 financial year. In 2000, BA completes a 9% acquisition with Iberia and in 2008 it has purchased French airline L’Avion.
On 26 May 2008, the oil price was US$135 a barrel, which was the reason for increase the in operating costs and decreasing the profits. The annual report 2007/08 shows that the total fuel and oil costs were £2,055 m and 1 August 2008, Keith Williams- the CFO of British Airways said that per day the total fuel cost was approximately £8 million as a result total costs have increased 15% in the quarter. Keith Williams also added that in the current year the total fuel and oil costs will be £3,000 million which is a real threat for this company.
Changing interest rate and inflation affects the debt financing of BA; therefore, interest rate and debt financing have a positive correlation. Pandey, I. M. (2007) argued that as interest rate rises, demand for debt falls as the cost of capital will increase and growth rate declined, on the other hand, falls in interest rate may cause a higher rate of inflation. In 2008, its finance income has been reduced by £18 million from 2007 for higher interest rates, and in 2009 its profits have fallen about 90% so the CEO of BA argued that the airline industry is in crisis.
It has its own Corporate Responsibility Board to set up its activities and to introduce a performance-based culture within the organization where BA would arrange a cultural alteration program for changing its innovation, growth, safety culture, and clear customer focus. British Airways always provides the priority of employee’s safety and health; therefore, it has established the Safety Review Board which is committed to creating a wide-ranging working culture where all its human resources feel valued, respected as well as motivated. It has cut the costs of employees by 4.9% and the amount is £2,166 m and it also cuts pension costs up to £92 million in 2008 to face the recessionary impact. A large part of total employees are coming from outside of the UK and among all employees 43% are female and 57% are male and it has more than 3,000 pilot and cabin crew.
The technical aspect is the first priority of BA; as a result, British Airways has advanced its technological support such as well as customer gets instantaneous information for the improvement of broadband & mobile technologies, which has changed the purchase system; moreover, it invested £25m to purchase 550 new-vehicles, with 38 new-buses. It has also introduced new seat technology for the comfort of its customer and BA will use telematics technology for remote monitoring.
British Airways has already reduced the emission of CO2 up to 28% since 1990 and its current target is to reduce the emission of CO2 by a further 25% within 2025. Its commitment to keep the environment free from CO2 emission from its operations and the contract between IATA4 and BA will play an important role in this issue; moreover, it has few own regulations to protect the environment from pollution.
Generally, UK airlines are regulated by the two independent statutory bodies – SST5 and CAA6; moreover, European airlines are also bound to follow EU regulations and treaty provisions. CAA is accountable for scrutinizing numerous issues of an airline’s economic condition, management as well as operations under the UK Civil Aviation Act 1982.
The core competence of British Airways
The core competence of British Airways is the competitiveness that originated from its core proficiencies as well as core products. British Airways pursues its core competence with the cooperative learning in the groups; particularly its capabilities to match up diverse products and skills integrated the streams of modern technology where British Airways keeps its significance of identical core competencies. The core competencies of British Airways provide prospective access to an extensive assortment of markets that construct huge contribution to the passenger’s benefits with the products and services which is enough difficult for the competitors to impersonate.
The Guardian (2009) has identified three potential core competence of British Airways those are it’s he outfitted and strategic logic, corporate governance connecting to pension, Anti-trust imperviousness with American Airlines, target to cost savings of £ 220 million, and well-built obligation from the organization to deliver on that goal.
Analyzing the resources and capabilities of British Airways under the present recessionary economy, though it has targeted to reduce 400 senior managers, its core competence evidenced with the announcement of purchasing new fleets to integrate with services, e-booking, e-recruitment, and continuous effort to recover the market. The BA’s value for money comes together with speed and flexibility including the incredibly best application of electronic services has evidenced its esteem core competence.
Porter’s five-force Analysis for British Airways
In the operation of British Airways, the five forces analysis facilitates the company to differentiate as a ready for action environment. This analysis has correspondence with further apparatus for environmental audit as well as PEST analysis.
However, the above figure demonstrates the factors that are affecting industry competitors, as the price is high-buyers bargaining power is average. Threats of substitutes are low as the market is saturated and bargaining power with the supplier is poor as they can switch towards in another way at any time. Porter, M. E. (1985) introduced the Value-Chain Analysis answer the attack on his five forces analysis.
The threat of new entrants
- The entry into the UK’s aviation industry needed extremely large capital that negates the threat new entrants for British Airlines
- For the recessionary impact, the airlines’ industry of Britain has seriously injured with continuous losses
- Shortage of take-off and landing facilities for new crafts in the UK
Bargaining Power of buyers
- Through the bargaining power of buyer is high in the low-cost airlines but the buyer of British Airways has limited power over the company for its brand awareness and it always consider environmental issues so spend large budget on fuel.
- The low-cost airways are enough matured and have the possibility to drive in the high-cost market as a competitor of British Airlines
The threat of Substitute Products
- Like British Airways, a number of local & international Airlines industries also provide available services for passengers and travellers to enhance the tourism sectors.
- The threat of new substitute products for British Airways is average because for recession its share has dramatically fallen down and the operating cost is high so it has no cost advantage.
- For the financial crisis travelers may choose another way like low-cost airways to serve their purpose though British Airways provides great service for international routes.
Bargaining Power of suppliers
- Airfare is a dependent factor on oil price where British Airways has no control.
- British Airways is extremely dependant on the suppliers like Boeing also for craft and spare parts.
Competition among the Industry
- Airlines like Ryan Air, EasyJet and MyTravel are the national players in the aviation industry of the UK when all the major international airways are the competitor of British Airways.
- Tour operators like Thomas Cook and TUI are interested in selling reduced price tickets
Corporate governance of British Airways
British Airways is committed to controlling the company by maintaining under strong corporate governance system and in order to manage the company perfectly, it has a Board of directors, a Leadership team, and Independent auditors who are responsible for the company. BA had followed the Companies Act 1985 but from this year, it considers the CA 2006 and now BA is providing Directors’ report, Audit Committee, the Nominations Committee and Independent auditor’s report.
Role of the Board of directors
The Board of directors comprised Chairman, Deputy Chairman, CEO (Willie Walsh), CFO, nine non-executive directors, and the Board is responsible for conforming guidelines, previous plan approval, and investment as well as divestment strategies. Annual report 2008 of BA, this board is accountable to its shareholders and stockholders and they are committed to following the listed rules such as Greenbury report for remuneration issues Higgs report, and Turnbull report for internal control. At the present time many large organizations have been collapsed for not following the measures designed for the expense of remuneration paid to the directors’ guided in the Companies Act, therefore, BA has adopted s.1 of the Combined Code which is implemented by the Listing Rules of the London Stock Exchange.
Independence of Directors
As the recommendation of the various reports and the London Stock exchange a majority of the directors and NED should be independent of the company, the NEDs of British Airways are independent and them exists three committees as Audit, Nominations & Safety Review Committees. To regulate the company and enhance accountability, these committees have provided several reports. Director’s remuneration is a most energetic issue in today’s business world. British Airways designed their own remuneration system and it includes basic salary, annual bonus (100% of salary), and Pension schemes. In 2009, Willie Walsh’s basic salary is £735,000, which is too high in a recessionary period.
Its corporate responsibility activities are consisting of workplace, marketplace, environment as well as community investment; however, it has a Corporate Responsibility Board, which is supported by several steering groups.
Strategic analysis of British Airways
The main principle of British Airways has to underlie in service and quality. The major undertaking strategies are given below.
- British Airways fixed their strategy considering the expansion of Heathrow Terminal 5 and it will complete BP10 ‘Fit for 5’ programme.
- It has recognized performance objectives to measure its progress in the areas of workplace, marketplace, environment and community investment areas, it has three major components such as vision, goals and programme plan and it has developed a programme plan, which contains more than 80 programme level actions.
- The BP10 business plan will be designed and the main objective of this plan accomplished record profits and consider the fuel price, BP11 business plan sets the direction for the next 3 years and BP11 contains a new theme of corporate responsibility.
- E-ticket system is a competitive advantage for British Airways. British Airways wants all tickets should be sold online. Therefore, customers can avail themselves of the advantages from anywhere in the world and administrative costs are reduced.
- Market segmentation is another strong strategy to pursue. British Airways segmented its market into students, tourists, corporate and business groups with state of art technology so the BP10 plan suggests it has to achieve a Competitive cost base.
- Besides, transferring passengers, British Airways wants to boost its revenue by extending its business line with sky cargo. In the 2008/2009 fiscal year, British Airways has transferred 947000 tonnes of cargo.
SWOT analysis of British Airways
- British Airways has a strong public image because of its strong brand name image/company reputation and erosion of the brand finally affect its future revenue & profitability.
- From the 1990s, British Airways was in number one position considering its income statement and the motto of BA was the World’s Favourite Airline, which is the strength of BA.
- British Airways always provide the latest information of their company, available routes, and other flight-related issues on their websites for the convenience of the travelers, customer and other citizens,
- British Airways has enhanced programme to attract new customer besides regular traveler or customer as new customer is also essential to develop company’s market segments; therefore, it provides high-quality customer service.
- It is capable to offset high fuel costs,
- It has developed the euro exchange rate and it helps to enhance service in the EU region.
- Suitable strategy innovation and implementation,
- In 2007, total revenue amounted to £ 8,492.0m that is more than 2.5 % than last year.
- Its economy of scale and/or learning and experience curve has more advantages condition than its competitors,
- Its security department constantly considers the threats to its business, develops strategies for the protection of its operations and this department provides recommendations and suggestions to the employees to implement appropriate countermeasures and scrutinize their efficiency.
- In this current economic downturn, British Airways is paying high salary to their executives,
- The competitors for example Ryanair, Easy Jet, Emirates, made a satisfactory profit.
- Fuel price is decreasing,
- In order to increase its profits, it has the provision of free travel, free redemption services including its flights for the regular traveller.
- EU single market strategies extend to the EEA7 comprising the EU as a result it is enjoying free market for internal flights,
- Skilled flight and cabin crew are essential for its success and it has efficient, trained and motivated employees and administration to serve quick customer service with high satisfaction.
- Corporate Responsibility Board has fixed to develop the employee relationship and they always follow these rules,
- Heathrow Terminal 5 will help to expand its business by creating new routes as it has a high level of cost efficiencies for further expansion and it will help to face the current financial crisis.
- In 2009, Airline shares fall and European stocks drop due to swine flu worries,
- Tourism sector has been seriously affected because global financial downturns and recession creates some uncertainty future expenditure of the citizen as well as tourist. As a result, the business of British Airways may be adversely affected by the financial crisis.
- It gives more emphasis on the expansion in the EU region but the competitors hold large market share in the non-EU region,
- Threats Increasing intensity of competition among industry rivals-may squeeze profit margins,
- New industry may become threat for British Airways, besides existing competitors.
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- Political, Economic, Socio- cultural, Technological, environmental and Legal factor.
- Corporate Responsibility Board.
- International Air Transport Association.
- Secretary of State for Transport.
- Civil Aviation Authority.
- European Economic Area.