Business Analysis of British Airways (BA)

Business Analysis of British Airways (BA) British Airways plc provides air services operations both at international and domestic level. Its major business is commercial flight. It also caters to various services like cargo freight, mail services and other auxiliary services all over the world. Mainly it runs its business in United States and Europe. It is situated in Harmondsworth, Middlesex, employing 42,755 people all over. It is emerging to be competitive and sustain its integrity as the best airlines which stress superior customer service. It has 300 destinations throughout the world; this extent of operations offers customers with world-class services at various destinations. Its customers range from explorers to executive. The aim of this report is to enable readers to comprehend strategic review and analysis of British Airways by explaining: History of British Airways Current strategic situation Potential Strategic options Recommended strategic direction with rationale Identification of critical success factors Performance measurement criteria The procedure used to compile this report is mainly extensive reading of various text books on corporate strategy, online journal articles and company’s website. All the information, surveys and experimentations included are taken through proper referencing from standard sources. II. Main Body 1. History of British Airways British Airways which originated as Aircraft Transport and Travel started its maiden daily international scheduled air services between London and Paris after World War 1. In 1939, UK government merged British Airways and Imperial Airways to form British Overseas Airways, which became a state owned company. BOAC’s main operation was long haul services and British European Airways was established to serve continental European and domestic market. Both BOAC and BEA expanded their business geographically over a period of time and BOAC started its flights to New York (1946), Japan (1948), Chicago (1954) and west coast of the US (1957). At the same time BEA expanded its network to Belfast, Edinburgh, Glasgow and Manchester. In 1970, BEA started its charter airline services, BEA air tours. BAOC and BEA were merged together in 1972 under British Airways Board and in 1974 British Airways was formed. In 1976, British Airways started its first supersonic passenger service jointly with Air France. British Airways was privatised in 1987 and was merged with British Caledonian. In 2002, British Airways CitiExpress was formed by merging British Regional Airlines and Brymon Airways which were wholly owned subsidiaries. Other two wholly owned subsidiaries of British Airways, British Airways Regional and Manx Airlines were also merged with British Airways CitiExpress making it a single entirely owned regional subsidiary airline. In 2003, British Airways sold Dba, its German subsidiary to a German based low cost airline Verwaltungsgesellschaft. Same year British Airways Holidays introduced its first program after re-integrating with British Airways. In 2004, to clear their debt, British Airways sold their 18.6% of stake in Australian airline Qantas for  £1.1billion and also sold their London Eye to Tussauds  £95 million. In 2006, British Airways CitiExpress was renamed as BA Connect and the same year, they sold 14.6% stake in an Indian based business services Provider VVNS Holdings. British Airways also sold its Travel Clinic business to MASTA (Medical Advisory Services for Travellers Abroad). Meanwhile British Airways came to an agreement with Maley Hungarian Airlines for code sharing on each other’s flights. They also started a flight from London to Calgary, Canada. At the same time they acquired American Airline’s Stake in Iberia Airlines. In 2007, British Airways started flights from London to New quay in UK and also they announced their intention of their investment in 777-200 ERs which were scheduled for delivery in 2009.In 2006 they also sold their regional operations of BA connect to an European regional airlines Flybe. At the same time, British Airways launched its new subsidiary, BA CityFlyer in Lodon city Airport. BA CityFlyer was expected to operate 250 flights a week from the Docklands airport to six UK and European destinations. In May 2007, British Airways placed an order for eight airbus A320 family aircraft which were scheduled to be delivered between 2008 and 2010. Same month they announced their decision to replace 14 oldest Boeing 737’s with Airbus A319 aircraft, but they were also de-listed from New York Stock Exchange in the same month. British Airways launched their services from Paris and Brussels to New York in January 2008 and in April, 2008 from London to New York. Each week British Airways operated 62 flights from Gatwick and 55 flights from Heathrow. To make best of EU-US Aviation agreement, that allowed carriers to fly between any destinations in the EU and US, British Airways started their first commercial flight inJune 2008 from Paris to New York under a new subsidiary airline â€Å"OpenSkies† In July 2008, British Airways bought L’Avion, a French airline, which expected to be integrated with OpenSkies by early 2009. In the same month British Airways and Iberia, a Spain based airline group held talks for the merger of two companies. 2. Current strategic situation 2.1 Internal analysis British Airways deals with the operations of domestic and international scheduled air services for freight and mail, carrying passengers and various supplementary services. The company mainly function in the America and Europe. Company’s operations are also spread across Australia, Middle East, East Asia, India and Africa. Its head office is located in Harmondsworth, Middlesex. As on March 31, 2008 it employed 42,377 people. British airways had 245 aircraft in service at the end of March 2008 in comparison to 242 in March 2007. During the financial year ended March 2008,  £8,753 million (approximately $17,572.3 million) revenue was recorded which was 3.1% increase over 2007,  £8,75 million (approximately $1,756.6 million) was the operating profit which was 57.4% increase over 2007,  £680 million (approximately $1,365.2 million) was the net profit in comparison to  £290 million (approximately $582 million) net profit in 2007. Airlines business and Non-Airlines business are the two segments in which the company has divided its business. Cargo operations, main scheduled passengers and revenue from ancillary services comprises airlines business. In addition to scheduled services, chartered services are also provided by company’s passenger transportation services at both domestic and international level. It’s among the largest scheduled international passenger airlines in the world with airline route network of 300 destinations. More than 33 million passengers travelled through British Airways in FY2008. BA Connect is a wholly owned subsidiary of British airways which operates on regional (UK) routes. Heathrow International Airport is the company’s principal base, where it carries 41% (approx) of airport passengers. Gatwick, London is its second base of operations. It maintains hangers, operates offices and other support services at Gatwick, Heathrow and other UK airports. Space and desks under lease or license is also occupied by the company throughout the UK including Glasgow, Newcastle, Manchester, Edinburgh and Birmingham. During the financial year ended March 31, 2008, 805,000 tons of cargo was carried by its cargo transportation services to destinations in the America, Europe and other parts of the world. Passenger aircrafts carries the majority of cargo, while the remaining is carried on part-chartered freighter aircraft or leased. A range of services to other air lines is also provided by British Airways like airframe maintenance, consultancy services, cargo handling and computer and communication services. Non-airline businesses comprise mainly Airmiles Travel Promotions (the UKs famous travel loyalty scheme provider) and BA Holidays (company’s subsidiary which offers sightseeing, transfer options, hotels and cars across 250 destinations over the world). 2.2 External Analysis We will briefly analyse the external analysis of British Airways based on â€Å"Porters five forces analysis† and PESTEL analysis. 2.2.0 Porter’s five forces analysis :http://www.themanager.org/Models/p5f.htm Competitor’s rivalry within the industry High. Rivalry is high due to power of buyers and threats of substitutes. It’s the only force which determines industry attractiveness. They compete with other airlines on the same city-pair routes, from charter services, from other modes of transport and from charter services. Virgin Atlantic, easy jet and other European airlines are in tough competition with British Airways as there is a free market for domestic flights operating in the whole of Europe. These airlines are free to decide the fares and operate on any route. There is competition not only in the air but also on ground as well, for instance a 17% decrease in rail journey times between London and Manchester in 2004 and 2007 led to 20% growth in the train’s share in total market. British airways introduced a corporate responsibility centre stage that helps the company to stand out from the other competitors. Threats of new entrants Low. Competitor’s mergers and acquisitions also have the potential to effect their revenue and market position. Very high cost is required by new entrants to start. British Airways have invested a huge amount on infrastructure, computers and online services. Therefore initial investment required to start up this business is very high. Further, its brand name and strong market position reduces the threat of new entrants. Bargaining power of suppliers High. Main suppliers of airline industry are for fuel, in-flight services and aircraft. The cost of changing suppliers proves very high in airlines business. The suppliers generally have a powerful brand in Airlines industry. For instance, like British Airways have Boeing and Airbus aircrafts, therefore they need to avail the services and maintenance of aircrafts from them. Bargaining power of buyers High. British Airways customers do don’t have any control over the prices or they lack bargaining power. However, they are very powerful as very high competition prevails in the airlines market. Their top competitors include Ryanair Holdings plc, Ryanair, Air France KLM, Virgin Atlantic Airways, Lufthansa etc and many times these airlines provide competitive offers to the customers with very low prices. Threat of substitutes Medium. The airlines industry has suffered a high loss of customer confidence after September 11, 2001 disaster in New York. There is no direct replacement available for airlines for long/overseas journeys. Coaches, Trains or ship/ferries can be used for short journeys. Rapid development of technology can be an indirect substitute of air transportation. According to International AirTransport Authority, Corporate Air Travel Survey 2002, for last 12 months â€Å"no frills/low cost† airlines were used by 1/3 of all business travellers basically for cost benefit. Further, video conferencing was used by 37% to save money and travel time. PESTEL The beginning of the new millennium has made the airlines industry witness the most difficult time it has ever faced. Political instability and unprecedented crisis have resulted from terrorist attacks in September 11, 2001 in New York and July 7, 2005 in London together with wars in Iraq. These incidents resulted in new security regulations from the US and EU and customer travelling confidence have also reduced. Economic factors are of vital importance. Fourth quarter of 2008 showed a 2.0% lower GDP than fourth quarter of 2007. This is mainly due to the recent credit crises and thereby economic slowdown. Company showed an operating profit of  £89 million as on 31st December’2008, which is 88% down compared to 2007. Further,  £70 million was the loss before tax for the same period and fuel cost went up by 48.4% to  £2,244 million. It is mainly due to economic weakness and fall in the value of sterling. Impacts of social factors vary from country to country. Size of potential market and customer’s needs are affected by them. Demographic changes have led to the growth of â€Å"grey† market which is incurring more expenses on travelling and leisure. Tastes, fashions and lifestyle are also changing. So as to maximize its capability to operate and plan in a most effective scheduling and routes possible, British airways is using route planning software. Use of standard technology will minimize cost and provide quality service to freight customers and passengers. (Gomm, 2005). Technology also enables to reduce the personal costs like automated check-in processes and e-ticketing and thereby enables the airlines to offer standard services with less human resource. BA is the first airline to introduce a unique technological system called â€Å"Microwave Landing Technology†, which increases the rate of safe landing during low visibility by 20%. Power of Trade Union is an important legal factor affecting British Airways. British Airways is aware of the consequences caused by Trade Unions (August 2004 and August 2005 strike actions). Factors which British Airways must consider are legal regulations on customer rights, employee rights and rise in ecological and environmental issues. 2.3 SWOT British Airways which has strong international operations network with 300 destinations across the world has its own strengths and weaknesses. Here is the SWOT analysis which helps to understand their business scenario better. Positive Negative INTERNAl Strengths Weakness Strong geographical presence at international level High employee productivity High Service Quality Large Airport Presence Strong operating performance first-rate new fleet of aircrafts Use of High end technology Competitive and quality customer service Bad performance at key markets in terms of revenue growth High Debt of the company Highly Dependent on Fuel Lack of effective marketing strategyEXTERNAlOpportunityThreats Growing global tourism industry and an increase in international travellers Growing air cargo industry EU-US aviation agreement Buracratic systems and management poor decision making Drastic change in technology and customer behaviour Intense competition from low cost airlines Increase in fuel cost Economic slowdown due to credit crunch 2.4. Current strategy â€Å"One Destination seeks to ensure our customers fly confident that, together, we are acting responsibly to take care of the world we live in.† is the vision of British Airways. Their corporate responsibility vision is to become the world’s most responsible airline and they have developed guiding principles describing what they are doing to achieve this goal. Leading the industry towards finding innovative solution is their determination. They plan to continually review how they fly, what they fly and what they buy to become the most responsible and efficient airlines in the world. The British Airways has developed a strategy where their main concern is to establish themselves in Terminal 5 and also acquire new aircrafts depending upon their financial performance by March 2010. They have adopted an approach to truly deliver this vision, uniting all areas of the organisation, divided into 4 major pillars:EnvironmentThey aim to minimise their impact on the environment, including their contribution to air quality, waste, climate change and noise. British Airways was the first airline to report its environmental performance in 1992 since they recognise the impact they have on our planet while delivering socially and economically vital service of air transport. So as to become the world’s most responsible airline, their environment strategy aims to minimise and manage the environmental impacts. Main focus: How they fly Efficient operation to minimise their impact on environment. What they fly Adopting recent technology including alternative fuels, airframes andengines to minimise their impact. What they buy Using economic tools like emissions trading for fully reflecting the cost oftheir environmental impact. Goals across these areas are: By 2010 landfill by zero waste in the UK. By 2025 they aim to improve the carbon efficiency by 25% reducing the carbon dioxidefrom 111 to 83 grammes per passenger per kilometre. By 2015* average noise per flight to reduce by 15%†¢By 2050 their net CO2 emissions to reduce by 50%*measured as the network average quota count (QC) for combined landing and take-off cycle. Comprehensive plan developed to achieve the Goals†¢Climate change British Airways overall strategy is to ensure maximum contributionto their share of global carbon dioxide emission reductions by 2050†¢Waste Focus on recycling, reducing, reusing and responsible waste disposal. Noise Their impact on the local communities nearby airport to be reduced. Air quality Air quality for communities nearby airport to be improved. Community Providing support to local communities in the country where British Airways operate is the main belief of the company. Conservation projects, small individual programmes, 120 international communities and various charities were helped by BA’s support. London Benchmarking Group reported British Airways direct and in-kind donations of  £5.7m last year. British Airways offer variety of support like cargo space, funding, fund raising events, merchandise, free flights and excess baggage. Their main concerns for support are Sustainable Tourism and Heritage, Education and Youth Development, Environment and Supporting employees. Marketplace British Airways suppliers and customers are involved in one destination in their marketplace pillar, to facilitate building up more sustainable business and to persuade dedication to corporate responsibility. Issue covered by their marketplace pillar comprises: How they fly Reliable customer What they buy Responsible procurement What they fly Sustainable products and services Goals across these areas are: 10% of customers to be encouraged to counterbalance their carbon on ba.com by 2012. By 2012 100% of their strategic suppliers to be audited for ethical practices. Corporate responsibility to be used as a decision criteria by 75% of corporate customersby 2010. Workplace British Airways aim to provide a work environment that engages, develops, motivates and support their colleagues. Encouraging employees to be committed to Corporate Responsibility is the main aim of British Airways workplace As employees plays a vital role in making up the airline and they need them onboard One destination. This commitment is not only going to help them deliver a great place to work, rather it will also ensure quality customer service in the industry. Issues covered by their workplace pillar comprise: How they fly Responsible colleague What they buy Tools to do the job What they fly Invest in people Our goals across these areas are: Every year British Airways 50% employees donate money to charity through ‘Pay Roll Giving’. Every year British Airways 50% employees donate time to communities and charities. 75% of employees committed to delivering our corporate responsibility goals by 2010 British Airways have recognized performance objectives to evaluate their development in each of these four sections. British Airways aim to deliver its corporate responsibility strategy by a programme plan developed including over 80 programme level activities and hundreds individual projects. Business Plan BP10Bring Terminal 5 aliveIn order to improve the operational performance and enhance customer experience British Airways main concern is successful delivery of terminal 5 at Heathrow base. Terminal 5 denote their sole biggest challenge and change. British Airways â€Å"Fit for 5† programme was set to be accomplished in the 1st year, which involved essential agreement modification and implementation on highly superior work performance all over the Heathrow terminals. BA Basics and Brilliance The British Airways board aims to offer â€Å"Brilliance† in its activities and deliver the â€Å"BA Basics† constantly. Business Plan 10 (BP10) primarily focuses on baggage performance and punctuality with additional plans to recover â€Å"BA Basics† in various areas for the long term. British Airways aims to offer â€Å"Brilliance† to their customers in numerous vital areas such as their customer services, Terminal 5, ba.com, their premium customer experience and their network and schedule from London. Competitive cost base Main priority of BP 10 is cost control; they expect savings from various areas of business too. The need to decrease considerable deficit position and resolution of pension’s problem is predominantly acknowledged in BP10. It’s quite difficult for them to achieve a competitive cost base if they are to accomplish their growth and investment plans. Invest in growth In the first year of the plan they campaign to commence a competition for the new long haul aircraft, if the pension’s deficit satisfactorily resolves. In order to meet their explicit growth plans they intended to secure first of these aircrafts in 2009, whilst the replacement of fleet will be started by 2011 with the second batch. The strategic significance of the operations in London and Gatwick airport is recognized in BP10. The key to British Airways network development programme from London airport is the operations maintenance of BA Connect’s London city, as part of British Airways regional business sale to Flybe. BP10 enablers The vital aspect behind implementation of BP10 is constant engagement and participation of British Airways’ people. A major segment of British Airways broader communication strategy was local face-to-face communication as it was accepted to be the most effectual engagement. The second major possibility for change in the business remained IT. British Airways investment plans in this sector comprised constant advancements in the functionality and usability of ba.com, Terminal 5, encouraging a variety of departmental change programmes and automating corporate processes plus simplifying services by use of employee self service. 3. Potential Strategic options After going through BA’s vision, goal and their current strategy, we are of the opinion that BA’s current strategy is very competitive and will definitely help British Airways to achieve their goals. In addition to the above strategy, we also have identified few more potential strategic options which could be helpful for BA’s further growth. The accessibility to enormous products and services creates an opportunity to exploit them appropriately. Making the most of global variations and technological trends serves as a potential opportunity to work with. The potential strategic options which British Airways could utilize for further development of business could be Virtual reality, which may serve as an innovative simulation, share expertise and attaining network software. Some of the potential strategic options for British Airways are discussed below:Global tourismThere are many factors which have a very strong influence on the airline industry and one of them is trends in global tourism industry. As per the World Tourism Organization survey, approximately 898 million international tourists travelled globally in 2007 which is 6% higher than the previous year (846 million- 2006). As per the Tourism Satellite Account research which is done by World Travel and Tourism council, it is been predicted that world travel and tourism will grow at an average rate of 4.3% per annum for the period of 2008-2017 and will generate $13 trillion for that period. Rising Air Cargo Industry There is a tremendous growth in the Air Cargo market and the volume of the business is doubling in every 10 years time. As per the International Civil Aviation Organization, the cargo business is expected to grow at an average rate of 6.5% per annum in next 20 years. Approximately 22.17 million tons of freight was carried throughout the world and it is expected to grow up to 60million in 2017. In 2008, BA transported 805000 tons of goods and these numbers will increase tremendously in coming years due to its operations presence in most part of the world and will be benefited by the growing trend in cargo market. Open Skies Agreement Open Skies aviation agreement between EU and US is an air transport agreement, which allows airlines of both EU and US to fly between any points among EU, US and non EU countries like Switzerland. This is the replacement for the previous agreement made between US and each European country. To take advantage of this agreement, British Airways started new subsidiary airlines â€Å"OpenSkies† and for the first time it started to fly direct flights from continental Europe to the US. The first flight of open skies was on June 2008, from Paris to New York. The new agreement has enabled British Airways to increase its operations in the key regions. Several Strategic options can also be identified with the help of the Ansoff Matrix analysis discussed below. Ansoff Matrix Market Penetration Market penetration strategy involves consolidating and protecting/building the existing product/services in the existing market. It occurs when a company with its existing product penetrates a market. This strategy starts with the existing customers of the organization. This strategy can be used to increase sales without losing focus on their existing product/services. British Airways can penetrate in the market through their joint business agreement with Iberia and American airways thereby gaining competitors customers, by upgrading the quality of their services and also increasing the frequency of the flights in the existing market. It is comparatively cheaper to retain existing customers than finding new ones. Product Development Product development strategy emphasises on building a new product with existing and new capabilities beyond current expectations in the existing market. In the present scenario of economic downturn, it is quite difficult to introduce new product considering the cost involved in developing new product and it is risky to predict customer reaction too. British airways have already invested a huge amount in setting up its infrastructure especially in Terminal 5. They should rather emphasise on maintaining and upgrading the quality of present services. Market Development Market development strategy focuses on finding new segments, territories, new uses of existing market with existing product/services. British Airways may go for new market development considering the current strategic situation of the market. However, as the company already operates in more than 300 destinations therefore we would recommend them to concentrate on maintaining the quality of services at the existing markets thereby further build up its position. Diversification Diversification concentrates on developing a new product in new market with existing and new capabilities beyond current expectations. Since British Airways have numerous services operating almost all over the world, it would involve high degree of uncertainty and financial risk to go for diversification. Mergers and acquisitions could be an important alternative for further growth. However the current financial situation of British Airways does not allow the same as they have already invested a huge amount on its current projects and it might prove to be difficult and risky too. Although British Airways may consider this decision once the company’s position is strengthened and there is potential for growth and acquisition in the market. It may be a useful strategy in order to attain fast market growth. Thus the strategy which we would advise British Airways is to concentrate on existing market and existing services and accomplishing its ongoing investment project. So as to achieve further growth in the market British Airways should make the best possible use of its investment projects and strengthen its brand name by providing new offers to the current customers and appealing to new niche market. 4. Recommended strategic direction with rationale After discussing the current strategy and potential strategic options for British Airways, we would like to further recommend the following strategic directions:Develop opportunitiesBritish Airways should try to continue their business tie-ups in the new market once they regain their financial stability. Though BA’s talks on merger with Quantas Airways Limited failed, they need to strengthen their existing joint business with Quantas to have a good hold on the Australian market. They need to concentrate on Asian and Middle East market which has a high potential for growth. Distributing the risk British Airways should concentrate on their Cargo industry which has got a great potential. They should also try to reach more markets through code sharing with other airlines which is a cost effective option. Manipulating strengths British Airways have got a very strong base in Heathrow Airport, UK. BA’s Terminal 5 presence will help them to maintain high standard of service as it will enable them to handle increased volumes of customers and baggage. Upgrading Customer experience They should focus on providing better facilities like T5 lounge, which provides premium customers better comfort and luxury like a private members club. They should strengthen their customer base by constantly upgrading their flight schedules, offering better competitive packages for customers and being competitive with the facilities provided on board so as to attract more customers and thereby creating an opportunity for increasing revenue. Controlling cost of expansion plan British Airways has been moderately successful by following its effective strategies. Currently, we would advise BA to control its expenditure on buying new fleets and expanding to new destinations. They also need to reduce the cost of high aircraft utilization so as to minimize environmental risks. Services British Airways needs to concentrate on providing value for money to the customers. There is an intense competition in the market from Virgin Airlines, Singapore Air, KLM, Quantas and Emirates who also fly in the same route. They might lose their customers if they do not provide something unique from their competitors. These days the number of low cost airlines is increasing through out the world in both domestic and international market. Hence, cost effective and better services should be provided. Passenger friendly airports It is of extreme importance for passengers to feel that their purchasing needs are met. British Airways should aim to establish an image of a major international hub with standard facilities.