An analysis of the British Airways external environment at the present time, concluding with a discussion of the main opportunities and threats facing the industry.

1. An analysis of the British Airway’s external environment at the present time, concluding with a discussion of the main opportunities and threats facing the industry.

1.1SPENT Analysis

1.11 Socio-demographic influences

In Comparison to other Area, people with higher GNP area usual will require transportation for their movement due to business and leisure (Ekamba,L.F., 2002).Therefore, setting up a new route or maintaining operations of a route, airline needs to focus the distribution in population when in order to make profit, such as London-New York as the busiest route around the world. BA, in 2003, scheduled flight serve 552 locations in 135 countries, obliviously the majority business are in America, Europe and Asia. (www.britishways.com)

1.12 Political influences

In 1978, the USA deregulation has brought a significant advantage in competition among airlines. It affected the recent growth in services by new low-cost competitor such as Easy Jet, and the cross-border acquisition of airlines. DBA, BA’s subsidiary, providing competition in Germany and Virgin Express competes internationally out of Belgium. (Ekamba,L.F., 2002)

1.13 Economical influences

In term of currency, BA still uses the pound sterling rather than the single currency, Euro is used in the majority of its competitor. Furthermore, the USA economy recession due to terrorism attack, on Sep11th, 2001 caused BA traffic to the US was down to 60% and the revenue loss. Besides, in 2003, BA’s deterioration in operating profit reflects as a result of economic weakness, the war in Iraq and the impact of SARS, particularly on Far East routes. (www.britishways.com)

1.14 Natural environment influences
Influence from natural environment that can affect airline industry is the weather conditions, particular in England where occur snow and high winds and freezing temperatures. In 2002 and 2003, Extreme weather conditions in the UK have resulted in unprofitable (see 2.2).

1.15 Technologic influences

BA has developed two systems, one in conjunction with travel agents and one for small to medium sized businesses who choose to book direct. It can offer off-line customer service and booking service for itineraries that the customer is inconvenient

, and the private access website which can be personalised with corporate travel policy can also produce management information. (www.britishways.com)

1.2 Five forces analysis

Force 1: Bargaining power of supplier

In Airline Company, the aircraft is a rare, unique and high technology product which need to maintenance regularly. Therefore, it is essential to budget for maintenance due to the cost (Ekamba,L.F., 2002). BA who has powerful supplier will adversely affect profit because the majority of aircrafts are made by Boeing which is the largest commercial aircraft manufacture in the world.

Force 2: The bargaining power of buyers

In low cost airline, Ryanair is Europe’s largest ticket less airline and other no-frills airlines including Easy Jet, Go and Buzz. BA is unable to charge high prices because of those successes of no-frills airlines. (www.britishways.com)

Force 3: The threat of substitute products

In airline industry, substitute product can be divided into two sides, which are direct substitutes (land transport, sea transport) and indirect substitutes (cruise ships, teleconferencing). There are several ways to go to Europe from Britain, expect for taking a flight, using coach, and car, Euro star or European ferry crossings are alternative more comfortable and much cheaper channels.

Force 4: The threat of new entrants to the industry

BA has developed over years, particular at long haul level. So, it is hard to entry and expands the network for the new entrants to ...

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Force 3: The threat of substitute products

Force 4: The threat of new entrants to the industry

BA has developed over years, particular at long haul level. So, it is hard to entry and expands the network for the new entrants to be a BA’s rival. Besides this, setting up a new airline company needs many millions of pounds to lease or buy aircraft and maintenance it. Furthermore, by technological development, new entrants can get access to distribution with a low investment.

Force 5: Intensity of rivalry between existing competitors

After deregulation, there are no barriers to enter into airline industry, so there are more and more airlines with different strategy in this industry. If competitors offer the better value than BA, perhaps the customer would change their propensity to a new one. Ryanair, is a low fares and no-frills Irish airline, improving the quality of service is important in order to retain customers. (www.ryanair.com)

1.3 Main opportunities

On December 10th, 2003, the EU has granted BA, Iberia and GB Airways, exemption from competition legislation for six years, subject to conditions necessary to maintain competition on four UK-Spain routes. The alliance will give BA customers access to more destinations and also bring significant cost benefits which will be passed on to customers in lower fares (www.britishways.com). Furthermore, developing the new technology which complement to the online booking system could be an opportunity. Therefore, BA can boost its sale by making it easier for customers to get the best possible deal with their inconvenience.

1.4 Main threats

The Airline industry suffers a major blow on two occasion, the terrorist attack on 11th Sep and SARS. Both events have significant decrease in passengers number, the global air travel is recorded all time low. The effect is especially affect to BA, in which company with a larger number in fleet and employee. With less on income but the large basic operational cost remains unchanged. And a lot of cost has to pay for rebuild the confidence of the customers to take their flight, such as security and safety.

Also there is a problem in currency market for non-US airline, as the oil price is tag on Us Dollars, any fluctuation in currency market which means a fact on the running cost. For example, strong US dollars in other means will increase the operational cost of BA, the petrol. Also with the competition of the low cost airline on short haul flights, such as Ryanair, Easy Jet, Buzz, which means BA are forcing to charge less on their ticket. With the cost to run high standard service but in low profit, the airline is facing major threat.

2. An internal analysis of the airline at the present time, concluding with a discussion of its main strengths and weaknesses

2.1 Generic Strategy

2.11 Differentiation

The brand BA itself is a means of differentiation. In term of service, BA offers different kind of service which gives to customer a wild option to choose the right one. Firstly, First Class is the brand name for the conventional of high-class service. BA continually changes into a very high standard of on-board service. These new enhancements to First are being introduced across the British Airways long haul fleet. Secondly, Club World & Club Europe was the first band developed by BA in 1995, which it would deliver the intercontinental business traveller to their destination relaxed, refreshed and ready to do business. Thirdly, World Travellers& Europe Travellers is also a brand name of economic class, it comprises a wild range of produce enhancement to serve BA diverse customer base, offering excellent value of money. Fourthly, Domestic, BA offers an unrivalled network and schedule to key destinations across the UK, Channel Islands and the Republic of Ireland and claimed that they fly more people, more often, to more UK destinations than any other airline. Finally, BA’s Executive Club is one of the most successful frequent flyer programmes in the world .For people who travel frequently; the Executive Club seeks to provide priority service with personalised rewards e.g. travel benefits such as lounge access and earning BA Miles for free flights in return for continued loyalty. (www.britishways.com)

2.12 Cost Leadership

In order to return the airline to profitably, BA announced the FSAS strategy in 2002, which took further step to remove unprofitable capacity, reduce costs and strip complexity out of the business by simplifying the fleet, fares and business system. So, Concord withdrew from service at the end of October, 2003 due to uneconomic evidence, and it resulted in a write off of 84 million in the year under review. In addition, the 13000 manpower reduction from 2001 to 2004 has announced. However, BA set a target of 10000 by March, 2003 and has achieved 10,182. By restructuring, BA wishes to become more competitive. (www.britishways.com)

2.13 Strategy Focus

BA’s strategy aims at three parts that are business passenger, passenger transport and cargo.

2.2 Financial Analysis-Performance Ratio

Return on capital employed

ROCE (2003) =2.32%

ROCE (2002) =-0.83%

ROCE (2001) =2.89%

ROCE (2000) =0.65%

ROCE (1999) =3.57%

In term of profit, 1999 was the best BA year in the last 5 years. From 2001 to 2002, company profitability was down to minus due to a weakening global economy, the impact of the foot and mouth epidemic in the UK and the effects of the September 11th US terrorist attacks. So, steps were taken immediately after September 11th to reduce capacity and manpower. In addition, company profitable was down to less than 1% due to the morale factors in 2000, was Rad Eddington’s first year as Chief Executive. The morale factors as BA faced were severe bad weather in the UK, the grounding of Concord and a serious computer failure. (www.britishways.com)

2.3 Main strengths

In airline industry, BA holds the enviable network and fleet, which serves the most number in international route, 552 locations in 135 countries(www.britishways.com). Furthermore, BA, one of the brand name in service, in which they are keeping improving their service to compare with their competitors. Such as upgrading their on board service and facilities, fit in new entertainment service and change to better seats, in which offering passengers with better value for money.

2.4 Main weaknesses

There is a big weakness in the basic cost in BA, which is labour cost. According to statistic, around 30% of the operation course is cost by labour. For example, BA has 9000 engineering staff over 100 locations around the world (Ekamba,L.F., 2002). The manpower is highly cost and uneconomically. But maintenance could be better managed and cost saving; setting up repair service only in some major sites, which aircrafts is scheduled to fly over those places for maintenance. This not only reduces the cost for labour, it can also save the cost for running and building unnecessary factory.

3. A discussion of the development strategies followed the by airline in the last five years, with an evaluation of their success

Over the last five years, BA has made significant changes in its business strategy. In Fleet and Network, BA reduced aircraft size on key routes and cut excess capacity while maintaining frequency of service to key destinations in order to reduce the unprofitable market segment, short-haul and connecting leisure passengers. By fleet downsizing, including long-haul and short-haul, it reduced the unit cost penalty of cutting capacity. Meanwhile, the improvement of the fleet with a series of changes designed to optimise the network and attracted high value business passengers. (www.britishways.com)

The effect of success of fleet and network strategy, BA, which is a full service airline, decided to improve the Product and Service and enhanced the very high standards of customer service, such as the new “flying bed” for Club World on long-haul aircraft and a world Traveller Plus which is a premium economy product. In addition, the change of configuration reduced the number of seats, particular in the “lounge in the sky” of Club World. After these changes, BA committed the economy passengers to provide the excellent service and good value for money. (www.britishways.com)

After the terrorist attacks of September 11th, the” Future Size and Shape” was announced in February 2002 due to the deterioration in financial performance. At the heart of this programme are three simple tenets. Firstly, accelerate the fleet and network strategy, particularly at Gatwick, where capacity would be cut by 60% between 1999 and 2003. Secondly , cut costs and simplify its business, targeting 650 million pounds of annualised cost savings, including a reduction in manpower of 13,000 (23%) relative to an August 2001 baseline by March 2004, however, BA had achieved 10,182 in March, 2003. So, it has exceeded both which no mean feat is given the hostile environment. Finally, restructure BA’s European short-haul business to respond the competition from no-frills carriers by changing its pricing structure, which give business travellers and holiday makers lower fares, greater flexibility and more choice. By the end of 2002, BA has begun the phrase roll out of the new year-round low fares, scrapping traditional restrictions on tickets, beginning with the UK domestic market. Underpinning the success of the new short-haul was the introduction of the new on-line booking engine called Fare Explorer. In brief, profitability was recovering in spite of being influenced by weakness of the global economy and fear of a war in the Middle East. (www.britishways.com)

4. A discussion of the key strategic issues faced the airline at the present time

In 2002, BA announced the programme “FSAS” in order to cut costs and simplify its business. One of reasons for cutting costs is that the expenditure on manpower is uneconomically as a current weakness. Therefore, BA aimed at reducing in manpower of 13,000 from 2001 to 2004. Until 2003, it has exceeded in number they expected. In the form of reduction in manpower, BA has changed the way of operating into invest deeply in Information Technology and web based business, such as online booking. However, an insensible phenomenon might be exposed in the future through this strategy. In certain aspects, Information Technology still can not replace the labour. Reducing too much cost of manpower, it perhaps wills bring a disadvantage of BA.

List of Reference

Book

David et al.(2002).,Business Strategy

Project

Ekamba,L.F., (2002)Strategy analysis of British Airways with Specific aspect to globalisation

Web page