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How Can British Airways Increase Profitability?

Extracts from this document...

Introduction

How Can British Airways Increase Profitability? Introduction This piece of coursework will consider how British Airways might seek to improve its profitability in the context of economic concepts and theories and the following operating environment: - * Regulatory constraints, subsidies, exchange rates and barriers to entry applied by the UK and other foreign Governments on its operations and those of its competitors * The elasticity, or otherwise, of demand and supply in a volatile market place * The globalisation of markets, and the impact on BA's sources of customers and its competitors * The impact of national economic performance on the Firm * Issues of competition, monopoly and market structure on price, costs and market share * Issues of efficiency and profitability as constrained by labour and employment issues Background to British Airways British Airways Plc is one of the world's leading international airlines, operating international and domestic scheduled and charter air services. Its revenues are generated primarily from business and leisure passengers, cargo and mail. On 25 August 1919, its forerunner company, Aircraft Transport and Travel Limited, launched the world's first daily international scheduled air service between London and Paris. In 1935 several smaller airlines merged to form the original privately owned British Airways Limited, which became Imperial Airways' principal UK competitor on European routes. Imperial Airways and British Airways were nationalised in 1939 to form British Overseas Airways Corporation (BOAC). This company had a monopolistic position on international routes. Following the formation of the Air Transport Licensing Board in 1960, the Government encouraged other British airlines to operate competing scheduled services. British Caledonian was formed in 1970, when the original Caledonian Airways took over British United Airways. Subsequently, the businesses of BOAC and BEA were combined to become British Airways in 1974. This marked the initial change from a state owned and subsidised entity towards the privatisation of BA, and slowly changed the structure of the industry from being virtually monopolistic towards becoming a competitive oligopoly. ...read more.

Middle

In a more stable economy such as Japan the marginal propensity to consume is 50%. This means that it has a multiplier of two. Which means their economy is more stable in turn attracting a higher level of foreign investment. This multiplier effect affects British Airways because foreign investors may be less willing to buy shares that are based in the UK stock market. Over time this will lead to a shortage of money for BA to use for investment, and a shift of its operations from the UK to abroad in order to save costs. Industry Structure Because of the influences referred to above the nature of the airline industry has many of the features associated with being oligopolistic and others tending towards perfect competition in a contestable market. For example in the airline industry barriers to entry remain high, and there are still relatively few firms competing with each other despite the emergence of new players such as Easyjet Ryanair etc. The main barriers to entry for an airline are factors such as: o High capital costs o Licensing restrictions o Route capacity and Government agreements o Ownership of landing slots o Technical expertise Increasingly the airline industry has become a contestable market with firms competing on price, and having perfect knowledge of the industry. The perfect competition theory model appears to apply to certain segments of the market. E.g. short haul, no-frills leisure travel. This is because prices have reduced as a result of competition from new entrants and also a homogenous product E.g. seat only travel, with no differentiation on cabin service or class. The oligopolistic model appears to be more applicable to that segment of the market, which focuses upon premium fare business travel where differentiation is not on price but on service and brand. Airlines are becoming increasingly dependant upon each other and have entered into mutually beneficial alliances and networks in order to compete in a global market. ...read more.

Conclusion

A major expense for BA, which it is possible to cut back on, is its staffing costs. This involves making some of its staff redundant. This has the advantage of being quick to implement and effective at saving significant money, but has several disadvantages also for BA. The first of these is that a knock-on effect is that as BA has less staff, they are unable to fly as many routes and so may lose out on potential profits. Secondly making staff redundant would make BA less responsive should there quickly be an upturn in the demand for British Airways flights. Lastly British Airways is seen as an excellent employer and making staff redundant could possibly tarnish its image. Another way in which British Airways could cut costs is by utilising its aircraft more efficiently. E.g. It needs to fly fewer planes for longer hours. It could also transfer a greater proportion of its bookings to the internet, thereby saving on staff and administration costs. History has shown that very few businesses have been able to operate successfully at both ends of a market. In order to be more efficient British Airways needs to streamline its business, so that it focuses closely on specific market segments, rather than trying to be all and everything to every type of customer. It needs to cut back on its infrastructure. BA has offices and buildings all over the world. Currently this helps it to run and manage its international operations. However it could be argued that its operations could be run from fewer offices particularly if it were to shrink the scale of its international services. A successful advertising campaign that manages to attract more customers to fly would help to stimulate demand for flights. Another way in which this could A possible permanent solution for British Airways would be for it to consolidate with another large airline such as American Airlines. They are confident that they will be well placed in the restructured airline industry as it emerges when the upturn in global demand arises. ...read more.

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