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The airline industry

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INTRODUCTION The Airline industry is one of the world's largest industries generating over $300 billion in revenues in 2001 alone and additionally has the second highest industrial growth rate, after the computer industry, with typical growth rates of 3-5% per annum over the last 20 years (Humphreys, 2003; BA Fact book, 2002). For the purpose of this assignment, freight/cargo airline activities will not be considered as freight travel consists of only 2 % of total airline activity (see figure 3.1 and appendix 1) (BA Fact book, 2002, ICAO, 2003). Furthermore, due to the nature of the airline industry and the Asian market being a lot smaller and internally focused, we will concentrate on the North American and European markets which between them, account for 65% of the market (see figure 3.1 and appendix 1) (ICAO, 2003). Section 1:The main forces shaping the airline sector's global business environment. The past two years has seen an unprecedented number of airlines, worldwide, filing for bankruptcy and many more would have followed suit had it not been for government intervention (Economist, 2002a). The main factors leading to their demise and to the problems currently faced by the airline industry in general, have their roots in the existing economic and political climate (see figure 1.1), which according to IATA (2002) continue to remain challenging. Figure 1.1: PESTEL Analysis of the airline industry 1.1 Economic Forces facing the airline industry Since the performance/profitability of the airline industry is closely connected to the economic cycle (BA Fact Book, 2002), the importance of the global economic environment and the impact that it has on the industry cannot be underestimated (see figure 1.1). This is evident from the performance of the industry during the late 1990's as profitability soared on the back of a buoyant world economy (characterised by the hype generated by the technological revolution; record levels of corporate activity etc) ...read more.


In our opinion BA's strategy to compete with low-cost airlines is a good one; however, the ultimate success will be determined by BA's pricing strategy. At present BA's strategy, as seen in figure 2.1, appears to either charge a competitive fare, or a high premium fee in comparison to its low-cost competitors. We believe that a pricing strategy that adapts a middle ground between the two extremes would be more appropriate. Table 2.1 Flight comparison between BA and EasyJet Departure Arrival Carrier Price (�) London (Heathrow) Paris (Charles de Gaulle) British Airways 77.70 London (Luton) Paris (Charles de Gaulle) EasyJet 89.90 London (Gatwick/Heathrow) Rome (Leonardo Da Vinci) British Airways 220.49 London (Stanstead) Rome (Ciampino) Easyjet 116.20 (Source: Adapted from Ba.com, EasyJet.com) BA's strategy to compete with low cost airlines can additionally be examined using the game theory (see figure 2.2). The Prisoners Dilemma II theory offers a 'best' payoff when deciding to maintain or lower prices. Due to the chosen strategy of low cost airlines (EasyJet) it is in the best interest of BA to lower prices and receive a reduced payoff rather than nothing at all (MBA Strategy, 2002). Figure 2.2: Game Theory: BA vs. EasyJet (Source: Adapted from MBA Strategy, 2002). 2.3 The OneWorld alliance and BA's cost cutting measures The second strategic choice selected for evaluation is BA's cost cutting measures aided by its strategic decision to form an alliance (See figure 2.3). BA chose to consolidate and horizontally integrate (Hennessey and Jeannet, 2001) its resources and activities with other world class airlines such as Aer Lingus, American Airlines, Cathay Pacific, Finnair, Iberia, LanChile and Qantas to form the OneWorld alliance that would operate under the banner of 'OneWorld revolves around you' (BA Fact book, 2002; Datamonitor, 2003). ...read more.


However, the UK are trying to overcome this dilemma of congestion by building a fifth terminal at Heathrow, airport. This airport is BA's major flight base and therefore, is positioning them well in order to attempt to circumvent this impasse. Furthermore, as outlined in section 2 and highlighted in figure 3.2, consumers and thus the power-of-buyers (Porter, 1980) is increasing due to them being more price sensitive and seeking value added services and products. BA has recognised this trend in consumer demand and taste, and is offering value added services by committing itself to innovation and product enhancements. These include the introduction of a new 'flying bed' for long haul business flights and the introduction of 'World Traveller Plus' - a new business and economy product. These two markets of business and economy are perceived to be the most demanding and profitable in the future and therefore BA have additionally positioned itself well to take advantage of these developments (Economist, 2002b; BA Fact book, 2002). Therefore, the penetration and consolidation of markets, cost management and refocusing of culture and infrastructure assisted by the collaboration available within its OneWorld Alliance are placing BA in a healthier position to survive the turbulence that lies ahead. Figure 3.2: Porter's Five Forces and the Airline Industry (Source: Adapted from Porter (1980) cited in Johnson and Scholes, 2002) FINAL THOUGHTS The future of BA and that of many other airlines is going to depend on the highly volatile political and economic situation facing the world as seen in section 1. War in Iraq is creating an increased sense of panic in the world's industries and therefore, an accurate forecast as to the airline industry development is somewhat convoluted and complex due to the overwhelming sense of uncertainty that prevails. Therefore, BA's future positioning and its subsequent success within this sector is going to be decidedly susceptible to the worlds events. ...read more.

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