Furthermore, the uncertainty surrounding Iraq coupled with the political instability in Venezuela have resulted in the price of aviation fuel soaring on the back of crude oil prices which have doubled in the past 12 months. Since fuel accounts for approximately 12 % of airlines total operating costs (Norbjerg and Market, 2002) volatile oil prices have significant cost implications for the industry and although many airlines limit their exposure to fluctuating oil prices by hedging their ‘fuel consumption’ through options in the futures market it is nevertheless an expensive, short term strategy which many of the smaller players can ill afford (Credit Control, 2001).
Traditionally the outbreak of war depresses the demand for air travel - a classic example being the Gulf War which saw a very steep V-shaped recovery in passenger traffic when it ended (Economist, 2002c). The current Iraqi conflict has already hit Middle East routes with passenger numbers down significantly (Wheatcroft, 2003) and any attack on Iraq will have severe consequences for an industry already in financial distress. The effect that war can have on an airline’s performance was summed up by Lord Marshall (Chairman of BA) when he said that the outbreak of war in the Middle East would literally mean the difference between making a substantial profit or recording a loss (BA News Release, 2003).
SECTION 2:British Airway’s Strategic Choices and Methods of Implementation
2.1 British Airways as a major organisational player
British Airways was selected as the major organizational player as it is the largest international airline covering 535 destinations in 160 countries (Mintel, 2001) and carries more passengers from one country to another than any of its competitors (BA Fact book, 2002). Furthermore, BA is one of the world’s longest established airlines and has always been regarded as an industry-leader.
2.2 British Airways and the low cost airlines
The first strategic choice selected for evaluation is BA’s decision to counter the rapid success and expansion of low cost airlines (See figure 2.3). It must be noted that there are two distinct markets within the airline industry: Point-to-Point, serviced by the low cost airlines with no connections, a single class and no rebooking, and Hub and Spoke, the primary market for the flag carriers such as BA and alliance members operating complex networks aimed at ‘seamless global travel’ (Economist, 2002c).
However, BAs’ strategy can be examined based on its position on the strategy clock (see figure 2.1). BA operates under a differentiation strategy (Johnson and Scholes, 2002) where it achieves its competitive advantage by providing a distinctive and unique service based on quality, reliability and efficiency- dimensions widely valued by customers (BA Fact book, 2002).
Figure 2.1: British Airway’s position within the strategic clock
(Source: Adapted from Bowman (1995) cited in Johnson and Scholes, 2002).
However, the growth of low cost airlines has forced BA to change their previous indirect competitive policy implemented through GO, to a direct method of competitive action on BA’s profitable short-haul routes (BA Fact book, 2002; Economist 2002b). This strategic choice was implemented through a web booking system and lower pricing policy, forming a part of BA’s strategic choice of developing directions and methods (Johnson and Scholes, 2002). This is demonstrated with the Paris example in table 2.1 where BA charges £12.20 less than EasyJet that flies via Luton and with a less supported infrastructure than BA.
BA is acknowledging the need to create and incorporate new technologies into its competitive strategy (Johnson and Scholes, 2002) in order to maintain its prominent market position and gain market share. Furthermore, this will entice travellers, particularly business travellers, to stick with BA due to the added advantage of flying from central airports, receiving food and beverages and flying with a reliable and reputable world class airline for a marginal price difference. This is reinforced by the flight comparison to Rome carried out in table 2.1 below, where for an extra £104.49 passengers can fly to and from convenient central airports with the above mentioned advantages.
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). The implementation of this strategic choice has been a part of BA’s Future Size and Shape strategy (BA Fact book, 2002) and has served them well as they were able to gain economies of scale in terms of benefiting from bi-lateral code sharing, best practice benchmarking and marketing deals due to the shrinking effect that alliances have on the supply chain (Datamonitor, 2003; Economist, 2001). The shrinking of the supply chain (see figure 3.2) has assisted BA and the other airlines in the OneWorld alliance in reducing the number of suppliers as well as locking them in (Porter, 1980). This, complemented by their web booking and e-procurement technologies has resulted in significant cost savings (Datamonitor, 2003; Johnson and Scholes, 2002). BA’s cost cutting measures have served them well as they have successfully reduced unit costs by 9.4%, debt by £1.4 billion and headcount by 10,000 (BA News release, 2003). This resultant effect being that BA has finally returned to profitability, obtaining operating of £335 million for the 9 months April-to-Dec 2002 against a loss of £115 for the same period in 2001 (BA News release, 2003).
Furthermore, BA’s Future Size and Shape program and Fleet and Network Strategy consists of implementing measures to reduce its exposure to unprofitable market segments by trimming its flight route structure (BA Fact book, 2002; BA Factsheet, 2003; Datamonitor, 2003). This strategic choice is significant because it has provided BA with a stronger market presence and a sound platform in order to penetrate long haul markets where numerous cost advantages present themselves (BA Fact book, 2002; Barkin and Hertzell, 1995; Walters, 2001). This is additionally significant due to this being a market where low cost airlines do not pose much of a threat, enabling BA to operate to its full potential (Barkin and Hertzell, 1995; Mason, 2002). Therefore, the advantages for BA in forming an alliance are clearly multiple and form a vital part of BA’s corporate level strategic choices (Johnson and Scholes, 2002; Stonehouse et al., 2000).
Figure 2.3: A Model of the Elements of Strategic Management
(Source: adapted from Johnson & Scholes, 2002)
Section 3:The Airline Industry, It’s Development to 2008, and How British Airways is Positioned to Take Advantage
Nothing in the past has prepared today’s aviation forecasters to predict the future direction of demand with any degree of certainty (Federal Aviation Authority cited in Shannon 2002c). However, the ICAO (2003), project global passenger volume growth through 2010 to be less than the previous decade with the exception of the Transpacific sector which is anticipated to grow (see figure 3.1).
Figure 3.1 Summary of ICAO air traffic forecasts for the year 2010
(By international route group)
(Source: adapted from ICAO, 2003)
As highlighted by figure 3.1, the most significant growth is forecasted to take place within the transpacific region and due to BA’s corporate level strategy (Johnson and Scholes, 2002) of strategic alliances; it is positioned well for this sector’s development. Additional industry forecast statistics can be found in Appendix 1.
3.1 The Survival of the Fittest
Future sector development is forecast to consist of continued consolidation creating airline alliance conglomerates where future competition will take place not between individual airlines but between airline alliances. This places BA in a good position as the number of airlines joining the OneWorld alliance are increasing and thus adding to BA’s pursued cost cutting activities and to its strategic advantage as seen in section 2.1 (BA News release, 2003).
Furthermore, BA’s Future Size and Shape and Fleet and Network Programmes have assisted BA in achieving a strategic ‘fit’ by charting an emergent strategy (Mintzberg, 1998); learning from ‘what happened last time’. This future positioning has included a strategy of flexibility and adaptability, involving scenario planning whereby BA is adapting a more proactive approach to dealing with the uncertainties in the world’s political and economic forefront.
A further area where BA have positioned itself successfully for the future lies in its continued investment in technology. As highlighted in section 2, the early stage of this implementation has been impressive, not least for the speed of implementation, but positioning them in a more competitive situation to counter the attack of low cost airlines. Furthermore, as highlighted in figure 3.2, BA is aware of the power of buyers (Porter, 1980) (see figure 3.2) as it is becoming more price sensitive and aware of the choices available to them in the marketplace. Therefore, due to the employed technology BA are rendering itself more in tune with consumer demands, reducing the power of supplier (Porter, 1980) (see figure 3.2) and thus becoming more able to increase profit margin as seen in section 2.1.
3.2 British Airways – A Lean Organisation?
BA has identified the need to become a ‘lean organisation’ if they are to remain in existence in the future. However, we perceive that BA needs to adopt a change in ‘culture’ if it is to be in a position to enforce and sustain its cost cutting activities. Though, BA’s cost cutting are currently successful as highlighted by Rod Eddington, Chief Executive of BA: "One year on, our Future Size and Shape program of cost control and simplification continues to make us a leaner, fitter and more competitive airline. Our total costs in the last 12 months are £1 billion lower than the previous year which demonstrates the determination of our people to deliver" (BA News Release, 2003). In our opinion, BA are in the process of acknowledging this need to change its ‘culture’ by engaging and focusing all staff members in its pursued activities in order to place BA in a successful position for the future.
Additional airline sector development is predicted to experience overcapacity and congestion problems. In Europe alone, 38 airports are set to run out of capacity by 2010 (Humphreys, 2003) and as stated by Gordon Bethune, CEO of Continental Airlines: “If a couple of airlines ‘disappear’ then the industry would get back into an equilibrium between the number of seats available and what the market demands. Then people will be willing to pay a normal price for the service” (Donoghue 2003). Evidently, congestion and overcapacity are coupled with environmental concerns surrounding emissions and noise pollution. 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.