After the terrorist attacks on the September 11th, consumer confidence has been knocked by fears of terrorism and concerns about pending recession. This was the reason for BA to loose quarter of its passengers and fire 7.200 people. ().
IATA reported that the number of passengers traveling on international scheduled flights fell by 17% in September compared with the same month last year. (http://www.iata.org/index.asp). In addition to that, this monthly drop is the biggest since immediately the Gulf war in 1991. Conclusively there is а slowdown in prices that favors buyers.
Now, due to the situation on the airline market, buyers are much more concerned with overall airlines safety, then with the service provided. Surprisingly not many companies work on reassuring people about the safety, which in my opinion is crucial under present circumstances. Buyers, are ruling the airline industry, thus for airline companies it is crucial to forego excessive profits in exchange for sales in order to compete effectively.
2.1.3 Threat of New Entrants
Obviously, the last thing established firms want is someone else taking their profits, but this is always a possibility if other people can enter the industry easily. High profits in incumbent firms always attract attention, so profitable firms in easily accessible industries are constantly under pressure from new competitors. The most profitable industries are those that are very difficult to enter. They have barriers preventing entry by other companies.
Porter spells out seven major barriers to entry in to a business. These major barriers are the economies of scale available to existing competitors, access to input and distribution channel, the resistance offered by existing businesses, the capital costs of entry, regulatory and legal constraints, brand loyalty and customer switching costs.(Campbell, 2002)
Due to the decrease of the profit of airline industry is not safe for new firms to enter the market. In addition to this, the airline industry now is extremely uncertain and new entrants need expensive start up costs. Threat of new entrance in the airline industry is low; however, the probability of the alliances and joint ventures between existing firms is very high.
2.1.4 Threat of Substitutes
Again, this is very similar to the threat of new entrants. If customers can get another product that does a similar job, they will not accept excessive profits in an industry. For the firm, the most desirable position is where there are no substitute products. The extent of the threat from a particular substitute will depend upon the extent to which the price and performance of the substitute can match the industry’s product and the willingness of the buyers to switch to the substitute.(Campbell, 2002).
After the September the 11th people in the UK, prefer to take the Euro Star to go shopping in Paris rather than going to New York with airplane. Furthermore, people that travel within Europe has the ability to go with their car for instance to Amsterdam because it offers them security and comfort ability.
The airline industry is constrained by the price and excessive promotion of the above substitutes. Heavy promotion of the cheap UK to US calls works against airlines. It could be concluded, that airline industry experiences heavy pressure from substitute products.
2.1.5 Industry Rivalry
This force can really swing things in favour or against a profitable industry. An industry where all the incumbent firms contest every little piece of custom is not going to be as attractive as an industry where the firms are just happy with the customers they have. It is certainly far easier to carve out a consistent niche in the latter, which allows profits to continue more certainly into the long term. ()
September 11th caused havoc in the aviation industry and heavily impacted the major passenger airlines. () Companies across the world are jumping on the bandwagon. India Air has announced restructuring. Singapore Airlines, Czech Air, Asiana, Varig (Brazil), Aer Lingus, Iberian, Aeromexico and many more are taking the opportunity to slash jobs. Swissair/Sabena filed for bankruptcy protection. (http://solidarity.igc.org/atc/95Ward.html)
The intensity of rivalry of the European airline industry makes it a challenge for any player to respond to the broad spectrum. British airways no longer enjoy the benefits of London Heathrow airport (). Since 1998 many airlines implemented variety of innovation to lure passengers, especially business travellers. For example Air Canada in 1998 opened its own Lounge in London Heathrow’s Terminal 3, where passengers can enjoy special benefits like showers, show polishing, cloth pressing services, breakfast and Xerox business centre with telephone, fax and internet. This lounge is open to Air Canada most frequent travellers regardless of them flying business or economy class.
(http://www.airlinequality.com/Product/AC-SAS-lnge.htm)
Local authorities also encourage carriers to fly to minor airports of the countries to uphold tourism industry via subsidies. Other airlines have entered strategic alliances to pool their resources, existing routes and expertise.
When analyzing competition it is necessary to outline, that one airline’s competitors are not only other airlines operating on this route, but airlines that fly to other destinations, trains. Other competitors are personal cars of the people, who intend to travel. Taking into account these factors it is possible to say, that rivalry in the airline industry is very aggressive at the moment and for any airline company it is necessary to upgrade its strategy on the continuous basis to compete successfully on the market.
3.0 PEST ANALYSIS ON BRITISH AIRWAYS
PEST factors are the four broad categories of influences that create the marketing environment: sociocultural, technological, economic and competitive, political and legal. (Brassington and Pettitt, 2003)
3.1 Political
The political arena has a huge influence upon the regulation of businesses, and the spending power of other businesses. The political environment is defined as that part of the macroenvironment that is under either the direct control or influence of the government and/or the state. (Campbell, 2002)
Politically, there are operating restrictions, (timings, rotations and slots), which all airlines, including British Airways, are obliged to work within. The benefits in joining an alliance, is that it makes otherwise unreachable routes, a reality. This also ties in with slots, as each national carrier in their home cities, has the monopoly. Another political benefit is the bilateral route agreements, which all members of an alliance can utilise. (http://media.corporate-ir.net/)
3.2 Economic
Marketers need to consider the state of a trading economy in the short and long terms. This is especially on planning for international marketing. Analysis of the economic environment centres on changes in the macroeconomy and their effect on business and consumers. (Campbell, 2002)
Capacity in Europe outstrips demand, which leads to rate wars, equalling lower yields for companies. Economically, alliances lead to a greater control on capacity, therefore reducing competition and increasing yields. Alliances also reduce the near term possibilities of airport expansion. (Griffin, 2002)
By code sharing, airlines are able to not only split costs but to offer services and enter markets they might ill afford to do on their own. This leads to less aircrafts at airports, therefore less space being required, and is another way in gaining access to prime airports, which can expand no further. Another factor is the cost of safety; alliances can share these additional costs on joint services. Globalisation has placed part by making it easier for airlines across the world to join forces.
3.3 Social
The social and cultural influences on businesses vary from country to country. Analysis of the social environment is concerned with understanding the potential impacts of society and social changes on a business, its industry and markets. (Campbell, 2002)
September 11th, 2001, contributed to a major downturn in the airline industry. It negatively affected consumer confidence and passenger numbers subsequently reduced. Passengers resorted to land substitutes or in business teleconferencing. These social and technological factors are still very much affecting airline travel. Other recent factors affecting the industry is heightened security, leading to increased costs, slower turnaround times and, therefore, lower utilisation of aircrafts.
3.4 Technological
Technology is vital for competitive advantage and is a major driver of globalisation. Analysis of the technological environment involves developing an understanding of the effects of changes in technology and their impact on all areas of an industry, its members and their activities including: goods and services, production processes, information and communications, transport and distribution, society, politics and economy. (Campbell, 2002)
Technology in this industry is fast moving and very expensive. Alliances give the opportunity for joint investment ventures, such as, shared check-in systems. ()
4.0 INTERNAL ENVIRONMENT
4.1 SWOT ANALYSIS ON BRITISH AIRWAYS
SWOT analysis is an assessment of a firm’s key strengths and weaknesses, compared with the opportunities and threats it faces. (Fry et al, 2004)
Strengths and weaknesses tend to focus on the present and past, and on internally controlled factors offered to the target market. Opportunities and threats tend to focus on the present and the future, taking a more outward-looking, strategic view of likely developments and options. (Brassington and Pettitt, 2003)
4.1.1 STRENGTHS
Organisational strengths are skills, resources, and other advantages the firm possesses relative to its competitors. (Griffin, 2002). The strengths of British Airways () could be that:-
- it continues to dominate London’s major airports;
- it contains the latest check-in technology;
- its communication between managers and staff is very good;
- It is still being perceived as the national airline.
- WEAKNESSES
The weaknesses reflect deficiencies or shortcomings in skills, resources, or other factors that hinder the firm’s competitiveness. (Griffin, 2002). The weaknesses of British Airways () could be that:-
- It consists of high labour numbers, especially in the United Kingdom;
- It has a pulling back capacity.
4.1.3 OPPORTUNITIES
The opportunities obtain data about economic, financial, political, legal, social and competitive changes in various markets the firm serves or might want to serve. (Griffin, 2002). The opportunities of British Airways () could be that:-
- Its economy segment is expending;
- It is being perceived as the national airline.
4.1.4 THREATS
The threats to the firm can be shrinking markets, increased competition, and the potential for new government regulations, political instability in key markets and the development of new technologies that could make the firm product lines obsolete. (Griffin, 2002). The threats of British Airways could be () that:-
- It has fierce competition from low fare airlines e.g Easy Jet
- Its economy is on downturn;
- Its companies are investing largely in order to improve their services;
- Its technology offers a short-term advantage.
5.0 FINANCIAL RATIO ANALYSIS
5.1 Working capital
Working capital measures how much in assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the necessary for . (http://www.investorwords.com/cgi-bin/getword.cgi?5334)
At March 31, 2003, net current liabilities were £179 million, down £463 million on last year. This change principally reflects higher short-term loans and deposits and cash (£433 million) and reduced trade creditors, due to reduced operational expenditure. These were partially offset by a reduction in debtors, mainly due to lower volumes and revenue, and reductions in stock. Sales in advance of carriage increased from £716 million to £783. million mainly due to the timing of Easter.
- Earnings per share
Total divided by the number of . Companies often use a of shares outstanding over the reporting term. EPS can be calculated for the previous year for the current year or for the coming year. (http://www.investorwords.com/1719/EPS.html)
For the twelve month period, profits attributable to shareholders were £72 million, equivalent to earnings of 6.7 pence per share, compared with losses of 13.2 pence per share last year.
- Net debt/total capital ratio
This will tell you how much the company relies on debt to finance assets. In general, the lower the company's reliance on debt for asset formation, the less risky the company is since excessive debt can lead to a very heavy and repayment burden. However, when a company chooses to forgo debt and rely largely on , they are also giving up the reduction effect of payments. (http://www.investorwords.com/1326/debt_ratio.html)
Net debt at the year end amounted to £5,149 million, including convertible bonds of £112 million, and net of cash and short term loans and deposits totalling £1,652 million. This reduction in net debt of £1,145 million from last year resulted from additional cash, short-term loans, deposits, and exchange effects. Debt repayments were partially offset by new loans and finance leases taken out. The net debt/total capital ratio stood at 60.7 per cent, a 5.3 point reduction versus last year mainly due to the reduction in net debt. Including obligations under operating leases, net debt was 64.2 per cent, a 4.9 point reduction from last year.
(http://media.corporate-ir.net/media_files/irol/69/69499/ar2003_final.pdf_)
6.0 CONCLUSION
A detailed analysis on the British Airways was conducted involving a SWOT analysis, a PEST analysis and Porter’s five forces analysis. We also used financial analysis ratio in order to show how the terrorist attack of September 11th influenced all kinds of industries. We have considered all the external and internal environment factors that affected British Airways and we realised that although is a well known airline industry it still has its limitations.
The airline industry is monopolistic competition as airline companies’ focus on particular segments. As an airline industry, British Airways is facing competition and it faces a downturn in economy. It has the latest check-in technology and the relationships between the staff members are good.
Overall, it is the world's second biggest international airline and has always been regarded as an industry-leader. (http://media.corporate-ir.net/)
7.0 BIBLIOGRAPHY
TEXTBOOK
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Campbell, D., Stonehouse, G., and Houston, B. (2002) Business Strategy.
(2nd Edition). Butterworth – Heinemann
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Fry, F.L., Stoner, C.R. and Hattwick, R.E.(2004).Business: An Integrative Approach. (3rd Edition). New York: McGraw-Hill Companies, Inc.
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Brassington, F. and Pettitt, S. (2003). Principles of Marketing. (3rd Edition). Pearson Education Limited
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Griffin, W, Ricky., and Pustay, W, Michael. (2002) International Business – A Managerial Perspective. (3rd Edition). Pearson Education Limited
WEB SITES
- British Airways Homepage
http://
Fact Book 2003 – Industry Profile
(Accessed: 20th November, 2003, 13:20 pm)
- International Air Transport Association Homepage
http://
- Porter’s Five Forces – A MODEL FOR INDUSTRY ANALYSIS
(Accessed: 20th November 2003, 18:30 pm)
- The Competitive Forces Model
(Accessed: 22th November, 2003, 17:15 pm)
Air Canada and Scandinavian Airlines open “The London Lounge” at Heathrow...
(Accessed: 28th November, 2003. 10:35 am)
- Industry News
(Accessed: 24th November, 2003, 15:45 pm)
- 2002/2003 Annual Reports and Accounts
(Accessed: 26th November, 2003, 17:45 pm)
- InvestorWords.com
(Accessed: 26th November, 2003, 18:30 pm)
WEB DOCUMENT
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Wald, R., (2001). The Crisis Through Flight Attendants – This Is the Thanks We Got.
(Accessed: 25th November, 2003, 11:34 am)