Business Environment - British Airways

University Degree Business and Administrative studies

BABS YEAR 1

Business Environment – Bernard Smales

Business activity in context

Submission date: Wednesday 11th March 2002

By William Aldridge – Group D

Although parts of British Airways (BA) can be traced back as far as 1916 it wasn’t until 1974 that the BA we know today was formed as a totally nationalised company. In February 1987 and after 8 years of planning Margaret Thatcher privatised BA. Over one million applications were received for shares in the airline, offered at 125 pence, making the flotation 11 times oversubscribed. Freed from the constraints of Government ownership, BA announced a merger with British Caledonian in July. During the next four years BA underwent significant re-branding, especially in the business market. They also introduced new Boeing planes and developed an international marketing campaign with United Airlines. Over these four years, through massive investment BA was becoming one of the strongest players in the market; it made profits the likes of which could never have been made while the company was in the hands of the government. BA last year flew 529,807 flights to around 263 destinations in 97 countries. The remainder of this essay is going to deal with BA over the ten years between 1991 when the Gulf War broke out and the end of 2001, just after the September the 11th attacks.

In 1991 the gulf war and an increasingly bad worldwide recession depressed revenue and profit for BA. This meant that ’91 was the first year since BA was privatised that they made less profit than the previous year. However they still had massive assets including 8 UK airports and were responsible for around 70% of UK passenger traffic and 85% of air cargo. The company’s business strategy and marketing campaigns remained pretty constant but put extra special emphasis on safety and security. This was mainly due to threats made by terrorists during the gulf war to highjack planes, a threat that wouldn’t really be realised until September 11th 2001. The impact of the gulf war on BA was an estimated loss of 2.8 million passengers and revenue of 25 million pounds. This year was described as “the most difficult year since records began” (BA Reports and Accounts, 1991–1992, inside cover). Despite these setBAcks BA managed to increase their shareholders earnings per share by 1.6% and expand capacity at their Stanstead, Gatwick, Heathrow and Glasgow airports.

This is a preview of the whole essay

1992 saw another year of recession in the UK making it the longest and deepest since the 1930’s; however growth increased from minus two point five percent in 1991 to minus one percent in 1992. This was heralded as the beginning of a recovery period in the UK economy and along with predictions from the then Prime Minister, John Major and Chancellor of the Exchequer, Norman Lamont that the UK would return to growth imminently greatly increased consumer and business confidence. Of course over confidence is a dangerous thing and on September 16th 1992 the UK was forced to leave the exchange rate mechanism; the very thing that John Major had predicted would lead us out of the current recession. Black Wednesday as it was called led to one of the biggest political and financial crisis of modern times. BA were still suffering from the previous years set backs and weren’t helped by the above situation. Turnover increased but profits decreased significantly, this was due to the poor economic situation forcing BA into aggressive marketing strategies including “the biggest ticket give away ever” and a reduction in some fairs to try and get passengers back on board. In an attempt to cut costs the number of people employed by BA fell by 4053, from 53,013 in 1991 to 48,960 in 1992 (BA Reports and Accounts, 1992-1993, p.1). BA shares took a knock when in July Lord King announced he was to step down after 12 years as Chairman. However new business strategies were developed including a 3 year plan to improve the profitability of Gatwick and plans to acquire a 49.9% share of (TAT) European Airlines.

In 1993 economic conditions improved and with it increases in revenue, profit and number of employees for BA (see figures 1, 2 and 3). It was also a massive year for investment and expansion by BA including an alliance and 25% stake in USAir, a 25% share of Qantas (Australian airline), an almost 100 million pound investment in maintenance facilities in Wales and the opening of numerous new routes and destinations. To pay for this BA raised approximately 442 million pounds through a rights issue and launched the “BA Dream Ticket”, its biggest ever-sales drive, to capture an additional £100 million revenue from the world business travel market.

Ninety-Four marked a significant increase in turnover and number of staff employed but a dip in profits. This was not seen as a concern as ’93 and ’94 were seen as years where the company was making big capital investments to improve future efficiency and capacity. For instance facilities at Gatwick and Heathrow were improved and the “Club Europe” brand was launched as a further incentive for business customers. BA teamed up further with Qantas and set up two franchises with Logonair and GB Airways in ’94 and a further one at the beginning of ’95 with Manx Airlines Europe. The economy’s of scale and new destinations that were offered by these companies allowed further cost cutting by BA but explains the increase in staff numbers.

Ninety-Five, Ninety-Six and Ninety-seven were good years for BA. Profits doubled to above those that were being reached before the gulf war and turnover and employee numbers also went up to cope with increasing demand. The economy was in good shape and John Major’s government secured new agreements with the USA allowing BA to occupy more slots at US airports. Shortly after BA sold its stake in USAir and went into an arrangement with the bigger American Airlines. A new three-year plan to revolutionise air travel is announced at a cost of £500 million and is aimed at premium Business customers, the market which was responsible for BA’s current large profits. New franchises are announced including overseas ones in Denmark and South Africa and agreements with Canadian Airlines. These arrangements go further towards developing BA’s brand and reducing costs through economies of scale. Union problems were settled and cuts or freezes were made on cabin crew and ground staff wages.

1998 saw BA launch “Go” a no frills airline which would not compete for the same clientele as the increasingly business orientated BA. Manchester airports new 75million terminal was opened. Turnover and Staffing levels continued to go up but alarmingly profit halved. Thus began a time when budget airlines boomed and business airlines suffered. However Go was finding it difficult to attract customers from competitor’s easyjet and ryanair.

In 1999 BA’s profit after tax went into the red for the first time since privatisation. BA continued to forge relationships with other international airlines. In particular Spain’s Iberia who they bought a nine percent share of in February. Turnover continued to rise as did customer numbers and staff levels. The failure of Go, was a contributing factor to BA’s “worst result since 1982” (BA Reports and Accounts, 1999-2000, inside cover). In 1999, profits had taken a dramatic decline, with operating profit falling by £358m, down to £84m. Gross profit had also fallen by £358m, down to £261m. This fall in profits also had a negative impact upon investment in the company, with capital and reserves falling (BA Reports and Accounts, 1999-2000). These dramatic falls in profitability were caused by increased competition in the market, which led to competitive pricing and marketing. British Airway’s funds were getting used too quickly. The increase in oil prices also meant increased expenditure for BA. Things got worse for BA, with low employee morale, leading to poor customer service, which in turn deeply impacted upon BA’s reputation (BA Reports and Accounts, 1999-2000).

2000 saw some return to form for the ailing BA. Turnover, Profits and Capital increased and cuts in staff were announced to try to curb the effects of the worldwide recession which seemed imminent. The figures for 2000, were an improvement, but were not back up to pre-1999 levels. One of the major reasons for this was the foot and mouth epidemic, which hit Britain in February 2000. This stopped a lot of people from traveling both out of but especially into the UK and badly hit BA. Also the petrol crisis boosted BA’s expenses, and scared people into not traveling (bbc.co.uk). The grounding of Concorde after the Paris crash on July 25th badly hit the travel industry. It hit BA’s upper and luxury class services including the business sector that they had been so carefully nurturing. In all this time of hardship, passenger traffic fell by more than 13% (telegraph.co.uk).

2001 looked promising; In May the airline reported a sharp rise in profits and revealed that it was making more money from each customer than it has done since it was privatised in 1987. The new chief executive, Rod Eddington, was being congratulated for turning BA around after years in the wilderness with former boss Bob Ayling. (news.bbc.co.uk/). He planned to stay true to the formula of concentrating on the premium business sector and so in June 2000 completed the sale of Go, BA’s no-frills airline, making a £75m profit from its initial investment three years ago. Then, unbelievably the events of September the 11th occurred and within 2 weeks BA were announcing job cuts of over 7000, profit warnings were issued and competitors were going bust. Passengers were unwilling to fly due to safety concerns and the whole industry was hit hard. Suddenly the safety issue that had not grabbed the headlines for 10 years is again a priority and the mountain that BA had climbed since the Gulf War is bigger than ever. BA posted huge losses in 2001 with analysts predicting that it will take several years for the industry to begin to recover.

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