Strategic_Analysis_British_Airways

BRITISH AIRWAYS plc. Managing the Strategic Dimension Table of content: 1. Introduction 3 1.1. Product and presence 3 1.2. Strategic issues 3 2. Dynamic environment 4 2.1. Macro environment 4 2.2. Industry environment 8 2.3. Key success factors 10 3. Strategic capabilities 11 3.1. Resource based view (RBV) 11 3.2. Assessment of company performance 13 3.3. Value chain 17 3.4. Distinctive Capabilities 19 4. Strategic options 19 4.1. Current options 19 4.2. Recommendations for change in strategy 22 4.3. Stakeholder analysis 22 4.4. Long term, Medium term and short term recommendations 24 5. Conclusion 24 6. Personal reflection 25 7. References 27 Executive summary: British Airways (BA) who proclaim themselves as the world’s favourite airlines are in a turmoil since 2008. Global economic meltdown is the main reason behind this. Troubled relations between the management and the labour union have further added to the worries of the company. This report analyses the main issues faced by British Airways. It does an analysis on the dynamic environment of the industry it operates in. It is evident from the analysis that BA no longer has the dominance it had in the market. On one hand the low frill carriers are encroaching on budget travellers and on the other luxury airlines such as Virgin are attracting the premium customers. It also analyses the strategic capabilities of the company. Through these analyses it identifies the Keys success factors of BA, which are attracting customers, managing employees and managing its resources. This report subsequently analyses the strategic capabilities by using the RBV and value chain. It identifies the distinctive capabilities in terms of architecture, reputation and ability to innovate. Based on the analysis of the dynamic environment and the strategic capabilities this report explores the current strategic options available to BA. It conducts a stakeholder analysis to understand the effect of strategies on different stakeholders. It goes on to recommend changes in strategy and reviews long term, medium term and short term strategies of the company. 1. INTRODUCTION: 1.1. PRODUCT AND PRESENCE: British Airways plc. is the flagship global airline company of the United Kingdom. BA is headquartered near Heathrow airport with its secondary hub at London, Gatwick airport. British Airways have 148 bases across the world. BA connects over 300 destinations in its global network (British Airways, 2009). It is amongst the leading international premium airlines in the world (Datamonitor, 2008). Fig1. British Airways bases across the world. Source: British Airways 1.2. STRATEGIC ISSUES: The airline industry has faced many problems in the recent years. Some of which is due to the external factors and others self-inflicted (Bized, 2010). The main issues concerning BA are that the low frill airlines are increasing their share in the UK/European market and the troubled relations between the employees and the management of BA. Ryanair have reported that the number of UK/Europe passengers carried by them was three times that of British Airways. The low frill airlines are slowly gaining control over the UK and European market (Business and Leadership, 2010). This has made the airline industry extremely competitive. MINTEL (2010), reports that BA is losing more than £ 5.5 billion due to decline in passenger number. To compete with low frill airlines, along with reducing their profit margins considerably, they have to reduce their operation costs. BA had plans to cut 1200 jobs to reduce their operational costs (BBC NEWS, 2010). The decision by the management to impose contractual changes of the employees is not accepted by the employee union. Hence they are planning on strikes (Metro, 2010). BA is losing £7 million each day due to strikes by the cabin crew union (MINTEL, 2010). Frequent strikes may result in poor service which could damage the brand image of premium airlines. BA needs to arrive at innovative and efficient strategies at the earliest to negate these challenges. 2. DYANMIC ENVIRONMENT: 2.1. MACRO ENVIRONMENT: The recent years have seen many developments in the airline sector across the world. Some of the important factors are shown above (in fig. 2). Political: Prior to 1978 the Civil Aeronautics Board (CAB) controlled the airline industry according to (Smith and Cox, 2008). Due to growing realisation that politically controlled economy was not in the public interest, CAB started the deregulation of the airline industry. The economic liberalisation of air travel in 1984 in the USA was an important part of a series of deregulation moves. The airline companies enjoyed more freedom in their operations and pricing. Fig.2. PEST analysis for airline industry. Liberalisation of the airline industry has facilitated the growth of the aviation market and boosted employability in the airline sector (CAA, 2004). Figure 3 (CAA, 2004) shows the unit cost of operation by world region. The cost of operation in Europe has improved due to liberalisation. The raise in threats through terror attacks had an adverse effect on the airline industry. “At the time of 9/11, the industry was already in financial trouble due to the recession. 9/11 severely compounded the industry’s financial problem” (Makinen, G., P.4, 2002.).The increase in security costs due to this has further added to the burden of operational costs of airline industries. Fig.3. Unit cost of operation by world region (Civil aviation authority, 2004) Economical: Competition from the low cost airlines is a major challenge to the flagship carriers such as British airways. The CEO of Ryanair, Michael O’Leary stated that Cutting down fares to compete with low cost airlines without compromising on quality is a big challenge (Johnson, G. et al, p 69, 2010). This has led to decrease in profits in the airline industry. The increasing fuel prices are further pushing down the profits by increasing the operating costs. Transportation research board (2010) reports that the price of oil increased more than 200% in 2008. This led to an increase in operational cost of airlines from 15% to 40%. Increase in ticket prices could discourage non business travellers and have an adverse effect on the growth of this industry. Social: After the 9/11 attack, BA cut flight operations by 10 per cent, withdrew sixteen wide body and four narrow body aircraft from service and axed 7,000 jobs in line with the reduction in passenger demand (Flightglobal, 2010). It took a lot of time and effort to regain trust back to the people. This incident may still have it effect till date. Low cost carriers are slowly encroaching on the market space of long haul carriers (section 1.2). According to (USA Today, 2009) the behaviour of the consumers to prefer the low cost airlines has a major role to play. As compared to 10 years ago, the low cost airlines are offering more destinations and better services. On the other hand the conventional airlines have cut services to many destinations. Although there are customers who wish to fly business class or full service airlines, certain section of the flyers are more comfortable shifting to the budget airlines. Technological: Internet and IT technology has changed the way the airline industry operates. “As airports were flooded by more and more passengers it became more and more obvious that only the technology of the integrated information systems can be the way leading to the future”(Kelemen,Z., p.45, 2003). Use of IT helped the airline companies to reduce their operation charges. According to the case study on Ryanair in (Johnson et al, 2008) Web based check-in was one such measure, where the company saved on airport and staff charges. BA has updated their flights with advanced entertainment systems, telephones, touch screen Television and many such technologies. BA has in house maintenance and overhauling capabilities (British Airways, 2010), which can be considered as backward integration. This gives BA a competitive advantage over its competitors. 2.2. INDUSTRY ENVIRONMENT: PORTER’S FIVE FORCES FOR BA Fig.4. Porter’s five forces diagram. Analysing the airline industry by using the Porter (1985)’s five forces tool (shown in fig.4) will give us more in depth in understanding this sector. Industry competition: Airline sector can be separated into 2 sectors, the premium service providers and budget carriers. BA operates in both the sectors. British Airways and Virgin Atlantic are the two European based carriers aggressively competing in the premium seat services. Virgin is voted online as the best service provider. But they are much more expensive compared to BA (Premium Flights, 2010). On the other hand low frill airlines are becoming an increasing concern for long haul carriers (section 2.2). “BA - which used to call itself the world's favourite airline - has been out-manoeuvred by smaller airlines in the fiercely competitive budget flights sector, and falling passenger numbers have forced it to overhaul its own market strategy”(BBC NEWS, 1999). Market dominance of BA is being squeezed from both directions by the low frill carriers such as Ryanair and luxury service providers such as Virgin. Suppliers: Aeroplane and jet fuel suppliers the main suppliers to the airline industry. Boeing and Airbus are the only two companies which supply commercial aircrafts in the world. “Airlines are being forced to pay cash in advance for jet fuel as the major oil companies tighten the screws on an industry that is being crushed by an extraordinary surge in the price of crude oil”(The Times, 2008). BA is the founding member of one world alliance (oneworld, 2010). Forming alliances with other airlines to purchase in wholesale might increase the bargaining power of the airline industry. Backward integration by BA has given them a higher bargaining power (section 2.1). Buyers: The buyers generally choose the cheapest available offers to their destinations. Loyalty cards and offering premium services to the premium customers are some ways of retaining the customers. The power of the buyers is not much as individuals in this industry, but as a large group the buyers have more power. Substitutes: Travelling by sea or land is not always convenient. According to (Datamonitor 2008), international air travel segment accounts for 77.9% in the UK as of 2008. BA having a large market share in the international market, it would not face a great threat of substitutes. But due to the economic down fall in the recent times, people might opt for domestic holidays to spend their leisure time. Potential entrants: In international air travel, due to conservative laws, the barriers to entry are very high. According to (eNT, 2010) USA and EU have signed an open sky agreement in June 2010. Although this will improve better trade, it might open doors for international airlines companies to pose a threat of new entry. 2.3. KEY SUCCESS FACTORS: From our understanding of the airline industry through the PEST and the five forces analysis, to understand what the key success factors for this industry are, we have to determine what the customers want and what a firm needs to do to survive competition. Key success factors of premium service airline sector in which BA operates are attracting the customers, managing employees and managing its resources. BA has huge resources in terms of fixed assets and human resources as seen in section 1.1. Adding value to the services and maximising values from fixed cost investments would play an important role in the success of British Airways (Jackson, S., 2008). 3. STRAGIC CAPABILITIES: 3.1. Resource Based View: British Airways who celebrated their 90 years of existence (British Airways, 2009), have accumulated a large resource base. Resource Based View tool analyses BA’s resources and identify the strategic resources available to the company. Tangible resources: • Fleet of 338 planes –BA is among the top five airlines in the world. Over 48% of its business is from the UK. With a fleet size of 338 planes, BA is the largest airlines company in the UK (Datamonitor, 2008). This is a rare and valuable resource which is difficult to imitate. But it is substitutable as other companies might develop these resources over a period of time. • Network of over 300 destinations – 148 bases across the world and a network of over 300 destinations (section 1.1) is a valuable and rare resource. But by increasing the fleet size other companies can imitate and substitute it. • Sole access to LHR’s terminal 5 – London Heathrow airport (LHR) serves 180 destinations in 90 countries (Heathrow airport, 2010). It is the biggest and most advanced airport in UK. This is completely owned by BA. For an international premium service provider, this resource is very valuable. Since no other airlines in UK have this resource it is very rare. It is imperfectly imitable and non-substitutable as the cost of setting up such a resource is financially not feasible for other companies in a highly competitive airline industry. Fig.5. Resource Based View. Intangible: • Brand image – British Airways is one of the best brands in the world. But the drawback is its vulnerability to crisis (Branding strategy insider, 2008). In addition to the crisis management, their troubled relation with the employees union is having an effect on the service and its brand image as (section 1.2). By the sheer magnitude of its brand image is a valuable and rare resource to have. It is very difficult for it to be imitated or substituted. • International customer base – In their existence over a period of 90 years, BA has accumulated large amount of international customer data. BA have partnered with “Circles” who are a leading, innovative customer and employee loyalty solutions provider. Together they have come out with innovative customer loyalty programs (BNET, 2001). This massive customer data is a very valuable resource. Very few airlines will have similar data hence it is a rare resource. But it can be acquired by other airlines. Since the customer behaviour is fickle, it is easily substitutable. • One world alliance – British Airways is the founder member of the one world alliance according to (oneworld, 2010). This is a valuable resource as more strategic destinations could be covered. At this point of time it is a rare resource, but it is easy to imitate and substitute. • Technology – BA has the latest and high end technology (shown in section 2.1). Although technology is a valuable resource to have, due to intense competition it will be adapted by other companies in the industry as well. Hence technology has become a necessary resource to have in this highly competitive industry. 3.2 ASSESMENT OF COMPANY PERFORMANCE: The recent global economic meltdown had a drastic impact on the airline industry in general. BA is no exception to this. The profitability margin which grew from 5.31 in 2005 to 10.09 in 2008, dipped to a negative (-) 4.46 in 2009(FAME, 2010). The conflicts with the staff unions due to layoffs have caused further damage. “Plagued by industry-wide losses, British Airways, the widely admired flag carrier, has been brought to its knees by a costly surprise strike just as it was poised to fly back into profitability”(MSNBC, 2010). Return on capital employed(ROCE) which grew comprehensively from 4.97 in 2005 to 11.21 in 2008, crashed to -5.83 in 2009 (FAME, 2010). It is evident from the financial information (in fig 3) that the company is in turmoil. From £887 million in profit in 2008, the company has had a turnaround to a loss of (-) £401 million in 2009 (FAME, 2010). The Net asset turnover has dropped from 1.143 in 2008 to 1.358 in 2009. This is a clear indicator that the efficiency of the company has declined. Although according to Financial times (2010), British airways has outperformed the FTSE 100 Index in October 2010. This may well be an indicator of a good future. Figure 3. British airways financial data for the last 3 years (FAME). Source: FAME Return on shareholders’ funds which grew consistently from 12.37 % in 2004 to 29.2% in 2008 saw huge fall in 2009 by dipping to (-) 24.38% in 2009(FAME,2010). Fig. 6 to fig.9 shows the graphical representation of evolution of the above discussed ratios from 2000 to 2008. Fig.6. ROCE British Airways Source: FAME Fig.7. Return on shareholders’ funds – British Airways Source: FAME Fig.8. Turnover - British Airways. Source: FAME Fig.9. Evolution of profit margin - British Airways. Source: FAME 3.3. VALUE CHAIN: Primary activities: • Inbound Logistics – As discussed in section 2.2, BA has a well-established, advanced in-house training facility. This can be used to train their employees to provide better service and have a good stock control system. • Operations – British Airways (shown in section 1.1) has updated itself with high end technology for quick check-in, online bookings, increased baggage security and other additional services. This adds to the premium value BA is trying to provide to its customers. • Outbound Logistics – with a network of over 300 flights and association with one world alliance, BA can try grow presence in key cities in the world (shown in section 3.1) Fig.10. Value chain - British Airways. • Marketing and Sales – BA’s marketing has become its own enemy. Particularly during a series of blunders at the launch of Heathrow terminal 5 (Branding strategy insider, 20008). Troubled relations with the employee union as discussed in section 1.2 also have had its impact on the BA brand. BA needs to take measures to restore its brand image. • Post-sales support – BA has a well structures customer loyalty programs (section 3.1). It has invested in IT to keep the customer updated with the information. Support Activities: • Firm infrastructure – BA has a well-established infrastructure (section 3.1) and over 300 planes and 45000 employees it can operate as an economy of scale. With sole access to Heathrow terminal 5 it has complete control on its flight operations. This gives BA a competitive advantage over others. • Human resource management – In recent years the relationship between the management and the employee union had problems. The layoffs by the company and imposing changes on the employee’s contracts have raised few issues (section 1.2). On a more positive side, BA has a dedicated training and carrier development department (British airways, 2010). This helps its employees to fulfil their potential. • Technology development – British Airways has advanced inflight technology and high end information technology (section 2.2.) Due to the increase in competition, it is necessary for them to be innovative and have the latest technology to be competitive in the market (section 3.1). • Procurement – Their alliance with the one world group (shown in section 3.1) gives them a higher bargaining power with the suppliers and allows them to be economical due to economies of scale. 3.4. DISTINCTIVE CAPABILITIES: • Architecture – The one world alliance as discussed in section 3.1 forms a strong architecture for BA. This this is a distinctive capability which gives a competitive advantage over its competitors. • Reputation – BA was the first airliner to start daily scheduled international flights and is still the leading international carrier in the world (one world, 2010). BA is called the brand power by (Branding strategy insider 2010). According to them it is among the leading brand in the world. • Ability to innovate –British Airways was the first airliner to offer Jet passenger services. They were the first in the world to operate weather beating auto landing and the first to offer supersonic passenger service. BA was the first to introduce full flatbed services (oneworld, 2010). Over its 90 years of existence BA has come up with many innovative ideas. British Airways have distinctive capability in terms of architecture, reputation and ability to innovate. 4. STRATEGIC OPTIONS: 4.1 Current options: British Airways have put the tough times they had behind them and moving forward to regaining their position as the “Global Premium Airlines” according to (British Airways, 2009). To achieve their vision (British Airways, 2009) they have formulated a strategy with five key goals as shown in figure 11. • They want to be the airline of choice for the long haul premium customers. They have chosen differentiation as their generic strategy as per Porter’s 3 generic strategies as shown in fig12. • Delivering an outstanding customer service at every touch point is their second goal. Providing premium service to the customers is a Key Success Factor (as discussed in section 2.3) to be a global premium airlines. • To grow their presence in key global cities to offer their customers better connectivity is next on their key goals. They are aiming to increase their network of destinations and are planning to expand through economy of scale. Presence of a well-established infrastructure might help them realise their goal. • They aim to build on the strength of LHR’s terminal 5 to provide better experience to customers and make their business more cost effective. British Airways are shifting from a marked led approach to a resource led one. With the resources BA has this might turn out to be a good move (Bized, 2010). • To generate new revenue streams by building profitable ancillary services that add value to the customers and parallely growing the business through economies of scope. Strong brand image if BA will add to its advantage. Fig.11. Key goals of British Airways. Fig.12. Porter’s generic strategies. 4.2. Recommendations for change in strategy: British Airways are adopting differentiation as their generic strategy which they have followed for a long time (section 4.1). Virgin Atlantic has differentiated themselves better as a luxury service provider (Section 2.2). Virgin pampers its customers since the point of first contact (Premium flights, 2010), Whereas on the other hand low frill airlines like Ryanair operate in the market as cost leaders (shown in section 2.2). British Airways (as shown in section 3.1) have well established infrastructure and resources. BA, who is operating through economies of scale and economies of scope, can adopt a strategy in between differentiation and cost leadership (section 4.1). By adopting this approach they would be able to attract wider range of customers which is a key success factor for them (shown in section 2.3). 4.3 Stakeholders analysis: Important stakeholders of BA are the management, the employees, labour unions, shareholders, investors and the government (shown in fig. 13). Fig.13. Stakeholder analysis – British Airways. The management, labour union and the investors are the stake holders who have high interest and high power. Hence BA will have to devise a strategy which will be acceptable to these three groups. As shown in fig.14 they would like to company to have a differentiation strategy which has worked for BA in the past. Shareholders and employees have high importance but have low power. Although the management need to take them into consideration, they don’t pose much threat to the company. Government has high power but low importance hence they will not get involved unless the situation gets too hard to control. They might want BA to adopt a cost leader strategy with the interest of make it more affordable to customers, particularly in the financial downturn. Customers would choose whoever is offering a better deal. They would prefer BA to adapt a cost leader strategy as the financial downturn has had an impact on the spending capacity of the people. Although there will be a group of customers who would want BA to adapt a differentiation strategy. Fig. 14. Impact of strategy on stake holders. 4.4. Long term, medium term and short term recommendations: • Short term - It is important for the issues between the management and the labour union to be solved in order to prevent further damage to the brand image. It is necessary for both the management and the labour union to come to a temporary settlement in these difficult times and work towards a final solution. • Medium term – As a medium term goal to recover from the current crisis, BA could build on the strength of their strong infrastructure and resources, particularly terminal 5 of LHR and try to become more cost effective. By offering better services to the customers they would attract more number of customers. They can try to generate new revenue streams by building profitable ancillary services that add value to the customers and try to grow the business through economies of scope (section 4.1). • Long term – In the long run, as discussed in section 4.1 BA can aim to increase their presence in the key cities across the world. With the kind of resources they have, they can slowly move from being market led to resource led. They should try and broaden their appeal and maximising the value from fixed costs (section 2.3). 5. CONCLUSION: By analysing the dynamic environment in section 2, we could see that the airline industry is a highly competitive one. Deregulation of rules and partial open sky agreements have made it even more competitive. By analysing the strategic capabilities in section 3, it was evident that British Airways has a large infrastructure and valuable resources. They have distinctive capabilities such as access to LHR terminal 5 and one world alliance. By using these in the right way would give BA a competitive advantage over its competitors. We examined the current strategic options available. By doing the stakeholder analysis we could deduce that sticking to differentiation as its generic strategy was the most feasible option. However, devising a strategy between differentiation and cost leadership would give them an added advantage. Option of expanding through economies of scale and economies of scope are available for BA. Improving cost efficiency and quality service would make the company financially more fit. Management and the labour union should agree on a short term settlement and work towards profits. This would solve the issue on the long run. Moving from a market led approach to a resource led on might be a good move for British Airways. 6. PERSONAL REFLECTION: With the help of different tools of strategy, this report has systematically analysed British Airways plc. The purpose of this is to understand the different factors which have influence on the organisation directly or indirectly. A keen understanding of these factors helps us to formulate a better strategy. This report has used PEST analysis to analyse the external environment in which the company operates, Porter’s five forces analysis to analyse the industry environment, resource based view to analyse the resources of the company, value chain to analyse how value can be added through different activities and stake holder analysis to analyse the impact of different strategies on the various stakeholders of the company. The tools used for the analysis are static and the analysis in valid only at that point in time. With time as the factors involved change the results of the analysis change. Tools like RBV and value chain are based on assumptions that the resources are completely controlled by the company. RBV further assumes that the resources are heterogeneous and immobile. This may not be the case in most of the practical situations. However, in spite of these assumptions, this tool gives a strong foundation on which the strategy for the unseen future can be formulated. 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