British Airways Case, Research Paper Example
Words: 2439Research Paper
Strengths: British Airways greatest strength may be its brand name which has a high recognition rate. This is not surprising given the airlines’ more than 90 years of history. Even though it may be a private company now, many may still perceive it as the national airline of the country. British Airways’ strengths also include its vast global network which covers more than 160 cities around the world. In addition, the company is the largest operator at one of the leading global hubs, Heathrow Airport where it accounts for about half of the total flight traffic (British Airways). The company’s strengths also include its leadership team which has extensive industry experience as well as industry insights, as reflected by their commitments outside the company. Company’s CEO Willie Walsh previously served as a CEO of Aer Lingus and is also an honorary board member of Flight Safety International. CFO Keith Williams is Non-executive Director of Transport for London (British Airways). The company’s board composition consisting primarily of independent directors also helps ensure accountability as well as minimize conflicts of interest.
One of British Airways’ strengths is its workforce productivity and commitment to their jobs. The company’s ability to achieve customers’ satisfaction is also determined to a great extent by the job satisfaction and productivity of its employees. The productivity and job commitment of the company’s employees is evident by the fact that British Airways was declared the best Transatlantic Airline at the 2012 World Airline Awards at Farnborough Air Show, ahead of Lufthansa and Swiss International Airlines. This award serves as a benchmark for passenger satisfaction levels and is based on customer satisfaction levels across all cabin travel types including First Class, Business Class, and Economy Class. British Airways is especially noteworthy because it beat over 200 airlines around the world to win the award (World Airline Awards).
British Airways’ mission is ‘to be the undisputed leader in world travel.’ (Johnson, Scholes and Whittingdon). The company’s strengths have important implications for the company as well as its mission. A brand is an identity for an organization and it helps create perceptions about a company in the customers’ minds. A strong brand also gives British Airways pricing power and as the company wants to be a leader in air travel, it needs a strong brand that becomes synonymous with unrivaled air travel experience. A strong brand will help the company achieve its mission and if we think about other industries, we observe that one of the most common traits shared by industry leaders is a strong brand whether it is Microsoft in operating system market, Ferrari in sports car market, Toyota in mass-manufacturing automobile market, or Apple in mobile communication market. Similarly, British Airways also need a strong global network in order to become an industry leader as well as achieve its mission. If British Airways doesn’t service, directly or indirectly, most of the places its customers want to go, it will have a hard time developing perceptions of being an industry leader in the market. A vast global network enhances customer satisfaction and increases their loyalty to the company because they can depend upon the company to meet most if not all of their travel needs.
The company also needs capable leadership and a board of directors that takes its job seriously if it wants to become the industry leader and fortunately, British Airways is in capable hands. The expertise and experiences of the leadership team are evident by the fact that their opinions are sought in various industry matters such as safety and control. Similarly, an independent board of directors keeps a close check to make sure management serves the interests of various stakeholders. In order to become an undisputed industry leader, British Airways has to be guided by a leadership which has a deep knowledge of how industry works, the nature of the competition, and what bold steps may be needed to strengthen company’s competitive position. By merging with Iberia and now focusing on BMI, leadership has been acquiring assets and capabilities that will bring it closer to achieving its mission.
Weaknesses: One of the company’s weaknesses is unionized labor force. They may limit the company’s ability to restructure its organizational model to improve efficiency and may also prevent the company from fully utilizing the potential benefits of BMI acquisition. The case study mentions that unions have already expressed skepticism over some of the benefits of BMI acquisition and have indicated they would resist any lay-offs or reduction in employee benefits. Another company weakness is its capital structure which is mostly current and non-current liabilities. While this may be true for the rest of the industry as well since all air travel companies have to make significant capital investments, it also means that any merger or acquisition that fails to achieve its objectives may not only threaten the company’s competitive position but even its survival. British Airways’ weaknesses also include its size which is already huge and the merger with Iberia has only further expanded company size. As organizations become large, diseconomies of scale may kick in because monitoring and control processes become more difficult. Monitoring and control may even be more difficult in British Airways case because the organizational cultures of British Airways and Iberia may be significantly different.
British Airways need to take steps to minimize the potential threat from weaknesses because it will not only negatively affect profitability but also prevent the company from achieving its mission of unrivaled industry leader. First of all, unions have shown to be great influence over the strategic decisions made by the management because they represent a large number of company’s employees. Sometimes, lay-offs are necessary to reduce wasteful duplication of resources and similarly, benefits may also have to be reduced or their formula to be changed to ensure company’s competitiveness. Airline industry is already characterized by huge expenses and low profit margins and frequent fluctuations in oil prices only further complicate the issue. British Airways and Iberia have merged and it is very likely they may have to lay-off some workers. Similarly, the companies are expected to incur significant expenditures to integrate their operations so that they can become more competitive in the industry. These expenditures may likely force the merged companies to incur losses for the next few years and unions’ lack of cooperation in this regard may only increase the losses as well as prevent the merged companies to achieve synergies. British Airways will have a difficult time achieving its mission if it is still inefficient in terms of operations and burdened by huge expenditures which significantly hurt its profitability and liquidity positions.
The company’s capital structure, mostly consisting of debt negatively hurts profitability and liquidity due to interest and principal obligations. The merger with Iberia and the potential acquisition and integration of BMI operations may result in additional debt. A company striving to be an industry leader also has to ensure liquidity and profitability and British Airways debt obligations may exceed obligations and may even force it to terminate some routes or services. Similarly, the company’s growing size may increase inefficiencies as well as negatively affects its ability to provide the same levels of customer service for which it is known.
Opportunities: British Airways already has a strong presence in its home market and Europe but the growth potential may be declining due to strong competition and saturated markets. But there are other markets such as Africa, Latin America, and Asia where growth potential may be significantly larger. This may be one reason why it has merged with Iberia which has strong presence in Latin America. The two companies now have more resources and will also be able to free some resources from markets with duplicate operations to focus on Asia and Latin America, specifically. Another opportunity for British Airways lie in owning fewer jet models because doing so will help reduce maintenance costs and may also enable the company to benefit from discount pricing on large orders. This strategy will be similar to U.S. based Southwest Airlines whose entire fleet consists of Boeing 737 (Spiegel). This strategy may be particularly suited to short-haul flights as the two merged companies have plans to increase short-distance coverage within Europe and possibly Latin America. British Airways understands it cannot achieve its mission unless it covers a significant number of short-haul routes. Doing so will also help the company improve customer loyalty as well as profit margins.
Another opportunity for the company lies in starting a service on the model of Lufthansa unit, JetBlue Airways which is targeted at business travelers. It is quite unlikely Lufthansa will be willing to part with JetBlue Airways which has an attractive business model and is profitable, earning a net income of U.S. $86 million during the fiscal year 2011 (JetBlue Airways). An airline service aimed at business travelers has several benefits. First of all, business travel segment has great growth potential due to globalization as business travel will continue to grow. In addition, business travelers are less-price sensitive than an average passenger who takes a trip for private reasons. Thus, British Airways may be able to charge premium prices due to better services. Another benefit of this strategy is that there are still very few airlines that offer a service particularly aimed at business travelers, thus, the competition is still low. This strategy may also suit the two merged companies because many countries in Asia and Latin America have been enjoying strong economic growth and their participation in international business has been growing accordingly.
Threats: One of the threats to British Airways, as is to every other airline, is fuel prices. The fuel and oil costs were approximately £3.25 billion during the fiscal year 2011 (British Airways) and was the single largest component among operating costs. The oil prices often fluctuate due to a wide range of factors such as production and political factors that are outside companies’ control yet have material impact on many industries including air travel industry.
Another threat facing the company is increasing competition from regional players who are focusing on selected markets or customer segments to achieve competitiveness. Such competitors are smaller in size, thus, they may be better equipped to meet the needs of their targeted markets, especially those who are price sensitive. Such competition may negatively affect British Airways profitability in regional or short-haul routes. Similarly, the company is also faced with the threat of legislations that may increase costs and make it even more difficult to earn profits in an industry that is already characterized by intense competition and low profit margins. Such legislations may directly increase production costs such as emission requirements or indirectly hurt British Airways competitiveness by placing restrictions and/or requirements on future acquisitions.
All of these threats may have material impact on the company’s ability to remain competitive and profitable as well as achieve its mission of becoming an undisputed industry leader. British Airways has already been taking or can take several steps to counter or minimize the impact of these threats. British Airways understands that it is essential to minimize the impact of fuel and oil prices fluctuations to remain competitive and become an unrivaled industry leader and the company has already been taking measures. For example, the company is focused on generating higher revenues per flight to lower average passenger fuel cost. The company has also been working with U.S. energy company Solena Fuels Corporation to establish Europe’s first sustainable bio-jet plant. The company also makes use of oil derivates (British Airways) in forward markets to achieve a certain degree of hedge against fuel prices fluctuations. The company may continue to watch the competition closely and match their prices, especially low-cost regional carriers. British Airways could employ smaller and more cost-efficient jets to service these regional companies in order to stay competition. As far as legislation threats are concerned, British Airways could work with other industry players to increase self-regulation by the industry so as to discourage regulations by elected political representatives and government bodies which may do more harm than good.
BMI Assessment: British Airways has its eyes on British Midland (BMI) because the company believes BMI will help improve its competitiveness and profitability. First of all, BMI may help British Airways increase long-haul coverage by improving company’s share of Heathrow Airport’s slots. The company will also be able to improve its short-haul coverage by using low-cost hubs such as Gatwick. As a result, profitability will improve due to economies of scale, especially due to increased capacity at Heathrow which is a strategic international hub. Thus, BMI acquisition is a strategic fit into British Airways ambitions to become unrivaled industry leader.
BMI acquisition will also yield several other benefits to British Airways. First of all, the increased capacity will help British Airways take better advantage of increased travel due to globalization. Most industry competitors have decreased their short-haul routes within Europe which tend to be less profitable. This presents a great opportunity to British Airways to grab customers that are being ignored by other airlines. By improving goodwill with customers, British Airways will also have a great opportunity to market other routes and services.
The airline industry is intensely competitive and most of the customers are price-sensitive. This presents very few opportunities to improve profit margins through higher prices. Thus, the next best alternative is to improve profitability by reducing costs through economies of scale. BMI may even be better fit than Iberia because British Airways expect to break even in medium-term. The best thing about BMI acquisition is huge potential for synergies because BMI also has a major presence at Heathrow. The acquisition may also help British Airways create more optimal networks given operating costs and traffic flow because the company will have more options regarding routes.
BMI acquisition is also attractive because it will not result in huge financing need for the company. Lufthansa is actively looking to off-load BMI which means British Airways will get an attractive deal terms. Adding capacities in airlines industry is often an expensive task but British Airways is doing so at very attractive terms. BMI acquisition is also desirable because BMI operates routes to Central Asia, Middle East, and Africa which are all fast-growing markets.
British Airways. “Annual Reports and Accounts.” Annual Report. December 31, 2012.
Board of Directors. 20 September 2013 <http://www.britishairways.com/cms/global/microsites/ba_reports0910/corpgov/board.html>.
British Airways Media Centre. 15 February 2013. 20 September 2013 <http://press.ba.com/?p=3019#more-3019>.
JetBlue Airways. JetBlue Announces 2012 Annual Profit. 29 January 2013. 20 September 2013 <http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-newsArticle&ID=1778805&highlight=>.
Johnson, G., K. Scholes and R. Whittingdon. Exploring corporate strategy. 7th. Harlow: Pearson Education Limited, 2006.
Spiegel, Brian. What Kind of Planes Does Southwest Airlines Fly? 20 September 2013 <http://traveltips.usatoday.com/kind-planes-southwest-airlines-fly-62394.html>.
World Airline Awards. The Best Transatlantic Airline. 20 September 2013 <http://www.worldairlineawards.com/awards_2012/atlantic2012.htm>.
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