British airway has privatised in 1987 and after that it was more profitable. In 2008 British airway has made profit of £813 million pound but it has great deficit 2009 and 2010. Due to credit crunch and now recession, economy is building slowly so British airway is moving towards big environmental change towards their polices and procedure to make British airway a better UK airline. British airways have lot of partnerships and alliance and in January 2011 British merged with Spanish Iberia airline and made international consolidated airlines group S.A. (IAG). (British airway website)
Resource based view
The resource base view is basically, tell us the internal capabilities of organisation and these internal capabilities can be use to formulate strategy which further to apply on organisation to develop sustainable growth and get competitive advantage within its market where organisation operates.
In sample words internal capabilities of organisation can be utilise to build strategy which will work in competing in its external environment.
Resource based view of British Airways
Resources
Competencies
Threshold Capabilities
Threshold Resources
Tangible
British Airways has 238 aircraft accessing over 300 destinations and plus 42 order (British Airways, March 2010).
British airways has employees of around 3,5920 in UK & overseas 5,574 so total =41,494 (annual report 2009/10 of British airways
British airways additional services are The London Eye Company (appendix)
Intangible.
A Goodwill
British airways Partnerships & Alliances are American Airlines and Iberia transatlantic joint business, (British airways)
Central Customer Database (appendix)
Threshold Competencies
British Airways Flight Safety course was developed for companies that are conscious about Health & Safety and caring their personnel safe when travelling. Flight simulators and cabin safety training (BAFT, 2011).
British Airways (BA) needs to be able to fly and manage passengers safely on its
Various routes (Phil Davies, 2000; Cranfield School of Management )( In appendix)
Economies of Scale from ongoing suppliers.(in appendix)
Capabilities for competitive advantages
Unique Resources
Tangible
Heathrow Terminal 5
Intangible
Strong brand image. BA is recognised globally as a reputable brand, reinforced by its long-standing existence within the industry.
Core Competencies
The British flag carrier has become the first airline to achieve the City & Guilds Approved Centre Status. This now means new entrants on the cabin crew-training programme are eligible to obtain a National Vocational Qualification (NVQ) Level 2 – equivalent to 5 GCSE’s (British Airways press office 7 February, 2008).
Fuel-efficient Boeing 757 aircraft never have more than 64 passengers per flight. (British airway)
SWOT Analysis of British Airways
Strengths
Weakness
Strong brand reputation
Customer loyalty
Good customer services
Fleet
Big financial size
Frills
Partnerships & Alliances
Bad relation with employee on pay rise
BA continues to have extremely high debts
Employee strike
Delays in flight or cancellations
Opportunities
Threats
Explore new market routes
Heathrow sixth terminal will open by 2020
Decrease in cost
Terminal 5
Fuel costs
Big competition with same routes
Virgin and other air lines
Global economic crises
Sky routes agreements
Terrorist attacks
Increase of competition in the low-cost airline market
volcanic disruption
The SWOT analysis explores the relationship between the environmental influences and the strategic capabilities of British Airways compared with its competitors. Source: Jill Shepherd: page 118. Swot analysis helps us to determine the strengths, weakness, opportunities and threats of an organisation.
PESTEL Analysis of British airways:
PESTEL analysis helps us to determine the political, economic, social, technological, environmental, and legal influence on organisation so here I am doing pestle analysis of British airways and determine six elements which can be influence on organisation.
Factors
Description and influence
Political
Government regulations in (AEA 2009) on reducing inconvenience caused to air passenger due to delay, cancellations and denied boarding is likely to cause an increase to cost for British airways.
Security threats forced the government to implement stricter security policies. The costs of these policies have been passed on to the consumer.(DFT 2008)
British pilots association is pressurizing for hiring of pilots based in UK. This action will increase the costs for UK based airlines ( British airways Ryanair, Easy jet etc)
Economic
Increasing fuel cost puts an extra pressure on the cost structures of all the airliners in industry. Chart in appendix shows the fuel prices since 2008 to 2011.it shows 2008 fuel prices were very high. So it’s directly impact to consumer as well as British airways.
Increasing calls for taxing aviation fuel and making the aviation to become part of emissions trading scheme which could increase the cost.
Mеrgеrs аnd аcquÑ-sÑ-tÑ-ons by nаtÑ-onаl аÑ-rlÑ-nеs аnd low-cost аÑ-rlÑ-nеs cаn bе а drаmаtÑ-c dÑ-ffеrеncе on mаrkеt shаrе, BrÑ-tÑ-sh AÑ-rwаys аnd pаssеngеr numbеrs. The British Airways merger with Spain’s Iberia was finally completed on January 21, 2011, formally creating the International Airlines Group, IAG & this news impact increase in market share.
Social
People have started spending more money on travel and holidays abroad. Ageing people are tend to live longer therefore the airline needs to focus more on supporting elder people who needs support in the airport and for disable passengers. Ageing population can help the business of the airline, as the retired populations then to have more leisure time and spending power to travel. British Airway has provided very systemic disability assistance facilities (British Airway, 2010).
Technological
Online booking services and check-in is becoming increasingly used by the airline industry. E-Tickets are now the standard ticket format used by BA, making flight ticketing more straightforward, flexible and secure
Availability of in flight mobile phone service. This is useful to increase the ancillary revenues.
Environmental
Environmental concerns regarding the carbon emissions could result with environmental taxes for airline industry which will directly affect British airways and its peers.
New fleet with less emissions and lower sound pollution. The consequences will subsequently be positive for British airways.
Legal
Open skies agreement which changes the regulatory landscapes significantly
Government regulations imposing a ceiling on pilot flying hours to prevent dangerous fatigue. Therefore British airways could not force pilots to fly more than a precise number of hours per week.
Porter five forces analysis of British airways
The five forces model was developed by Michael porter of the Harvard Business School is powerful in its ability to describe many market situations. So here I am exploring British airways market situation through five forces model. Five Forces model will enable BA to make strategic decisions in order to increase profitability. Source: (Luffman, Lea, Sanderson & Kenny ) ; 1996 page 49.
Reference:http://image.shutterstock.com/display_pic_with_logo/5880/5880,1261995816,2/stock-photo-competitive-rivalry-porter-five-forces-business-diagram-434985
Bargaining Power of Customers
Force
Strength
Customers are highly price sensitive therefore customer wants great service on affordable rate. So low concentration of buyers to suppliers means they have little bargaining power. Buyer power is strong especially in the low-cost market, as there is little differentiation between market offers.
Internet usage has given awareness to customer to find better deal online.(appendix shown the increase of internet user)from 2000 t0 2010
Medium
Bargaining Power of Suppliers
Assess the power of suppliers to British Airways
Aircraft suppliers has high bargaining power
Recognition of the secondary rules established by IATA which includes the period of use of a land slot and re-timings of existing slots for specific reasons which are given priority over completely new slot demands.(IATA,2010) (Reference of web in bibliography)
BA restricted by sole supplier fuel suppliers (Air BP is the sole supplier of fuel at the airports)
BA employees use collective bargaining through trade unions in order to increase their bargaining power
High
Threat of new entrant
The threat of new entrants will depend upon barriers to entry such as
Expected retaliation: Price and advertising barriers
Product differentiation
Regularity policy or legislation
Economies of scale
High Capital requirements of cost entry
competitive environment
Availability of supply and distribution channels
Low
Competitive Rivalry
Competitive rivalry measures competition in an industry. A mature industry with very little growth; companies can only grow by stealing customers away from competitors.
BA operates both short haul and long haul flight. There is little differentiation in term of price of product and services they offer to customer in long haul flight.
BA merges and alliance has strong impact on virgin and other competitors. In this way they increases customer attraction in new market and which also increases market share. In January 21, 2011 Spain’s Iberia airline merger with British airways.
High
Threat of Substitutes
The threat of substitutes refers to the ability of buyers to switch to an alternative type of product, hence alternatives to air travel. While it is fair to suggest that there is no real alternative to long haul air travel in terms of time and cost, the alternatives for short-haul destinations do exist, and vary from coach to car to rail. Short haul flights: the fast train Long haul flights: no notable substitutes.
Low
Task 2
Porter’s Generic Strategies:
Every business and company can gain and obtain competitive advantage through many ways such as differentiating its products and services from their competitors through low costs. It has been stated by porter that there are three simple approaches which companies can obtain competitive advantage which are
Cost leadership
Differentiation
Focus
Source: M.E. Porter, Competitive strategy (free press, Glencoe, 1980)
Cost leadership
Cost leadership strategy means producing products or services at low price for sensitive consumers. The company with lowest costs would earn the highest profits. When they competing products are essentially undifferentiated and selling at a standard market price. Companies adopting this strategy create cost reduction in every activity in the value chain. When I compare British airway to low cost leadership strategy of Ryanair, I found Ryanair is low cost. British airway is progressing towards high value. They belief that they give value to customer through high quality services and charge them with premium prices. They belief that providing good quality service makes their image brand strong. In 2009 BA has loss of £401 million. So CEO of BA decided to cut down revenue of 1 Billion pound to survive British airways from deficit. This measure also affects the staff big pays cut to 2.60 percent from October 2009 and CEO of British airways have also cut down their allowance up to three year. Low Cost strategy of BA also decided to close down those routes which are not beneficence. It means their leadership strategy want to cut down on spending, this action help British airways to stay in competition in market.
Differentiation
Differentiation requires strong marketing and often R&D as well as distinctive requirement from people. Further the product has to be perceived by customer as offering something unique to their competitor and which want to pay a premium.
Highly competitive environment British airway strategy is one of differentiation. Management of BA belief that providing highly services give them premium price so this way the policy of BA shows right people are employed for right job. So BA are giving training to their employees to get better customer services result so in this way they do not want any of their employee miss these training programmed. The CEO of BA wants they will look after their valuable customer. So this way they want to target focus group to find out about customer value and needs.
The British airways differentiates toward their products and services for example
BA strategy toward this is “BA airport lounges are includes as total package. In total packages BA provides “drink to telephone ” are free for their premium passenger and it also includes fast track check-in channel have installed to enable premium passenger with minimum time pass to immigration and customs.
During flight, BA wants that cabin crews are highly visible throughout the flight; research shown that this create a high level of customer satisfaction. British airway also introduced sleeper service for first-class customer on long distance journey.
“As differentiation strategy if BA cannot compete effectively on price across the broad market than, the cost leader must ensure to control expenses of organization. As we know that “the differentiation strategy defiantly works if organization provides unique service around the competitive environment.
Focus
Michael porter focus strategy means that company should chase those market routes which have least amount of competition. Focus strategy is divided in three segment Mass, local, and niche. Focus strategy is also known as a niche strategy. This entire segment can be use by companies to boost sale of fair trade product and increase the consumer satisfaction.
Stuck in the middle
According to Michael porter those companies which stuck in between differentiation and low cost has not got competitive advantage. Example of British airways, they have started low cost short haul flight and long haul flight in market. They found that their image brand was deeply affected.
Financial analysis of British Airways
I have taken financial ratio from British airways financial statement from 2008 to 2010. Now I am analysing British Airways performance since March 2008 to the year March 2010. I will see some changes that occurred whether it was in their return on asset, or Revenue, Current ratio, and other more. Bear in mind that the number down are in £ million. Now I am analysing British Airways and showing you some Graph stating how is British Airways financial condition, whether it is performing well or not.
Return on Capital employed ROCE 2008
31-Mar-2008
£ million
profit before tax
922
Net interest payable
64
∑ =
986
shareholder fund
2659
long term borrowing
2971
minority interest
200
∑ =
5830
ROCE =
Profit before interest and tax/long term capital Ã- 100
ROCE=
986/5830Ã-100
=16.91
%
Return on Capital employed ROCE 2009
31-Mar-09
£ million
profit before tax
401
Net interest payable
87
∑ =
488
shareholder fund
1646
long term borrowing
3074
minority interest
200
∑ =
4920
ROCE =
Profit before interest and tax/long term capital Ã- 100
ROCE=
488/4920Ã-100
=9.91
%
Return on Capital employed ROCE 2010
£ million
Mar-10
profit before tax
531
Net interest payable
137
∑ =
668
shareholder fund
1913
long term borrowing
3446
minority interest
200
∑ =
5559
ROCE =
Profit before interest and tax/long term capital Ã- 100
ROCE=
668/5559Ã-100
12.01
%
Assets turnover 2008
31-Mar-08
£ million
Calculation =
Asset Turn over
Asset turn over
Sale/ Capital employed
=
8758 / 13320
£ =
0.65
Assets turnover 2009
31-Mar-09
£ million
Calculation =
Asset Turn over
Asset turn over
Sale/ Capital employed
=
8992 / 12339
£ =
0.72
Assets turnover 2010
31-Mar-10
£ million
Calculation =
Asset Turn over
Asset turn over
Sale/ Capital employed
=
7994/ 13150
£ =
0.60
Net profit 2008
31-Mar-08
£ million
Net profit
Calculation
total expenses – total revenue
=
7880-8758
Net profit =
878
Net profit 2009
31-Mar-09
£ million
Net profit
Calculation
total expenses – total revenue
=
9212-8992
Net loss =
(-220)
Net profit 2010
31-Mar-10
£ million
Net profit
total expenses – total revenue
Calculation
=
8225-7994
Net loss =
(-231)
Gross profit % 2008
31-Mar-08
£ millions
Gross profit %=
Gross profit/sale Ã- 100
=
1971/8753
=
22%
Gross profit % 2009
31-Mar-09
£ millions
Gross profit % =
Gross profit/sale Ã- 100
=
1140/8992
=
12%
Gross profit % 2010
31-Mar-10
£ millions
Gross profit % =
Gross profit/sale Ã- 100
=
981/7994
=
12%
Operating profit margin 2008
£ million
2008
operating profit margin =
operating income÷ sale
=
873÷8758
=
0.099
=
10%
Operating profit margin 2009
£ million
2009
operating profit margin =
operating income÷ sale
=
(-220)÷8992
=
(-0.024)
=
-2.4%
Operating profit margin 2010
£ million
2010
operating profit margin =
operating income÷ sale
=
(-231)÷7994
=
(-0.028)
=
-2.8%
Current Ratio 2008
31-Mar-08
£ million
Current Ratio =
Current assets / Current Liabilities
X: 1
=
3111/3492
0.89 : 1
Current Ratio 2009
31-Mar-09
£ million
Current Ratio =
Current assets / Current Liabilities
X: 1
=
2346/4142
0.56 : 1
Current Ratio 2010
31-Mar-10
£ million
Current Ratio =
Current assets / Current Liabilities
X: 1
=
2674/3740
0.71 : 1
Acid Test Ratio 2008
31-Mar-08
£ million
Acid Test Ratio=
Current Assets – Stock / Current Liabilities =
X : 1
=
3111- 109 /3492
=
0.85: 1
Acid Test Ratio 2009
31-Mar-09
£ million
Acid Test Ratio=
Current Assets – Stock / Current Liabilities =
X : 1
=
2346- 125/4142
=
0.53 : 1
Acid Test Ratio 2010
31-Mar-10
£ million
Acid Test Ratio=
Current Assets – Stock / Current Liabilities =
X : 1
=
2674- 98 /3,740
=
0.68 : 1
£ million
Ratio Analysis
2008
2009
2010
ROCE
16.91%
9.91%
12.01%
Asset Turnover
0.65
0.72
0.60
Net profit
878
(-220)
(-231)
Gross profit
22%
12%
12%
Current Ratio
0.89 : 1
0.56 : 1
0.71 : 1
Acid test Ratio
0.85 : 1
0.53 : 1
0.68 : 1
Graph A
Source: Word Excel used
2008
2009
2010
Revenue
8758
8992
7794
Cost of goods sold
3549
4571
3942
Loss or Profit before tax
922
(-401)
(-531)
operating income
873
-220
-231
operating Profit margin %
10%
-2.4
-2.8
British airway operating profit margin performance
Operating Profit Margin %
2009/10
-2.80
2008/09
-2.40
2007/08
10.00
British airway operating profit margin performance graph
Graph B
Source: word excel used
Fuel cost
British Airways use more than six million tonnes of crude oil in a year. Fuel cost plays an important role in deciding operating results of BA. The prices oil and petroleum products are very uncertain and the price risk partially hedged through the purchase of fuel derivatives in the market, can achieve a gain or loss. As we know the prices of fuel were at the highest, which gone up by 44.5 per cent to £2969 million in 2009, as compared to £2055 million and £1931 million in 2008 and 2007 respectively.
British airways overall Performance
When I see return on capital employed ratio from 2008 it was 16.91 % but compared to 2009 it is falling to 7% and little rise 2.1% in 2010 compared to 2009.
When I see revenue there is small increase in 2008 to 2009, but huge decrease of 1 billion pounds in 2010. Asset is so far increases 0.07 in 2009 compared to last year performance, but down 0.12 percentage in 2010, so it’s clearly shows if British Airways want to increases its overall success it will need to increase their asset annually. British Airways is always on time to purchase many Boeing Aeroplane in order stay in a good financial position, because the more assets the greater return of money. As you can see there is big decrease in the current ration, 2008 compared to 2009 but 2010 there is small increased compared to 2009.
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You will see in B graph, that so far for the performance from 2007 to 2008, British Airways are in an uptrend, with a 10 percent increase. But 2008 to 2009 it has down 8.60change compared to last year performance, but 2009 to 2010 it has also down 0.40 changes. So British Airways are not in good condition, but they might still be aware of economical changes. British airway has gained profit before tax £922 million pound in March 2008.
British Airways has its biggest annual loss due to lower passenger numbers, higher costs and the impact of strike action.
British airway has biggest lost since it was privatised in 1987.BA has lost before tax £401m in the 2008-9 financial years and British airway has lost before tax £531 million in the 12 months to March 2010.
Strategic Options analysis:
Strategic analysis is all about the analysis of organisation position and understanding the important external factors that may influence that position. The process of strategic analysis can be helped by various ways which are PESTEL, SWOT, and porter five forces. Strategic options will now be apply on British airways to consider further in terms of suitability, acceptability and feasibility.
British airway achieve goal through segment, so BA compete more in long haul market as compared to short haul i.e. Virgin &Ryanair.
SUITABILITY
SUPPORTS STRATEGY?
British Airway compared to Ryanair is high cost in price strategy. They belief that providing high value services gave them premium price. (Porter five forces & porter generic strategy)
ü
They belief that their competition stood in long haul market as compared to short haul. Before they compete in short haul flight, they found their strong image has wrong impact. (Porter five force & porter generic strategy)
ü
Strong brand image remain through high value services and premium prices. (Porter generic strategy)
ü
2009 BA has loss of £401 million. So CEO of BA decided to cut down revenue of 1 Billion pound to survive British airways from deficit. (Financial analysis)
ü
BA also decided to close down those routes which are not beneficence. It means their leadership strategy want to cut down on spending, this action help British airways to stay in competition in market.
ü
British Airways’ first-class and business-class passenger numbers fell by 20 per cent. ( The Sunday Times ;David Robertson; March 5, 2009 ) ( SWOT analysis) &In appendix
û
ACCEPTABILITY
SUPPORTS STRATEGY?
British airways Strategy works when they compete in long haul flight as compared to short haul flight.(porter generic strategy)
ü
In this deep recession, businesses are shutting so they should think deeply about cost differentiation ratio.
û
The benefits should also be sustainable through strong brand image and preference.
( Porter generic strategy) & (Resource base view)
ü
FEASIBILITY
SUPPORTS STRATEGY?
British airway has kept big competition in long haul market i.e. Virgin and other airlines, so they are looking deeply in segmentation development; however they have strong brand reputation and their capacity. So management uses both to build British airways success.
ü
BA strategy is achievable through resource and employee performance as we know that passenger falling ratio, cost ratio & strike action of employees make difficult for BA to achieve best goal. (financial analysis)
û
BA may have already missed the first mover initiative with specialists such as Virgin being so successful, the imitation BA would offer may gain little credit (SWOT).
û
Task 3
TOWs Matrix:
The TOWs matrix is a conceptual framework for future research about the combination of external factors and those internal to enterprise, and strategies base on these variables equally important, the matrix forces of their company and to develop strategies, tactics and actions for effective & efficient attainment of its organization objectives and its mission. A range of strategic options will now be formulated using the TOWs matrix to resolve the strategic issues highlighted from the analysis.
Source: The TOWs Matrix; a tool for situational analysis; Heinz Weihrich; professor of Management; University of San Francisco
External
Opportunities
Explore new market routes
Heathrow sixth terminal will open by 2020
Decrease in cost
Terminal 5
Internal
Strengths
Strong brand reputation
Customer loyalty
Good customer services
Fleet
Big financial size
Frills
Partnerships & Alliances
SO-Strategies
Focus on Segmentation
Supply chain migration.
Introduction of complimentary services.
Broader service offering.
Weaknesses
Not good relation with employee on pay rise
BA continues to have extremely high debts
Employee strike
Delayed in flight or cancelled
Strategies for opportunities to overcome weaknesses:
Create good environment to improve employee relation.
Advancement in new Technology.
Mergers and Acquisitions:
As we know that mergers and acquisitions have become one of the most important corporate-level strategies in the 21st century. So this strategy helps organization to improve growth in new markets. As British airway is growing continuous and company are merging with alliance such as American Airlines and Iberia transatlantic joint business, One world alliance Executive Club and airline, partners BA City Flyer, Franchise partners Open Skies, Code share partners, Private Connect – a private jet service in order to improve its capabilities and obtain more competitive advantage.
British airways Strategic Option
SUITABILITY
SUPPORTS STRATEGY?
British airway has very bad employee relation in past and present. Which is affecting BA Brand image (SWOT analysis )
ü
Internet users are increasing rapidly, so this type of mechanism can be use for feedback and improve relation. (porter five force)
ü
British airway current strategy is to making alliance & partnership to explore new making routes and increase market share.
ü
As we know that in current economic environment business are shutting and unemployment is rapidly increasing (PESTEL Analysis). So threats of industrial action are less.
û
One of big unique resource of British airway is terminal 5. (Swot analysis) this is opportunity for British Airway.
ü
ACCEPTABILITY
SUPPORTS STRATEGY?
Employees and customers are showing high interest for development of their relations within the organisation due to the negative past experiences.
ü
So BA latest alliance with Spain airline which increases their assets as well as market share.(RBV)
ü
This unique source (terminal 5) helps them
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