The Effects Of The Recession On British Airways Management Essay
The recent economic recession in many parts of the world have affected various industries and eventually, individual companies in several ways. Prices of goods and services have risen, causing the demand for goods and services to fall. Among the affected industries and companies is the airline and the British Airways PLC respectively. This has caused many organisations to adopt different strategies to dealing with the situation. While some have decided to merge the others are laying off its workers. However, as you have studied on your course, proper strategies cannot be drawn unless one has a good understanding of the situation in the business environment.
Identify the mission, Values and key objectives of the British Airways and assess the influence of stakeholders on the organisation.
Using PESTEL and any management tool you are familiar with evaluate the impact of macro economic policy measures and the influence of the global economy on British airways and its stakeholders.
Explain whether the problems facing the British airways can be found in a planned economic system and discuss whether the economic system in which the BA operates allocates resources better.
State the market in which the British Airways operate and discuss whether it is easy to merge in that type of market (regulatory environment implication etc)
Explain whether the British airways have benefited from international business/trade and the European Union. What will be the business implication to the BA, if the UK, joins the European Monetary Union (EMU).
The author also discusses how British Airways benefits from international business. Also the impact of European Union on British airways has been discussed along with the implications on British Airways if UK joins the European Monetary Union.
British Airways is a transportation company of the United Kingdom. On the 1st of September 1974, British Airways was formed. It was nationalized by the UK government. After 13 years of the formation of BA, it was privatized in February 1987. BA is known as a public limited company, as it is also listed in the London Stock Exchange. Its 2 main hubs are the London Heathrow Airport and the London Gatwick Airport. The organizational structure of British Airways is given below
Figure 1.1 - Organizational structure of British Airways ()
For the year ending March 2011 the turnover of British airways was £7994 million. But there was a net loss of £425 million because of heavy investment by British airways during the time of recession.
1) Identify the mission, Values and key objectives of the British Airways and assess the influence of stakeholders on the organisation.
Mintzberg (1997) says that a Mission statement is a formal statement that describes the organizations basic function in society, in terms of the products and services it produces for its clients.
The mission statement of British Airways is "To be the undisputed leader in world travel".
This means that British Airways wants to be the best and far ahead from its competitors.
Bennis & Nanus (1985) describes Vision as an image of a possible and desirable future state for an organization. It is an articulation of a realistic, attainable credible and attractive future.
The Vision of British Airways is "Worlds most responsible Airline".
The value that British Airways has is "Putting People First".
Objectives play a significant part in developing strategies. Strategies are likely to be less successful if objectives are not clear.
The objective of British Airways is to become the "World's Leading Global Premier Airline".
To become the world's number one airline British Airways is doing things like delivering excellent services to its passengers, decreasing costs in order to increase their profit level, diversifying and meeting the levels of customer expectations.
All organizations affect and are affected by different stakeholders. The aim of the management is to prioritise objectives and satisfy majority of stakeholders at most of the times. However, this involves opportunity cost for every decision made.
A list of British Airways stakeholders and their role is given below.
Due to service being a key part of BA' image employees have the power to influence customers. They have a major interest as BA provide their financial wellbeing. The workforce is heavily unionised, this increases the power of the employees.
Two airline suppliers, Boeing and Airbus. They have a high interest and power over BA as BA is a big source of income for them and BA in turn relies upon them. With only one supplier of fuel, they too have a high interest and power over BA.
Customers provide all of the sales but have low interest in how the company is managed. They still have a high impact as the goal is to attract more customers.
BA's main rivals within their strategic group have both a high interest and power in influencing BA's strategy. The oligopolistic nature of the market will affect the decisions BA make.
New legislation if introduced can have a great impact on the organisation but is not individualised to BA specifically.
Shareholders have a high interest due to aspiring to gain financially. They have high input into selecting board members and authorising new strategies.The shareholders must be well informed of the risks of the strategies and length of time before returns are expected and the size of those returns.
Financial support maybe required from Financial Institutions to fund strategies and even though BA has lowered it's gearing ratio and increased its liquidity. With the current conditions the institutions have great power over BA and can refuse finance.
BA continues to show corporate social responsibility including environmental issues and has a high power over its direction. BA must keep the local communities satisfied as they can severely damage BA's brand image.
British Airways believes in active engagement with stakeholders. They have well developed meetings for employee communication and consultation. They have an active programme of communication with investors, where plans are discussed. They communicate on environmental and social issues to their suppliers and request them to follow similar policies if suitable.
Stakeholders to some level have a link of dependency to the organization. Each stakeholder makes demands and has expectations from the organization. However, expectations may clash with other stakeholders. This may affect organizations in a negative way.
In 2005, wildcat action was taken by union members to lock out 670 workers and replace them with agency staff after a contract with British Airways was not renewed. It is estimated that the strike cost British Airways £30Â million and caused disruption to 100,000 passengers. In 2007, cabin crew threatened strike action over salary changes to be imposed by the British Airways Board. The strike was then confirmed but called off just before the start of the action, leading to British Airways losing £80Â million.
Virgin Atlantic has given British Airways a scorching run for its money on North Atlantic routes. BA's European short haul has been hit hard by competition from low cost airlines such as Ryan air and Easy jet. In addition, BA created its own enemy in Go - the subsidiary aircraft it sold to competition earlier. As a result of competition British Airways has to keep their pricing low and increase their services which are affecting their profit level.
Government and Community
Government is always having a close look on airlines and British Airways continues to be low on carbon emission level to be on the good side in front of the government and community.
2) Using PESTEL and any management tool you are familiar with evaluate the impact of macroeconomic policy measures and the influence of the global economy on British airways and its stakeholders.
PESTEL Analysis is an analysis of the external Marco-environment that affects all organizations. PESTEL stands for political, economical, social, technological, environmental and legal. Such factors are usually beyond the firm's control and sometimes they possess as a threat.
The PESTEL analysis of British Airways is given below
Implication on British Airways
The political factor includes antitrust regulation, tax laws, stability of government, alliance with different other companies. Politically, British Airways have to work with different operating restrictions. It has several benefits because of alignment with other companies which can approach in unapproachable routes. It is essential to maintain government policies and British Airways has QQA (Quality of Assurance)
Economic factors generally fluctuate, so it is very necessary to analyse it regularly.
At the moment British Airways has faced the worst recession. Being the international organisation it is very important to view world's economic fluctuation. The heavy investment in the time of recession is one of the biggest mistake which leads to £531 million loss before tax.
Social factors are crucial factors for any organisation. It includes life style, consumer activism, life expectancy and so on. Costs should be reduced with accordance social environment. These can develop the customer satisfaction. Indeed, British Airways was first airways to introduce carbon offset scheme to the passenger.
New legislation enforcing tighter environmental regulation may increase operational costs each year. Consumers are becoming increasingly
'Green' and more aware of the environmental impact of their actions. Failure to adopt an integrated environmental strategy could lead to a detrimental effect on the BA's reputation and income.
Restriction on mergers will have an impact on BA's proposed alliance with American Airlines. Good employee relations are essential if BA wants
to avoid industrial action and interrupted operations.
Basu (2008) says SWOT (Strengths, Weakness, Opportunities, and Threats) is a tool for analysing an organizations competitive position in relation to its competitors.
Strong brand name and brand image
Flights in more than 55 destinations
Variety of customer service
Lack of marketing strategy to win customer loyalty
Lack of proper management
Cutting flights to the US and Middle East
2012 Olympic Official Airline
High demand for flights
Asian market (fastest growing over the next 10 years)
Low fare airline companies
Increase in insurance/security costs
Figure 1.5 - SWOT Analysis of British Airways (http://www.speedyadverts.com/SATopics/html/leadership_in_tourism3.html)
British Airway's fiscal and monetary policies have been extremely affected by the September 11th attacks. Although this tragedy occurred several years ago, the effects on British Airways have surprised all. Instantly following the tragedy demand decreased, the base-ticket prices increased, along with added taxes. The workforce was hit with layoffs nationwide in the airline, and the travel industry as a whole was affected. The demand for airline tickets took a dip and British airways were forced to cut down costs. As a result of many people being afraid to fly and the rise of ticket prices a steep decline in demand caused some airlines to go into bankruptcy and had an adverse impact on British Airways.
The global economy has affected British airways in a negative was. Due to the recent recession the demand of tickets decreased which meant lower sales for British Airways. Also investment in the time of recession led to £531 million loss before tax. As there was a decrease in sales and profit it was difficult for British Airways to be "the undisputed leader in the world". Shareholders were also affected in a negative way by the global economy as some employees were made redundant, shareholders were not getting the returns expected and also Financial Institutions were affected because British airways was not returning them the money lent to them on time.
3) Explain whether the problems facing the British airways can be found in a planned economic system and discuss whether the economic system in which the BA operates allocates resources better.
Figure 1.6 - Types of Economies (Viva Books 2009)
Strikes have affected BA in a negative ways
In 2005, wildcat action was taken by union members which cost British Airways £30Â million and caused disruption to 100,000 passengers.
In 2007, cabin crew threatened strike action over salary changes to be imposed by the British Airways Board. The strike was then confirmed but called off just before the start of the action, leading to British Airways losing £80Â million.
British Airways has faced the worst recession. Heavy investment during the time of recession meant a heavy loss of £531 million loss before tax.
British Airways introduced its first fuel surcharge in May 2004, adding £2.50 to the price of long haul and short haul fares. Due to the constant increase in fuel prices British Airways profit margin s going down and also customers are choosing low cost airlines which are also having a negative impact on their profit level.
Had British Airways been in a Planned Economy the scenario would have been different. British Airways would not have been affected by increase in fuel price as the government would keep on providing subsidies in order to maintain the same level of oil price. Strikes would also not take place in this type of a system as everything is controlled by the government so there would be no one to negotiate with. Recession would also not affect British Airways in a Planned Economy as people would be having limited spending power so they would spend only that much so there would not be a decline in GDP.
Mixed Economies are intended to combine the best of both free economy and planned economy. As mixed economies is a mixture of both the allocation of resources are more efficient as products or services which are provided are done by both the public sector and private sector with aims of satisfaction and profit as well . As a result the employees work efficiently due to high motivation and there are no monopolies so it is beneficial for consumers as well. Reports show that inefficiency is rife, waste and pollution are at alarming levels when there is a planned economy. However, planned economy may give work to everyone. Yet, For example there is free education and health care as well paid high class education and health care for those who can afford. So consumer needs are fulfilled as well as most of their wants. Therefore allocation of resources is much efficient in mixed economies than in planned economy.
McDonald & Dunbar (2004) say Market is an aggregation of all the products and services which customer regard as being capable of satisfying needs.
Figure 1.7 -Types of Markets (VIVA books 2009)
The type of market in which British Airways operates is Oligopoly. It is because in the UK there are many airlines along with British airways, like Easy Jet Airlines, Flybe Airways, Eastern Airways and many more.
The advantages of oligopolies are -
Oligopolies may be dynamically efficient in terms of innovation and new product and process development. The super-normal profits they generate may be used to innovate, in which case the consumer may gain.
Even though there are a few firms, making the market uncompetitive, their behaviour may be highly competitive which could mean lower prices.
Price stability may bring advantages to consumers and the macro-economy because it helps consumers plan ahead and stabilises their expenditure, which may help stabilise the trade cycle.
The disadvantages of oligopolies are -
Oligopolies can be criticised on a number of obvious grounds, including:
High concentration reduces consumer choice.
Cartel-like behaviour reduces competition and can lead to higher prices and reduced output.
Firms can be prevented from entering a market because of deliberate barriers to entry.
There is a potential loss of economic welfare.
On January 21 2011 British airways merged with Spanish carrier Iberia, creating Europe's third-largest airline in a deal meant to counter a slump in air travel following the global financial crisis. BA shareholders get a 56 percent stake in the new company. Annual revenue is estimated at around 12 billion pounds ($19 billion) from the merge. The pair also planned to expand their one world alliance with American Airlines suggesting that UK laws & EU makes it easier for airlines to merge.
5) Explain whether the British airways have benefited from international business/trade and the European Union. What will be the business implication to the BA, if the UK, joins the European Monetary Union (EMU).
British Airways had gone global in order to stay competitive. The advantages that British Airways has got by going global are - :
British airways were making domestic sales convincingly, so they went globally by which they attracted new customers internationally which increased the overall sales of British Airways.
Going Global meant more sales which meant they earned more profits then they would have earned domestically.
By diversifying globally British Airways was able to take advantage of booming places internationally which helped them increase sales and profits.
Reduction of dependence on traditional markets
By diversifying globally British Airways was not depending domestically so even a loss domestically could be covered by Profit internationally.
New knowledge, experience and enhanced domestic competitiveness
British Airways learnt new ideas, new approaches, new marketing techniques learned from going global which they also used in the domestic markets.
A group ofÂ EuropeanÂ countries that participates in the world economy as one economic unit is called European Union.Â The EU's goalÂ is to create a barrier-free trade zone and to enhance economicÂ wealth by creating more efficiency withinÂ its marketplace.
The impact of the European Union on British Airways are -
Increasing Competition- Laws have been introduced in the European Union to make aviation competitive which meant that British Airways had more competitors and therefore they have to keep prices low in order to be competitive and successful in the market.
Specific restrictions on liquids - laws have been made that airlines in the EU allow passengers to carry liquids or gel in a quantity of only 100ml. This means if a person wants to travel to a country via the EU countries he could chose other flights whose countries are more flexible in allowing to carry liquids.
European Monetary Union is the agreement between some members of the European Union to establish a common currency.
The implications of EMU on British Airways are -:
It will promote stable and low interest rates and low inflation- this means it will be beneficial for British airways as when they take loans they would have to repay at low interest rates which would mean higher profits. Also inflation would be low so people would spend more, thus travel more which would increase their sales and profits.
Exchange Rate fluctuations - exchange rates would not fluctuate this would mean people from countries of EU would have to pay the same amount. If they did not join and if the pounds increased against euro British airways might lose sales as people would be reluctant in spending more euro's then before. If UK joins EMU it will also remove the risk of currency depreciation which will be beneficial for mostly all UK businesses including British Airways.
Taxes- British Airways would have to pay higher taxes if UK joins EMU because the tax rates are higher which would mean a decrease in the profit level for British airways.