Global Airline Industry Issues - Dissertation Example

?The Global Airline Industry Table of Contents The Global Airline Industry Table of Contents 2 Task 3 Cost of ASK (Available Seat Kilometres) 3 Revenue per RPK (Revenue Passenger Kilometres) 3 BELF (Break Even Load Factor) 4 Employee Productivity 5 Task 2 5 Introduction 5 Main Findings 6 Appraisal of airline’s operating environment 6 Market Analysis 6 PESTEL 7 Appraisal of airlines internal capabilities 10 SWOT 10 Key issues Identification and Analysis 12 Conclusions 14 References 16 Bibliography 17 Task 1 The airline industry is one of the most attractive and highly capital intensive industry segments operating in the business market. The present study would try to analyse the airline industry by conducting a strategic analysis of British Airways. The study would also include a comparative analysis of the selected company with Emirates Airlines which is one of the most important competitors of British Airways in the international sector. Cost of ASK (Available Seat Kilometres) An available seat kilometre in airlines is calculated by multiplying the total number of seats offered by an airline and the total distance flown by an airline (British Airways-a, 2010). The Available seat kilometres for British Airways was found to be 141178 in 2010 which represents a decline from its previous year figures of 148504 in 2009 (British Airways, 2010, p.128). The statistics for its competitors Emirates airlines states the corresponding figures at 161756 which represent a rise from its figures last year that was quoted at 134180 (Emirates Airlines, 2010, p.4). The low value of ASK for British Airways can be largely held accountable to the financial downturn which put a pressure on the profit and revenue margins of the firm. Emirates airlines owning to better fleet management and route optimisation generated a much better performance than its competitor British Airways. Revenue per RPK (Revenue Passenger Kilometres) Revenue passenger kilometres (RPK) is calculated by multiplying the total number of revenue based passengers and the total air miles flown by the airline (British Airways-a, 2010). A good value of this statistic represents a healthy operational and financial aspect of the organization. The value of RPK for British Airways in 2010 was calculated at 110851 which represent a decline from its figures in the last year which was stated at 114346 in 2009 (British Airways, 2010, p.128). The slump in figures can be attributed to decline in the revenues per passenger as well as reduction in the total air miles flown due to route optimisation owning to pressures from the economic recession. The figures for Emirates airlines however show a distinct and definite opposite trend which is pegged at 126273 representing an improvement from its previous year’s figures of 101762 (Emirates Airlines, 2010, p.123). BELF (Break Even Load Factor) Break Even Load Factor or BELF is a value term expressed in percentage that represents a scenario in which revenues and operating costs become equal. This factor has different values for different flights and includes aspects like seasonal fluctuations and is largely based on the dynamics of demand and supply in the market (Radnoti, 2002, p.99). The Break Even Load Factor for British Airways was found to be 78.5 percent which represents a rise by about 1.5 percent from its figures in the last year. This was mainly reported due to a reduction in revenue from passengers by about 10.9 percent from the previous year (British Airways, 2010, p.16). The Break Even Load Factor for its competitor Emirates Airlines was found to be 64.4 percent which again represents a rise by about 0.3 percent from its corresponding figure quoted last year (Emirates Airlines, 2010, p.123). The major reason for this trend is accountable to the large scale dip in demand for air travel by business as well as individual passengers which was due to the reduction of disposable income and decline in profit margins of the other business travellers. The advent of low cost airlines has also led to a reduction in the revenues for the legacy carriers like British Airways. The dip in disposable income has made these low cost carriers more choice able for travellers both in individual as well as business class. Employee Productivity Employee productivity is largely measured as the revenue earned per employee after considering the cost borne by the firm for hiring a particular employee. The ratio of RTK to average manpower equivalent for British Airways in 2010 was pegged at 414.6 Pounds which represents an increase from its previous year figures that was pegged at 387.1 Pounds (British Airways, 2010, p.16). Employee productivity for Emirates Airlines was found to be 1459 AED which also represents an increase in figures from the previous year which was calculated as 1492 AED (Emirates Airlines, 2010, p.123). The increasing trend of Employee productivity largely reflects the growing operational excellence in the two organizations. Use of new aircrafts like Airbus A 380 coupled with improved demand forecast have led to a growth in the employee productivity of both these organizations. Task 2 Introduction The airline industry is one of the most capital intensive industry segments of the world. The impact of economic recession was largely felt by this sector which reported large scale losses owning to dip in demand following the global recession. According to a report published by IATA the global airline industry lost approximately 9.9 billion US dollars. This was largely on the backdrop of decline in passenger traffic by about 2.1 percent. Similar trends were also observed in the cargo segment as well with business levels dropping down by about 9.8 percent. The total revenue of the global airline industry fell by about 15 percent which in actual monetary values represents a whopping 479 US dollars. In addition to the aspects of demand and supply the airline sector was also impacted by the oil prices which started showing northward trends throughout the year. The oil prices were reported to about 90 dollar per barrel which represents an increase from its figures in 2009 that was quoted at 62 US Dollars per barrel. Certain other factors that had an impact on the profit margins of the airline industry also include high taxation and fuel surcharge imposed by the governments that has eroded the profit and revenue margins of the participants of the global airline industry (IATA, 2010, p.8). Main Findings Appraisal of airline’s operating environment Market Analysis British Airways is one of the oldest legacy carriers based in London UK. The company features among the top global brand sin the airline industry. The airline operates domestic as well as international flights from UK to other nations across the world. The company was established in the year 1930 and presently operates a mix of both passenger and cargo aircrafts to numerous destinations across the world (British Airways-b, 2011). British airways like its other counterparts were hit badly due to the impact of the global economic recession which led to a dip in the turnover of the company. Stiff competition within the internal market from low cost carriers and from other carriers in the international sector set a downward trend for the revenues and income of the company. The last quarter of 2009 started showing positive signals for the economy that resulted in growth of demand for the products and service of the airline. In an attempt to beat the market competition and to maintain consolidation within the market British Airways embarked upon a strategy of mergers and acquisition. The company merged with Iberia to create a mega consortium that would ensure consolidation in the market and would also beat the market competition to some extent (British Airways, 2010, p.20-25). PESTEL The external environment of an organization is largely influenced by the Political, Sociological, Technological, Environmental and Legal factors (Kay, 2010, p.23). Political Numerous political factors have a major impact on the sustainability of the participants of the airline industry like British Airways. Governmental factors like taxation largely help in determining the profit margins of an airline company. In addition to the policies of the local government in UK it is also affected by the government policies in the nations where British Airways operates international flights. Aspects like restriction own routes are largely outcomes of the governmental policy of a nation. The government also has the power to control competition in the market such as prevention of cartels considering the oligopolistic nature of the airline industry in UK. State owned carriers also play an important role in British Airways international sectors as governments try to enact legislations that seek to protect the local market players. Other aspects like security and safety standards are also determined by the government which shows the large scale influence of political aspects for British airways (Haberberg & Rieple, 2008, p.107). Economic Economic factors like GDP largely help in influencing the level of disposable income of individuals which has a widespread influence on the demand for the services of the airline industry. In addition a healthy growth rate also shows a good growth for business organization which leads to surge in demand for the services of players like British Airways. UK’s GDP in terms of purchasing power parity stands at 2.189 trillion US dollars as of the year 2010. The GDP growth rate for the nation in 2010 has been pegged at 1.6 percent which represents the fact that the economy has bounced back on the path of recovery which is a healthy and positive indicator for British airways whose business prospects are largely dependent on the overall economic growth of the nation (CIA, 2011). In addition to UK the airline is also largely impacted by the GDP and other macroeconomic indicators of markets where it has its operations. Sociological Sociological aspects largely include the behavioural and habitual aspects of the customers of the target market. In case of British Airways sociological factors largely includes: Element of price and selectivity. The advent of Low cost carriers like Ryanair has put pressures on legacy carriers like British Airways owing to their rock bottom prices. Sociological factors also involve the brand image and position g of an organization that largely helps in making a purchase decision (Uwagwuna, 2011). Technological Technological advancements like addition of new aircrafts as well as modernisation of airports constitute the factors that affect the business prospects of market players like British Airways. The fleet of new aircrafts acquired by British Airways helps in manoeuvring technological aspects to its favour in the business market. Environmental Environmental factors include adherence to norms that seek to reduce carbon emission in the environment. The government in its recent white paper has made it compulsory for airlines to ensure compliance with the environmental laws (CBI, 2006, p.13). Legal Legal factors include aspects like litigations pertaining to various laws. It also includes factors like legislations for mergers and acquisitions which are important for British Airways as it has entered into a merger with Iberia whose terms and conditions are dictated by the legal bodies of the nation. Appraisal of airlines internal capabilities SWOT SWOT is an acronym for Strengths, Weakness, Opportunities and Threats and is largely used to assess the internal business environment of an organization (Griffin, 2007, p.67). Strengths The main strengths of British Airways arise from the following facts: British Airways strong brand image that has evolved from its association in the airlines industry. World’s 2nd largest airline company Good operating revenues Operations spread across 75 nations Strong operations in the cargo segment which is a growing market with considerable potential for future demand. The company’s main operations are from Heathrow airport which is one of the busiest airports of the world. The strong financials of the company which includes a good operating margin helps in generating additional strong points for the organization. The airline also has presence in diverse markets across the world offering good connectivity (Datamonitor, 2006, p.19). The values of employee productivity also highlight the strong human resource base as well as operational efficiency of the organization. Weakness Weaknesses of the airline are stated below: Decline in revenue margins which is highlighted from its ASK, RPK and BELF values that have values which are not favourable for the organization. The dips in the values of these crucial aspects mainly arise due to the dip in demand following the economic recession. Over dependence on suppliers for aircrafts and fuel also emerge as some of its weaknesses (Datamonitor, 2006, p.19). Opportunities Opportunities for the airlines mainly arise in the markets of Asia pacific and other Asian nations like India and China which have good market opportunities. The growth in cargo traffic in the pacific region also shows significant opportunities for the airline. Recovery in the economic conditions also generates large scale opportunities for the organization in terms of increase in demand for its services (Datamonitor, 2006, p.19). Threats British airways faces threats from the low cost carriers whose no frills business model has emerged as a formidable challenge to the organization. The dip in disposable income and the propensity of customers to switch based on price has also generated pressures on the revenue margins of the company. The carrier also faces stiff competition from competitors like Emirates which has a favourable ASK, RPK and BELF values that has given the carrier a run for its money. Over dependence on suppliers for aircraft parts and high cost of switching also emerge as a threat for the organization. The rise in oil prices and dependence on external suppliers for fuel also emerges as a significant threat to the organization. Finally consistent dip in crucial indicators like ASK, RPK also pose considerable challenges for the organization (Datamonitor, 2006, p.19). Strategic issues in merger with Iberia Key issues Identification and Analysis The analysis of the airlines internal and external business environment of British Airways reveals certain areas that emerge as key issues for the organization’s sustainability in the market. These include firstly, finding out sources of funds during times of credit crunch in the market. This assumes significance considering the fact that airlines is a highly capital intensive industry and its expansion requires sufficient funds. Secondly the aspect of poor performance in ASK and RPK values implies dip in demand for the services which also reflects unutilised capacity. Thirdly the firm also faces strategic issues with regards to its merger with Iberia that has come under scanner. Fourthly the issue of intense market competition has led to pressures on the revenue and profit margin of the firm. British Airways also faces strong competition from the low cost carriers especially in the European markets. The dip in disposable income levels of individuals due to the economic recession has made these low cost carriers as a good alternative to legacy carriers like British Airways. The airlines also have numerous opportunities especially in the developing markets like India and China. The airline already has operations into these regions and also plans to add more cities in its network. The airline can use the hub and spoke model with London as the international hub from where it can provide easy connectivity to different locations especially around Europe. This would help the firm to leverage on the opportunities generated by the developing nations and to generate opportunities for the organization to beat the competition in the market. Finally the issue of rising oil prices and dependence on suppliers for spare parts and new aircrafts emerge as certain key issues that need urgent attention from the organization. Oil prices have started skyrocketing in the recent years that has eroded the operational efficiency of the airline. The price wars triggered by the advent of the low cost airlines have also intensified the competition in the market that has further eroded the profit margins of the company. The organization has responded favourably to all these issues. Considering the fact that aircraft manufacturing industry is a highly duopolistic market that is dominated by Airbus and Boeing. Hence it becomes extremely difficult to switch between these players as it becomes very costly to interchange the suppliers. This has provided them with large scale bargaining powers that have taken a toll on the revenues and operating margins of British airways. In order to tackle financing issues the firm has issued convertible bonds that have helped in generating about 350 million pounds in 2009 which was used to pay off debts and also acquire new aircrafts to augment the fleet and to increase capacity (British Airways, 2010, p.6). The operational efficiency as well as route addition and deletion of non-profitable routes have led to generation of operational efficiency that seeks to increase the number of passengers and reduce the cists thereby improving the BELF values. The company has also started low cost flights to cater to the competition in the domestic market. Certain other key issues for the organization involves adherence to the strict environmental protection laws which has made it necessary to induct newer aircrafts that have a lower emission. Conclusions British Airways remains one of the most successful brands in the airline industry even in the midst of a severe crisis in the economy that has put considerable pressures on the profit margins of the firm. The economic recession apart from large scale competition accentuated by the advent of the low cost carriers has also emerged as challenges for the organization. The company also faces threats from the suppliers as well as rising fuel charges. However the company with an established and formidable brand image has the capacity to reverse the challenges and take full leverage of the opportunities of the market to emerge as a global leader in the airline industry and maintain its sustainability in the industry. In order to achieve this British Airways should look towards consolidation in the domestic and European markets and should increase its association with global associations and alliances such as star network to increase its popularity. The company should try to identify routes that are profitable and should cut down on the loss making and saturated routes. Focus on growing markets like India and China can also reap advantages for the organization. Finally the company must also adopt a customer centric approach and inculcate strategies and practices that tend to increase the value proposition of the customers that would help it to emerge as a global leader in the industry. References British Airways. (2010). 2009/10 Annual Report and Accounts. [Pdf]. Available at: http://www.britishairways.com/cms/global/microsites/ba_reports0910/pdfs/BA_AR_2010.pdf. [Accessed on May 20, 2011]. British Airways-a. (2010). Glossary. [Online]. Available at: http://www.britishairways.com/cms/global/microsites/ba_reports0910/sitetools/glossary.html [Accessed on May 20, 2011]. British Airways-b. (2011). History and heritage. [Online]. Available at: http://www.britishairways.com/travel/history-and-heritage/public/en_gb [Accessed on May 20, 2011]. CBI. (2006). British Airways. [Pdf]. Available at: http://www.article13.com/CBI/CBI_CSR_Case_Study_BA_March_06.pdf [Accessed on May 20, 2011]. CIA. (2011). The world factbook. [Online]. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html [Accessed on May 20, 2011]. Cuilleanain et.al. (2004). Seminaire d’elaboration d’un Business Plan. [Pdf]. 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