Strategic and SWOT Analysis Report on British Airways
COMPANY OVERVIEW
British
Airways Plc (British Airways or “the company”), a part of International
Airlines Group, is one of the leading scheduled premium international airlines.
It primarily operates in Europe and the US. The company is headquartered in
Harmondsworth, the UK and employed 38,761 people as of December 31, 2012.
The
company recorded revenues of £10,827 million ($17,162.2 million) during the
financial year
ended
December 2012 (FY2012), an increase of 8.4% over FY2011. The operating profit
of the
company
was £233 million ($369.3 million) in FY2012, a decrease of 55% compared to
FY2011. Its net loss was £116 million ($183.9 million) in FY2012, compared to a
net profit of £654 million ($1,036.7 million) in FY2011.
SWOT ANALYSIS
British
Airways, a part of International Airlines Group, is one of the leading
scheduled premium
international
airlines. The company's strong brand image gives it significant competitive
advantage and helps it to register higher sales growth in domestic, as well as
in international markets. However, intense competition may pressurize the
operating margins of British Airways.
Strengths
Strong
market position and brand image in the UK
British
Airways is the UK's largest international scheduled airline. It is also one of
the world's leading global premium airlines.The company's principal place of
business is London with significant presence at Heathrow, Gatwick and London
city airports. The company has a strong brand image. For instance, in January
2012, the company won the first place in the “Favorite Airline” category at the
Globe Travel Awards. In March 2012, the company won the gold award for best UK
based airline. In addition, in the British Travel Awards 2012, the company won
the gold for the Best shorthaul airline and best airline for customer service. The
company also won the silver for best longhaul airline at the awards. The
company's strong brand image gives it significant competitive advantage and
helps it to register higher sales growth in domestic, as well as in
international markets. Brand recognition also allows British Airways to charge
premium prices than its competitors and thus register relatively higher margins.
Diversified
geographic presence
British
Airways maintains diversified geographic presence. The company is a full
service global
airline
providing both passenger and cargo services globally. The company serves more
than 400
destinations
worldwide and generates significant amount of revenue from all these locations.
For
instance
in FY2012, the company's largest geographic region, the UK, contributed 44.3%
to the total revenues. In addition the company generated 19.9% of its total
revenues from the US and Canada, 16.4% from Continental Europe. Moreover,
Africa, Middle East and Indian sub-continent accounted for 10%, Far East and
Australasia accounted for 6.5% and the remaining 2.8% from the rest of Americas,
highlighting the geographic diversification. Hence, a diversified geographic
presence offers the company more avenues for attaining significant revenue
growth. It also reduces the company's
exposure to risk associated with a particular market, including geo-political
and socio-economic reasons, and facilitates a strong positive global image for
the company.
Weaknesses
Labor
disputes
The
company has been involved in a conflict over wage and labor issues. British
Airways has a large unionized workforce and collective bargaining takes place
on a regular basis. Any breakdown in the bargaining process may disrupt
operations and adversely affect business performance. For instance, in 2010,
British Airways faced its first national strike since 1997 following a dispute
over pay and conditions of its cabin crew. The dispute over working practices
escalated as British Airways withdrew staff travel concessions from workers who
joined strike action and employed disciplinary procedures to sack and suspend
crew members, including many union representatives. The Unite union held 22
days of strikes in 2010 that resulted in over £150 million ($239.5 million) in
costs to the company.
Unite
represents majority of the workers at British Airways, such as baggage
handlers, engineers and check-in staff.
Additionally,
in 2012, a group of non-UK based cabin crew accused the airline of
discrimination over the withdrawal of travel concessions during strikes of
2010. The group alleging indirect racial discrimination is seeking compensation
of up to £8,000 ($12,681) each. A total of 30 staff are seeking redress from
British Airways because they live outside the UK and relied on discounted fares
in order to commute into and out of Heathrow airport. Such labor issues disrupt
operations which can hinder the reputation of British Airways. Further, the
company also has to incur higher expenses to meet the expectations and demands
of the workforce which could strain its revenues.
Opportunities
Accelerating UK airlines industry
The
UK airlines industry showed stagnation over the last couple of years. However,
the industry is expected to reverse this trend with high growth rates expected
in the forthcoming years up to 2016. According to MarketLine (a unit of Informa
plc), the UK airlines industry generated total revenues of $24.8 billion in
2012, representing a CAGR of 0.5% between 2007 and 2012. Furthermore, the performance
of the industry is forecast to accelerate, with an anticipated CAGR of 13.2%
for the four-year period 2012-2016, which is expected to drive the industry to
a value of $40.7 billion by the British Airways is the flagship carrier airline
of the UK with strong presence in London, with significant presence at
Heathrow, Gatwick and London city airports. Also, the recent takeover of bmi by
IAG has resulted in IAG controlling more than half the take-off and landing
slots at Heathrow Airport. Specifically,
this acquisition gave British Airways an additional 56 average daily slot pairs
at Heathrow. Therefore, the growing market in the UK coupled with the
acquisition of bmi represents an opportunity for the company to capitalize and
increase its revenues and profits from this region.
Growing global tourism industry
The
global tourism industry has witnessed a strong recovery since its downfall due
to recession in 2008. The recovery is primarily boosted by improved economic
conditions worldwide. According to the World Tourism Organization (UNWTO), international
tourist arrivals grew by 4% in 2012 to a total 1,035 million, up from 996
million in 2011. In terms of regions, Asia Pacific was the best performer with
a 7% growth in arrivals. The sub-region of South-East Asia and North Africa
with 9% growth in arrivals and the Central and Eastern Europe with 8% growth
topped the ranking. Furthermore, UNWTO forecasts international tourism to
continue growing in 2013. Arrivals are expected to increase by 3% to 4%
globally. In terms of region, prospects for 2013 are stronger for Asia and the
Pacific with (5% to 6%) growth, followed by Africa with (4% to 6%), the
Americas (3% to 4%), Europe (2% to 3%) and the Middle East (0% to 5%). Thus,
British Airways, with its strong operational base and expertise, is well positioned
to benefit from increasing global tourism industry, which in turn would help
the company to generate additional revenues.
Fair outlook for the global air freight
market
The
global air freight sector is forecast to achieve fair growth rate over the
forecast period to 2017. The air freight sector recovered from substantial
decline in 2009 by posting strong growth in value and volume in the past few
years. According to MarketLine (a unit of Informa plc), the global air freight
sector generated total revenues of $120,582 million in 2012, representing a
compound annual growth rate (CAGR) of 0.4% between 2008 and 2012. Furthermore,
the performance of the sector is forecast to accelerate, with an anticipated
CAGR of 1.6% for the five-year period 2012-17, which is expected to drive the
sector to a value of $130,378.1 million by the end of 2017.Thus, the growing air
freight sector provides a significant opportunity for the company to further
strengthen its topline and gain competitive advantage over its peers.
Threats
Intense competition and price
discounting
The
airline industry is highly competitive. The principal competitive factors in
the airline industry are fares, customer service, routes served, flight
schedules, types of aircraft, safety record and reputation, code-sharing
relationships, capacity, in-flight entertainment systems and frequent flyer
programs. Airline profits are sensitive to even slight changes in average fare
levels and passenger demand. British Airways face direct competition from other
airlines on its routes, as well as from indirect flights, charter services and
from other modes of transport. Some of its competitors include Air France, AMR,
Cathay Pacific Airways, Continental Airlines, Delta Air Lines, Deutsche
Lufthansa, easyJet, Ryanair, United Continental and Virgin Atlantic.
Price
competition between airlines occurs through price discounting, fare matching,
increased
capacity,
targeted sale promotions and frequent flyer travel initiatives. A relatively
small change in pricing or in passenger traffic could have a disproportionate
effect on an airline's operating and financial results. In addition, British
Airways face competition in the air and on the ground on short haul routes.
Moreover, train operators in the UK are sidelining a larger share of the travel
markets due to cut in journey times as a result of the infrastructure
improvements on key lines such as the West Coast mainline. Therefore, such
intense competition may pressurize the operating margins of British Airways.
Volatility in jet fuel prices
Jet
fuel forms the main raw material used in the airline industry. The demand for
petroleum and
related
products has historically been cyclical and sensitive to the availability and
prices of oil and related feedstock. Historically, international prices of
crude oil and refined products have fluctuated widely due to many factors that
are beyond the control of companies such as Virgin Atlantic. Moreover, the
global jet fuel prices have seen a considerable increase over the past few
years. For instance, the jet fuel price was $12.7 per million British thermal
unit (Btu) in 2009, and is expected to reach $23.7 per million Btu in 2015. It
is further forecast to grow to $27.6 per million Btu by 2030.
Furthermore,
the political turmoil in the Middle East has impacted the oil prices. As the
jet fuel prices account for a major portion of the operational expenses, the
company’s margins will be affected. Hence, a drastic change in the prices of
the fuel can have a serious impact on British Airways’ expenses which may in
turn impact its profitability and margins.
Regulatory constraints
The
airline industry is highly regulated. Airlines are subject to extensive
regulatory and legal compliance requirements that result in significant costs.
The company's operations are subject to
numerous
domestic and international laws, regulations, and restrictions. British Airways
has operations in many parts of the world and operates in a highly regulated
environment. Non-compliance with these laws, regulations, and restrictions
could expose the company to fines, penalties, suspension, or debarment, which
could have a material adverse effect.The company expects to continue to incur expenses
in connection with complying with government regulations. Additional laws,
regulations, taxes, and airport rates and charges have been proposed from time
to time that could significantly increase the cost of airline operations or
reduce the demand for air travel. If adopted, these measures could result in
increased costs of compliance, which in turn would increase obligations on
British Airways and thus adversely impact its margins.
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