British Airways needs to do strategically to consolidate its market leadership during the final years of this decade
The reduction of service that is now seen from British Airway now is not due to any difficulties of the airline itself, but of the present situation in England, and the restrictions imposed on its airport. This is temporary and it may be expected that this will be sorted out shortly.
The present situation of British Airways is complex and the latest announcement from their side has been that only passengers with confirmed tickets should go to the airport for their flights. The official statement from their side has been that they face a complex position where they have a minimum of 100 aircraft not in the proper position for them to undertake scheduled flights and 1,000 crew members also in a similar position. This is the reason why it will take them some time to return to a normal program of flying, and the airline is trying its best to meet this deficiency in meeting the desire of their clients to go away on their holidays. (British Airways operations)
From the side of the management, which is basically controlled by the government though the airline is now not owned by the government, the attempts have been to paint a rosy picture of the whole situation. For the first quarter, the results have been announced and according to the announcements the airline had made a pre-tax profit of 124 million pounds and an operating profit of 176 million pounds. The operating margin was estimated at being 8.5%, and the revenue had increased by 8.3% and was at 2.1 billion pounds. The net unit costs had improved by 0.1% and net debt had come down. These results were for the period ending on 30th June, 2005 and had been prepared under International financial Reporting Standards. The airline had reported profits as noted and that in itself is a rather difficult exercise for the large airlines now. The operating margin estimated at 8.5% was also higher than 2004 when the operating margin in the same period was 6.8%. The important change in the airline had come from the services that it offered its Internet customers, and they now book hotels, car hire and sightseeing tours on their own site of ba.com along with booking the tickets for the flights. (Good Q1 results)
The greatest change is through the use of e-tickets and 94% of their customers use them on the routes where they can be used. Even boarding passes collected through Internet are now accepted at 53 airports where they operate. At the same time, costs were climbing and the rise was 6.2% due to a 37.6% increase in the cost of fuel. This will continue in future also. The costs of selling by BA were reduced as the travel agent's commission was restructured and online sales increased. These are the two opposing sides of cost increase and cost decrease that have to be kept in mind, and under the present situation, it seems that fuel price increase cannot be controlled. On the other hand, Internet sales had already reached 94% and how much further can they really go up.
The costs due to employees had also risen by 5.4% due to wage awards and increased pension costs and that is one of the troubles of being a government controlled organization. They are trying to reduce manpower, but that also has limitations. During the particular quarter, revenue had increased by 8.3%, and this had probably been the reason for the decrease in net debt. The passenger loads had increased sharply in July and that had made the management happy and the decreases during August will probably make them unhappy, and this is the tourist season for them. The management says directly that due to the uncertain nature of the economic outlook and also because of the volatility involved in both fuel prices as well as that of the U.S. Dollar exchange rate, exact forecasting is a real challenge. (Good Q1 results)
The saving grace for them had been the increase in strength of U.S. Dollar and surcharges. The expectation was that the total revenue will increase for the current year by around 6% and the capacity and volumes were still expected to increase. The total increase in fuel costs was expected to be even higher by 525 million pounds over 2004 and there seems to be an increase with every estimation as this was 75 million pounds more than the last estimate. Cargo volumes for them were coming down and had dropped by 2.6% as compared to 2004. The total load factor had also dropped by 0.2% over 2004. Thus one can say clearly that the picture that emerges is that the airline is going nowhere and trying desperately to hold on to its present position. The plans of the airline also shows this as they are plans in relation to new European routes from Gatwick inclusive of Grenoble during this year and in the next year to Tirana, Varna, Izmir and Reykjavik. (Profile of British Airways) Can these really make much of a profit?
In terms of size, it is now the second largest international airline and the measurement is in terms of the passengers that it carries from one country to another. At the same time, it is only the tenth in the world when the carriage of American airlines are considered on their domestic flights, and the reason is that there are so many domestic routes there with a high number of passengers. Even during the year ended in March 2005, the airline employed 47,472 members of the staff and around 85% of them were based in UK. Thus one can say that in spite of all the changes, it has still remained a British airline. The nature of ownership of the airline has now changed to private ownership with some 260,000 shareholders and half of the shareholders are employees of British Airways. (Profile of British Airways) This also has to change for the airline to become independent. Well now let us look at the development of British Airways to its present position.
The airline started on its long journey on 25th August 1919 as the Aircraft Transport and Travel Limited, and was the first to launch the daily international scheduled air services between London and Paris. Thus there are definite reasons why the airline can be called a pioneer. The airline was not then owned by the government, but was nationalized when the government decided in 1939 with the merger of Imperial Airways and British Airways, which had become its name. The name of the new airline was British Overseas Airways Corporation. The process of mergers and growth continued till 1974 and just before that, there was the merger of BOAC and BEA to form the re-launched British Airways. (British Airways History)
It was still a government airline and then in July 1979, the government decided to privatize the airline along with many of its commitments. The government passed an act called Civil Aviation Act for this to happen and Lord King was appointed the Chairman and given the responsibility by the then Secretary of State to make the organization profitable so that the organization could be privatized. In that period the company was having deficits and 544 million pounds was declared as deficit in 1981-82. Then the process for privatization started with stoppages of surplus and unprofitable routes, disposal of its assets and other methods. The revival of the airline started in 1983 and succeeded only in 1987 when the airline could be privatized. (British Airways History)
Thus one can see that the arrival of the airline to its present position was a result of many efforts by the government, rather than its own development. This makes the airline look at various aspects which other airlines do not consider as their responsibility, though it is doubtful whether it helps the airline in terms of profits. This can be seen in British Airways becoming the first airline from Britain to start a series of health pages on its website -- www.britishairways.com/health. This site informed passengers about cabin environment, medical air and other matters which were thought to be important for potential passengers with health problems. The site has a number of pages which attend to health questions like travelers' thrombosis, jet lag, fear of flying, cabin air quality, etc. (Well being in the air) These aspects are certainly important, but the question remains as to their importance in running an airline profitably.
Well the airline continually keeps talking about its profit revival strategy and carries out one exercise after another. The airline has had new developments like sleeper seats and painting of its tailfins in many colors, but these steps are certainly not for meeting the demands of regular suited customers, but for shorts wearing, short haul passengers. The question is whether British Airline realizes its own directions…