British Airways External Environment Analysis

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Any organization in any sector, particularly in the airlines’ area, cannot exist like an ‘island’ without being influenced by the external environment or without changing the external environment. External environment affecting an organization can have several influences or catalysts that can impact directly or indirectly on different aspects of organizational functioning. These external factors will change or reorient the organization’s operation in a particular way. That is, when an organisation undergoes changes according to the external environment, it will maximize the collective advantages; it could have regarding opportunities, thereby maximizing its profit as well as its share in the market. The factors that will generally affect the organizations in the external environment are such factors as political, economic, cultural, etc. Such variables can affect an organization in many ways, in both a positive and negative context. These factors, which will be initiated and run by ‘factors’ or individuals unrelated to the organizations, could impact the organization in one way or another. So, it is of utmost importance to study these external environment factors in an in-depth way by the organization so that they can come with strategies accordingly. If an organization comes up with both external strategies like marketing strategies and importantly internal strategies like operational, Human Resources, and various other procedures, after studying its external environment, it will aid the organization to function optimally. Therefore, this paper would first examine the organization’s external state of affairs, British Airways (BA), which is the UK. Then, the paper will examine the major strategies that are available to BA because of the factors or issues or changes in the external environment of the UK, finally coming up with an optimum plan that can be implemented by BA.

British Airways External Environment Analysis

External Environment

In the region or country where the company operates, a company is always affected by both macro and micro-environmental factors. On those lines, Airlines’ company, particularly BA, could also be regulated by those macro factors that are not in its control. The firms can only build their infrastructure and carry out their operations if the political situation is stable, with a healthy atmosphere for the firms. This is quite applicable to the airline industry and the organizations like BA operating in that industry sector. From that perspective, the UK has had a safe political climate, with no major terrorist or even war threat. Likewise, the ruling government has to be stable, and that is also favorable for businesses. The coalition government of Conservative and Liberal Democrats headed by David Cameron is welcome news, as business wants to see a stable Government. (telegraph.co.uk 2010). In this globalization era, governments should have an open policy to allow as well as facilitate the organization’s functioning through tax and other benefits. If the government enforces tariffs and business restrictions, it may impede the country from having a complete or relative benefit to having difficulty in its business activities with various countries. (Dowling, 2007). The impact of the environmental factor of politics on BA is far more profound because BA was established and operated by the British Government for close to 15 years. As government ownership gave way to privatization, British Airways’ emphasis evolved from flag carrier to profit turner with the management under Lord King and Sir Colin Marshall going for greater efficiency, customer service, and the promotion of brand values. (BBC 2010). Although direct political influence was over, BA is indirectly influenced by the political government in various ways. For example, the government’s decision to increase the Air Passenger Duty this year has negatively impacted or impacting the airline’s sector on the whole, including BA. It has inflated the prices of air tickets and has made air travel even more expensive. “From Monday, a family of four will have to spend £240 in tax to fly to Florida – up 33 percent.” (Walsh cited in The Sun 2010). In addition, this tax will also affect the inbound visitors from foreign countries, fears Airline companies. “It’s making it more expensive for everyone to come to the UK – as they have to pay this duty to fly back out again.” (Walsh cited in The Sun 2010). Because of this tax, the airline companies opine that whatever advantage they got because of the positive signs of economic recovery, has been nullified. The other political based decision in the external environment which impacted all airlines including BA is the closing of the airspace and grounding of flights in the aftermath of the Eyjafjallajokull volcano eruption in Iceland. Although, it occurred in an environment which was more than 1,000 km away from UK, the toxic plume containing ash spread over UK and also much of Europe, posing a serious problems for any air travel. Because of this issue, the British government closed the country’s entire airspace, grounding all flights at five airports, including the flights whose journeys originated elsewhere in Europe, North America, and beyond and who would have only passed through Heathrow. (Walsh 2010). However, various airlines including BA, Ryanair were against this decision of the British government and added that the sky was safe. BA and other airlines conducted tests over the airspace using test flights and came to the conclusion that aircraft engines did not suffer any damage from the plume of ash. “The analysis we have done so far, alongside that from other airlines’ trial flights, provides fresh evidence that the current blanket restrictions on airspace are unnecessary,” (Walsh cited in Arnott 2010). So, even at the peak of the Icelandic volcano issue, BA protested against the government, but has to follow the government guidelines, again validating how external environmental factors will impact BA, as BA and other airlines suffered to losses close to $200m every day

In the current times, the one economic factor that is impacting every business and is impacting the Airline industry as well as the recession. Positively, this year, there has been good news on the economy front, as the British economy is showing signs of recovery. “The British economy has been buoyed by growth, soothing fears of a double-dip recession. The growth of 0.8 of 1 percent between July and September is double market expectations.” (Brown 2010). This was further validated by Chancellor George Osborne, who opined that UK’s economic recovery is on the right track based on the financial results and growth forecast put forward by the Office for Budget Responsibility (OBR). “The OBR has said in the study that gross domestic product would rise slower than anticipated in 2011 and 2012. However, it also revealed that the economy is growing faster than expected this year.” (BBC 2010). On another hand, the International Air Transport Association has been cautious in predicting the recovery and has taken a cautious approach regarding the economic impact on the Airlines sector including BA. IATA reported that the impact of the recession on the airline industry had been somewhat reduced, announcing that foreign passenger demand grew by 9.2 percent compared to the same month a year earlier, with freight demand showing a 22.7 percent raise. Still, IATA CEO Giovanni Bisignani added that the rate would slow towards the end of the year. (iata.org 2010). So, the recovery has to be sustained for a long time for the airline business, particularly for BA’s business to tap and flourish.

Available Strategies 

British Airways, the national carrier of the United Kingdom, is the largest airline in the UK, both based on destinations as well as fleet size, as it operates to more than 169 destinations spanning around 75 countries. However, this strength did not translate into profits because BA suffered sizable financial losses last year and in the early part of this year, and thereby lost its position as the UK’s largest airline based on passenger traffic. With a definite drop in passenger numbers and a drop in profits, BA was ‘diagnosed’ as a ‘sick,’ struggling, and loss-making entity. “British Airways has sunk another £ 50 million into the red for its worst-ever year. The airline, in the thick of a row with cabin crew…its losses for the first nine months (2009) is a whopping £342m – almost five times the £70m deficit in 2008.” (Hiscott 2010).

However, as pointed earlier, with the UK economy showing functional recovery and with the spending power of customers increasing, it has started achieving profits in the second part of 2010, ending with September. “BA beat analysts’ forecasts with a pre-tax profit of £158 million ($219 million) for the six months to the end of September. During the same period last year, it slumped to a loss of £292 million ($466 million)” (Whiteman 2010). So, it is clear that BA has recovered from the heavy losses, but to retain this success, it has to try out various options. That is, based on the happenings in the external environment, BA has to take some constructive as well as bold steps to keep on growing. These helpful steps have to be made mostly in its internal environment so that BA can become more efficient in its functioning in the external environment. The fact is, BA cannot change any of the above mentioned external environment factors, so what it can do is to change its internal processes accordingly, and thereby coming up with apt and optimum operational strategies.

One of the change management approaches that could be adopted by BA is to simply remove all frills and extras from its products or service. That is, with the profits of BA still not getting consistent, it has to bring in more customers to sustain its growth. Customers can come in and choose a BA only if they offer competitive prices. Extra services only inflate the cost of operations, and the additional charges have to be passed on to the passengers in the form of higher ticket prices. So, BA can provide air transportation service mainly, without or even minimizing augmented services like variety food on board, various in-flight entertainment options, lounge services in many flights, limousine drop off, etc., etc. When these changes are carried out, the cost savings can be transferred directly to the passengers in the form of a reduced price. This way, BA can offer ticket prices less than or equal to the prices offered by its competitors, especially the low-cost airlines like Ryanair, Easyjet, Virgin Airlines, etc. These changes can bring in more passengers, profits, and thereby efficient functioning. However, there could be resistance to this strategy because with BA being a full-service airline, any attempts to reconfigure it on the lines of a low frills airline could evoke opposition or may not find favor from individual sections of the customer. This is because the current and the past customers of BA, as well as prospective customers, already have image and expectation of BA as a full-service airline. So, if those existing facilities are changed or minimized, it could negatively impact the customer’s preferences.

More than this issue, there a lot of players in the already crowded low-cost market. As BA’s competitors from Ryanair to Easyjet focus on the cheap market, it would not be feasible for BA to jump into this market. “No-frills airlines are masters of their trade with all their negative publicity. If the flag carrier chooses to do battle on their home-ground, it could find itself hopelessly out of its depth.” (riverscrap.typepad.com 2009). Thus, BA can go for minimal changes, modifying or reorienting its current model in a minimal manner by removing only a few frills or new products, which are not popular among the clients.

During the change management process, one of the options the organizations and its management could adopt is removing expendable workers and also cutting down the salaries. That is, as BA tries to cut costs in maximum ‘points’ of its operations, salaries for expendable employees is a significant point. One of the substantial variable costs that can be controlled is the wage bill, which is done by BA by retrenching the employees, reducing the employees in the flights, and also by reducing or freezing the salaries. BA’s downsizing processes involved giving 1,000 cabin crew members voluntary retirement and even turning around 3,000 of them into part-time employees. Also, a two-year pay freeze from 2010 is in the anvil. However, these strategies have elicited a lot of resistance from the employees and could act as an impediment for change management. So, in the early part of this year as well as now, BA cabin crew members have initiated strike action and are abstaining from work, leading to disruption of activities. On the part of the pilots, they have agreed to pay cuts, but still, there are a lot of resistance forces brewing up against this management strategy.

The other option that is available for BA to cut down its losses, particularly the losses it faced because of the Icelandic Volcano explosion, is requesting compensation from the British government. Already, many European airlines have started asking their respective governments to compensate for the grounding of the flights and the resultant losses, and BA also joined this bandwagon. “British Airways (BA) is adding its voice to European airlines’ calls for government compensation for the financial impact of the volcanic ash cloud.” (Arnott 2010). BA is favoring this option on the basis of the European Commission rules which allows its member countries to compensate for any commercial organization, which faced both infrastructural and financial damage due to any natural catastrophes. BA and other airlines are expecting some positive response from the government as there was a precedent set by the US government during the 9/11 terrorist attacks. This was pointed out by Willie Walsh, BA’s chief executive, “There is a precedent for this to happen as compensation was paid after the closure of US airspace following the terrorist events of 9/11, and the impact of the current situation is more considerable,” (Arnott 2010). Although this does not come under the internal process of BA, it is a natural extension or change strategy for the things that happened in its external environment.

Optimum Strategy and Conclusion

Apart from these strategies, the one strategy that BA can implement without any many oppositions, and thereby importantly nullify any negative impacts from the external environment, is cutting costs in various segments of its operations through new applications. That is, going for the mass removal of any of its service-oriented features and thus turning into a low-cost airline, it would be feasible and effective for BA to focus on cutting costs in specific segments mainly. Typically, organizations can achieve cheap opportunities in the form of cheap labor, automation of processes, going for inexpensive but at the same time quality equipment, importantly maximizing the functioning of the employees. On these same lines, BA can adopt lean management processes as part of its change management. Lean thinking or Lean management is considered a multi-dimensional philosophy, with the primary focus on the reduction of waste and optimization of quality. The lean philosophy, according to Womack, was defined as: “Pursuing perfection to meet or exceed internal and external customer requirements by focusing on the entire value stream and continuous development, research and waste management initiatives “(Czabke, Hansen and Doolen 2008). As far as a business strategy is concerned, mass production strategy mainly focuses on exploiting the economies of scale of stable product designs and non-unique technologies. On the other hand, the lean approach focuses mostly on identifying and using shifting competitive advantage. (mamtc.com). Paul Coby, Chief Information Officer at British Airways has this to say, “We need technically leveraged digital innovation and strategic change. Lean and agile approaches are essential enablers. “(King 2009). That is, as part of the change management, BA can incorporate ‘lean’ aspects in many of its operational processes and thereby make the employees’ functioning effective, reduce the losses, etc. The incorporation of lean incorporation can be witnessed in BA’s storage warehouses, where crucial operations have to be carried out but had “poor flow and general confusion.” “The introduction of Lean culminated in a modern model with simpler procedures and a more cohesive team “(King 2009). Thus BA, while planning the change management strategies, needs to focus on the factors that could resist and impede the change. This way, they can come up with strategies, which can overcome these resistance factors. So, by removing the resisting things, and importantly by implementing optimum change management strategies, BA can surmount the recession caused losses and emerge successfully. When this change is implemented and started to show positive results, organizations can extricate from any tough situations and ‘pilot’ on the path of success, achieving long term goals.

References
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  • The Sun 2010, We’re Back, viewed on December 8, 2010 http://www.thesun.co.uk/sol/homepage/news/money/3203961/In-profit-British-Airways-slams-Governments-passenger-tax-hikes.html
  • Walsh, B 2010, Why Iceland’s Volcano Is a Hazard for Air Travel, viewed on December 8, 2010 http://www.time.com/time/health/article/0,8599,1982328,00.html
  • Whiteman 2010, British Airways ‘back in the game’ after profit rebound, viewed on December 8, 2010 http://edition.cnn.com/2010/BUSINESS/10/29/british.airways.walsh/index.html

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