MANAGEMENT ECONOMICS

MAY 31 2011 VINAY RAMAMURTHY P120536

MANAGEMENT ECONOMICS

BRITISH AIRWAYS

Contents
Contents..................................................................................................................... 2 1. Introduction............................................................................................................. 3 PART- 1....................................................................................................................... 3 2. PESTL analysis.........................................................................................................3 UK's aging population is a bigger economic threat than the financial crisis (The Telegraph, 2011). See appendix-1 for statistics of the aging population according to the national statistics. ..............................................................................................5 Incidents like the 9/11 impact on aviation industry has changed the working style of the organizations. (American Public Media, 2006).......................................................5 3. Economic Concept...................................................................................................7 3.1 Price discrimination............................................................................................8 3.2 Government influences on the company and industry......................................11 3.3 The impact of new technology..........................................................................12 4. Co-Opetition..........................................................................................................14 5. Conclusions ..........................................................................................................18 6. Appendices ...........................................................................................................18 6.1 Appendix-1.......................................................................................................18 6.2 Appendix-2.......................................................................................................19

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1. Introduction
The report is categorized broadly into two sections asPART- 1 which contains the PESTL analysis and the Economic concept that evaluates the economic environment within which BRITISH AIRWAYS is trading. Economic concepts such as

Price Discrimination The government influences on the company and industry The impact of new technology

are discussed in brief to give a clear picture of things. PART-2 which contains arguments both for and against the possible application of the theory of co-opetition to the above case study of B.A. and the airline industry

PART- 1
2. PESTL analysis
A PESTL analysis is carried out using the macro environment of B.A. as in todays competitive business environment all these factors play a major role in growth of organizations and the industry. According to Kotler (1997) PESTL analysis is a useful tool for understanding market growth or decline, business position, potential and directions for operations. Political:

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The political factors refer to the government policies and its effects to an organization, impact on economy which in turn influences the way a business functions and its scope in the future within the constraint limits. B.A. has faced political issues like The current governments policy towards aviation in the UK could lead to

fewer routes being served by the airline from London. This has been in fact challenged by B.A.(abtn.co.uk, 2011)
In the past they faced issues with respect of the security enforcements in

place across the UKs airport network and also limiting passengers to single piece of hand baggage.(airport-int.com, 2007) Regulations on safety, infrastructures, securities etc laid down by Association of European Airlines (AEA, 2011) All such social factors has led B.A. loose a lot of money as they had to cut down on number of destinations, flights, improve security measures and various other reasons.

Economical: The economic factors refer to exchange rates and inflations, whether economic goals are achieved, interest rate, taxation. These also impact on the production, capital, costs etc for companies.
Due to the rise in oil prices the airways inevitable had to increase the price

of tickets which resulted in less number of passengers (The Sunday times, 2008). British Airways has raised its fuel surcharge for the second time in two months after the Egypt crisis pushed the global oil price to more than $100 (62) a barrel( guardian.co.uk, 2011)

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The global economic and financial crisis coupled with continued high fuel

prices has accelerated consolidation in the airline industry(Annual Report and Account 2009/10, British airways) These factors help the organizations to organize business strategies for the future such as budget planning, cutting down costs etc. B.A. is vulnerable as a UK operating airline to poor exchange rates. As the airline industry demands high overhead costs economic analysis becomes major area of interest.

Social: The social factors refer to changes in the latest trends like importance to security as a prime focus that would affect the demand for the industrys services.

UK's aging population is a bigger economic threat than the financial crisis (The Telegraph, 2011). See appendix-1 for statistics of the aging population according to the national statistics. Incidents like the 9/11 impact on aviation industry has changed the working style of the organizations. (American Public Media, 2006)
National

statistics also indicates step increase in the rates of

unemployment in the UK population which impacts the B.A. , Figures show an increase of 70.7% (see appendix-2) These social factors have posed many threats to the companies and have become major areas of concerns for the aviation industry.

Technological: The technological factors refer to use of new equipments, processes and means to serve the customer better and faster in terms of aviation industry. They play a

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chief role in promoting the company and attracting more customers at the same time. There is increase in online ticket booking and check-in services by the people, as it saves a lot of time and allows the customers to compare prices with the other airlines. B.A website provides options to compare its prices alongside to EasyJet, Ryanair etc and they call it the value calculator (britishairways.com). [Source: essabra-mensah.blogspot.com]
In 2000, British Airways enabled its passengers to check-in their flights

online on the website.

British Airways also launched its new online boarding pass in 2004,

allowing passengers to print their own boarding passes from home.

In 2007, British Airways also launched a payment system in collaboration

with Standard Chartered Bank, enabling customers to pay for their online bookings at any of the Banks branches.
In 2008, the airline has extended its remote check-in facility to allow

customers to check-in via mobile phones with wireless connectivity B.A are continuously upgrading their technology and serving their customers

Legal: The Legal factors refer to the proper functionality of companies following the set standard rules and regulations. It can be a measure whether or not these companies abide by the rules in the interest of the public and the government.
BA has suffered many strike actions and is aware of the implications that

the trade unions can cause. B.A. Cabin crew votes for fresh strikes (BBC News, 2011), they voted to take industrial action in protest against the
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removal of travel perks from members of staff who went on strike last year and other forms of disciplinary action.
Price Fixing is a major legal issue in the airline industry and many

companies have faced lots of problems in the past. B.A. and Korean Air pleaded guilty to violating the Sherman act; each was fined $300 million in August 2007. B.A. admitted fixing cargo surcharges from 2002 to 2006 and passenger fuel surcharges from 2004 to 2006. 21 airlines being fined in price fixing scheme, the global carriers have paid $1.7 billion in fines (msnbc.msn.com,2011)
B.A. must also consider factors like environmental and ecological issues,

customer and employee rights, corporate and social responsibilities.

3. Economic Concept
The concept of economics arises from the need of how a customer makes decisions from the available wide variety of resources in order to satisfy his/her individual needs. It involves theories and real time models of different case studies which can be useful (Source: campus.greenmtn.edu, 2011) Broadly economics are classified under

Micro economics- Economic behavior of firms and how prices of services are determined.

Macro economics- Economy wide phenomena resulting from group decision in the entire market.

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Positive- Contains descriptive statements or scientific predictions. Normative- Value judgment about economic policies, what ought to be.

3.1 Price discrimination

Price Discrimination is a process of selling the same product or service to different groups of people for different prices (economicshelp.org, 2011) they can be categorized into 3 different sections as

First Degree Price Discrimination- Selling services to customers at the maximum price that they are willing to pay. Here the entire market is separated into segments and charged separately also termed as OPTIMAL PRICING. It becomes hard for B.A to adopt this as the market is very huge and many customers to deal with.

Second Degree Price Discrimination- This is a method where the usage or the frequency of consumption comes into picture. The more the consumer uses your services the more benefits they get. It also accounts to selling at stand-by basis or selling in the last minute to cover marginal costs per unit at least. In the airline industry it is termed as Yield Management, though sounds simple is a prime basis for industry and airlines also known as Price elasticity of Demand in economic terms. The peak and off-peak pricing can also be considered in the industry where the peak refers to seasonal and the off-peak referring to unseasonal states.

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Source: Geoff Riley (2006)

Third Degree Price Discrimination- This involves pricing differently for different sectors or groups of people. Here market segmentation comes into picture considering factors such as geography, time, nature etc.

Sour ce: Geoff Riley (2006)

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The Airline industry is using price discrimination as a supplementary profit, an alternate source of cash flow and for Profit Maximization.

Source: economichelp.org (2011) Profit is maximized where MR=MC. Because demand is more inelastic in market (A) it leads to a higher price being set. In market (B) demand is price elastic, so profit maximizing price is lower. B.A. uses Price Discrimination by categorizing its customers under various categories. They have an Executive Club which provides benefits to frequent customers, membership benefits and facilities of Sharing, Purchasing, Spending and collecting B.A. miles which is an effective technique to attract more customers in the future.

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3.2 Government influences on the company and industry

The government imposes many rules and regulations on the airline industry which they need to abide by for smooth functionality of their businesses. They have a Federal Aviation Administration (FAA) board which sets rules on various aspects like Air traffic, Aircrafts, Licenses and certificates, Training and testing, health and safety etc. The government taxation is another major area of concern for the airline industry. According to Michael Keen and Jon Stran (IMF Working paper, 2006) the aviation tax can be broadly categorized as

Exercise tax- meaning one that (unlike, in particular, the value-added tax (VAT)) is not creditable or refundable to business users.

Trip tax- by which will be meant an ad valorem excise on sales of passenger tickets and cargo waybills.

Ticket tax- meaning some charge that is levied on passengers as a fixed amount per trip, at a common rate for all trips within some wide class.

Aviation taxes also imposed on fuel, cross border damage and few other factors. The FAA sets regulations on various categories of the airline industry-(faa.gov, 2011) Air Carriers and Operators
Hazardous

Materials Regulations and Dangerous Goods Advisory

Bulletins.
Certification: Air Carriers and Commercial Operators Over flight Fees

Pilots, Flight and Ground instructions General Operating and Flight Rules (14 CFR Part 91) Certification: Pilots, Flight Instructors, and Ground Instructors (14 CFR Part 61)

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Pilot Schools (14 CFR Part 141)

Commercial Space Transportation Regulations Advisory Circulars Guidelines

B.A. in the past has many problems and has also challenged a few regulations set upon by the government. (Source: avationweek.com, 2007)
British Airways has come out swinging about the governments handling of

airport security right as an industry summit on the issue was about to be held. The government's one carryon policy was hurting London Heathrow's baggage handling system and causing massive passenger delays.
British Airways and Virgin Atlantic said plans by the new coalition government for

a new plane tax were unworkable and could financially disadvantage Britain's travel industry(uk.reuters.com, 2011) Apart from these, the government can set rigid immigration rules by limiting the number of people impacting on the number of travelers. It has various boards under their control to check on price fixing.

3.3 The impact of new technology

New technologies have major impacts on the airline industry in order to provide better service to customers and save on costs, control environmental damage etc. Source (britishairways.com, 2011) From customers point of view

B.A. allows its customers to book tickets online and also helps them manage bookings.

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B.A. goes mobile, which keeps customers updated on the latest on their phone. Information like delay in flight timings is very helpful, and they also provide features like Mobile Boarding Pass.

It provides features like online check-in which saves a lot a time for travelers

From Environmental point of view

B.A. is fitting new technology equipment to our existing long-haul aircraft engines.

Operating newer, quieter, aircraft is an important part of reducing our noise impacts. By investing 7 billion in more efficient aircraft we have managed to halve our noise impact since 1999.

B.A. adapts new technology to manage waste and is geared around the principle of Reduce, Reuse, Recycle and Responsible disposal.

B.A. is determined that the aviation industry plays its part in reducing climate change emissions.

From Companys point of view

B.A. upgraded its systems with service-oriented technology. They use SOA, i.e. service oriented architecture and project will last until the end of 2014 and aims to bring new products to market faster and reduce costs.

British Airways sets up tech innovation unit, it has set up a special innovation unit to explore ways the airline can use web 2.0, shareware and open source technologies (silicon.com, 2011)

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The airline has been investing in its BA.com website, which accounts for 33% of sales in the UK and 80% of sales worldwide, as its core IT system. B.A. cites IT investment as key factor in 20% profit increase. Innovative use of technology has enabled British Airways to improve the quality of its IT operations while reducing the costs running our IT operation by 40% over the past four years (computerweekly.com, 2011)

Technology can also be used as a training tool as B.A. trains its pilots through various models. Efficient use of these will show upon the effectiveness of the organization. Considering all these implications technology plays a major role in itself in organizations in the airline industry and leads to progress towards strengthening strategies and achieving business targets.

PART- 2
4. Co-Opetition
Co-opetition, describes a business situation in which independent parties cooperate with one another and co-ordinate their activities, thereby collaborating to achieve mutual goals, but at the same time compete with each other as well as with other firms. The basic philosophy underlying co-opetitive business relationships is that all industrial management activities should aim for the establishment of mutually beneficial partnership relationships with other actors in the system, including competitors (Zineldin, M. 1998, 2000). It is imperative for a successful alliance and relationship between the collaborators to communicate and cooperate in an atmosphere of frank debate, trust, interdependence, and mutual positive expectation so that the mutual benefits and interests may be achieved.) Zineldin, M. (1998) The theory of co-opetition plays a major role in the airline industry, as it is large and has many areas to be looked after such as air traffic control, luggage transport, catering,

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fueling etc. To manage all these factors well and satisfy the customers, many airlines have adopted the theory of co-opetition and B.A. falls one among them. As always there are pros and cons in any theory the industry also faces a lot of challenges in striking the perfect balance and mutually benefiting and to yield a non-zero sum game relationship, which in other words is a win-win situation for both. Benefits to the airline industry and B.A. (Focus on- For)

The first aspect which needs to be considered is Costs of airline alliance (Rietzes and Moss, 2008) Eliminates horizontal intra-alliance competition( higher routes) Provides incentives to foreclose non-alliance rivals from providing interlining services at alliance hubs or to otherwise raise their costs The concept of Code Sharing which benefits airlines to broaden its networks without having to service additional flights.
B.A. and S7 Airlines have signed a code-sharing agreement, opening

Eliminates

horizontal intra-alliance competition fares and reduced choice on certain

up joint flights from Russian regions via Moscow Domodedovo to London Heathrow(ruaviation.com, 2011)

British Airways PLC said it has entered into a code-sharing agreement with Kingfisher Airlines Ltd., under which both carriers will use each other's flight network as part of their expansion(THE WALL STREET journal, 2010)

Doganis (2001) states that code-sharing agreements may or may not involve blocked space arrangements. Code-sharing related joint ventures are often complemented by agreements to jointly use airport facilities (e.g., gates). Additionally, sharing of customer loyalty (i.e., frequent flier) programs is very common.

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It facilitates inter-alliance competition, eliminating double marginalization thus reducing costs through facility sharing.
British Airways has sealed an alliance with American Airlines that will

allow the two carriers to agree fares, routes and schedules together. The move will also include Spains Iberia, which is merging with B.A. (BBC Report, 2008) Co-opetition helps the industry in other ways such as Its impact on Market price Benefit from being in co-opetition in an complementary airline network Participating in an overlapping airline network. Allows the airline industry to effectively maintain its staff and people involved at various levels. Increase the share price in the market by making more profits globally. Widens network and expands the business globally creating a good brand value.

Disadvantages to the airline industry and B.A. (Focus on- Against) The Economist also reminds us of other risks: crafting co-opetition deals is a tricky business, not least because potential partners need to swallow their pride first. Firms also need to be very clear about what will and will not be covered by a deal. You have to figure out exactly where you are co-operating and where you are competing, and not get your staff confused, says Harold Sirkin of the Boston Consulting Group. (Source: tutor2u.net, 2011)

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Walker (2004) identifies reduced control over decision making, strategic inflexibility, weaker organizational identity of the participating companies, and potential conflicts with antitrust law as additional disadvantages of cooperation among firms in general and joint ventures in particular. Close relationships can sometimes become black-holes as mutual expectations increase and thus demand on each others resources increases. In these cases a relationship can be an economic burden without anyone noticing it (Hakansson and Snehota, 1995). B.A. and American Airlines
The Justice Department advised the Department of Transportation to reject a

proposed alliance between American Airlines and British Airways, because the alliance threatens a substantial loss of competition which would likely result in higher air fares and reduced service.(The Providence Journal, 2001) The anti-trust assessment in EU Cartel-type where an exemption forms competition rules need to be granted. Merger-type where an application of merger control procedure needs to asses costs and benefits. These anti-trust causes a lot of potential threats for the company have to get into a co-opetition relationship. Since the approval of the Delta/Continental/Northwest code-share alliance, formal empirical analysis of the alliances effects on price and traffic levels fails to support collusive behavior for approximately 64% of the code-sharing between the three.(Gayle, 2008)

An update of DOT data show 12-15% increase in fares in Open Skies Market (Reitzes and Moss, 2008)

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Code sharing and immunized alliances are found to have significantly lower prices than traditional interline (multicarrier) service, but the effects are smaller in magnitude than previous results(Whalen, 2007)

It leaves the customer/passenger with less number of choices in the end. Price Fixing also can also come into picture and impact on travelers.

5. Conclusions
Part-1 The PESTL analysis gives a clear understanding of the issues face by B.A. within its operating environment. Whereas the Economic concepts discussed above gives an idea of the challenges which the airline industry and B.A. in particular face, and helps to figure major areas of concern and threats in the future for organizations operating in this segment of business. Part-2 We can never say if the theory of co-opetition actually benefits the company or the industry as a whole. Positive results can be achieved if at all the agreement between the two parties stand for a longer term/duration and managed well within their interests.

6. Appendices
6.1 Appendix-1 Aging Population of UK a Social threat

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By 2034, 23 per cent of the population is projected to be aged 65 and over compared to 18 per cent aged fewer than 16. [Source: Office of National Statistics, 2011]

6.2 Appendix-2 Unemployment rate in the UK

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The employment rate for those aged from 16 to 64 for the three months to March 2011 was 70.7 per cent, up 0.2 on the quarter. The number of people in employment aged 16 and over increased by 118,000 on the quarter and by 416,000 on the year to reach 29.24 million. [Source: Office of National Statistics, 2011]

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