Environmental Forces Affecting British Airways
Identify the main environmental forces affecting British Airways by undertaking a PESTLE analysis (focus on current trends). Which ones are likely to be drivers for change in the future of the company and why? Analyse the nature of competition British Airways faces using Porters Five Forces framework. Porters five forces analysis looks at factors outside of an industry that influence the nature of competition within it, the way in which firms compete and the industry’s likely profitability conducted by the model.
The degree of rivalry is one force that needs to be taken under consideration. Rivalry could lead to competitive practises such as price wars, offering credit terms, adding product features etc. This usually occurs when there are lots of competitors in a market or when the market is declining to attract new customers. Competition in the airline industry is at an all-time high which is challenging providers to reduce costs while improving quality.
In this environment, attracting new customers and retaining existing ones through superior customer service is not only a key competitive differentiator but a necessity. Also the rising oil prices have had a dramatic effect on the airline industry. In the year up to September 2008, 26 airlines had gone out of business! British Airways (BA) cater for both long haul and short haul flights unlike the low cost airlines such as Ryanair and Easyjet which only cater for short haul flights.
There is little differentiation between BA and their competitors within the long haul flights in terms of prices and service offering whereas the short haul market is more fragmented with many small players. Direct competition in the airline industry is fierce with likes of Virgin, Emirates, Qatar Airlines competing. BA offer high quality customer based service in urge “to be the most exclusive and first choice airline for all airline travellers” . They have a strong competitive advantage through the corporate image that they have created for their airline.
So they could sell slightly more expensive seats in return for their outstanding service. Airlines could snatch hold of sustainable competitive advantage through innovative ideas or more advertising would be another factor to consider to limit rivalry. It is said that if normal profits exist, firms outside will have an incentive to enter the market and cause new entrants to enter the market and eventually decrease the profitability for all firms in the market. However there are significant barriers to entry that prevent this in the airline industry such s the competitive environment. There are already numerous firms combating for the most customers and fighting for consumer loyalty by offering high quality services or low prices. It would take a new entrant a long time to establish their brand before they could start earning profit within the airline industry which is usually done by mass advertisement which is a big sunk cost. They would not have the advantage that big airlines would have from economies of scale from bulk purchases from buying equipment for the planes etc.
They would have to invest a lot of money in the aeroplane themselves as well have some contacts and expertise. They’d have to abide by the government legislations which may weaken the company’s competitive position and also they’d have to offer a differentiated service otherwise why would customers go to them? There are barriers to exit which are also in place which deter entrants from the market. Also the failure of airlines such as XL and Zoom are likely to deter entrants as they wouldn’t want to end up in the same way.
BA have already established brand equity and are in possession of customer loyalty as well as being in the top ten airlines so they have a strong position in the airline industry. There are very few substitutes within the airline company. In substitution of a short haul flight, you could take a ferry or the Eurostar train service. However these methods tend to take much longer and sometimes are more expensive than flights themselves. As for long haul flights there really is no suitable substitute at all unless you would drive to New York from London in a couple of months with a combination of road, trains and boats.
There are two main reasons for air travel- leisure and business. Leisure travel is seen to be price elastic as demand increases when prices drop vice versa. On the other hand business travel is seen to be price inelastic because a change in price doesn’t affect the demand for travel. Bargaining power of buyers can reduce profitability by lower prices such as Tesco, Walmart. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer’s willingness or incentive to use that power.
This force is relatively high when there are few large players in the market and is present when there is a large number of undifferentiated, small suppliers such as small farming businesses supplying large grocery companies. There is a low concentration of buyers to suppliers in the airline industry which means that they have little bargaining power. Increased internet usage has amplified awareness and interaction of customers. There are two main aircraft manufacturers who have a high bargaining power. They are Boeing company (US based) and Airbus SAS (European based).
Another supplier of importance is the oil industry- oil represents a third of the operating costs of the airlines. BA are restricted by sole supplier of fuel to the airport. The priority of landing slots is given to historic rights of existing users so BA who have a high power of their brand would have a great advantage of this. At the moment there is a clear example of BA employees using collective bargaining through trade unions in order to increase their bargaining power. What do you think is the strategic rationale for the merger?
Do you agree with this statement made by the BA’s Chief Executive, Wille Walsh that the merger between BA and Iberia will be ‘good news for passengers and staff’? give your reasons why. Bibliography Griffiths & Wall (2009). Economics for Business and Managment. 2nd ed. London: Prentice Halls FT. Ian Worthington & Chris Britton (2009). The Business Environment. 6th ed. London: Prentice Halls FT. Conway E. (2010). Financial Crisis. Available: www. telegraph. co. uk/finance. Last accessed 17 January 2011. Lane, E. , (2010). Are mergers good for airlines? BBC News, 4 May. Available: http://www. bbc. co. uk/news/10095309 Last Accessed 17 January 2011 Office for National Statistics, (2010). Ageing: fastest increase in the oldest group. Available: http://www. statistics. gov. uk/cci/nugget. asp? id=949 Last Accessed 17 January 2011 Rosalie Marshall. (2009). British Airways’ social networks strategy takes off. Available: http://www. v3. co. uk/vnunet/analysis/2238297/updates-image-online. Last accessed 17 January 2010. Dan Milmo. (2009). Q: Iberia British Airways merger. Available: