Analyse the internal and external environment of British Airways using Pestel, Swot, Porters five forces & BCG matrix 2018

• For EasyJet Pestle and Swot analysis, see EasyJet Pestle & Swot.
• For Virgin Pestle and Swot analysis, see Virgin Atlantic Pestle & Swot.

1.0 INTRODUCTION 

British Airways or BA (as it is often shortened) is the largest airline carrier in the UK by fleet size. Founded in 1972 by the government as the main national carrier and later privatised in 1987, BA operates a fleet of 290 aircraft (as of December 2016). It is among the few global airline carriers that fly to all the major inhabitable continents of the world. Latest revenues for the year ending 31 December 2016 were approximately £11.4 billion on operating profits of £1.4 billion (BA annual report 2016).

2.0 British Airways (BA) PESTLE analysis 2016-2017(Opportunities and threats)

On the 24^th May 2017, British Airways experienced a massive IT failure when the airlines servers at its data centres were physically damaged supposedly following a power outage (The Guardian 2017). The IT glitch affected more than 1000 flights carrying close to 75,000 passengers meaning BA faced compensation costs over £100million (Butler 2017). This is an example of the importance of investing in the latest technological developments within an industry which can help to eliminate technological weaknesses that can leave a firm vulnerable, just like BA’s case.

PESTLE is used in strategy to analyse the macro environment and identify how future trends in the political, economic, social, technological, environmental and legal environments might impact individual organisations within an industry. Firms then study the key drivers of change behind the PESTEL factors. These key drivers of change constitute opportunities and threats in a firm’s external environment and industry which can be overcome by focussing on strengths and eliminating weaknesses. This is why PESTLE is only a starting point since other frameworks such as Porters Five Forces and SWOT have to be used in conjunction to help firms like British Airways utilise internal core competencies so as to take advantage of opportunities while neutralising threats in its industry.

2.1 Political environment

In 2016, British Airways operated in a challenging political environment, characterised by major terrorist attacks in key destination markets such as Paris, Nice, Brussels, on top of Brexit. In June 2016, Britain voted to leave the EU, a move predicted to cause both political and economic upheaval and uncertainty for not only firms but also the UK economy, at least in the short term. Unsurprisingly, Brexit has already sparked political turmoil across the UK with Scottish Prime Minister Nicola Sturgeon calling for a second Scottish independence referendum to protect Scottish interests in the EU (Douglas and Gross 2016). The potential implications to leave the EU are many, not least Brexit inflation, in part due to a weakening pound against the dollar and Euro, a situation that could get worse if Britain does leave the EU before 2020 (Davies 2017; Mintel 2016).

Nevertheless, the government’s decision last year (in 2016) to approve a third runway at Heathrow to expand UK airport capacity was welcome positive news for BA which operates predominantly at Heathrow (Johnston 2016). The proposed expansion has been welcomed by the BA as well as other domestic carriers like Virgin Atlantic as expansion will create new and affordable extra capacity at Heathrow. It will also reduce the cost of operating to or from Heathrow which is currently the world's most expensive hub airport (Johnson 2016). Further, expansion of Heathrow post-Brexit will allow carriers like BA to offer more direct flights to not only UK destinations but also up to 40 new cities abroad such as Wuhan, Osaka and Quito (BBC 2016).

2.2 Economic environment

The uncertainty following Brexit had an economic impact on BA. According to the annual report (2016), due to the Pound Sterling’s depreciation, BA’s revenues generated in overseas currencies benefited, but overall, the impact of exchange was negative on the company’s financial results. The best Brexit outcome would obviously be business as usual but with much remaining to negotiate over and the possibility of Britain being made an example of, fears of a negative impact on British firms are not baseless (Johnson 2016).

On a more positive note, BA on the other hand benefitted from low fuel prices and interest rates, economic factors that helped promote growth in market capacity and competition (Annual report 2016).

2.3 Social Environment

The peak summer season in 2016 was operationally difficult for BA, largely due to social factors outside of the airline’s control particularly, air traffic controller (ATC) strikes in France. A number of ATC union strikes hit France in 2016 due to social unrest over a series of disputed labour reforms from the Socialist government, causing BA to cancel many flights to and over France. Further, recently in March 2017, French air traffic controllers (ATCs) started a five-day strike that affected BA flights to and from the UK, France, Spain, Switzerland and Italy. Many BA flights were either cancelled or delayed forcing the company to use larger aircraft where possible to help its customers reach their destination. BA and other airlines such as EasyJet have already petitioned the EU and the French government to develop an action plan to minimize the impact of ATC strikes on passengers (The Guardian 2017).

2.4 Technological environment

The airline industry is currently undergoing digital disruption after years of relative stability following 911. The digital revolution has been ushered in by the internet and the larger role it plays in how consumers travel (Bloomberg 2017). More importantly, digital technologies are materially changing the cost structure of the industry, enabling new entrants such as WOW Air, to use digital technology to disrupt the legacy carriers such as BA. WOW Air for instance is exploiting digital technology such as internet-only booking systems that don’t require physical check-in infrastructure as well as new technologically advanced fuel efficient fleets to outcompete BA by offering customers very cheap domestic and international flights (Elliott 2016).

The good news is that BA is also exploiting such technological developments to try and reduce the impact of digital disruption on it in near/far future. BA has for instance invested in digitising its boarding pass operations, which has made it a lot easier for its passengers.The importance of investing in the latest technological developments was highlighted by the massive IT failure on May 24 2017 when the airlines servers at its data centres were physically damaged supposedly following a power outage (The Guardian 2017). The IT glitch affected more than 1000 flights carrying close to 75,000 passengers meaning BA is very likely face compensation costs over £100million (Butler 2017).

2.5 The Legal environment

British Airways has been forced to delay the introduction of paid-for meals on its short haul flights at London's City airport after one disgruntled customer threatened to take legal action. The move which initially was to be introduced in January this year (2017) has been put on hold until October due to potential legal wrangles arising from customer claims of advance bookings (Harley 2017).

2.6 Environmental Factors

BA faced sustained operational disruption in June last year (2016) due to adverse weather conditions, in particular thunderstorms in South East England, which led to a cancellation of more than 50 flights to and from London and a delay in many other flights –– including a service to Los Angeles that left 27 hours late (Calder 2016). Such external environmental factors do cause travel chaos for BA and adversely affect passenger satisfaction resulting in loss of future revenue and additional costs.

Figure 1: British Airways pestle analysis 2016-2017

3.0 British Airways BCG Matrix Analysis 2018

3.1 British Airways Stars

British Airway’s European routes can be considered stars. Commanding 21.35% market shares with a capacity of 11,427,425 and rated number five in Europe (Casey 2017). This route generates more cash than other routes because of its high growth rate.

3.2 British Airways Cash cows

UK and Ireland routes are the cash cow routes for British Airways. These are the company’s most successful routes in the mature market and generate more profits than all the other routes. The transatlantic routes to North America and Canada also boast some lucrative routes for BA including its most profitable route from London Heathrow to JFK New York where BA commands a 38 per cent market share, ahead of second ranked fellow British competitor Virgin Atlantic with 24 per cent. If you add BA’s code share with American Airlines, the combined share of the two airlines of the New York route, rises to more than 50 per cent (Jameson 2015).

3.3 British Airways question marks (problem children)

The China route can be classed as a question mark with its growth rate. Being in the emerging market, the route has the potential to grow market shares and become a star. The company should invest more in this route as a way of growing its market shares (Maszczynski 2018).

3.4 British Airways Dogs

British Airways boutique airline concept, Open skies, can be argued to be BA’s dog over years. Its operations between Amsterdam and New York, Paris and Washington were a failure making losses for BA (London Air Travel 2017). The airline boutique business unit has been a cash trap with very little capacity. This is why BA will be shutting it down in September 2018, after 10 years in operation (Peterson 2017)

British Airways Africa routes can also be classified as a dog because of the poor performance. The company had to close some flights like the one to Uganda, which it closed in 2015 (after twenty years of operation), because of the country’s poor economy and unprofitability.

Figure 1: British Airways BCG Matrix Analysis 2018

4.0 BRITISH AIRWAYS SWOT ANALYSIS 2017

A SWOT provides a reality check on British Airway’s internal and external situations and performance (see figure 2).

4.1 Strengths

• During the year, BA management action sought to mitigate where possible the impact of many of the challenges and threats analysed in PESTLE (above) while also benefiting from opportunities such as low fuel prices compared to the prior year. As a result, BA delivered a record pre-tax operating profit of £1,473 million (2015: £1,264 million) for the year, a 16.5% increase on prior year.
• BA enjoys strong brand reputation partly derived from a long a long history of service panning over forty years, which has enabled it to build a strong brand over time. The company is globally recognised and trusted by passengers all over the world. This is why in 2016, BA won the business and consumer SuperBrands accolade in the United Kingdom [for the third year in a row], beating off competition from other multinational giants like Tesco, Apple, and Amazon; and beating a total of 1,600 competitors for the top spot (Macalister, 2016). As a top SuperBrands company, British Airways, at least in 2016,  was trusted and respected by clients, and ultimately enjoyed the good will of consumers, which any company needs to survive and outcompete others.
• Thirdly, the company has a robust customer retention programme that has ensured customer loyalty in a challenging competitive environment. The “frequent flyer” programme, involves BA giving loyal flyers complementary flights if they accumulate a certain number of points, cumulatively awarded every time a client flies with company. Although other airline companies run similar programmes, British Airways’ programme was deemed exceptional in 2016 this it received recognition from the Business Traveller Magazine as the best (Otley, 2016).
• British Airways partly draws its strengths from the economies of scale, which give it a competitive edge over other operators. It is an offshoot of a large parent company, International Airline Group, which also owns and manages other airlines, including, Aer Lingus, Vueling, and Iberia.  The parent company operates an extensive network of operations both domestically and internationally, from which British Airways benefits. The economies of scale allow British Airways to enjoy reduced costs of operations.  No wonder, British airways in 2016 also won the Business Traveller’s accolade for best Short-Haul Carrier (Otley, 2016).
• In this digital age, it is impossible for any company to survive if it is not digitised. British Airways has not lagged behind. The Company has integrated Information Technology and the Internet, which has improved efficiency and improved service provision; for instance, the digital boarding pass is used by 28,000 people every day (Dudovskiy, 2015), whereas this was not possible before the digitisation.

4.2 Weaknesses

• British airways’ growth seems to be disproportionate skewed towards domestic short haul flights as the company is very competitive in the domestic market more than in the international market, which may not help its continuity in the future. The uneven competitiveness of the Company is reflected in the revenue ratios between domestic and international operations, in which domestic operations revenue accounted in 2016 for more than 50 percent of the Company’s total revenue (Bhasin, 2016).   This is not good for a company that boasts global stature. The management of British Airways should, without sacrificing the domestic competitiveness, focus on the international market, not only to strengthen the Company further, but also to ensure its future sustainability
• British Airways has a strong worker’s union, created to promote the interests of workers, including good working conditions, adequate remuneration, and fair treatment of workers by the Company, among others. Whereas the union may be positive for the company especially if its efforts result in employee satisfaction and increased productivity, it is more often a liability to BA resulting in frequent incidences of industrial action, which hurt and cripple BA operations, revenues, and the image and reputation of the Company in the process. Whereas it may not be possible to reduce the power of the union, it is prudent that the Company creates and maintains good rapport with union leaders. To this end, the Company must hire people with good diplomatic and strong negotiating skills, if it lacks them. The company also needs to have a pro-employee policy, and if it has it, it needs to maintain it. It needs to treat employees and remunerate them fairly, to avert stalemates between the union and the Company.  

4.3 Opportunities

• Government approved third run away at Heathrow is great opportunity for BA.The proposed expansion will create new and affordable extra capacity at Heathrow. It will also reduce the cost of operating to or from Heathrow which is currently the world's most expensive hub airport (Johnson 2016). Further, expansion of Heathrow post-Brexit will allow carriers like BA to offer more direct flights to not only UK destinations but also up to 40 new cities abroad such as Wuhan, Osaka and Quito (BBC 2016).
• 2016 was characterized by low fuel prices and interest rates, and such favourable economic factors continue, it will help promote growth in market capacity, benefiting BA and other airlines.

4.4 Threats

• Brexit uncertainty is bad for many businesses including British Airways
• Air traffic controller (ATC) strikes in France in 2016 and much more recently in March 2017 continue to cause massive cancellations and delays for BA and other airlines. This is not helped by BA cabin crew, who members of the Unite union, yet again going on another strike in March 2017 over earnings or what the Union regards as “poverty pay”
• Digital disruption continues to pose a risk though BA is also exploiting such technological developments to try and reduce the impact of digital disruption on it in near/far future. BA has for instance invested in digitising its boarding pass operations, which has made it a lot easier for its passengers.
• Adverse weather conditions in the UK such as thunderstorms and extreme winter conditions are only becoming more frequent, not less, leading to more future scenarios of cancellations and delays for BA
• The removal of free onboard meals and introduction of paid-for meals from M&S will likely run into legal implications.

Figure 2: British Airways SWOT analysis 2016-2017

Conclusion

2016 was a very challenging year for British Airways dealing with major issues such as uncertainty due to Brexit, terrorist attacks in major destinations and flight disruptions due to industrial disputes as well as adverse weather. Nevertheless, the company sought to mitigate where possible the impact of these challenges through actions such as investing in digitizing its boarding pass operations to minimize digital disruption and modernizing its fleet. The good news is the company also benefited from low fuel prices and interest rates, economic factors that helped promote growth in market capacity. Going forward, British Airways has core competencies and strengths that can enable it withstand short-term shocks. It is profitable with strong brand reputation which can serve it well to grow and expand to more international destinations as growth is currently skewed towards domestic short haul flights, which is one of its weaknesses.

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