Economics: British Airways - Essay Example

 Economics: British Airways Introduction British Airways, based near the main hub at London Heathrow Airport is the leading airline in the United Kingdom. Based on the sizes of the fleets it is the largest airline company and the second largest in passenger carriage. The British Airways Board was formed in the year 1971 and its task was to control BOAC and BEA, the two nationalized airline corporations. In the year 1974, the two companies merged with two smaller ones namely Cambrian Airlines and North east Airlines to set up the British Airways. Along with some other airlines, British Airways is the founding member of Oneworld airline alliance. A supersonic airliner was also run by British Airways and Air France. The company acquired a lot of space in Gatwick Airport after the acquisition of Dan-Air in 1992. The company acted in the constituent of the FTSE 100 index for 23 long years. In the first month of 2011, the company decided to stop trading on the London Stock exchange (Customer Success Report, n.d.). Demand and Supply Factors The main factors that lead to demand for British Airways are business travelers, tourists, freight transport and mail transport (Airline Industry Background, n.d.). The other demand factors include prices of the tickets, income levels of the passengers, access to substitute mode of travelling, the frequency of fleets, safety on travel and some random factors like threat of terror. Globalization and free mobility of people have also contributed to the increasing demand of air tickets (Department of Air Transport at Cranfield University, n.d.). The supply factors are behavior of competition, regulation of the government, resource cost like fuel, labor, maintenance of the service and the technology used for the travelling purpose and capacity of the airport with route structures. The other supply factors include the capacity of the aircraft, competition among the different players, the rate of taxes in which the company operates (Fleming Gulf, 2010, p.2). Market Structure Oligopoly is the characteristic of the airline market structure. The market provides the evidence of few competitors. Each of the operating companies in the industry has pricing power and can set the prices according to its wish. Each company has the potential to affect the market but is also affected by other companies (Del Oro social Science Dept., n.d. p. 2). There are some barriers to entry into the industry mainly because of the high set up costs involved. Vertical integration is limited in the airline industry as the choice of the entrant faces legal restrictions. Foreign ownership of most domestic airlines is limited mainly because of the regulation of the government. Cabotage restrictions prevent the airline in a certain country to carry passengers further the entry point of another country (Sullivan and Coughlan, p. 8). Requirements to compete in the market The company can make intensive usage of revenue management. Some of its steps might be using seats that are convertible so that the flights are filled with passengers who are profitable. Signing up alliances between carriers can be the alternate way to sustain in the market. Investments can be attracted to upgrade the efficiency of the fuel (Whitelegg, 2000, p.1). Investments in new or modern aircrafts that are fuel efficient will lead to lower consumption of fuel. The revenue streams can be diverted into many other sectors including shift towards air cargo services. The loss making routes should be identified and closed. The frequency of flights can also be reduced in certain identified routes which will have its effects on the average fixed costs. The employment contracts can be made more flexible. The costs on labor can be split up between fixed and variable costs. A policy of mixed pricing strategy that will improve the flow of cash and also act to shoot up the total revenue can be undertaken. In the short run, the profit maximization policies can provide space for the pricing strategies. This will act as the shield in the situation of recession and focus will be on the survival of the firm (Riley, 2008). Elasticity concepts One of the important concepts that can influence the pricing strategy is price elasticity of demand which shows the change in the quantity demanded of a certain product due to change in the price of the same product. For example, if British Airways reduces the price of one of its services by 10% and the demand of the same service increases by 20% then the price elasticity is 2. Again if the price of the tickets increases by 10% but the rise in the demand 5%, then the demand curve comes out as inelastic (Biz/ed, 1998). Another important concept is the income elasticity which is referred to as change in demand of a certain product (airline service in this case) due to changes in the income of the people keeping the other conditions as constant. Since tickets for air travel is considered as normal good, the income elasticity will be positive. Elasticity of cross price is measured as the variation in demand for a product (tickets) due to fluctuations in the price of substitutes of that good may be rail travelling tickets in this case (OECD, 1993). Efficient use of resources British Airways placed an order for four 777-200ER aircrafts in the year 2007. The valuation of the order was more than 800 US dollars. Flight expansion was the motive of the company behind such step. In that year itself the company ordered thirty six new long haul aircraft. The company started the premium service between London Airport and New York JFK. The recent version of advertising theme also came up in 2007. In the financial year ending in March 2010, turnover of the company was around 8000 million pound with a profit of 531 million dollars. British Airways merged with Iberia to form the largest airline group in 2011 in terms of annual revenue. The company maintains its own engineering services for the aircrafts at more than 70 airports all round the globe. The official flight of the Wimbledon Tennis Tournament is British Airways. The company is also the official airline and tier one partner of the Summer Olympics in 2012 and the Paralympics. British Airways also was the official Airline in the bid of England to host the Football World Cup for 2018. Economic Growth The company is likely to be benefitted from economic growth. Economic growth brings increased income in the hands of the population. This will act as the incentive to buy tickets for air travelling. Economic growth is the wanted situation for business activities. Businessmen are required to travel frequently. With economic growth they will be more inclined to buy air tickets mainly because of lack of time and leisure. Unemployment In the situation that is characterized by unemployment the company will have to operate below the level of optimal efficiency. The company will not be able to make optimal use of the resources and this is unwanted situation for the perspective of the company. The efficiency of the economy gets reduced as the frictionally unemployed labor operates at below efficiency level. Inflation One of the major impacts inflation can have on the aviation industry is raising the cost of Aviation turbine fuel. As a result the company will prefer to ground flights. Thus the revenue stream of the company will suffer a shock. The company will involve itself in the process of retrenchment causing job loss and the economy will face the downturn. The interest rates will rise along with the price of inputs (Bowett n.d.). Inflation will also shed its effects on flight travelling as passengers will look out for cheaper airline companies or even other modes of travel where possible. The ability to borrow money and the process of creating new job opportunities will be on hold (Federal Aviation Administration, 2011, p.12). Balance of Payments Healthy balance of payments situation is ideal to attract investments. The investments can be used in diverse activities in up gradation of technology. The technological advancements will be the added advantage of the company among other competitors. Interests can be shifted in researches to use the fuel efficiently or innovations of fuel efficient flights. Fluctuations or variations in the balance of payments situation will reduce the aggregate demand for tickets. This may hurt the confidence of the investors. Business Cycle The four phases of business cycle are prosperity, recession, recovery and depression. The phase of prosperity or boom is characterized by high levels of effective demand. Recession will affect the sector either partly or wholly. There will be reduction in the volume of demand and possible back up measures are needed to be undertaken as soon as possible. The situation is partly compensated in the phase of recovery as it will bring investments and a lot depends on the efficient use of the resources by the company. The possibilities of business will open up again an the company will be of the track of extracting revenue once again (Fatas, Insead and Cepr, 2001, p. 4). Reference n.d. Airlines Industry Background. [online]. Available at: http://www.galbithink.org/topics/ka/industry.htm. [Accessed:20th March, 2012]. British Airways, n.d., Customer success Report. [pdf]. 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Whitelegg, J., 2000, Aviation: the social, economic and environmental impact of flying. [pdf]. Available at: http://waag.co.nz/pdf/res0006.pdf. [Accessed: 22nd March, 2012]. Riley, G. 2008. Maintaining Profitability in the Airline Industry. [online]. Available at: http://tutor2u.net/blog/index.php/economics/comments/maintaining-profitability-in-the-airline-industry/. [Accessed: 20th March, 2012]. OECD, 1993, Glossary of Statistical Terms. [online]. Available at: http://stats.oecd.org/glossary/detail.asp?ID=3185. [Accessed: 22nd March, 2012]. Biz/ed, 1998, Price Elasticity and Pricing Policy.[online]. Available at: http://www.bized.co.uk/learn/business/accounting/busaccounts/notes/pl.htm?page=14. [Accessed: 20th March, 2012]. Bowett R., External environment-business and inflation.[online]. Available at: http://tutor2u.net/business/external/economy_inflation.htm. [Accessed: 22th March, 2012]. Fatas, A., Insead and Cepr, 2001, The Effects of Business Cycles on Growth. [pdf]. Available at: http://faculty.insead.edu/fatas/growthbc.pdf. [Accessed: 22nd March, 2012]. Federal Aviation Administration, 2011, The Economic Impact of Civil Aviation on the U.S. Economy. [pdf]. Available at: http://www.faa.gov/air_traffic/publications/media/FAA_Economic_Impact_Rpt_2011.pdf. [Accessed: 22nd March, 2012]. Read More