Micro and Macro Economics Analysis of British Airways - Coursework Example

?Running head: Micro and Macro Economics   Micro and Macro Economics Analysis of British Airways Insert         Insert Grade Insert s Name 18 March 2012 Outline  Introduction Microeconomic analysis Macroeconomic analysis Conclusion Reference List             Micro and Macro Economics Analysis of British Airways Introduction British Airways is a company that was started in 1919. The company has been propelled to greater heights by the good managing performances, which have consequently enabled it to develop to what it is today. In addition, the British Airlines Company is one of the best companies in the aviation industry. It is now a dominant player in the aviation industry, having managed to withstand competition from other airlines, especially the low cost airlines. Microeconomic Analysis Some of the demand and supply factors that have affected the profitability of British Airways as a company over the years include economic conditions, competition from other airlines, rise and fall in global oil prices, changes in government policy, and employees’ expenses. Economic conditions include one important demand and supply factor that affects the profitability of British Airways. For example, in the first few years of the new millennium, global recession has hit hard the company’s profitability. Generally, global recession means that the world’s economy is shrinking. A bad economy means that many people will not have a lot of money in their accounts to tour the world and in the process, affecting the company’s demand. This in the long run affects the profits of the company. Competition from other airlines is also a factor that affects the British Airways’ profitability. In the new millennium, the emergence of many low-cost airlines has really affected the company’s profitability by reducing the demand. The number of travelers using British Airways did drop, with some travelers opting for low-cost airlines even when their safety is not guaranteed (Young, 2007, p.42). Rise and fall in global oil prices is also another important factor affecting British Airways’ profitability. It is an important supply and demand factor in that, aircrafts use jet fuel, which most of the time makes a huge portion of the company’s operation costs. When global oil prices rise, the cost of jet fuel, which is a by-product of the refined oil, will also rise. This will lead to a significant rise in the price of air tickets and in the long run, reducing the demand as well as the company’s profits tremendously. The vice-versa happens when the global oil prices fall. Recently, when oil prices rose, knowing that this would affect the company’s profits tremendously, BA executives took part in an illegal act of fixing fuel surcharges. This led to the fining of BA and the executives charged with a criminal act (Thompson and Martin, 2010, p.298) Government policy also affects the company’s profitability. When the government issues travel advisories to some destinations in the world due to terrorist attacks, the number of travelers to those destinations goes down and in the process reduces the company’s profits that would have been made in travels to those destinations. For example, the terrorist attacks on the World trade center had the government informing people of how the situation on the ground was and in the process, the number of travelers reduced tremendously bringing down the company’s profits. Employees’ expense is another factor that affects British Airways profitability. It forms a big part of the company’s costs which are later passed down to the travelers and which affects demand. For example, in 2002 when the British Airways was restructuring its business operations, it had to have 13,000 job cuts. This job cuts were an attempt by the company to cut its costs by 650 million pounds. This showed how employee expenses as a factor has a big impact on the company’s profitability (Young, 2007, p.42)     The market structure in which the chosen company operates in is a perfect competition market structure. The airline industry as a market has many competitors who enter and exit as they wish. In doing this, they constantly consolidate, competing mainly on price. Some of these competitors include major players like Virgin Atlantic, KLM and low cost carriers like EasyJet and Ryanair (Young, 2007, p.43)  At the moment, the company is using its resources efficiently. At the height of stiff competition from other players in the market, BA changed its business model to cut down on costs and remain relevant in the market. Sales have been driven online through advertising, and in the process, third party costs have been minimized. It also uses its resources well in advertising, which as a whole is a good idea. Econometric analysis shows that if BA had not used resources in advertising, it would have missed out in over 11.7 million Sterling Pounds in sales (Young, 2007, p.44).    Macroeconomic analysis I.            Economic growth changes affect the success of British Airways as a company, as it has an effect on the income elasticity on demand. When a country’s GDP grows, the average income for every citizen goes up. This means more people will be able to make more travels around the world on their vacations and in the process, benefiting BA as a company. In addition, multinational companies will have more money to invest in businesses abroad, leading to more travels being made to countries abroad and in the process, benefiting BA, and air travel as a whole (Evans, 2003, p. 55).       ii.            Unemployment is another factor whose change affects the success of British Airways. When unemployment rate goes up, the number of people without jobs goes up as well. This means that there will not be many people going on world tours during vacations due to lack of income. This will mean fewer travels in the aviation industry, thus, the success of British Airways as a company will be affected negatively. For example, in the new millennium, when global recession led to high unemployment rates, performance of the British Airways was dented (Young, 2007, p.42).     iii.             Inflation changes affect the success of British Airways as a company, as it negatively affects the company’s profits and the company’s growth. High inflation rates mean that life becomes more expensive and people have to dig deeper into their pockets whenever they have to spend money. This will mean that they will have less money to spend, especially when it comes to going out on vacations. This will reduce the number of travels made by people and in the process, affect demand in the airline industry. A high inflation rate will also lead to a lower growth rate of British Airways as a company, therefore negatively affecting its success (Walker & Vasconcellos, 1997, p.182).     iv.            The balance of payments is another factor whose fluctuation affects the success of BA as a company. When the balance of payment between two countries is not good, trade between the two countries is also negatively affected. When trade is affected, fewer and fewer travels between the two countries will happen, meaning that the demand for BA’s services will go down and in the process, affect its success. The Committee of Inquiry that was set up to look into Civil Air Transport in Great Britain noted that, improving the balance of trade between countries went a long way in improving air travels between the countries, therefore leading to growth in the aviation industry (Staniland, 2003, p.214).       v.            Business cycle is another factor whose fluctuation affects the success of British Airways. When the business cycle moves downwards, it hits the company hard, as the company collects low profits and sometimes even losses. This can lead to the company laying off some employees to cut down on costs, and in the process, affecting service delivery to customers. This is an obvious indication that the company’s success is affected negatively. In the recent downturn of the economy, British Airways, which by then was almost bankrupt, experienced several strikes by workers. These strikes affected service delivery as flights had to be cancelled as well. This obviously affected BA’s success (Sennett, 2007, P. 65) Conclusion The success of British Airways can be attributed to good management. The management has been able to study the market and all its affecting factors, both microeconomic and macroeconomic. In the microeconomic analysis and study of the market, the executives managed to identify the factors that could negatively affect the company such as competition from other airlines, the economic conditions, and the employee expenses. It managed to come up with comprehensive structures of how they were going to go round the obstacles and maintain BA as a dominant player in the market. In the macroeconomic analysis and study of the market, the management also came up with clear-cut policies of how they were going to round the challenges that the company was going to face such as the economic growth changes. They did not have the power to affect the macroeconomic factors or make them go away, but they came up with strategies of how they would go round the challenges. British Airways will continue being a dominant force in the aviation industry if the managers continue to manage it well, as they are doing currently.   References Evans, KM 2003, Macroeconomics for Managers, John Wiley & Sons, NJ. Staniland, M 2003, Government birds: air transport and the state in Western Europe, Rowman & Littlefield, Oxford. Sennett, R 2007, The culture of the new capitalism, Yale University Press. Thompson, J & Martin, F 2010, Strategic Management: Awareness and Chang. Cengage Learning EMEA, OH. Walker, JS & Vasconcellos, GM 1997, A financial-agency analysis of privatization: managerial incentives and financial contracting, Lehigh University Press, New Jersey. Young, A & Aitken, L 2007, Profitable marketing communications: a guide to marketing return on investment, Kogan Page Publishers, London. Read More