Turbulent Times for British Airways - Essay Example

Going Online: Airlines’ Lifeline Introduction The 9/11/01 terrorist attacks in the US by itself would have been enough to crack the world economy wide open. But misery always comes in pairs, and as it sent the world tumbling in a wild panic it was buffeted in quick succession by the SARS scare and the skyrocketing prices of oil. All three problems were especially paralyzing to both overseas and domestic travel, on which the aviation industry live and die. With the use of planes demonstrated in the US as preferred method of terrorist attacks, air travel begun to make people nervous. SARS, the mysterious flu virus that originated in Southeast Asia, soon spread throughout the world and many countries so affected had been crossed out as travel destinations. As for the surging oil prices, all kinds of transportation systems were logically the first and worst sufferers. The airline industry received the hardest blows. In effect, the airline industry was among the sectors of the world economy lying prostrate as the old millennium changed to the new. Many flag carriers, notably Swissair of Switzerland and Sabena of Belgium, could not hang on and wrote finis to their operations. In the US, a number of domestic airliners filed for bankruptcy proceedings as an option for folding up completely. Going into 2005, the airline industry as a whole was estimated to have suffered losses to the tune of $43 billion (Watson, J., 2006). This was equivalent to the combined capitalization of 13 American airlines in today’s terms. The British Airways (BA), which for many years held the distinction of being the world’s most profitable airline, found itself hemorrhaging by 2 million pound-sterling per day in operating costs during those troubled years, following the 9/11 tragedy and the added one-two punch of SARS and the almost doubling cost of fuel. From 2001 onwards, BA went through an almost uninterrupted four-year decline. As the world’s largest international airline, BA is regarded as the industry leader, its profit ledger the bellwether of the market. Had it collapsed in the aftermath of 9/11, there would have been serious repercussions for both the aviation industry worldwide and global business as a whole. Airlines have precisely taken to forming an alliance among themselves to consolidate their resources so they can joined hands in warding off industry-wide problems like rising fuel costs, overcapacity and under-capacity. Such an industry grouping is the American Alliance which consists of Cathay Pacific, Qantas and other airlines. BA, an old member, resumed its membership in the alliance in 1999. But the storm that hit the industry in 2001 was of such magnitude that all airline alliances in the world were rendered helpless. Thus, the rest of the airline industry was studiously taking notes when BA pulled itself out of that hole and averted the same disaster that all of them were facing. How? By simultaneously cutting excess fat – and going online. BA – the Airlines’ Airline BA is not only the largest and most profitable but also the world’s oldest airline. It conducted its first flight in August 1919, only 10 years after the Wright brothers opened their pioneering airplane company in 1909 in New York City. The London-to-Paris maiden flight was ran by BA’s forerunner company Aircraft Transport & Travel. As British Airways, it operated for many years as UK’s national airline until it was offered for privatization in 1987, which configuration was completed in 1996. BA emerged from this privatization program with 265,000 shareholders on record, of which the largest block of 66 per cent was owned by employees of the company. By then, BA had grown into a giant conglomerate owning 100 per cent of Airways Plc., BA Holidays Ltd., BA Airways Travel Shops Ltd., Brymon, Cityflyer Express, Airmiles Travel Promotions Ltd. and Deutsche BA; and 25 per cent of Qantas, 9 per cent of Iberia, and 18.3 per cent of ComAir, its franchise partner in South Africa. Between that year and 2000, BA’s fleet of 340 aircraft was unmatched in Europe. This consisted of seven Concordes, 71 Boeing 747s, 38 Boeing 777s, 21 Boeing 767s, 48 Boeing 757s, 83 Airbus A318/319/320s and 52 Boeing737s. The airline’s routes covered 535 destinations in 160 countries as it operates from two main bases – at Heathrow, the world’s biggest international airport, and at Gatwick. During that period, BA was staffed by 65,157 people worldwide, 78.7 per cent of whom were based in UK. It was already rough flying for BA in the period between 1996 and 2000 when it was beset by low employee morale, an Asian-wide economic slump, competition from low-cost airlines and fuel prices that were starting to shoot up. An industry-wide slump saw a drop in passenger volume that gouged a 50 per cent loss in BA’s profits in 1999, considered the company’s worst showing since 1982. The following year, the airline recovered somehow and flew over 48 million passengers on 529,807 flights to retake its place as the airline that carried more passengers from one country to another than any of its competitors. Also, it maintained its position as the world’s seventh biggest cargo airline with 897,000 tons of freight and mail moved yearly. Then 9/11 spoiled everything. In 2002, the embattled BA embarked on a cost-cutting program to shave 650 million pound-sterling yearly from its operating expense. First on the chopping block were 1,200 employees taken from the engineering, mechanical and support sections. Subsequently, 5,800 more jobs got the axe. Cuts were also exacted on managers’ pay, overtime work was reduced, jobs were streamlined and employees were placed on an extended leave schemes. The company then terminated 270 of its 300 existing contracts for IT services on such varied airline operations as dispatching, scheduling, air traffic control and ticketing. The latter move was part of a grand design for BA to enter the brave new world of e-commerce, starting with ticketing and sales. It was decided that taking ticket sales to the Internet would yield tremendous savings by eliminating the need to deal with travel agents and maintaining ticketing offices in every city. Traditionally, airlines rely for the most part on travel agents, sales agents and its own ticketing offices to sell plane tickets. This entails vast amounts of resources and maintenance costs. The process is also inherently slow and laborious for a business that runs by the clock. With real estate value going sky-high everywhere, renting space for a ticketing office in densely populated cities is not worth it if the volume of business conducted therein is as sparing as the purchase of plane tickets. Travel and sales agents, for their part, need to be paid at least 10 per cent of the ticket cost that they sell as commission. Yang Siliang (2001) notes that in most cases such commission paid by airlines to travel agents comes to as high as 25 per cent of the ticket cost. When BA announced in 2002 that it was going online for ticket sales, it gave travel agents a 90-day notice, the period deemed necessary to put the new system completely in place. In the succeeding three years, the “BA.com” website was placed at the center of the company’s customer-facing business process involving online booking of flights, checking-in and boarding. By the third year, some 89 per cent of the airline’s ticketing requirements had been switched from paper to digital In terms of customer acceptance, 10 per cent of had by then begun booking flights and checking-in through BA.com, while 6 per cent had started patronizing the online boarding pass service. Online Airlines By 2005, BA had established itself as the first online airline, blazing the trail of e-commerce for the airline industry. Watson, J. (2005) reported that BA had turned itself around to retake its position as the world’s most profitable airline. With e-commerce in place, the airline realized savings of over 134 million pound-sterling. In May of that year, BA reported a yearly pre-tax profit of 415 million pound-sterling, representing a 80 per cent increase from the 2004 figure and a big leap from the 5 million pound-sterling profit posted with great difficulty in 2000. This mirrored the growing acceptance and improvement of its IT-based customer services that simplified the passenger-airline interaction and afforded passengers much ease and convenience. As a result, they come back for more of the same. By 2006, four out of five BA passenger are buying their tickets online and they are able to check-in and choose their plane seats even before arriving at the airport. One in five passengers, or 600,000 passengers monthly, also now use the self-service kiosks at the airports to speed up their check-in. Within e-commerce, BA hopes to increase productivity by 35 per cent in the next two years, along with a reduction of 450 million pound-sterling in operating costs. With the good return on its initial IT investments, BA is prepared to plow more money into the effort. By next year, such investment is programmed to be increased 50 per cent, from 66 million pound-sterling initially to 93 million pound-sterling, going up to 100 million pound-sterling if the situation justifies it. The projections were that when BA moves to its new, bigger headquarters at Heathrow Terminal-5 in 2008, 80 per cent of its customers will be checking-in online or using the self-service kiosks, while 95 per cent will be boarding its planes with e-tickets. More passenger safety and convenience are also expected when the airline re-launches BA.com with improved navigation and extra services, such as more advanced seat-booking facilities and excess baggage registration services. Also planned to be combined in a one-stop-shop setting are booking for hotels, car rentals and excursions. Simplification of the IT services of BA continues, with plans to allow passengers to pay for excess baggage online and delivery pay slips electronically to BA employees. The company’s back-end systems such as finance, human resource and other business units are also scheduled to be computerized. The achievement did not pass unnoticed in the airline industry, which since the turbulent years after 2001 had been on the lookout for new systems to copy to improve their own wobbly operations. Inspired by BA, one of UK’s largest domestic airlines, BMI, came up with its own IT-based program called “Blue Sky,” a three-year e-enabling undertaking that sought to cut costs by 100 million pound-sterling by 2006. The project, which in its initial year promptly generated a 34 million pound-sterling savings for BMI, reviewed existing process, introduced simplicity and used more technology to cut manpower costs and increase automation in company operations. Like BA’s e-commerce project, BMI seeks to simplify and speed up its operations through e-ticketing, self-service check-in and online check-in. The online check-in part of Blue Sky was launched January 1, 2006 and by end of the year it is expected that all sales will be conducted online, with two-thirds of passengers checking-in self-service. But while going e-commerce may have succeeded in easing the financial worries of BA, as it starts to do the same with those of BMI, it can only do so much in resolving their institutional problems. For example, Watson, J (2006) noted that BA has not paid any dividend to shareholders for four straight years. In addition, the airline owes nearly half of its 3.5 billion pound-sterling market value to its employees’ pension fund. Made for Airlines E-commerce seems to have been devised with airlines in mind. In the business world, airlines could emerge as the biggest winner of Internet use due to the nature of airline business and its cost structure (Yang, S., 2001). No other industry can derive greater benefits from online ticket sales. In fact, Kenney, M. & Curry, J. (1999) said software companies that vied for leadership role in e-commerce in 1997 seemed to be thinking of clipping the wings of travel agents when they made it possible for airlines to create online reservation systems that they could control. With this system, the functions of travel agents in flight reservation and booking become extraneous. It was noted that an e-ticket costing only $1 could bloat to $8 when transacted through travel agents and mostly by telephone. For this reason, airlines together with banks were the early birds insofar as using e-commerce was concerned. A US-based research group, Jupiter Communications and Forrester Research, affirmed that ”airlines could reduce distribution costs by 75 per cent through the use of Internet bookings.” The operating costs of an airline are split in two, one direct and the other indirect. The direct operating costs make up 60 percent and are those incurred on aircraft, fuel and salaries. The remaining 40 per cent is sustained from expenses on distribution, reservation, sales, advertising and promotions, agent commission and ticketing fees. Nothing much can be done about the direct operating costs which are more or less fixed, but airlines can do away entirely with their indirect operating costs by going online. All it needs is a computer, a credit card and Internet access at reasonable speed. Airlines already online are trying to maximize the benefits from e-commerce by turning to such new IT tools as Revenue Management Systems (RMS) and Internet Distribution Systems. With RMS, airlines can analyze booking trends, thus making it possible for them to forecast the passenger traffic demand for each flight and each market segment, meaning the passengers’ willingness to pay at each price level. Based on this information, an airline can generate more revenues by recommending the appropriate number of seats for each booking class. Savings in distribution and transaction costs are also realized in the process. Notwithstanding the tremendous benefits to airlines and convenience to passengers promised by e-commerce, why are Internet bookings not growing as fast as it should be? The answer lies in the very nature of airline operations. Yang, S. explains: Airlines sell tickets at different prices. The same plane seats fetch different prices depending on when or where it was sold. The earlier one buys the ticket before the scheduled flight, the cheaper it has to be priced. Airline seats are also perishable and time-sensitive such that seat not sold at departure time will become “spoiled.” On the other hand, seats that are sold too early at discount prices may dilute the airline’s revenue. If the airline sells tickets too cheap, it loses revenue. If its fares are priced too high they may remain unsold when the plant departs. Airlines cannot therefore price tickets correctly online, not knowing when to sell at what price under what conditions. Like most businesses, airlines have to sell tickets on discounted prices to attract more customers. These include group price, frequent flyer discount, alliance share deals, etc. Such low-fare tickets are usually given based on season, market and air traffic demand. Most airlines do not have the capability to handle these conditions fast enough to accommodate Internet bookings. Another reason airlines are not stampeding into e-commerce is that most of its benefits appear to go to the consumer. Moreover, there is always the possibility that something could go wrong which, when it does, could be swift, ponderous and irreversible. Conclusion There are arguments for and against e-commerce but there is no denying that it has proven to be a giant machine for reducing transaction costs. It speeds up, simplifies and enhance relations between companies and consumers, by eliminating the human and paper intermediaries in business transactions which make up the lion’s share of operational costs. In the US, for example, Kenney & Curry revealed that processing paper documents in business transactions generates an overhead of some $250 billion, which is almost 5 per cent of that country’s GDP. As in airlines, most customer service activity in business is routine and person to person by telephone. Telephone call processing is slow, has a very low bandwidth and subject to disconnection anytime. Customers’ questions in such transactions are mostly related to costs, directions, flight schedules, simple data that could be codified in the Internet, indexed and stored in a service to be accessed online and downloaded as needed. That way, no cost is incurred and the company economizes on effort and service. Through the Internet, airlines can provide customers with a much broader and more detailed information, including textual descriptions, images and even reviews of travel destination. This way, the travel itinerary of customers can be “customized.” No other IT tool allows customers to personally search databases of airline schedules, including books, cars and software and then complete the purchase without a face-to-face interaction. For this reason, e-commerce achieved “one of the fast adoption rates any technology has ever experienced (Yang, S.).” There is no telling what other human activities Internet-related commerce will encompass but in addition to airlines, such businesses as stock trading, bookstores and banking have migrated online. E-commerce is even making inroads on the traditional retail industry. The Internet will be used in ways that will transform existing relationships such as those between buyers and sellers, workers and owners, suppliers and assemblers and, yes, airlines and passengers. Changes are expected in such institutions as manufacturing companies, service providers and retailers. References 1) James Watson (2006). “Turbulent Times for BA.” Computing Business, 19 January 2006. 2) James Watson (2005). “IT Strategy Propels BA Profits Skyhigh.” Computing Business, 18 May 2005. 3) Sarah Arnott (2006). “BA Puts IT at Heart of Growth.” Computing Business, 16 May 2006. 4) Martin Kenney & James Curry (1999). “e-Commerce: Implications for Firm Strategy and Industry Configuration.” e-Conomy Paper 2, July 1999. 5) Silian Yang (2001). “e-Commerce in Airline Business.” Paper presented at the International Symposium on Government in e-Commerce Development; Ningbo, China; April 23-24, 2001. Read More