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The UK Airline Industry - Assignment Example

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This assignment "The UK Airline Industry" shows that the UK aviation industry has been undergoing great turmoil as the scheduled airlines faced increasing competition from the newer competitors, whose main attention has been devoted to cost reduction and offering alternative options…
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The UK Airline Industry
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? UK Airline Industry May 6, Outline: Introduction……………………………………………………………………….…………… 3 UK Airline Industry Overview…………………………………………………………….……3 Macro Environmental Analysis…………………....................................................................... 4 Micro Environmental Analysis……………………………………………………………….... 8 Main Competitors within the UK Airline Industry………………………………………….…12 Conclusion…………………………………………………………………………..………… 13 Introduction The UK aviation industry has been undergoing great turmoil as the scheduled airlines faced increasing competition from the newer competitors, whose main attention has been devoted to cost reduction and offering the alternative options of air travel services. While such competition among scheduled airlines and low cost carriers (LCCs) is rather indirect, the travel preferences of passengers are what matters at the end. The global financial meltdown changed people's travel habits as they looked for cheaper alternatives to their previous destinations. Have the needs of travelers diverged or changed dramatically? Do they prefer cheaper prices or comfort and good service during the flight? Today it becomes vitally important to understand the consumers’ needs, requirements and expectations from the contemporary air travel services, which should become an integral part of airlines’ future strategies. UK Airline Industry Overview Recently all UK carriers, including LCCs, experience the increasing competitive threats, including potential to depress onboard loads and dilute yields, continuous and increasing pressure to reduce unit costs, need to maximize aircraft utilization, and all magnified by the global economic crisis. Though, at the same time opportunities for UK airlines include potential traffic stimulation, new markets and route access, new partnerships, and new business models. According to the research by White and Crasta (2010), there are four main purchase criteria of travelers while buying airplane tickets, including price of the ticket, convenient flight times, distance of the airport used by the airline, and brand of the airline. While all four criteria are important for travelers, the price occurred to be the most important factor among 80% of respondents while the rest 20% care more about brand name of the airline and convenient flight times. Throughout the world, British Airways is recognized as the leader in the service industry and as one of the companies which internal and external practices proved high quality service for the clients and care about the employees. Being the largest international scheduled airline of the United Kingdom, British Airways provides flights to more than 550 destinations at the most convenient times for its customers. Charts 1 and 2 in the Appendix show international versus domestic capacity share and international capacity of British Airways by region in 2011 accordingly. Macro Environmental Analysis PESTLE analysis described below will help to analyze the macro environment of the UK airline industry, including such factors as political, economic, social, technological, legal and environmental. Political Factors The current political environment in the United Kingdom is supportive to aircraft services providing loans and funds toward different social and environment projects and programs. Traditionally, many UK companies are based on trade unions, which recently increased their pressure inspiring employees’ strikes. Financial Times informed that 78.5% of BA employees voted for walkouts and strike ballots supported by trade unions as the result of news about merger between BA and Spanish airline Iberia (Groom, 2011). UK government turned their main attention toward the security issues of airplanes as the result of several accidents, which will increase the cost of service. At the same time, UK government continues supporting British Airways as the flag carrier and leading national scheduled airline. Finally, the expansion of European Union presumes new opportunities and new routes for UK airlines, but it also means new competitions and threats of entry and competitive rivalry. Economic Factors Nowadays the fuel prices continue to be the main economic factor influencing the airline industry causing increased costs and ticket prices. Taxes and interest rates within the United Kingdom present another threat for the market in addition to the rise of airport handling fees. A number of business class travelers increased, which gives opportunity for larger profits. In November 2010 the premium traffic of BA was reported to increase by 4.5% (Elder, 2010). However, fears about overcapacity on North Atlantic routes from Heathrow, which increased by 10.6% in December 210, might bring pressure on the airline. According to BAA traffic statistics in March 2011, all airports reported the continued growth. The traffic at Heathrow airport increased by 2.3%, but external events make year-on-year comparisons difficult. Significant growth was also reported on BRIC routes with 29% traffic increase to Brazil up. In addition, all three airports in Scotland reported growth as well. Six airports of BAA handled 8.3 million passengers in March 2011, an increase of 0.9% compared to the same month last year. Social Factors Many British airlines are concerned for the local and international community by continually striving to improve their social performance and aiming to ensure that their activities contribute to the sustainable development of the local and international community UK airlines operate in. Traditions and culture of UK industrial relations are rooted in a strong presence of trade unions, thus, majority of employees within UK airline industry are trade union members. For example, British Airways supports more than 130 community projects worldwide, cooperates with UNICEF in the project “Change for Good” that reached 24 million GBP, and provides merely 40,000 young people with the opportunity to participate in education programs at British Airways community learning center. Certainly, with such positive image BA can be sure in the loyalty of existing customers, effective ways to attract new customers and the improved ability to generate income. In addition, BA provides a special service for children travelling alone called Skyflyer Solo, according to which airline staff members take special care about the children before, during and after the flight. Technological Factors In the modern high-technology world UK airlines, both scheduled and low cost, are keeping up with the times by providing their customers with the latest technological achievements in the aircraft industry, including Internet sales through interactive websites, online ticket order and payment, option to change the flight date and time, etc. High-speed trains and airport taxies help to decrease the time of transfer between the terminals and gates. Self-service check-in kiosks used at the airports all over UK and Europe help to control check-in process, minimize check-in time for customers arriving at the airport with easy on-screen instructions. In addition, travelers can benefit from electronic identification by screening international passport and boarding card printing. Finally, many airlines are planning to apply technologies that help to reduce fuel consumption and are more environmentally friendly. In case of British Airways, the company constantly improves its internal networks, recreates ticket distribution and customer service operations, and eliminates redundant and inefficient systems. Improvements in the internal network activities allowed the company saving merely $95 million. Through the cooperation with Vodafone, customers of British Airways while becoming Vodafone Live! Customers get an opportunity to receive text message alerts about special offers and exclusive fares. In August 2006 British Airways became the first airline to apply Google Earth technology on its website to book flights, find nearby hotels, car rentals and other contacts on a 3D map. Legal Factors According to the Securities Exchange Act of 1934, UK airlines have to report on traffic and capacity statistics each month. Data Protection Act requires all organizations and companies to prevent unauthorized and unlawful processing of personal data of their customers. Employees of UK airlines are hired according to UK Labor Law that guarantees official employment, life and health insurance, vacations and sick-leave days according to the legislation and protection from any workplace accidents. Privatization of airline companies has always been an important legal factor in the UK airline industry because more and more state-owned companies, including airlines, face the necessity to go private in order to deal with high competition, to increase profits and to improve their competitive advantage at the market. Regulations about carbon emission level are also an important legal factor for UK airlines. Environmental Factors UK airlines are aware of the negative effects of flying on the local communities and environment as a whole. That is why, many companies actively work on minimizing negative impact by promoting carbon trading, investing into research on innovative technology and working on improvement of the energy efficiency. For example, according to the strategic plans of the British Airways described in the British Airways Environmental Overview 2009/2010, the target level of aircraft fuel efficiency should be 70.00 in 2010. UK government is requiring airlines to control noise level, carbon emission level, and fuel consumption, which proved to lead to such environmental problems as air pollution, global warming and green house gas effect. Micro Environmental Analysis The micro environmental analysis of the UK airline industry can be done by applying Porter’s Five Forces analysis, including bargaining power of suppliers, bargaining power of customers, new entrants, threat of substitutes, and competitive rivalry. Bargaining power of suppliers The two main aircraft suppliers for UK airline companies are Boeing and Airbus. Some airlines prefer Boeing aircrafts, some Airbus aircrafts and the others provide the mixed aircraft fleet. Whatever the aircraft choice airlines make, the cost of switching from one supplier to another is very high. Traditionally the large UK airports like Heathrow, Gatwick and some others have high bargaining power since majority of airlines are directly dependant on airports’ regulations, fees, flight scheduling, handling services, etc. On the contrary, the regional airports have little bargaining power if they mainly depend on one or several airlines only. Though, day by day the bargaining power of UK airports increase because of the increasing competition among scheduled airlines and low cost carriers. While British Airways continues to be a leading scheduled airline, alternative air travel services provided by such LCCs as easyJet and Ryanair take considerable market share. Finally, both scheduled airlines and LCCs are heavily influenced by the oil prices, which recently increased again causing higher operating costs and higher ticket prices. Thus, fuel prices always represent the direct threat for the airline industry. Bargaining power of customers As it was mentioned above, the research by White and Crasta (2010) showed that price continues to be the most important factor for travelers in their decision to purchase the airline ticket, thus, majority of UK travelers are price sensitive. Bargaining power of customers within the UK airline industry is low. Today the knowledge of customers about the cost of service is rather high, thus, it is quite easy for them to shift from one airline company to another based on their price offers, flight schedules, in-flight services, etc. This means that there is no strong customer loyalty among UK travelers, who can choose among British Airways, Ryanair, Thomas Cook Airlines and other airline companies based on the purpose of their air travel. New entrants There are a lot of barriers of entry to the UK airline industry since entry capital is extremely high, including airline and aircraft documentations, flight authorizations, operating costs, airport fees, etc. Due to the increasing competition at the UK airline market, it becomes harder to get necessary permissions from British Civil Aviation Authority (CAA), slots, dates and times. In case of scheduled full-service airlines, it is less obvious that there is any threat of new entrants. However, there is always an entry possibility from LCCs since the starting capital is much lower than for scheduled airline and demand for low cost carriers rapidly increases among UK travelers, which has been proved by easyJet and Ryanair. Threat of substitutes The threat of direct and indirect substitutes within the UK airline industry is very high because there is no strong customer loyalty toward certain airline as the switching costs are minimal or do not exist at all. Competitive rivalry The UK airline market is highly competitive. While it might not be easy to provide same or similar service advantages among scheduled airlines, the cost advantages among LCCs can be easily copied within short period of time. If so, current LCCs like Ryanair and easyJet might experience high pressure on prices, margins and profitability. By analyzing the micro environment of UK airline industry it might also be useful to consider SWOT analysis of scheduled airline British Airways and low cost carrier Ryanair to compare the main differences between these two types of airlines at the UK market. BA Strengths BA Weaknesses > Fleet size (228 aircrafts) > Strong brand reputation > Strong customer focus assists to develop expertise in customer areas > High quality customer services on land and onboard > Customer loyalty > Large investments into research and development > Engineering know-how > Wide variety and selection of software available > Due to high level of internal staff moves, knowledge is lost > Teams adopt solution approaches aligned only to their skills > Lack of involvement in choice of software > Poor labor relations > Difficult to enhance specialist airline software > More luggage lost than if to consider, for example, with Ryanair > More delayed and cancelled flights > Reliance on established revenue sources BA Opportunities BA Threats > A knowledge-based, targeted, and coordinated national effort to expand and diversify the services for international customers > Virtual reality could provide a new use for simulation software > Obtaining networked simulation software > Large opportunities of Terminal 5 at Heathrow > Shifting customer needs towards low cost travel due to Terminal 5 > Transatlantic flights > Code sharing > Share expertise through special interest groups and/or educational programs > Growing international competition, with technology giving world-wide access to even the smallest competitor destination > Strong competition for the same routes with other UK airlines > Outside natural factors which are not under company’s control > Fuel costs > Environmental problems due to fuel usage > Limitations of some packages and difficulties of continued development > Continuing problem of pricing of software licenses, corporate packages and special offers > Turbulence in the aviation industry > Continued diversification into unsupported software Ryanair Strengths Ryanair Weaknesses > Fleet size (272 aircrafts) > Recognized brand name > Usage of secondary airports with lower airport charges that help to reduce costs > All ticket bookings are via Internet that helps to reduce costs > High seat density that helps to reduce costs > High punctuality and low baggage loss > Niche market, which means restricted expansion possibility > Secondary airports, which might be uncomfortable for passengers to reach city center > High sensitivity to any changes in prices and airport charges Ryanair Opportunities Ryanair Threats > New countries and new destinations for low cost carrier > Potential increase in market share since LCCs did not reach the peak level yet > Recession because customers prefer to pay less and continue flying > Fuel costs > Increasing competition among LCCs > Increasing bargaining power of regional airports > Improvements in UK economic situation when passengers might prefer to pay more and get better and more diversified service Charts 3 and 4 in the Appendix show figures of Ryanair’s international versus domestic capacity in addition to international capacity by region in 2011. Main Competitors within the UK Airline Industry The passenger airline industry within the United Kingdom is made up of several airlines that can be divided into the following strategic groups such as scheduled full-service airlines, low cost carriers, and charter and incentive travel airlines, including British Airways (BA), BA CityFlyer, Virgin Atlantic, BMI, British Midland (bmibaby), Virgin Atlantic, EasyJet, Ryanair, Air Southwest, Flybe, Jet2, Thomas Cook Airlines (UK), Titan Airways, TUI Travel (UK), and others. Though, there are also foreign airlines operating at the UK market such as KLM, Air France, Swissair, Emirates, Iberia, Delta Airlines, Kenyan Airways and others that transport passengers in and out of the UK, thus, increase competition at the market. Scheduled Airlines British Airways with 228 aircrafts flying to 163 destinations continues to be a leading scheduled airline within the UK airline industry. The other full-service scheduled airlines in UK are BA CityFlyer with 12 aircrafts and 13 destinations, BMI with 19 aircrafts and 17 destinations, Virgin Atlantic, and finally Flybe with 71 aircrafts and 30 destinations. According to Travel Weekly (2011), British Airways and Virgin Atlantic experienced the enormous traffic on flights to New York in 2011. However, the benefits of liberalizing transatlantic air traffic have all gone to the airlines. Low Cost Carriers The UK low cost carriers include Ryanair (272 aircrafts), EasyJet (175 aircrafts, 106 destinations), Jet2 (34 aircrafts, 50 destinations), Bmibaby (14 aircarfts, 31 destinations) and Air Southwest (6 aircrafts, 11 destinations). These low cost carriers generally avoid busy hub airports by flying to/from secondary and regional airports, enabling some passengers to bypass the hubs. An important question is how far capacity constraints at hub airports can be alleviated, either through the use of larger aircraft or through greater use or direct point-to-point flights. In this regard airlines serving long-haul markets will in future face a choice between two different kinds of aircraft, the Airbus A380 to serve markets via hubs and the Boeing 787 to operate direct on point-to-point routes. Charter and Incentive Flight Airlines Thomas Cook Airlines (UK) is the main passenger airline in UK providing package holidays and incentive travel flights to various destinations with substantial influence in hotels around the world. Thomas Cook has 36 aircrafts in service and operates inclusive tour flights from several UK airports to more than 60 holiday destinations in Europe and Mediterranean zone. TUI Travel with 150 aircrafts is the second airline offering holiday travel packages to 27 destinations for UK tourists. With 10 aircrafts in service Titan Airways operates contract and ad hoc passenger group, VIP and freight charters in Europe, the Middle East and North Africa. Conclusion The sustainable advantages of UK scheduled airlines as British Airways include that being a part of multinational strategic alliances keeps airlines above the competition in the UK and global aircraft industry. Volume and availability are the main factors leading to various advantages. Macro and micro environmental analysis described in the current paper show that both scheduled full service airlines and low cost carriers in the United Kingdom have large potential to grow and stay competitive due to intensive investments into research and development of technology, customer- and environment-oriented attitude and creative ideas toward further development. Price continues to be the most important factor for the airline consumers while making their decision to purchase an airline ticket. That is why, it becomes important for both scheduled and low cost carriers to reduce their costs and consequently prices to stay competitive at the UK airline market. Appendix: Chart 1: British Airways international vs domestic capacity share in 2011 Chart 2: British Airways international capacity by region in 2011 Chart 3: Ryanair international vs domestic capacity share in 2011 Chart 4: Ryanair international capacity by region in 2011 References: BAA.com. (2011). March traffic figures - BAA's airports. April 11. http://www.baa.com/portal/page/BAA%20Airports%5EMedia%20centre%5ENews%20releases%5EResults/ca0051499013f210VgnVCM10000036821c0a____/a22889d8759a0010VgnVCM200000357e120a____/ British Airways Official Website. (2011). http://www.britishairways.com Competition Commission. (2011). BAA provisional consideration of possible material changes of circumstances. http://www.competition-commission.org.uk/rep_pub/reports/2011/5111baa.htm Elder, B. (2010). Overcapacity fears place pressure on British Airways. Financial Times, London (UK), December 4, p. 24. Freiberg, K. and Freiberg, J. (2006). British Airways Recipe for Business and Personal Success. Broadway Books, USA. Groom, B. (2011). BA cabin crew threaten more strikes. Financial Times, London (UK), January 22, p. 4. Hofmann, O. (2007). Airlines implement strategies to compete with low cost carriers. Euromonitor International. Accessed on 14 January, 2011. Plane, P. (2005). Privatization and Economic Growth. An Empirical Investigation from a Sample of Developing Market Economies, Applied Economics. Ryanair Official Website. (2011). http://www.ryanair.com/en Travel Weekly. (2011). Heathrow-New York traffic boom has not reduced prices. April 12. http://www.travelweekly.co.uk/Articles/2011/04/12/36823/heathow-new+york+traffic+boom+has+not+reduced+prices.html Read More
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