Management Consultancy Report: Independent-Study Project

A study of British Airways response to increased

competition from budget-airlines

Contents
ACKNOWLEDGEMENTS

ABSTRACT

1.0 INTRODUCTION

2.0 COMPANY DETAILS

2.1 INDUSTRY ANALYSES

2.1.1 AIRLINE INDUSTRY GLOBALLY
2.1.2 AIRLINE INDUSTRY IN EUROPE
2.1.3 AIRLINE INDUSTRY IN THE UNITED KINGDOM
2.2 AIRLINE PROFILES
2.2.1 BA PROFILE
2.2.1.1 Strengths
2.2.1.2 Weaknesses
2.2.1.3 Opportunities
2.2.1.4 Threats
2.2.2 EASYJET PROFILE
2.2.3 RYANAIR PROFILE

9
9
10
11
12
12
12
13
13
14
15
16

3.0 RESEARCH PROGRAMME

18

4.0 PROBLEM QUANTIFICATION

19

5.0 PROBLEM RESOLUTION

23

5.1 STEP 1 IDENTIFY CONSTRAINTS

25
5.2 STEP 2 DECIDE HOW TO EXPLOIT CONSTRAINT
26
5.3 STEP 3 SUBORDINATE AND SYNCHRONISE EVERYTHING ELSE TO THE DECISION OF
STEP 2
28
5.4 STEP 4 ELEVATE THE PERFORMANCE OF THE CONSTRAINT
28
5.5 STEP 5 RETURN TO STEP 1 IF CONSTRAINT HAS SHIFTED
28
5.6 COMPETITIVE STRATEGIES
29
5.7 EXAMPLE ADVERTISEMENT
29
6.0 FEASIBILITY STUDY

31

6.1
6.2
6.3
6.4
6.5
6.6

31
31
31
32
32
32

TECHNOLOGICAL
ECONOMICAL
LEGAL
OPERATIONAL
SCHEDULE
POLITICAL

7.0 DISCUSSION

34

8.0 CONCLUSION

37

REFERENCES

38

APPENDIX

43

A1.0
A2.0
A3.0
A4.0

43
44
45
46

AIRLINE USE IN THE UK

BRITISH AIRWAYS PRICE QUOTE LONDON TO MALAGA
EASYJET PRICE QUOTE LONDON TO MALAGA
RYANAIR PRICE QUOTE LONDON TO MALAGA

List of Figure

FIGURE 1: EUROPE AIRLINES INDUSTRY GEOGRAPHY SEGMENTATION: % SHARE, BY

VALUE 2011. ADAPTED FROM MARKETLINE, 2012B.......................................11
FIGURE 2: THE ATTRIBUTABLE PROFIT FOR THE YEAR FROM 1996 FOR BA. DATA FROM
BRITISH AIRWAYS (1997; 1998; 1999; 2000; 2001; 2002; 2003; 2004;
2005; 2006; 2007; 2008; 2009; 2010; 2011)......................................20
FIGURE 3: A COMPARISON OF AIR FARES BETWEEN BA, EASYJET AND RYANAIR FOR A
RETURN FLIGHT FROM LONDON TO MALAGA (MAWER, 2011)..........................26
FIGURE 4: AN EXAMPLE OF A MARKETING CAMPAIGN THAT BA COULD IMPLEMENT AS A
RESULT OF THE APPLICATION OF THE THEORY OF CONSTRAINTS..........................30

List of Table

TABLE 1: GLOBAL AIRLINES INDUSTRY VALUE: $ BILLION, 2007-11. ADAPTED FROM

MARKETLINE (2012A)................................................................................9
TABLE 2: UNITED KINGDOM AIRLINE INDUSTRY VALUE 2007-11. ADAPTED FROM
MARKETLINE (2012C)..............................................................................21
TABLE 3: UNITED KINGDOM AIRLINES INDUSTRY VOLUME: MILLION PASSENGERS, 200711. ADAPTED FROM MARKETLINE (2012C)..................................................21
TABLE 4: A COMPARISON OF FLIGHTS FROM LONDON TO MALAGA BETWEEN BA,
EASYJET AND RYANAIR - OUTBOUND FLIGHT ON 1ST AUG 2013; RETURN FLIGHT ON
2ND AUG 2013......................................................................................27

Acknowledgements
I would like to express my sincere gratitude and thanks to all who have
helped me write this dissertation; Mr Sebastian Kitching of Swansea
University, who guided me in the beginnings of this report and Ms Corina
Edwards for providing academic support towards the end. Furthermore, I
would like to thank my cohorts who have not only guided me emotionally
and academically while I write this dissertation, but throughout the entire
year. Lucy B, Rhys, Sophie, Julie, Owain, Rich and Lucy E, thank you.

Abstract
British Airways in an institution synonymous with Great Britain. It is a flag
carrier that has transported royalty, and dignitaries alike; and carried the
Olympic flame from Greece to the United Kingdom. However, BA faces a
growing threat from the rise of low-cost airlines such as Ryanair and
EasyJet. Posed with drastically lower face-value airfares, BAs market
share is falling. Using the Theory of Constraints, a solution is identified
in a new marketing campaign that would draw the customers attention to
the hidden charges not clearly advertised with low-cost airlines. When the
hidden charges are included in a comparison with BA fares on a typical
flight from London to Malaga, BA is the cheaper option as its airfare is
more all-inclusive. An appropriate marketing campaign that takes
advantage of this development would be recommended, and is predicted
to improve BAs competitive advantage, prevent and even reverse the
rising tide of low-cost carriers on to BAs market share.

1.0 Introduction
The purpose of this report is to identify a particular challenge or
opportunity facing a company. The company that is the focus of this study
is British Airways (BA). The particular challenge facing BA is the increasing
competition it faces from budget airlines, and therefore the pressures it
places upon its basic cost base.
The report will begin with a section on the company details. This will
include a description of general background information of BA and an
analysis of the aviation industry. Furthermore, an in depth identification
and explanation of the problem BA faces as a company will be included.
Section 3.0 will address the research programme for this project. This will
include a detailed account of the methods that will be used to investigate
the problem, and a justification of each of these. Section 4.0 will include
the substance of this report, an investigation into the problem identified in
BA. Section 5.0 will then compliment section 4.0 by reviewing the problem
and put forward solutions to the problem identified in a reasoned and
justified manner. Following this, section 6.0 will contain a feasibility study
of the proposed solution in order to properly anticipate any problems or
obstacles that may occur and therefore mitigate their effects.
Finally, in sections 7.0 and 8.0, all previous sections will be reviewed and
discussed into a fitting conclusion.

This report will aim to strengthen the position of a leading global airline,
steeped in history and legacy and contribute to BAs propulsion as a
strong player in the airline industry in the 21st century.

2.0 Company Details

2.1 Industry Analyses
Various analyses of the airline industry is necessary in order to
contextualise the problem at hand. The market definition for the airline
industry states that it comprises of passenger air transportation,
including both scheduled and chartered (MarketLine, 2012a).
2.1.1 Airline Industry Globally
The airline industry globally has shown healthy growth in the years
leading up to 2011, and is forecasted to grow further at a high rate in the
years up to 2016. Table 1 indicates the recorded growth mentioned here.
Total airline industry revenue in 2011 amounted to $570.1bn, indicating
the lucrative potential that is available to airlines.
Year
$Billion
Billion
% Growth
2007
477.2
343.0
2008
527.6
379.2
10.6
2009
445.5
320.2
(15.6)
2010
515.8
370.8
15.8
2011
570.1
409.8
10.5
CAGR: 2007-11
4.5
Table 1: Global airlines industry value: $ Billion, 2007-11. Adapted from
MarketLine (2012a).
In addition to revenues, growth is also measured by passenger numbers,
and in the period from 2007 to 2011, passenger numbers grew 2.6% with
the strongest growth occurring in years 2010/11 (Ibid.).
Geographic segmentation of airline industry value is an important factor
that should always be considered when studying the industry. Europe

10

represents the second highest region accounting for global airlines.

Therefore, industry analysis within Europe is also necessary.
2.1.2 Airline Industry in Europe
For the purposes of this report, the geographical area of Europe includes
eastern and western Europe.
Western Europe comprises Belgium, Denmark, France, Germany, Greece,
Italy, the Netherlands, Norway, Spain, Sweden, Switzerland, Turkey and
the United Kingdom.
Eastern Europe comprises the Czech Republic, Hungary, Poland, Romania,
Russia and Ukraine.
So therefore, 14 out of the 27 member states of the European Union are
included in this geographically defined area and 7 out of the 11 member
states in the Eurozone area also. It is reasonable now to assume the
impact the Eurozone crisis has had on this geographic area. Even so, there
remains room for optimism for the countries that have fared less well in
the financial crisis with Italian airlines industry show[ing] growth (Ibid.).
The market value of the European airlines industry grew by 17.4% in
2011 to reach a value of $183.3 billion with the industry set to have a
value of $356.8bn by the year 2016. The geographical segmentation of
airlines in Europe show that the United Kingdom ranks second behind
Germany as containing the largest share, illustrated in Figure 1.
(MarketLine, 2012b).

11

14
13.2

44.8

German
United Kingdom
Spain

11.1

Italy
France

6.9

10

Rest of Europe

Figure 1: Europe airlines industry geography segmentation: % share, by

value 2011. Adapted from MarketLine, 2012b.
The Rest of Europe segment therefore includes 14 countries.
The study further details the major forces driving competition in the
airlines industry, with degree of rivalry and supplier power being the major
factors; new entrants are not deemed as much of a threat. Delving further
into the cause of increased buyer power, is attributed to the los-cost
nature and ease at which customers may change their airline of choice.
This highlights the increasing presence of the force of budget airlines
(Ibid.). This rise of budget airlines has been of significant prevalence in the
United Kingdom.
2.1.3 Airline Industry in the United Kingdom
In 2011, the airline industry grew 13.4% to a value totalling $24.2 billion,
and is forecasted to grow hugely by 68.2% to $40.7 billion by 2016. The
majority of flights operating in the UK are international, comprising 82.5%
12

of the industry in 2011. There exists competition between British airlines,

with budget airlines competing intensely on price with the legacy carriers.
Furthermore, the domination of the supplier market by Boeing and Airbus
add to the pressures at play on British airlines (MarketLine, 2012c).
There exists a highly competitive environment in the UK airline industry,
placing large companies like BA alongside much smaller competitors. With
very low switching costs for passengers, the threat from low cost airlines
to legacy carriers like BA is magnified (Ibid.).
2.2 Airline Profiles
This section will analyse the company profiles of BA and its main
competitors. In this case they are the low-cost airlines of EasyJet (2.2.2)
and Ryanair (2.2.3). Firstly, an analysis of BA:
2.2.1 BA Profile
BA is one of the worlds leading scheduled premium international airlines.
Recently, BA merged with Iberia to form the IAG Group. Its operations are
mainly in Europe and the US, Its headquarters are in Harmondsworth, UK.
BA has a long history in aviation, beginning in 1916 as Aircraft Transport
and Travel (MarketLine, 2012d).
2.2.1.1 Strengths
BAs strengths lie firstly in a strong market position and brand image in
the UK and indeed the world too. BAs brand places the company with a
strong competitive advantage. Further strengths lie in BAs online
presence, in retaining customers and attracting new. BAs online services

13

have allowed the company to diversify what they offer their customers by
providing choice of hotels and hire cars. This has resulted in almost a third
of all bookings being made on BAs website, and contributed to a decrease
in costs and an increase in revenues (Ibid.).
2.2.1.2 Weaknesses
BAs weakness has been identified in their recent labour disputes. Strike
and union action have been increasingly prevalent due to cuts and
worsening conditions for staff, in particular cabin crew (Ibid.; British
Broadcasting Corporation (BBC) News, 2009). Labour disputes also have
an impact on BAs revenues (costing over 150m), adding to the
companys weaknesses.
2.2.1.3 Opportunities
The opportunities that face BA include its recent merger with Iberia (BBC
News, 2010). Consolidation appears to be the only opportunity for flagcarrier airlines of Europe to remain competitive amid fierce competition by
budget airlines (Financial Times, 2013). The merger enhances the airlines
presence internationally while maintaining their important individual
brands in their respective countries. The merger would thus benefit both
the companies in terms of combined balance sheet, synergies and
network fit (MarketLine Report, 2012d).
Further opportunity has been identified in the growth of the global tourism
industry since the 2008 financial crisis. The International Air Transport
Association has forecasted that international passenger numberto rise
from 952 million in 2009 to 1.3 billion passengers in 2014 (2011). This
14

anticipated growth has a knock on effect on increased consumer

confidence, which provides further opportunity (MarketLine Report,
2012d).
The final opportunity defined for BA is the rebounded growth expected in
the UK airline industry following a steep decline in 2009. This growth was
shown previously, in section 2.1.3.
2.2.1.4 Threats
The primary threat facing BA is from intense competition and discounted
prices. MarketLine identifies 11 competitive factors at place in the airline
industry including:

Fares
Customer Service
Routes Served
Flight Schedules
Types of Aircraft
Safety Record
Reputation
Code-Sharing Relationships
Capacity
In-Flight Entertainment Systems
Frequent Flyer Programs
(2012d)

BAs competitors are both direct and indirect, with charter services and
other forms of transport (e.g. trains) impacting its profits.
Price volatility in the oil markets poses a further threat to BA. Traditionally,
oil prices have been cyclical and also based on geopolitical issues and
supply and demand. Over the last few years though, prices have been

15

rising strongly. This cost forms a significant proportion of total expenses

for BA and so reduces the companys revenues and profitability (Ibid.).
Finally, regulatory conditions; with an industry that is already highly
regulated, airlines must comply with a cocktail of licences, conditions and
rules in order to operate. Any increases in these costs would raise ticket
prices, reduce revenue and increase costs, negatively impacting BAs
profit margins (Ibid.).
2.2.2 EasyJet Profile
EasyJet plc. (EasyJet) is a pan-European low-cost airline carrier company
that primarily operates from the UK. Founded in 1995, the aim of its
founder, Stelios Haji-Ioannou was to create an airline that offered low cost
scheduled services within Europe. In its first few years, the airline saw
huge growth, expanding its operations beyond just the UK to France and
Spain. By the year 2000, the company was listed on the London Stock
Exchange, just five years since its genesis.
A quick glance at EasyJets income statement, comparing revenue and
gross profit for 2010, 2011 and 2012, there has been a steady growth.
This growth has therefore stemmed from two sources, the first being a
return to consumer confidence following the 2008 financial crisis and the
subsequent Great Recession, and the second being gaining customers
from rival airlines. By 2012, revenues were recorded at 3.85m (increase
of 11.6%) (MarketLine, 2013a).
A SWOT analysis of EasyJet shows the following:

16

Its strengths lie in a strong market position, competitive business model

and a robust capital structure. EasyJet occupies the number one or two
market share position in 21 major slot constrained airports such as
London [and] one of the largest carriers with a market share of around
20% of the total intra-European market (MarketLine, 2013a: 17).
EasyJets weaknesses bear resemblances to other airlines given the
current political and economic uncertainty of Europe (MarketLine,
2013a: 19), this quality together with limited geographic diversification
poses quite a large weakness. Further weakness lies in the recent dispute
between the founder and the board of directors of EasyJet regarding the
companys strategy which can negatively impact the companys brand.
This in-fighting demonstrates a poor corporate image to customers.
Opportunities are similar to that of other airlines in that there is a growing
trend of international tourism (MarketLine, 2013a: 20).
Threats to EasyJet are similar to the threats that face any airline, the
increasing charges at regulated airports, challenging macro-economic
environment in Europe and intense competition and price discounting
(MarketLine, 2013a: 21).
2.2.3 Ryanair Profile
Ryanair operates as one of the main competitors of BA and as a low fare
scheduled passenger airline. From its origin in 1985, Ryanair has
experienced unprecedented growth with passenger numbers increasing
from 5,000 to 82,000 in their first year of trading (MarketLine, 2013b).

17

The MarketLine SWOT analysis of Ryanair showed that its strengths lie in
its distinctive business model that is universally recognised as resulting
in low operational costs (2013b: 18). Its opportunities lie in growing
international tourism. Its weaknesses however, include legal proceedings
involving lawsuits and claims and investigations by the European
Commission. Further weakness lies in Ryanairs bare minimum, no frills
brand image which may impact negatively on consumer confidence in
Ryanair. (MarketLine, 2013b: 20). Finally, threats to Ryanair include a
gloomy economic situation in Europe, grounding of the fleet due to a
tough operating environment in the winter months, rising costs such as
airport charges and air travel taxes together with rising fuel costs.
Furthermore, while Ryanair poses a competitive risk to BA as we are
investigating in this report, BA and other airlines provide intense
competition to Ryanair, also adding pressure to the operating margins of
the company.

18

3.0 Research Programme

The research programme for this report will involve a combination of
secondary data. In order to identify the problem facing BA, it is necessary
to carry out market research, therefore, information on the rise of budget
airlines and competition to BA is vital.
Further to the research programme of this report will be the inclusion of,
newspaper articles and news websites the follow the response of BA to the
threat of competitors and the successfulness of those responses.
Research will also stem from academic material, in particular journal
articles that specialise in the airline industry and are able to offer useful
insight into the problem at hand for BA.
Should it be required, senior management at BA is available for
verification of information and data.
The philosophical framework of this report will centre upon a joint
positivist

and

interpretivist

paradigm.

The

positivist

philosophical

framework involves a deductive process with a view to providing

explanatory theories to understand social phenomena (Collis & Hussey,
2009: 56); whereas an interpretivist framework involves an inductive
process with a view to providing interpretive understanding of social
phenomena within a particular context (Collis & Hussey, 2009: 57).

19

4.0 Problem Quantification

Low cost airlines emerged following deregulation of aviation markets and
competition between airlines is purely through the prices of fares. (Pels &
Rietveld, 2004). Therefore the emergence of these airlines is an important
development in the airline industry and poses a large problem for BA.
The impact of low-cost airlines in the UK aviation industry has been hugely
significant. In the year 1996/7, a year after the founding of EasyJet, the
total attributable profit for BA increased 16.9% to 553m (British Airways,
1997). However, following the expansion of EasyJet into the international
market, the following years financial summary highlights a stark
difference with the same figure, down 16.8% on the previous year to
460m (British Airways, 1998). Here, one may observe the beginnings of
the impact low-cost airlines such as EasyJet will have on BA. Further
analysis of annual financial statements from BA show a steady decline in
profits (see Fig. 2) before picking up again, and then being hit by the
financial crisis of 2008. The growth of EasyJet and the demise of profits at
BA coincided with the rise of another low-cost carrier competitor Ryanair.
It is clear, from surveying the graph in Fig 2 that the fortunes of BA have
been very susceptible to price competition. With the emergence of the low
cost carrier, EasyJet in the mid-90s impacting revenues, then consumer
spending fall and shift towards cheaper alternatives in the 2008 financial
crisis illustrating this.

20

800
600
400
200
Attributable Profit ( million)
0
-200
-400
-600
Year

Figure 2: The attributable profit for the year from 1996 for BA. Data from
British Airways (1997; 1998; 1999; 2000; 2001; 2002; 2003; 2004; 2005;
2006; 2007; 2008; 2009; 2010; 2011)
Further to the competition pressures that face BA, there is the pressure of
a weakened airline market in the UK. The MarketLine report into the airline
industry in the UK showed that in the years between 2007 and 2011, the
compound annual rate of change (CARC) was -0.01%. This is of particular
concern when compared to the French and German industries which
reported CARCs of 3.3% and 3.8% respectively (2012c). However, in 2011,
the industry saw relatively huge growth (see Table 2) and performance of
the industry is expected to accelerate, with anticipated CAGR of 10.9% for
the five year period 2011-2016 (Ibid.).
A glance at Table 2 will immediately demonstrate the impact the 2008
financial crisis had on the airline industry. The result was a 21.5%
contraction, potentially fatal for airlines such as BA.

21

A further pressure at work on BA and other airlines are the passenger

numbers, which was another victim of the 2008 financial crisis. As this is
the source of revenue for airlines, a decrease in this variable can prove
detrimental to business. Industry volume is illustrated in Table 3.
Year
$ billion
billion
billion
% Growth
2007
24.2
15.1
17.4
2008
26.0
16.2
18.7
7.2
2009
20.4
12.7
14.6
(21.5)
2010
21.3
13.3
15.3
4.8
2011
24.2
15.1
17.4
13.4
CAGR: 2007-11
(0.0)
Table 2: United Kingdom Airline Industry Value 2007-11. Adapted from
MarketLine (2012c).
Year
Million Passengers
% Growth
2007
119.6
2008
117.3
(1.9)
2009
108.6
(7.4)
2010
104.9
(3.4)
2011
109.2
4.0
CAGR: 2007-11
(2.3)
Table 3: United Kingdom airlines industry volume: million passengers,
2007-11. Adapted from MarketLine (2012c)
There are five forces that MarketLine reason to drive competition in the UK
airline industry (2012c). These are:

Buyer Power
Supplier Power
Substitutes
Degree of Rivalry
New Entrants

The degree of strength these forces exercise varies also. The two largest
identified by MarketLine (2012c) are Supplier Power and Degree of
Rivalry with Buyer Power close behind.

22

The reason for a strong presence of Supplier Power is because of a high

degree of supplier size and lack of substitute inputs (Ibid.). Airbus and
Boeing form a duopoly of suppliers of new jetliners (Ibid.). Further to the
strength of suppliers are those who supply fuel. Fuel is a variable that
cannot be changed by the airline. It is a commodity that is highly volatile
and depends upon various environmental and political pressures. In 2011,
the International Air Transport Association estimated that fuel accounted
for 29% of total operating costs.
These three forces are what drive innovation and change at BA, and so the
solution to the increased pressure from BA will lie in these forces.

23

5.0 Problem Resolution

An early response to resolve the problem of high competition from lowcost carriers was for BA to launch a low-cost carrier airline themselves.
This materialised in the form of Go Fly. In its early years, BA reported
that their new subsidiary was performing to expectations and competing
well in the low-fare alternative air travel market. However in 2002, Go Fly
was sold to its rival, EasyJet (BBC News, 2002). The reason for the demise
of such a venture has been investigated by Casadesus-Masanell and
Tarzijn (2012). They note that operating more than one business model is
devilishly difficult and a leading cause of strategic failure (Ibid.;
Eyring, Johnson and Nair, 2011). Casadesus-Masanell & Tarzijn note that
within the airline industry, the perils of running such a venture are the
highest (2012). It was announced by BA that it wanted to focus on the
business it understands best, being a full-service carrier (BBC News,
2000). So here, even though this route had the potential to resolve the
problem, it was not in keeping with the brand of BA and the type of
service they aim to provide.
A further response to competition from low cost and the added pressure
the 2008 financial crisis had on the airline industry, BA took the
unprecedented step of reducing the prices of their premium fares in 2006.
Routes to destinations such as Berlin, Paris and Barcelona were cut by up
to 50%, and were made as part of an overhaul of the airlines fare
structure (Guardian, 2006). Such a move has prompted a significant
pick-up in the number of passengers carriedup to 9 percentage points
24

(ibid.). The competitive advantage from this strategy is to match the

prices of low-cost carriers whilst maintaining its traditional extras that
conventional budget airlines charge for. For example, in the month of
March, 2006, Ryanair imposed a 5 per bag fee on all passengers
wanting to check in luggage (ibid.).
More recently, BA have been remedying the heavy competition from lowcost carriers by reducing the prices of their fares through various costcutting schemes. One such scheme is to offer hand luggage only fares
(Smith, 2013). This new feature to BA is in reaction to commercial
pressure from its no-frills rivals (Ibid.).
The Theory of Constraints is a concept made famous by Eliyahyu M.
Goldratts book The Goal, (Goldratt & Cox, 1984) in which the theory is
communicated through the medium of a fictional novel. The protagonist
(Alex Rogo) is a manager with ninety days to save his plant from closing.
The book highlights the importance of bottlenecks and the need to
reduce the impact of these constraints; but also, the importance of the
theory at being a tool to increase competitive advantage. Leading on from
this theory to identify weaknesses in organisations, Goldratt further
reasoned the Thinking Processes Theory (Goldratt, 1994). This theory
presents structured steps to identify the weakness in the company and
develop an improved logic to lead to a more desirable situation. There
exists steps within this theoretical framework that one must follow in
order to overcome the issue at hand, in the case of British Airways, it is

25

the threat of decreased revenues as a result of increased dynamic

pressures from low-cost airlines.
For Goldratt and Cox, the solution to any organisational problem lies
within a framework that employs the Five Focusing Steps (Goldratt &
Cox, 1989). These steps are:
1.
2.
3.
4.
5.

Identify the constraint

Decide how to exploit the constraint
Subordinate and synchronise everything else to the above decision
Elevate the performance of the constraint
If the constraint has shifted, return to Step 1 and begin again.

It is vital that the organisation does not let inertia become the systems
constraint (ibid.).
5.1 Step 1 Identify Constraints
Prior to beginning step 1, it is necessary to determine BAs sphere of
influences, which are the dependent variables it is able to exercise some
degree of control:

Its strong market position and brand image

Website and online presence
Staff pay
Efficient technologies
Alternative fuels
Government lobbying
Consolidation

Working from Goldratts theory, one must begin by identifying the

bottleneck or, the constraint within BA that is causing the weakness and
vulnerability to budget airlines. This is the price of fares. The way BAs low
cost competitors have managed such unprecedented low fares is through
sometimes draconian, ruthless cuts to services and perks.
26

In a BBC Two documentary on low-cost airlines in the UK, the practices of

Ryanair and EasyJet were investigated (Miller, 2013a). The programme
tells the inside story of Ryanair and EasyJets owners Michael OLeary and
Sir Stelios Haji-Ioannou, who opened up new frontiers in the aviation
industry. The programme continues then, to ask how much further can
these companies grow? Stelios is trying to halt its expansion, while
OLeary has just placed a massive order for new planes (Ibid.). In this
documentary, the frugal and simplistic nature of operations at Ryanair and
EasyJet are identified and investigated. Chief executive Michael OLeary,
has an aversion to anything which interrupts what he calls a culture of
action (Miller, 2013b).
5.2 Step 2 Decide how to exploit constraint
The next step is to decide how to exploit this constraint, by transforming a
problem into an opportunity and therefore a solution. The constraint here
is the fiercely competitive lower prices of budget airlines. Even though
budget airlines compete well on price, they added extras where they fall
short; that the experience of air travel is perhaps not as enjoyable. The
hidden costs in which Ryanair and EasyJet sometimes surprise their
customers are the area in which BA can exploit. In an article in the Daily
Mail (Mawer, 2011), a comparison of BA, EasyJet and Ryanairs total price
for a return flight from London to Malaga. Figure 3 shows a comparison of
fares between the airlines.

27

Figure 3: A comparison of air fares between BA, EasyJet and Ryanair for a
return flight from London to Malaga (Mawer, 2011)
The initial price of the three airlines shows that EasyJets fare is almost
40% cheaper than that of BAs. Furthermore, that Ryanairs fare is about
14% cheaper. However, the nature of a budget airline, being no-frills
comes in to play in this example. While BAs price includes extras that
would make the flight more enjoyable and easier, EasyJet and Ryanairs
price is only that of transporting the passenger from point A to point B,
and just that. So, to compare the service like-for-like, BAs price remains
the same, however EasyJets price increases 148%; and Ryanairs new
price increases 93%, well above the price of BAs flight.
A new, up to date comparison of flights from London (any airport) to
Malaga

was

conducted

using

price

comparison

website

(travelsupermarket.com); the results are shown in table 4. Ryanair was not

28

present in the price comparison site, so its fares were collected directly
from its website. See appendix for list of additional fees for Ryanair.

Original Fare
Reserved
seating
Check in

British Airways
279.49
0

one 0

bag
Reservation

EasyJet
238.98
3

Ryanair
286.32
15

34

140

10

20

fee
New Fare
279.49
285.98
461.32
% change
0
20
61
Table 4: A comparison of flights from London to Malaga between BA,
EasyJet and Ryanair - outbound flight on 1st Aug 2013; return flight on
2nd Aug 2013
From table 4, it is possible to see that Ryanair is surprisingly, the most
expensive fare, with BA in second place and EasyJet in third in terms of
original price. However, when including the hidden charges, BA becomes
the cheapest. Including hidden charges, EasyJets fare rose 20% and
Ryanairs charges rose 61% while BA showed 0% change.
With further analysis, the constraint identified in the previous step in fact
is only a half-truth. While competitors such as EasyJet and Ryanair are
labelled as budget or low-cost airlines, consumers may not be totally
aware of the realities of airline fares. Therefore the best way to exploit this
constraint-turned-opportunity would be in a marketing campaign to
consumers to make aware of the differences, and hopefully choose BA
instead of believing a pre-conceived notion that budget airlines are in fact
cheaper in the long term.

29

5.3 Step 3 Subordinate and synchronise everything else to the

decision of Step 2
In this step, it is essential for BAs operations to work to support the
constraint, and therefore the solution to the constraint. Constant research
should be conducted into competitors fares so as to maintain an informed
and up to date perspective on the situation and not release any false
advertising.
This step is relatively easy compared to the detail one has to take with the
previous steps. It requires no extra financial input and only a few extra
resources are used, and those only being resources associated with the
constraint.
5.4 Step 4 Elevate the performance of the constraint
This step involves investing more financial resources

into

the

constraint/opportunity. This is done at this point because it is good

practice to complete the lowest costing changes to the constraint first.
This step will therefore involve improved marketing strategies such as
recruiting new marketing executives.
5.5 Step 5 Return to Step 1 if constraint has shifted
A form of Total Quality Management (TQM) should be applied here, where
constant improvement should be the practice. The next constraint should
be identified and the process of Five Focusing Steps should be repeated.
5.6 Competitive Strategies
In following the steps outlined previously, a new competitive strategy
would be added to BAs short and long term operations.

30

Traditionally, BA has had a differentiation strategy as a legacy carrier,

steeped in tradition, history and momentous moments. The strategy is
indeed very effective as BA remains a huge player in the airline industry.
Most recently, BAs partnership with the London Olympic Games saw the
differentiation strategy successfully applied, with the Olympic Flame being
flown from Greece to the UK on a BA plane.
However, in an industry as volatile as this, and where there exists
constant and high competitor pressures, multiple competitive strategies
are recommended. There exist three competitive strategies as defined by
Richard Daft. These are: differentiation, cost leadership and focus (Daft,
2011:224).
As has been established established, BA have pursued the differentiation
aspect of this theory by Daft. Therefore, operations should work now to
include the cost leadership aspect in BAs strategy. It has been identified
that BA does possess cost leadership when it comes to value for money,
and no hidden charges (see sections 5.1-5.5).
So, in continuation and expansion of the cost leadership strategy, BA
should seek efficient facilities and cost reduction strategies to strengthen
the competitive advantage the company has with hidden costs.

5.7 Example Advertisement

The following is an example of how a marketing campaign by BA,
highlighting customers to its air fares compared to that of BAs
competitors when including hidden charges, from the research conducted
in this report.
31

32

Figure 4: An example of a marketing campaign that BA could implement

as a result of the application of the theory of constraints
The advert shown in figure 4 was created using a combination of Adobe
InDesign, Illustrator and Photoshop.

6.0 Feasibility Study

A useful manner in which to conduct a feasibility study of the problem
resolution defined in section 5.0, is their TELOSP acronym for project
management, which stands for technological; economical; legal;
operational; schedule and political (Taylor, 2007).
6.1 Technological
Some research studies require a level of technology (computing,
electronic devices, equipment) that may need to be tested or developed
(Taylor, 2007: 1789). With regards to the feasibility of a new marketing
position, the technological resources required to include value for
money advertising campaign would be well within BAs capability. The
proposed problem solution is technologically feasible.
6.2 Economical
The economic feasibility assessment is to determine whether or not there
is profitable benefit to carrying out the recommendations in the problem
resolution. As was ascertained from industry and airline analyses in
previous sections and the problem quantification section, the price of air
fares are a major factor in determining the competitiveness of an airline in
attracting customers. Therefore, it would be reasonable to assume that

33

the economic benefits of the problem solution specified in section 5.2

would be plentiful.
6.3 Legal
As Taylor notes in her article, this is an increasingly litigious world,
coupled with the highly competitive nature of the problem solution being
proposed in this report, the legality of the strategy should be of
paramount importance and therefore lawyers should be consulted
throughout the process. Perhaps a dialogue with the Office of Fair Trading
would be of benefit to the process, in order to minimise the success of
objections raised by competitors to BA.
6.4 Operational
This aspect of feasibility analysis can often be overlooked and not mapped
out properly (Taylor, 2007). Management at BA must be prepared to
ensure that work practices and procedures are adequate to meet the
demand of this new venture. Operational parameters including: reliability
(where the information in the advertisements should be correctly verified
and reliable) and maintainability (information on price changes is readily
available, and therefore this advertisement campaign can prove to be
very maintainable, simply update the data).
6.5 Schedule
A timetable of operations should be set out. It is up to management for
the specific timings; however a few things should be noted. Firstly, that it
would be in BAs interest to observe a trial period, to test the strengths of
this new strategy. Upon successful completion of a satisfied length of
34

time, the new marketing strategy may be extended on a company wide

scale.
6.6 Political
This aspect of feasibility analysis states that research should be carried
out to consider whether the project will have the potential to upset
anyone (Taylor, 2007: 1790). Obviously, it should be obvious that BAs
main competitors who are shown in the comparison advertisement
campaign will be disgruntled. Furthermore, this may contribute the legal
issues in section 6.3. However, if one were to look at a different industry,
with Asdas recent promotion on having the lowest prices on fuel, in which
their TV advert used comparative figures with their leading competitors
(Asda, 2013). This advertisement campaign by Asda may be used as a
precedent to justify singling out BAs competitors in the air fare
comparison scheme detailed in section 5.

35

7.0 Discussion
This management consultancy report was written independently of BA,
and examined the emergence; rise and impact low-cost airlines such as
EasyJet and Ryanair have had upon BAs profits and operations.
In order to gauge a suitable context for the environment in which BA
operate, various industry analyses were undertaken. Firstly, in section
2.1.1, the global airline industry was examined. While the analysis showed
that the industry displayed strong signs of growth, the 2008 Great
Recession hugely impacted it. As table 1 demonstrates, the effects of the
Great Recession on the global airline industry saw a -15.6% decline for the
year following the crisis. However, the industry did return to growth and
for the period of 2007-11, growth of 4.5% was recorded.
A more specific analysis on the airline industries in Europe and the United
Kingdom further strengthened the typical behaviour of the airline industry
as represented globally. These sub-divisions of geography in the airline
industry also presented decline as a result of the Great Recession;
combined with the characteristic of the industry being heavily reliant upon
consumer confidence, can prove detrimental to airlines.
What is required of airlines nowadays is to develop a useful competitive
advantage over their competitors, to maintain this advantage, and to
identify other areas in which to exploit an advantageous position. What
has been identified as a threat to BA is the rise of the budget airlines.
These airlines possess a huge competitive advantage to traditional flag-

36

carriers, due to the competitiveness of their air fares. Particularly since

the Great Recession, whose effects are still being felt today (particularly in
Europe); price is a major factor for consumers when choosing which airline
to fly with. Therefore, comparisons between BA and their leading budgetairline competitors were required. Ryanair and EasyJets prolific rise in the
airline industry proved to have serious consequences upon BAs revenues,
illustrated in BAs annual financial reports.
These budget airlines have built their success on a brand that is
synonymous with low-cost. Together with coupling their brand with a sort
of, easy-to-recognise theme, companies such as EasyJet have seen huge
growth of market share (see section 2.2.2). However, through research of
the problem this poses for BA, it has been discovered that while low-cost
airlines may appear on the surface to be the cheaper option to traditional
flag-carrier airlines such as BA, it is in fact, not the case. Through the
theory of constraints, a solution to the problem of low-cost airlines was
found; being the hidden charges that face customers who choose to fly
EasyJet or Ryanair result in the total price paid for the flight being higher
than the air fare for BA which includes almost no hidden charges. This
realisation was demonstrated through secondary research analysis in
figure 3 and table 4 in section 5.2. While there exists other production
methods (Just-In-Time (JIT)), the theory of constraints is more complete
than the JIT system in the helping the production process (Rahman, S.,
1998: 350). There are however, limited examples of business applying the
theory of constraints, and any resultant successes (Noreen et al., 1995).

37

Perseverance with the theory of constraints identified in this report will

prove to be beneficial to the organisation. Where the weakness identified
was the perception of customers that the no-frills low-cost airlines were
cheaper and therefore the comfort of travel was a worthy sacrifice for this
saving, and therefore opted not to fly BA. The way to exploit the constraint
is to draw attention of the customers away from the advertised price of
flights, to the price a customer would normally have to pay, including the
optional extras such as hand-luggage.
This would take the form of a new marketing initiative, and therefore no
new resources would be required, only those already existing. There would
perhaps be a situation created where other marketing objectives may
have to be suspended to allow for this proposed strategy to be properly
undertaken.
The recommendation made in this report would allow BA to take utilise a
competitive advantage that has been present for a long time, but perhaps
just not known. If consumers were alerted to the true figures that one
would have to pay if one travelled on a low-cost carrier, after including the
hidden charges, consumers would be much more inclined to choose BA:
firstly, for the brand that is steeped in history and association with good
quality air travel; secondly, for the huge selection of destinations offered
by BA (and their new partner Iberia through the IAG Group), because a
variety of places to fly to will cater to more people; finally, due to the fact
that price is probably the leading factor when consumers are deciding on
who to fly with. Therefore when faced with the basic values of fares, it is

38

easy for consumers to be convinced that it is the logical and economical

decision to go for the likes of EasyJet or Ryanair. However, as research in
this report has discovered, a suitable marketing campaign by BA
highlighting the overall better value of choosing BA, will positively impact
on its market share, competitive advantage and ultimately its revenues.
Future limitations and problems to this recommendation however could
present itself, with changing pressures on air fares, changing flying
policies and changing actual prices of tickets, it is easy for the
recommended new marketing strategy to become quickly out-dated and
therefore obsolete. It is highly recommended that constant supervision of
dynamic pressures/airline policies/air fares is maintained by BA in order to
maintain the legitimacy and therefore effectiveness of the marketing
campaign.

8.0 Conclusion
In conclusion, this report was tasked with undertaking an independentstudy project of an organisation that faced a particular problem, and then
evaluate this problem using reviewing various secondary data sources,
academic and practitioner materials to identify potential solutions to this
problem and the feasibility of these solutions.
The problem identified was the threat posed to BA from low-cost airlines
and therefore a decreasing market share as customers opt to fly for the
perceived cheaper option. However, analyses of BA and its competitors
found that when one included hidden charges, BAs air fares turned out
cheaper (shown by analysis of a typical flight from London to Malaga).
39

This realisation would serve a new marketing campaign to inform the

consumer of this fact and improve BAs competitive advantage over
EasyJet and Ryanair. This form of comparative marketing could then be
expanded globally, where BA are trying to increase their market share of
customers in other countries.
It is in the view of this report that these recommendations would further
contribute to BAs position as a key player in the airline industry. It will
allow BA to become more in tune with the needs of its customers and
bring it further in line with its motto:
To Fly, To Serve

40

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47

Appendix
A1.0 Airline Use in the UK
Departure to Arrival - the Air Experience - UK - August 2010
- Airline Use
Figure 21: UK airlines flown with in Britain, June 2010
%
British Airways
EasyJet
Monarch
Thomson/First Choice
Thomas Cook
Virgin Atlantic
Bmi
Bmibaby
Flybe
Jet2
Loganair
Air Southwest
Eastern Airways
None of these
I have never flown

51
46
29
27
26
22
17
14
10
7
2
1
1
9
7

Base: 2,000 internet users aged 16+

Source: Source: GMI/Mintel
(GMI/Mintel, 2010)

48

A2.0 British Airways Price Quote London to Malaga

49

A3.0 EasyJet Price Quote London to Malaga

50

A4.0 Ryanair Price Quote London to Malaga

51