Summary

This report identifies through research, the impact that marketing environmental
issues have on British Airways. It clearly outlines the macro and micro environmental
factors and internal factors that the new Chief Executive, Willie Walsh, has to
consider in order for him to successfully drive the company forward and receive a
10% operating margin.

Introduction

British Airways (BA) is the UK’s largest international scheduled airline, operating
international and domestic scheduled and charter air services for the carriage of
passengers, freight and mail and the provision of ancillary services. The airline flies to
over 550 destinations globally and is considered to be a leader in the industry.

In order to profitably satisfy customer needs, an organisation must understand its

external and internal situation including the customer, the market and its own
capabilities. Furthermore, it needs to understand and adapt to the dynamic and
uncontrollable factors of the environment in which it operates.

A marketing audit is in a number of ways the true starting point for the strategic
marketing planning process, and is therefore, as Kotler (1999)has suggested ‘a
comprehensive systematic, independent and periodic examination of a company’s-or
business unit’s-marketing environment objectives, strategies and activities with a
view to determining problem areas and opportunities. An analysis of the three key
perspectives of a marketing audit the macro-environment, the micro-environment and
the internal environment will be carried out for BA.

2005 saw a new Chief Executive being appointed in BA; Willie Walsh, former head
of Aer Lingus. The man with an excellent reputation for driving down costs has
stressed his determination to realise his predecessors, Sir Rod Eddington’s, goal of a
10% operating margin.

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External Analysis

Macro Environmental Analysis

The marketing environment is ever changing and therefore it is essential that a

structured, detailed and continuous analysis of the principal dimensions of the
environment is made.

Political and Legal Factor

The start of the millennium is turning out to be some of the most difficult times that
the airline industry has ever faced. The events of terrorism attacks in September 11,
2001 in New York and July 7, 2005 in London along with the wars in Iraq have no
doubt caused an unprecedented crisis and political instability. The events have caused
the introduction of new security regulations from the EU and US that come into effect
in summer 2006 and a fall in customer travelling confidence.

Governments have controlled where airlines can fly, and aspects of their product
planning and pricing policies. In recent years, substantial regulatory reform has taken
place, giving carriers more opportunity and increasing the market competition.
Deregulated companies like BA require systems that enable decisions to be made
quickly Open skies are an agreement which changes the regulatory landscapes
significantly.

A significant legal factor affecting BA is the power of trade Unions. BA has suffered
many strike actions (August 2004 and August 2005) and is aware of the implications
that the trade unions can cause. Legal regulations on employee rights, customer rights
and an upsurge in environmental and ecological issues are more factors that BA must
consider.

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Economic Factor
The demand for air travel is characterised by very high income elasticity. Therefore,
as the world economy grows, so the demand for air travel can be expected to increase
too.

The political situation in Iraq has helped to drive oil prices to a record high and for
BA; the oil price rise might add £100 million to their costs. In response, the cost of
fuel surcharges is always at risk (appendix 2). BA is in the business of transporting
people to and from worldwide destinations for both business and pleasure. If the
international economy slows down, business trades less and fewer business people
will use plans. Equally, people may loss ‘exciting’ holidays.

Social Factor
The social and cultural influences on business vary from country to country however
it is important that such factors are considered and include demographic and cultural
aspects. These factors affect customer needs and the size of potential markets.
Demographic changes have resulted in the development of the ‘grey’ market that are
spending more on leisure and travelling. Lifestyles, tastes and fashions are all
changing; customers require opportunities to visit new and interesting, often long-
haul, and destinations.
Technological Factor
Technology is vital for competitive advantage, and is a major driver of globalisation.
A key issue will be the extent to which technological advancements can offset upward
pressures on prices and costs. Online sales are regarded highly important by BA and
they are placing considerable faith in its website presence to boost online-sales which
will reduce customer traffic via BA’s call centres. E-Tickets are now the standard
ticket format used by BA, making flight ticketing more straightforward, flexible and
secure.
BA is focused on improving its customer service in line with modern technology and
has opened its first drive-through, offer Wireless LAN systems and communicate
through modern SMS taxing. A significant long-term threat is the effect of video-
conferencing on the demand for air transport and they may have to accept
telecommunications companies as formidable competitors for their business
customers.

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Environmental Factor
Sir Rod Eddington, former Chief Executive of BA stated ‘The whole aviation
industry must accept global warming as a reality, and galvanise its efforts to limit
generation of greenhouse gases.’ (www.sbac.co.uk) Global Warming also affects the
demand for airline travel as warmer UK summers may result in more people spending
their holidays in the UK. There is also a threat of a pollution tax being imposed on
airlines from the government (Adam and Gow, 2005).
Micro Environmental analysis

This environment influences the organization directly. It includes suppliers that deal
directly or indirectly, consumers and customers, and other local stakeholders.

Industry Analysis

Michael Porter’s (1998) five forces analysis will allow an examination of the amount
of power BA has in its immediate environment.

Force Strength

Competitor Rivals
• BA caters for both haul and short flight. Within long haul there is
little differentiation between BA and their competitor, in terms of
price and service offering. High
• The short haul market is more fragmented with many small players.
• Direct competitive rivalry is fierce e.g. Virgin has a website.
• Consolidation of competitors has increased competition.
Power of Suppliers
• Two aircraft manufacturers = High bargaining power.
High
• BA restricted by sole supplier of fuel to the airport.
• Priority of landing slots is given to historic rights of existing users.
• BA employees use collective their bargaining power.
Power of Customers
• Low concentration of buyer to suppliers means they have little
bargaining power. Low
• Increased internet usage has amplified awareness and interaction of

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 customers.

Threat of new entrants

• Significant barriers to entry such as the competitive environment
high regularity requirement and high capital cost requirements. Low
• Barriers to exit are in place which daters’ new entrants.
The failure of recent airlines such as XL and Zoom is likely to deter new
entrants.

Competitor Rivals
This not only refers to the degree of competition, but also the type of competition
occurring. BA operates in two different markets - long-haul and short-haul flights -
and therefore faces competition in both. In the long-haul market, competition comes
from other large airlines for example Air France, who competes on routes, service,
comfort and overall quality. In short-haul, competition is driven by low-prices from
airlines including Easy Jet. A growing number of tour operators (like Thomas Cook
and TUI) are also now selling air only scheduled seats to reduced prices (Feldman,
2002).
Bargaining Power of Suppliers

This refers to the extent to which firms who supply a business can dictate prices,
contract terms or delivery times. For BA this situation can be complex. As identified
in the macro analysis BA’s prices depend on fluctuations in oil prices which it cannot
control. Without aviation fuel, planes do not fly and BA will not make a profit.
Although one may argue that BA has a choice as to which fuel supplier it uses, the
petrol market is alike in terms of prices. In terms of suppliers of the actual planes, the
situation is different again. Companies such as Airbus with its new A380 plane and
Boeing with its 787 Dreamliner are desperate to secure long-term orders to recover
development costs.
Bargaining Power of Customers
There is a high degree of buyer power for BA’s. Customers as they have the ability to
vote with their feet if they are not happy with the product. Events such as the check-in
and baggage-handlers strike at Heathrow 2005 (in support of Gate gourmet
employees) seriously affected BA’s revenue as customers had to find alternative
airlines to use. Buyer power is strong especially in the low-cost market, as there is

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little differentiation between market offers, and hence consumers shop around for the
cheapest price, supported by the convenience of online-sales. These low switching
costs mean that customer loyalty is crucial. Customers also have the Civil Aviation
Authority (CAA) on their side.
Threat of new entrants
BAs dominant position means that it would be difficult for a firm to compete with the
company on a global level from the start. However as barriers of entry are becoming
non-existent, new entrants are appearing in the short-haul business and these low-cost
operators, such as Easy Jet, have steadily chipped away at BA’S European
dominance. However, a lack of take-off and landing slots makes it difficult for new
carriers to find suitable airports. Several speculators have suggested that it is only a
matter of time until a low-cost operator attempts a more serious move into long-haul
market. Lufthansa has responded early to this speculation by offering a high-cost
high-quality service, including private limousine transfers to and from the airport,
massages and champagne.
Threat of substitutes
The threat of substitutes refers to the ability of buyers to switch to an alternative type
of product, hence alternatives to air travel. While it is fair to suggest that there is no
real alternative to long haul air travel in terms of time and cost, the alternatives for
short-haul destinations do exist, and vary from coach to car to rail. The extent to
which any of these pose a real threat depends upon factors such as the efficiency and
the price of the rail or coach service, however, until trains travel as fast on UK rail as
they can on the continent, this will not be so much of a threat.
Market Analysis
The first thing that needs to be done is to identify which market BA operate in to be
able to carryout an accurate analysis. BA operates in the airline industry. Their main
market is hence transportation but they also work in other areas such as
communication, leisure and logistics.
During the last 10 years the airline industry in the UK has changed out of almost all
recognition. Today, according to the International Air Transport Association (IATA),
the airline industry is going through ‘the worst crisis in history’ (BBC, 2006) British
Airways operates within the highly competitive airline market. The UK market for
airlines grew by 1.2% since 2003 to reach a value of £8.7 billion in 2004. The
number of passengers flying from UK airports alone has increased from 70 million in

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 2000, to 86 million. The development of a fifth terminal at London Heathrow testifies
this growth. However, against this expanding consumer market, the airline industry
continues to struggle with the continuous threat of terrorism, high fuel prices and
increased competition. The two main sectors of the market are long-haul and short-
haul, both of which BA operate in.
The market for airlines is forecast to grow by 5.7% by 2009 to reach a value of £9.2
billion as air travel will remain to be the favourable mode of transport. Short-haul is
expected to be both the most dynamic and largest sector accounting for 72.9% of the
market in 2009 (appendix 5). Prices for both markets will continue to decline as the
price competition continues to grow between major carriers like BA and low-cost
airlines who are already dominating the short-haul market. There will be however,
some upward pressure from the ever growing fuel prices.

Competitor Analysis
The airline sector is more competitive today than it has been at any time in the past,
providing consumers with more choice and cheaper fares than ever before due to the
emergence of low-cost airlines.
British Airways operates within two strategic groups within the airline sector – the
short-haul and the long-haul. Each of these sectors has different competitors (see fig
1). One group consists of airlines with regional operations offering scheduled flights
and competing on costs. The second group offer long haul flights, with quality
environments and services to a range of destinations. Therefore, BA competes on a
global, European, national and regional scale.

British Airways
Virgin
Lufthansa
UAL Corporation
Air France
EasyJet
PRICE

Ryanair
BMI Baby

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 Scope Operations
Regional Global

Strategic groups in the airline industry (Drummond & Ensor 2004)

Within the UK, BA is the largest carrier in the market accounting for 45.1% of
passengers in 2004 (Euromoniter) with Virgin Atlantic being the second largest
carrier in the market with 9.2% market share. It is also likely that long-haul licenses
will be granted to low-cost airlines which will enable them to compete in both
strategic groups increasing its influence on BA’s strategy. In Europe, the UK’s Easy
Jet and Ryan air were the pioneers of budget airline travel. Their initial business
model was based upon offering low fares through outstanding cost management.

Lufthansa’s change in strategy will have direct affect on BA as they continue to

attract customers for their high quality standards. Another strategy that seems to be
emerging amongst traditional carriers is to reduce fares in order to become more
competitive with the low-cost airlines.
New planes, new routes, additional flights and management changes are all factors
that impinge a business. Such changes made by a competitor need constant
monitoring in order for BA to examine its current position and develop future
strategies.
Customer Analysis
Shaw (2004) addresses what he calls the most fundamental and commonest mistakes
made in airline marketing - failure to make a proper distinction between the
‘Consumer and the ‘Customer’. Consumers are the people who actually travel
however it is important that BA consider customers, as they are the decision makers.
This is important in both consumer and industrial markets.
BAs customers differ enormously in terms of their buying behaviour. Not only do
they differ in terms of their age, income, educational levels and geographic location
but more fundamentally in BAs case in terms of their lifestyles and expectations
which are influenced by many factors.
BA also operates in an industrial market where differences in buying behaviour are
exhibited by the formality of BAs purchasing policies, delivery dates and expected
performance. The majority of these decisions are made by a group of individuals

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 working to a set of purchasing criteria, known as the Decision Making Unit (DMU) as
illustrated below.
BUYER

GATEKEEPER

USER

Post
Recognition Purchase Purchase Search and Evaluation of Choice of Agreement purchase
of purchase classification specification investigation alternative Supplier on terms and evaluation
ORDER
requirement of alternative proposals conditions of and
PLACED
proposals supply feedback

INFLUENCER

DECISION MAKER

Fig.3 Buying process for BAs industrial consumers. Adapted from Fifield and Gilligan

Stakeholder Analysis
BA recognises that financial stability alone cannot ensure long term prosperity,
therefore it strongly believes in the importance of loyalty, support and trust amongst
its stakeholders; customers, employees, pressure groups, government, suppliers, banks
and local communities within which it operates. A report carried out by Mintel in
2003; found that 44% viewed BA as the most trusted brand in the UK.

Internal Analysis
All factors that are internal to the organization are known as the 'internal
environment'. The internal environment is as important for managing change as the
external and is used to aid communication and change management.
Value chain Analysis
British airways have tried to control the system further by forward and backward
mitigation. Through controlling companies payment supplies in-house and through

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BA holidays PLC, BA increases their reach in the value system to the supplier and
channel value chain.
Firm Infrastructure
Structured hierarchy allows BA to make of a multitude of specialist knowledge in order to
gain competitive advantage over down sized firms.
HRM
Invested in the development of customer service training in 2009 attracting the best
employees. ‘speak up’ opinion survey encourages employees to provide feedback.
Technology Development
British airways has added value in this category over smaller companies due to slack
resources that can be employed to innovate the service. (e.g. individual LCD screens)
Procurement
Due to the size and historical relationships and alliances, BA is able to leverage suppliers and
through economies of scale make efficiencies where competitors may fail.
Primary Activities
Inbound Operations Outbound Marketing & Post Sale
Logistics Logistics Sales Service
Stock control Increased Customer Marketing Loyalty club
Baggage service communications card.
capacity to all stakeholders

High quality Quick check in Large database Brand allowing Update

training services and of airport slots for large budget communication
accredited by secure online enable to be spent in this on other
city and builds. booking with passengers to field. services.
ability to pre- access the
book additional majority of
services destinations
from preferred
airport.

Ongoing
relationship with
suppliers.

Resource Analysis
As stated by Hooley et al; ‘The realistic identification of an organisation’s marketing
strategy options can only be undertaken in the context of that organisation’s’. The
resources of an organisation should be the things that give it a competitive edge. The

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corporate capabilities should be sources of competitive differentiation and advantage
in activities that matter to the customers.
BA places much importance on their employees and hence is seen as an excellent
employee. For example, for the fist 6 months that Walsh was with the company, he
spent getting to know the company through meeting the employees. However, recent
jobs cuts made by Willie Walsh will affect the morale of the workers.

It is essential to have an understanding of BA’s strategic resources; both assets and

capabilities as these are the things that determine the nature and strength of the
internal and external resources BA have. Please see overleaf for resource analysis.

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ASSETS
TANGIBLE
Physical Ownership and control of facilities at
prime airports across the word
Financial Is making a large profit yet still in
some amount of debt. A
Considerable amount of money is put
into marketing each year at BA.
Operational High standard and range of planes,
equipment and technology
Human Highly skilled workforce from
managerial to baggage handlers.
Legal Licensing agreements to fly into
other airports
Systems Databases and MIS, E-ticket system
Marketing
RESOURCES
INTANGIBLE
Ability to expand e.g.
terminal 5 at Heathrow
Good credit ratings – the
government will always
bail them out
Procedures and Systems
Their skills and abilities to
perform effectively
BA will go to court to
defend their rights e.g.
(DVT case)
Specialised knowledge and
an infrastructure that
supports decisions
COMPETENCIES
Strategic Recent recruitment of Willie Walsh
who has an excellent reputation since
Aer-Lingus
Functional Excellent skills of individual
departments – marketing department–
able to handle customer relationships,
product management and new product
innovation
Operational The skills required to run the day to
day operations including the flexibility
to react to sudden changes within the
environment and the skills required to
maintain relationships with agencies
for example Bartle Bogle Hegarty
(BBH)
The three above competencies are successful in BA on
an individual, team and corporate basis.
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 Product Life Cycle

BAs product is, of course, an intangible one which is instantly perishable and cannot
be stored. To be able to market its product properly, BA must be aware of the product
life cycle. The standard life cycle tends to have five phases: Development, Growth,
Maturity and Decline. Taking BA as a whole, it is currently in the maturity stage,
which is evidenced through their current application of the marketing mix1. For
example, their product has been developed and they are now concentrating on
SALES – BA
differentiation through emphasising quality, their pricing strategy is to simply expected cou
PRESENT
compete with other key competitors rather thanPOSITION
price penetration and their advertising
aims to remind its target audience that they are ‘the no 1 airline’ and to re-emphasise
the brand which is already well established.
SALES – Typ
cour
As suggested by Meek et al, BA is a classic product as it seems to defy the
traditional S shape PLC and go on forever (see fig below). Marketers in BA need to PROFIT –
expected c
+
understand that the PLC is limited use as a forecasting tool and although they are in
the mature stage of the PLC, creativity and innovation is still necessary to enable
- INTRODUCTION GROWTH MATURITY DECLINE SENILITY
Customer based Distribution Alliance based Internally based
TIME
based PROFIT –
Market leader Large global Member of the one world BA can achieve lower costs than
Strong brand which has geographic alliance. Allowing them to have competitors through online booking.
developed customer loyalty network and access to markets, management Large customer database
and high reputation presence expertise and exclusive Innovative culture – new product
agreements. development and welcoming ideas from
staff
organisational success.

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SWOT ANALYSIS

Strength

• British Airways is a well-established brand name that has gained loyalty and
trust from customers.
• Innovative culture enables BA to take full advantage of technological
developments for example, online sales, drive thru check in.
• BA has a global geographic coverage with excellent communication with
strong international alliances.

Weaknesses

• BA has yet to have recovered from events including the Iraq war, the 2001 and
2005 terrorist attacks because of its reliance on international air travel. The
threat still remains.
• BA continues to have extremely high debts.
• Recent job cuts may have a negative effect on BA as in the past this cost-
cutting exercise has resulted in understaffing and industrial action in 2004 and
2005.

Opportunities

• The growth of internet usage globally is likely to further expand BA’s online
customer base
• Value-added and innovative flight services such as sleeper services will attract
more customers as customer expectations are rising.
• Terminal 5 is due to open at Heathrow in 2008, which is likely to benefit BA.
The current UK government stresses Heathrow as a global gateway and

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 recommends a third short runway and sixth terminal be opened by 2020,
which will also benefit BA

Threats

• Lo-cost airlines continue to enjoy strong growth and power in the market and
new entrants and the likelihood of them being issued with long-haul licenses
could pose a further threat to BA’s market share.
• The continuing growth and fluctuations in fuel prices is may threaten them
with regards to not achieving a 10% profit margin.
• Customers are still cautious of the threat of repeated terrorist attacks.
• With the increase of competition in the low-cost airline market, more
companies may focus their strategy on high quality and hence increase the
direct competition for BA.

Generic strategies
Generic strategies were used initially in the early 1980’s and seen to be even more
popular today. They outline the three main strategic options open to organisation that
wish to achieve a sustainable competitive advantage. Each of the three options are
considered within contact of two aspects of competitive environment.

Competitor Advantage

Low Cost Higher Cost

Overall cost leadership Differentiation

Cost focus Differentiation focus

Porter’s Generic strategies

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The generic strategies are:
Cost leadership: The low cost leader in any market gains competitive advantage from
being able to many produce at the lowest cost. Factories are built and maintained.
Labour is recruited and trained to deliver the lowest possible cost of production. Cost
advantage is the focus. Costs are showed off every element of the value chain.
Products tend to be ‘no-frills’. However, low cost does not always leads to low price.
Producers could price at competitive party, exploiting the benefits of a bigger margin
than competitors.
Differentiation: Differentiation goods and services satisfy the needs of customers
through a sustainable competitive advantage. This allows companies to desensitize
price and a better margin. The benefits of differentiation require producers to segment
market in order to target goods and services at specific segments generating a higher
than average price for example, British airways differentiates its services.
Focus and niche strategy: The focus strategy is also known as niche strategy. where
an organisation can affected neither a wide scope cost leadership nor a wide scope
differentiation strategy, a niche strategy could be more suitable. Here on organisation
focuses effort and resources on a narrow, defined segment of a market. Competitive
advantage is generated specially for the niche. A niche strategy is often used by
smaller firms.

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