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Remi Cossart

British Airways (LON:BAY) is a major airline ranking ninth in the world in total number of kilometers flown and the third in international kilometers flown.^[1] British Airways specializes in providing transportation in Europe and between Europe and North America. It operates a fleet of 234 airplanes which serve 150 different destinations around the globe, 46% of which are in Europe.^[2] The company gets the majority of its revenue, 86%, from passenger travel. The remaining revenue comes from cargo transportation and engineering services provided to other airlines.

British Airways experienced falling net profits from 2005 to 2007. However, in 2008, the company was able to increase its net income by cutting selling costs and labor costs.^[3] However, the company's relatively small fleet (13th largest fleet in the world ^[4] has prevented it from increasing the number of passengers it carries per year. In an attempt to increase its market share in transatlantic flights, the company announced in 2009 that it planned to spend £4B to enlarge its aircraft fleet, particularly long-haul planes.^[5]

Like much of the airline industry, British Airways has been hurt by the volatility and rise of fuel prices. Because of the rise in crude prices, British Airways has had to pay 17% more on fuel prices from 2007 to 2008. The company hedges on fuel prices to protect itself from sudden price increases. However, British Airways faced a £12 million loss from fuel derivatives in 2007. The economic crisis has also negatively impacted airline travel and BA experienced a 12% decline in revenue from premium ticket sales from 2007 to 2008.

In March 2009, the British Government has also announced that it will be increasing regulation on the airline industry with respect to punctuality, customer service and other key areas.^[6] This is particularly problematic for British Airways since the company has a history of poor punctuality; its flights were late 33% of the time in 2008.

Company Overview

British Airlines ranks ninth amongst airlines by total number of kilometers flown and the third in international kilometers flown.^[1] It operates a fleet of 234 airplanes which serve 150 different destinations around the globe, 46% (or 69 destinations) of which are in Europe.^[7] The majority of the company's planes tend to be of medium to small size, which reflects British Airway's emphasis on short- to medium-haul travels (flights shorter than 7 hours).^[8][9][10]

In addition, British Airways is partnered with American Airlines (AMR) and other smaller airlines. This partnership allows customers to book flights under BA but through another airline company. This enables British Airways to offer its customers flights that it does not personally offer. This way, British Airways is able to maintain a larger customer base and a perceived greater number of flights.^[11]

In an attempt to expand its business and market share in Europe, British Airways has proposed a merger with Iberia, a Spanish based company with a large cargo segment. The merger would push the company to first in total kilometers flown in Europe.^[12] In addition, British Airways' fleet has an average age of 11.5 years which is slightly older than the industry average of 10 years. The company has announced that it will spend £4B in 2009 to replace and improve its fleet of aircraft in the coming years. This plan is in an attempt to increase British Airway's strength in transatlantic flights between Europe and America.^[5]

Business and Financial Metrics

2008 Revenue and Income in millions of £ *NOTE: As of 20 May 2009, 1 British Pound (GBP) is equal to 1.5648 US$ ^[3]

In 2008, British Airways' revenue was £8.75B, which is a 3% increase from 2007. British Airways has experienced falling year on year net income from 2005 until 2007 due to rising fuel prices. However in 2008, it managed to improve net income to £694 or a 128% increase from 2007. This was largely possible due to a net decrease in total expenses from £7,936 in 2007 to £7,878 in 2008.^[13] Selling costs have fallen by 18% from 2007 to 2008 because more customers use online booking and e-tickets. In addition, labor costs fell 4.9% to £2,166 million after a new labor agreement lowered pension costs and future service benefits.^[14] The combined drop in selling costs and labor costs, was able to overcome the 6.4% increase in fuel costs.

There are a series of key metrics in the airline industry. With respect to passenger load, British Airways has been unable to effectively increase the the number of passengers it carries each year. Instead, passenger load has fluctuated between 32 million and 35 million passengers over the course of the past 4 years. This is because it has not been able to increase its Available Seat Kilometers (ASK) - which is calculated by the total number of available seats times the total number of kilometers flown. This value essentially determines the company's total capacity for travel. This stagnation in flight capacity is largely due to the fact that it has been unable to purchase new aircrafts in 2008 (as the company had originally planned) due to higher than expected fuel costs.^[5]

British Airway's key operating metrics are listed below, the currency is listed in British Pounds. As of May 2009, the exchange rate was 1£ yields 1.5648 US$.

Business Segments

2008 Revenue Breakdown ^[3]

Passenger Flight (86% of Revenue)^[14]

The Passenger Flight segment is, by far, British Airways' largest segment. It provides transportation services to customers in the form of either economy seats or premium service. Premium tickets have access to lounges, higher quality service, and other perks in exchange for a higher fee.^[16] With the Heathrow Airport in London as its base, the segment focuses on European and transatlantic transit. This segment's revenue was up 3.8% from 2007 to 2008.^[3]

Cargo Transportation (7% of Revenue)^[14]

The Cargo segment transports parcels and large packages across the UK, South Asia, Africa, and North America. It provides shipping for both general cargo and premium packages which are handled with greater care and speed at a higher cost. The Cargo segment's revenue rose 3% from 2007 to 2008 due to a 12.6% rise in premium product volumes.^[14]

Aviation Engineering (7% of Revenue)^[14]

In addition to providing airline service, British Airways also has an engineering team. This team does in-house technical repairs and services to the company's fleet and offers a limited service to other airline operators. However, the engineering team does not have the technical abilities to take on all repairs and so must often outsource its maintenance requirements to other companies to keep costs low and quality high.^[17][15]

Key Trends and Forces

British Airways faces intense competition from discount airliners

During the first three months of 2009, British Airways' total passengers per month fell by 10.1%. Meanwhile, Ryanair Holdings (RYAAY), a top British discount airline, experienced a 5.5% rise in total passengers per month.^[18] Ryanair and EasyJet PLC (EZJ-LN), another British discount airline, have both refused to charge fuel surcharges in the face of rising fuel prices. However, customers have moved away from British Airways which charges an average fuel surcharge of £20.^[19] These excess fuel surcharges were deemed as anti-competitive activity by the British Department of Justice and the company was assessed a £300 million fine in 2008.^[20] In addition, British Airways has a record of poor punctuality compared to their low cost rivals. British Airways was on time 63% of the time in 2008 compared to 88% and 80% for Ryanair and EasyJet.^[15] Since 2000, Ryanair and EasyJet have both surpassed British Airways in total passengers.^[21] The continued rise of these discount airlines threaten British Airways' passenger base.

The economic crisis hurts British Airway due to its reliance on premium tickets

The economic crisis has put pressure on British Airways as many businesses cut nonessential business travel in the hopes of lowering costs. BA experienced a 12% decrease in revenue from the sale of premium tickets from 2007 to 2008.^[22] British Airways has a focus on high level premium tickets and offers first class ticket holders access to premier lounges.^[23] The company relies on premium tickets for over 50% of its revenues, which is far above the 32% industry average.^[24][25] Thus, a drop in premium ticket sales will hit British Airways the hardest.^[26]

Recent Increased Regulation by the British Government of Airlines Operating in the UK will hurt British Airways

In March 2009, the British Government announced that it would be implementing new regulation in order to improve punctuality and customer service, among other aspects of the airline industry. The regulation will be run by a consumer watchdog group which will be in charge of creating criteria that airlines operating in Britian must achieve. It will then have the authority to assess fees to violators.^[6] This is a particular problem to British Airways due to its historically poor punctuality and its operations in Britian. BA went from being within 15 minutes on time 76% of the time in 2005 to only 63% of the time in 2008. Because of this poor performance, the company will likely face increased fines and regulation stemming from the new British laws.^[15]

British Airways' fuel hedging can be hurt by increased volatility of prices

British Airways purchases approximately 6 million tons of jet fuel each year. In 2008, fuel costs made up 23.5% of its total expenses.^[3] To protect itself from price increases, British Airways hedged over 50% of its needs for fuel in 2009 which is far higher than many other companies in the industry - American Airlines (AMR) and Continental Airlines (CAL) heged 35% and 30% respectively.^[27][28] However, the volatility of oil prices makes it difficult for British Airways to effectively hedge. This means that if prices change drastically, it is hard to predict the future price of fuel. British Airways may suffer a competitive disadvantage to its competitors if it purchases contracts for future fuel at a higher price than its competitors. For example, in 2007, British Airways faced a £12 million loss from fuel derivatives. In addition, rising fuel prices put pressure on British Airways. Since 2006, fuel costs have maked up a larger share of the company's total expenses each year.^[3] British Airways paid 17% more per barrel of jet fuel from 2007 to 2008.^[29]

Competition

Within Europe, British Airways ranks sixth in total kilometers flown. It faces intense competition from companies like EasyJet PLC (EZJ-LN) and Ryanair Holdings (RYAAY) which are low cost airlines similar to JetBlue Airways (JBLU) and Southwest Airlines Company (LUV). These companies have been able to take on a larger portion of the market share within Europe than British Airlines, however they do not provide transatlantic flights like British Airways. A brief description of the company's main competitors are as follows:

• EasyJet PLC (EZJ-LN): provides low cost airfares to its customers. The company operates only in Europe and offers only short-haul and some medium-haul flights. EasyJet acquired GB Airways in January 2008, and became a significant competitor to British Airways in its European flights.^[30]

• Ryanair Holdings (RYAAY): which, like easyJet, provides low cost flights to its customers. Ryanair serves only Europe and Morocco and uses secondary and regional airports in order to cut costs. However, it focuses on short-haul flights with the average flight length only 662 kilometers (411 miles). ^[31]

• Air France-KLM (AFLYY): is a French based airline company which competes with British Airways on an international level. The company is relatively evenly split between short-haul (within Europe), medium-haul (Europe and surroundings), and long-hual (transatlantic and Asia). Because of this, Air France is similar to British Airways in its focus on both Europe and the surroundings and transatlantic flights.^[32]

• Continental Airlines (CAL): is substantially larger than British Airways, but competes with the company in transatlantic flights. Continental is based on the East Coast of the United States and so is heavily focused on European-American flights. However, unlike British Airways, Continental generally uses larger aircraft and so is restricted to larger airports.^[33]

As discussed above, British Airway has a poor punctuality rating and encounters higher fuel surcharges on average than its competitors. This means that it tends to be be more than 15 minutes late more frequently and assess its consumers higher fuel surcharges in order to overcome high fuel costs. This is problematic especially in the light of recent British regulation which aims to improve airline punctuality and customer service.

^[40]

References

1. ↑ ^{1.0 1.1} International Airline Transport Association "Services & Solutions" Scheduled Passenger - Kilometres Flown
2. ↑ BAY-LN 2007/08 Annual Report and Accounts "Where we fly to" 15 May 2008
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5} BAY-LN 2007/08 Annual Report and Accounts "Group Consolidated Income Statements"
4. ↑ British Airways: Media Corporate "Aircraft Fleet" 31 March 2008
5. ↑ ^{5.0 5.1 5.2} BAY-LN 2007/08 Annual Reports and Accounts "A Plan for Growth"
6. ↑ ^{6.0 6.1} Wanderlust "Airlines face regulation shake-up" 10 March 2009
7. ↑ BAY-LN 2007/08 Annual Report and Accounts "Where we fly to" 15 May 2008
8. ↑ PlaneSpotter "British Airways - Details and Fleet History" 2009
9. ↑ AirSafe "Average Fleet Age for Selected U.S. Carriers" 3 June 2008
10. ↑ Thomas Cook Airlines "Seating"
11. ↑ British Airways oneworld Airline Partners
12. ↑ Times Online "BA-Iberia merger would create biggest airline in Europe" 30 July 2008
13. ↑ The Independent: Business "BA says airlines face challenging times"
14. ↑ ^{14.0 14.1 14.2 14.3 14.4} BAY-LN 2007/08 Chief Financial Officer's report p.2 "Operating expenditure" 15 May 2008
15. ↑ ^{15.0 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8} BAY-LN 2007/08 Annual Reports and Accounts "Operating and financial statistics" 31 March 2008
16. ↑ British Airways "First"
17. ↑ BAY-LN 2007/08 Annual Reports and Accounts "Engineering"
18. ↑ Times Online "British Airways first-class and business-class passengers down by 20 per cent" 5 May 2009
19. ↑ Directline Holidays "Ryanair Slams British Airways Over Fuel Surcharges" 16 Oct 2008
20. ↑ BAY-LN 2007/08 Chief Financial Officer's report p.2 "Revenue" 15 May 2008
21. ↑ Anna Aero "easyJet and Ryanair battle for supremacy in UK short-haul market" 17 April 2009
22. ↑ ETN: Airline Industry "Premium air-travel slump gathers pace as trade slows " 19 Jan 2009
23. ↑ Juanted "Lounging at The Airport: The Many Lounges of British Airways" 5 May 2009
24. ↑ The Guardian "British Airways ditch first class in new planes as age of austerity bites" 22 May 2009
25. ↑ Airport International "Changes In Demand For Air Travel"
26. ↑ CNN Money "Air travel drops in December" 18 Feb 2009
27. ↑ Purchasing.com "Despite lower jet fuel prices fewer airlines hedging" 30 April 2009
28. ↑ Chron Business "Southwest's hedging advantage turned on its head" 16 Oct 2008
29. ↑ BAY-LN 2007.08 Annual Report and Accounts "Operating financial and statistics"
30. ↑ Google Finance "easyJet plc (LON:EZJ)"
31. ↑ Reuters: Business & Finance "Ryanair Holdings PLC (Nasdaq)"
32. ↑ Google Finance "Air France - KLM (ADR)"
33. ↑ Reuters: Business & Finance "Continental Airlines, Inc. (New York Stock Exchange)"
34. ↑ EasyJet "Passenger Statistics for December 2008" December 2008
35. ↑ Ryanair "Ryanair News" Press Release 2008
36. ↑ Finfacts.com Ireland Business News
37. ↑ About BMI
38. ↑ British Airways Statistics
39. ↑ European Low-Fares Airlines Association Statistics
40. ↑ Ryanair Annual Report, compiled from most recent Annual Reports