Risks and Decision Making

Contents

1. Introduction

2. Company Background

3. Airline Industry Analysis
3.1 External Environment Analysis
3.1.1 The Operating Environment
3.1.2 The Remote Environment
3.2 Internal Environment Analysis

4. Risks and Uncertainties British Airway`s is facing
4.1 Internal Risks
4.2 External Risks

5. Mitigating Risk in the Airline Industry

References

1. Introduction

Nowadays strategic planning comes more than ever to the fore. In the course of an onward globalisation and with an increasing stress of competition, it becomes more and more difficult for entrepreneurs to keep or to improve their market position.

For this account, strategic planning comes into the main focus to choose the best strategy for a business.

However, every business man knows that there are always chances and risks in economic life.

For this reason, risks cannot be eliminated, but they can be managed.

Especially in the airline industry, the competition is on a very high level. Since 2001 more and more low cost carriers have been competing with the big well known national airline companies like Lufthansa or British Airways.

That’s why a well thought out strategic management, strategic planning and of course risk management are essential to overcome the stress of competition.

This report will analyse why risk management is so important in strategic planning. By evaluating different models and techniques, the best method to analyse the internal and external environment will be elaborated.

By using a current business paper, in that case the annual report of British Airways Plc 2007, different kinds of risks will be analysed and strategies will be given, to overcome and mitigate those risks.

2. Company Background

British Airways (BA) is the biggest airline company in the United Kingdom. With the fusion of Daimler Airways, British Air Marine Navigation and Imperial Airways in 1924, the history of BA began (British Airways, 2008).

The company divides its business into two segments. Those are the airline business, which includes the company’s main scheduled passenger, cargo operations and revenues from ancillary services (Datamonitor, 2008, p.5). Furthermore the non-airline business which includes Airmiles Travel Promotions Ltd, BA Holidays Ltd, and the London Eye Company Ltd (Datamonitor, 2008, p.6).

Their international transport network covered up to 550 destinations around the world (British Airways, 2008). However, the company operates predominantly in Europe and America (Datamonitor, 2008, p.4).

With their headquarters located in Harmondsworth, Middlesex their 42,755 employees and a fleet of 242 aircrafts, BA established a good basis for a successful business (Datamonitor, 2008, p.4). For future planning, BA placed an order for new Airbus aircrafts in September 2007. A modernisation of the fleet is absolutely essential, because the age of their fleet is a bit beyond the European average. According to the Jet Airliner Crash Data Evaluation Centre (2008) the average age of BA`s fleet is 11,2 years. In comparison to BA, the average age of the fleet of Air France is 9,1 years and Easyjet 3,0 years. Just Lufthansa is even beyond BA`s fleet, with aircrafts about an age of 12,2 (JACDEC, 2008).

Referring to the financial figures of British Airways, MarketLine (2008) figures out; “The company recorded revenues of £8,492.0 million during the fiscal year ended March 2007 […]”. That is an increase of 3.4% over 2006 (MarketLine, 2008).

As mentioned in the introduction, the aspect of competition in the airline industry is increasing more and more. In that case strategic alliances and partnerships with other airlines are essential to compete on that dynamic market.

BA is a member of the “oneworld alliance”, one of the two biggest airline alliances nowadays (Oneworld, 2008). Furthermore; they have different partnerships to a diversity of aviation partners, for example BA City Flyer (British Airways, 2008).

The aspect of environmental protection also plays a dominant role in the firm philosophy of BA. In 1984 they developed several programmes to reduce the negative effect of air travelling like environmental damaged and supported various projects in different developing countries like Somalia (British Airways, 2004, p.11). But also the reduction of carbon offsetting is essential for the company. However, nowadays it is very important for every airline company to compete with the others and as well to a very good reputation (Mintel, 2007). In the end, time will tell whether those issues will be realised.

3. Airline Industry Analysis

To analyse the risks, which British Airways is facing, it is essential to analyse primarily the airline industry in itself.

In 2006 the number of airlines amounted a total of over 1400, including full-service airlines, low-cost carriers, charter operators, regional airlines, air taxis, etc (Hanlon, 2007, p.11).

The biggest airlines like American Airlines, Delta Airlines, Air France, Lufthansa, British Airways, Emirates, Singapore Airlines and others, aligned together in two different alliances. On the one hand, the “Oneworld Alliance” and on the other hand, the “Star Alliance”. True to the motto “together you are more competitive”.

However, the two biggest airlines can be found in the USA. According to the International Air Transport Association (2006), those are American Airlines, Delta Airlines and Southwest Airlines.

The biggest European one is Lufthansa, with 51,213 carried passengers in 2006. With a merge of Delta Airlines and Southwest Airlines, the two companies could displace American Airlines from its first position (The Economist, 2008a).

All in all, today’s the airline industry nowadays is much more under pressure than 20 years ago. Aspects like carbon offsetting, carbon footprints and environmental protection become more and more important for this industry (Mintel, 2007).

3.1 External Environment Analysis

The airline industry operates in a highly dynamic environment (Kangis & O`Reilly, 2003, p. 109).

British Airways has to be aware of forces which are beyond their control and which are more powerful than they are. In that context an external environmental analysis is essential, because BA has less influence on the external environment than on the internal one.

By analysing the external environment, we have to differ between the operating and the remote environment. Furthermore the analysing of the internal and external environment is essential, because it is the first step in the risk management process (Chapman, 2006, p. 109).

3.1.1 The Operating Environment

Industries and sectors which are parts of the operating environment could be analysed by using Porter`s five forces, which allow an analysis of its competitive position (Oelsnitz, 2000, p. 46).

This model is based on the essential knowledge that a company strategy has to be geared to its environment. In this context, Porter identified five different competitive strengths, which appear in every branch and market.

These are according to Johnson et al. (2008, p. 83), “barriers to entry, substitutes, buyer power, supplier power and rivalry”. The characteristics of these strengths specify the intensity of competition in a branch and therefore its profitability and attractiveness (Johnson et al., 2008, p. 83).

Figure 1

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The European airline industry – Porter`s 5 Forces (Source: Evans et al. 2003, p.183)

For new entrants it is quite difficult to enter the airline industry. The comparison of bank loans and credits is essential. If borrowing is cheap, “… the likelihood of more airlines entering the market is much higher” (Investopedia, 2008). In case of a new competitor, the well established airlines will try everything to crowd out that competitor. Nevertheless, the airline business is as well a business of confidence. Airlines with a strong brand name are more reliable than new ones.

Boeing and Airbus are the biggest suppliers in the airline business and play a predominant role. That’s why the competition between them and the airline supplier business is very small (Investopedia, 2008). However, with new products and innovations, new suppliers could find a gap to enter this market.

The customers are very important for every business. The competition about customers has increased in the last few years. A lot of airlines, especially the low-cost carriers offer lower fares by taking out some service features. Nevertheless, “The bargaining power of buyers in the airline industry is quite low” (Investopedia, 2008). The costs of switching planes is quiet high, anyway, there is still the possibility to compete on service (Investopedia, 2008).

Regarding the substitutes it should be pointed out that there are high speed trains like the TGV in France and the ICE in Germany, however, those are substitutes principally for regional and low-cost airlines which operating nationally. In the international scheme of things there are no real substitutes, except for cruise ships. But it takes much longer to reach a destination as with an airplane.

Investopedia (2008) sums up, “… highly competitive industries generally earn low returns because the cost of competition is high”.

However, Porter`s five forces model considers basically the current situation like customers, suppliers and competitors (Johnson et al., 2008, p. 60) as well as predictable development like new market participants and substitutes (Oelsnitz, 2000, p. 52). To become competitive, it is necessary to permanently strengthen one’s own position inside the five forces model.

Another technique to analyse the operating environment is to look at the product, market and industry life cycles. Dollinger (2002, p. 107) mentions, “… industry environments are static only in the short term; over a longer period of time they involve”.

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