Background
The purpose of this report is to show the effect of external factors in British Airways PLC through a PESTEC analysis, which will evaluate the external business environment and its impact on the organisation’s performance. British Airways (BA) is the flag carrier airline of the United Kingdom and the second-largest UK airline, behind budget airline EasyJet. British Airways are owned by parent company International Consolidated Airlines Group (IAG).
Analysis & Interpretation
Political
There are several political factors which could impact an organisations performance, particularly their profitability and their ability to provide a high-quality experience for their customers. The UK government has increased Air Passenger Duty Tax (APD) on several occasions, meaning that consumers have to pay more to fly from the UK compared to other countries, especially on long-haul flights. British Airways has a major presence at many UK airports, in particular, their main base at Heathrow Airport, London. The increase in ADP that the government has implemented means that consumers are less likely to book flights if costs are increased and many travellers may look to fly from other European Airports for long haul flights. This means that there is a decline in British Airways’ profitability and reduced chances of survival for the business.
https://www.telegraph.co.uk/travel/travelnews/air-passenger-duty/8095665/Tax-rise-will-end-benefits-brought-by-air-travel-warns-BA.html.
The increasing rate of terror attacks around the world has been detrimental to the travel and tourism industry, like the November 2015 Paris attacks and the March 2016 Brussels bombings. The terror attack that occurred at Brussels Airport in 2016 caused airline companies share prices to plummet, in particular, the owner of British Airways, IAG. Terror attacks like this mean that there is reduced demand for flights and a notable decline in company revenue. This means that airline companies like British Airways must account for their decreased number of bookings and therefore decrease their flight prices significantly, which may mean that profits become less than the cost of operating flights, which will, therefore, decrease their chances of survival.
https://www.theguardian.com/business/2016/apr/29/iag-revises-growth-plan-brussels-attacks-air-travel-demand
Economical
The cost of fuel, which is vital in the day-to-day running of the business is a significant economic factor that all airlines must adapt to, in order to ensure their business remains profitable. In 2018, it was released that the profits of British Airways owner IAG suffered greatly after increased fuel costs as well as currency exchange rates over a three-month period. This, therefore, means that British Airways are forced to pay more for fuel and the cost of this is passed onto passengers through flight prices and fewer cheaper seats. This will result in decreased customer satisfaction, as most customers are looking for affordable prices and a high-quality service, which may also be affected as the airline are forced to make budget cuts, meaning that they can’t provide customers with the experience they would expect from a premium airline such as British Airways.
https://www.telegraph.co.uk/business/2018/10/26/british-airways-owner-iag-suffers-profit-slip-fuel-costs-rise/
https://www.independent.co.uk/news/business/news/british-airways-iag-profits-fuel-costs-flights-hack-cyber-attack-ba-a8602346.html
In 2016, the UK population voted to leave the European Union and with it, came a depreciation in the value of the pound. IAG reportedly lost £124 million from the foreign exchange loss caused by the UK’s departure from the European Union (Brexit). IAG said, “Our performance this quarter saw a negative currency impact of €148 million, primarily due to the weak pound”. In other words, IAGs share price fell by 33%, which meant that consumers gain a negative view of British Airways, decreased dividends for shareholders, increased risk of take-over from other organisations and it may also mean that the company must sell ore shares to compensate for the loss of profits, which may mean more loss of control within the business. Moreover, a decrease in share price means that market share will decrease which will have an adverse impact on the organisation’s performance.
https://www.businessinsider.com/british-airways-owner-iag-hit-by-brexit-currency-fluctuations-2016-7?r=US&IR=T
Social
British Airways have gained a reputation of being a premium airline, and this reflected in the service that they provide. They have an extensive range of travel classes which are detailed on their website, offering customers a satisfying experience. They are however regarded as one of the more expensive UK airlines. Class distribution in the UK population greatly affects the business. British Airways would be unable to their premium service to consumers if the majority percentage of the UK population were of a lower class. This would mean the business would have to use niche marketing and focus on a certain market segment, instead of the UK population as a whole. This means that consumers needs are not being met by the business, as they may not be able to afford the service they are providing, and they, therefore, may turn to British Airways’ budget airline competitors for a cheaper service. This also means that the profitability of the business will suffer as they must decrease their prices the adapt to changing population. If prices are decreased, then their brand image will likely be affected, and the airline will no longer be seen as a premium airline.
https://www.britishairways.com/en-gb/information/travel-classes/economy/world-traveller
https://www.telegraph.co.uk/travel/advice/british-airways-ryanair-or-easyjet-which-is-better-cheapest/
Travel trends are constantly changing, and airlines must constantly adapt to these changes. Consumers are earning more than they were 10 years ago, resulting in an increase in disposable income. More disposable income means that the frequency of holidays taken by consumers is increasing. As is detailed in the 2019 Holiday Habits Report by ABTA, “the average number of holidays per person have both increased”. If consumers are taking more holidays and booking more flights every year, this means that British Airways must accommodate more customers and therefore they may have to increase their fleet size, so that they can operate more flights to more locations around the world. This would also mean that British Airways’ profits are likely to increase as more tickets are being sold to customers meaning that there is an increase in sales.
https://www.abta.com/industry-zone/reports-and-publications/abta-holiday-habits-reports/holiday-habits-report-2019
Technological
The airline industry is highly competitive and therefore British Airways must adopt the latest technology to ensure that they are able to survive and remain competitive. A recent technological advancement is the development of online boarding ticket access and check-in services. This advancement means that airlines must ensure that their online check-In services are easy and accessible to customers. Keeping up-to-date with the latest technology means that customer satisfaction will increase as they feel that the process of flying with the airline is effortless. For example, the use of online check-in services means that long airport check-in queues are a thing of the past meaning that more customers are satisfied with the service provided, and they are therefore more likely to use the airline again, customer loyalty will increase as a result.
https://www.britishairways.com/en-gb/information/checking-in-and-boarding/checking-in
New innovative technology means that airlines can provide safer, comfortable and economical flights. New technological advancement by Boeing and Airbus mean that British airways can operate a fleet of aircraft which provide fuel economy and speed. Overall, they are more reliable and efficient and allow airlines like British Airways to provide an enhanced service to their customers. A high-quality experience means that customers are satisfied with the service provided and are more likely to use the service again in the future. Aircraft which are more fuel-efficient means that British Airways are able to save costs on fuel, meaning that their profits are likely to increase as a result, which will increase will increase their chances of survival in a highly competitive market and shareholders will gain higher dividends and the company will have a higher market share.
https://www.britishairways.com/en-gb/information/about-ba/fleet-facts/airbus-350-1000
Environmental
Weather is an important external factor for any airline, as it dictates when flights are able to take off, in other words in dictates when the business can provide customers with the service they were expecting. An example of adverse weather impacting the airline is in December 2010, when the UK was hit with severe snowstorms, grounding flights and decreasing air traffic by 8.3% in comparison to the previous year. This meant that British Airways were grounded meaning flights were unable to take off. This means that customers are not being provided with the service that they paid for and will either be given a refund or booked onto the next available flight. This would undoubtedly decrease customer satisfaction and would mean that the company would lose profits, just as they did in 2010 when they reportedly lost £50 million. This would have therefore decreased their market share and would have resulted in unhappy shareholders from decreased dividends.
https://www.bbc.co.uk/news/business-12130480
https://www.britishairways.com/en-it/information/customer-service-contingency-plans
All businesses must be socially responsible to maintain a valued name for themselves. According to the Intergovernmental Panel on Climate Change (IPCC), and the World Meteorological Organisation (WMO), “air transport contributes to 4.9 per cent of human-caused climate change, including emissions of carbon dioxide and other greenhouse gases”. This means that the aviation industry, including British Airways, are under heightened pressure to decrease their carbon footprint and their impact on the environment. Apart from ensuring their aircraft are the most fuel-efficient on the market, they can make their airline more environmentally friendly by recycling or by using a method adopted by a British Airways competitor KLM, by selling branded reusable drinking bottles during flights. They could impose stricter baggage policies and even stop selling in-flight magazines, like their competitors KLM and Lufthansa, who have created free digital reading apps and online e-journals. Being socially responsible and environmentally friendly would strengthen the image of British Airways and help build their brand. This would result in increased market share, from more customers and higher profits as a result.
https://phys.org/news/2018-08-effect-global-aviation-environment.html
https://medium.com/yieldr/7-small-and-profitable-ways-airlines-can-be-more-eco-friendly-61f705990c5d
Competitive
The UK Government competition policies regulate the market to ensure that organisations in any industry compete with each other in a fair environment. Competition policy means that British Airways have to keep its services appealing to customers by ensuring their prices are attractive to customers. Competition policy urges against any type of unfair advantage to large organisations, meaning that British Airways have to rely on their quality of service to gain brand loyalty and repeat purchase. This, therefore, encourages the business to improve the quality of service it provides customers. British Airways were reportedly fined £270 million for collusion with Virgin Atlantic between 2004 and 2006. This clear violation of UK Competition Policy would results in an obdurate poor image for the organisation and the company would have likely had decreased sales and therefore a decline in profits and market share for the business.
http://news.bbc.co.uk/1/hi/business/6925397.stm
https://www.telegraph.co.uk/finance/newsbysector/transport/9213267/British-Airways-fined-58.5m-for-fuel-price-fixing.html
The airline industry is a highly competitive market, in particular, the European Market which could adversely affect the profits and market share of British Airways. Increased competition from Budget Airlines such as EasyJet and Ryanair may mean that British Airways are likely to have to drop their prices in order to remain competitive. Heathrow airport is set to expand through a third runway and with it, Virgin Atlantic wants to expand gain presence at the airport and have said that they want to be the “second flag-carrier” for the UK. This increased competition means that British Airways would be under increased pressure to improve their quality of service. Having a second flag-carrier would mean that consumers pay lower prices for tickets, but British Airways profitability may be at risk considering they have to charge lower prices to customers. It may also mean that Virgin Atlantic may take over some flight routes that were previously run by British Airways, which means that British Airways’ chances of survival are decreased and their overall market share may decline.
https://www.twoflagcarriers.com/second-flag-carrier
https://www.theguardian.com/business/2019/sep/17/virgin-atlantic-british-airways-heathrow-flights-dominance
12.1.2020