management consultancy report

Management Consultancy Report: Independent-Study Project

A study of British Airway’s response to increased competition from budget-airlines

Contents

ACKNOWLEDGEMENTS 6

ABSTRACT 7

1.0 INTRODUCTION 8

2.0 COMPANY DETAILS 9

2.1 INDUSTRY ANALYSES 92.1.1 AIRLINE INDUSTRY GLOBALLY 92.1.2 AIRLINE INDUSTRY IN EUROPE 102.1.3 AIRLINE INDUSTRY IN THE UNITED KINGDOM 112.2 AIRLINE PROFILES 122.2.1 BA PROFILE 122.2.1.1 Strengths 122.2.1.2 Weaknesses 132.2.1.3 Opportunities 132.2.1.4 Threats 142.2.2 EASYJET PROFILE 152.2.3 RYANAIR PROFILE 16

3.0 RESEARCH PROGRAMME 18

4.0 PROBLEM QUANTIFICATION 19

5.0 PROBLEM RESOLUTION 23

5.1 STEP 1 – IDENTIFY CONSTRAINTS 255.2 STEP 2 – DECIDE HOW TO EXPLOIT CONSTRAINT 265.3 STEP 3 – SUBORDINATE AND SYNCHRONISE EVERYTHING ELSE TO THE DECISION OF STEP 2 285.4 STEP 4 – ELEVATE THE PERFORMANCE OF THE CONSTRAINT 285.5 STEP 5 – RETURN TO STEP 1 IF CONSTRAINT HAS SHIFTED 285.6 COMPETITIVE STRATEGIES 295.7 EXAMPLE ADVERTISEMENT 29

6.0 FEASIBILITY STUDY 31

6.1 TECHNOLOGICAL 316.2 ECONOMICAL 316.3 LEGAL 316.4 OPERATIONAL 326.5 SCHEDULE 32

2

6.6 POLITICAL 32

7.0 DISCUSSION 34

8.0 CONCLUSION 37

REFERENCES 38

APPENDIX 40

A1.0 AIRLINE USE IN THE UK 40A2.0 BRITISH AIRWAYS PRICE QUOTE LONDON TO MALAGA 40A3.0 EASYJET PRICE QUOTE LONDON TO MALAGA 40A4.0 RYANAIR PRICE QUOTE LONDON TO MALAGA 40

3

List of Figures

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

4

List of Tables

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, 2007-11. 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

5

AcknowledgementsI 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.

6

AbstractBritish 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, BA’s market share is falling. Using the “Theory of Constraints”, a solution is

identified in a new marketing campaign that would draw the customer’s 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 BA’s competitive advantage, prevent and even reverse the rising

tide of low-cost carriers on to BA’s market share.

7

1.0 IntroductionThe 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 BA’s propulsion as a strong player in the airline

industry in the 21st century.

8

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 % Growth2007 477.2 343.02008 527.6 379.2 10.62009 445.5 320.2 (15.6)2010 515.8 370.8 15.82011 570.1 409.8 10.5

CAGR: 2007-11 4.5Table 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 represents the second

9

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).

10

14

13.2

11.1

106.9

44.8 GermanUnited KingdomSpainItalyFranceRest 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% of the industry in 2011. There

exists competition between British airlines, with budget airlines competing intensely on

11

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 world’s 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

BA’s strengths lie firstly in a strong market position and brand image in the UK and

indeed the world too. BA’s brand places the company with a strong competitive

advantage. Further strengths lie in BA’s online presence, in retaining customers and

attracting new. BA’s online services 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 BA’s website, and contributed to a

decrease in costs and an increase in revenues (Ibid.).

12

2.2.1.2 Weaknesses

BA’s 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 BA’s revenues (costing over £150m), adding to

the company’s 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 flag-carrier 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 number…to rise from 952 million in 2009 to

1.3 billion passengers in 2014” (2011). This 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.

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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)

BA’s 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 rising strongly. This cost forms a significant

proportion of total expenses for BA and so reduces the company’s revenues and

profitability (Ibid.).

14

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 BA’s profit margins (Ibid.).

2.2.2 EasyJet ProfileEasyJet 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 EasyJet’s 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:

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).

15

EasyJet’s 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 company’s strategy which can negatively impact the company’s 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 ProfileRyanair 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).

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 Ryanair’s ‘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

16

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.

17

3.0 Research ProgrammeThe 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).

18

4.0 Problem QuantificationLow 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 year’s 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.

19

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-600

-400

-200

0

200

400

600

800

Year

Attrib

utab

le P

rofit

(£ m

illio

n)

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.

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

20

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

21

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.

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.

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5.0 Problem ResolutionAn early response to resolve the problem of high competition from low-cost 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 Tarziján

(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 & Tarziján 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

airline’s fare structure” (Guardian, 2006). Such a move has “prompted a significant pick-

up in the number of passengers carried…up to 9 percentage points” (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.).

23

More recently, BA have been remedying the heavy competition from low-cost carriers

by reducing the prices of their fares through various cost-cutting 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. Goldratt’s 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 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. Identify the constraint

2. Decide how to exploit the constraint

3. Subordinate and synchronise everything else to the above decision

4. Elevate the performance of the constraint

5. If the constraint has shifted, return to Step 1 and begin again.

24

It is vital that the organisation does not let inertia become the system’s constraint

(ibid.).

5.1 Step 1 – Identify ConstraintsPrior to beginning step 1, it is necessary to determine BA’s 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 Goldratt’s 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 BA’s low cost competitors have managed such

unprecedented low fares is through sometimes draconian, ruthless cuts to services and

perks.

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 EasyJet’s owners Michael O’Leary 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 O’Leary 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

25

identified and investigated. “Chief executive Michael O’Leary, has an aversion to

anything which interrupts what he calls “a culture of action”” (Miller, 2013b).

5.2 Step 2 – Decide how to exploit constraintThe 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 Ryanair’s total price for a return flight from

London to Malaga. Figure 3 shows a comparison of fares between the airlines.

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 EasyJet’s fare is almost 40% cheaper

than that of BA’s. Furthermore, that Ryanair’s fare is about 14% cheaper. However, the

26

nature of a budget airline, being ‘no-frills’ comes in to play in this example. While BA’s

price includes extras that would make the flight more enjoyable and easier, EasyJet and

Ryanair’s 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, BA’s price remains the same, however

EasyJet’s price increases 148%; and Ryanair’s new price increases 93%, well above the

price of BA’s flight.

A new, up to date comparison of flights from London (any airport) to Malaga was

conducted using a price comparison website (travelsupermarket.com); the results are

shown in table 4. Ryanair was not present in the price comparison site, so its fares were

collected directly from its website. See appendix for list of additional fees for Ryanair.

British Airways EasyJet Ryanair

Original Fare 279.49 238.98 286.32

Reserved seating 0 3 £15

Check in one bag 0 34 £140

Reservation fee 0 10 £20

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,

EasyJet’s fare rose 20% and Ryanair’s charges rose 61% while BA showed 0% change.

27

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.

5.3 Step 3 – Subordinate and synchronise everything else to the decision of Step 2In this step, it is essential for BA’s 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 constraintThis 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 shiftedA 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.

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5.6 Competitive StrategiesIn following the steps outlined previously, a new competitive strategy would be added

to BA’s short and long term operations.

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, BA’s 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 BA’s 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 AdvertisementThe following is an example of how a marketing campaign by BA, highlighting

customers to its air fares compared to that of BA’s competitors when including hidden

charges, from the research conducted in this report.

29

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.

30

6.0 Feasibility StudyA 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 BA’s

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 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

31

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 BA’s interest

to observe a trial period, to test the strengths of this new strategy. Upon successful

completion of a satisfied length of 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 BA’s 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 Asda’s recent promotion on having the lowest prices on fuel, in which

32

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

BA’s competitors in the air fare comparison scheme detailed in section 5.

33

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 BA’s 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-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,

34

comparisons between BA and their leading budget-airline competitors were required.

Ryanair and EasyJet’s prolific rise in the airline industry proved to have serious

consequences upon BA’s revenues, illustrated in BA’s 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).

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

35

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 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

36

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 ConclusionIn conclusion, this report was tasked with undertaking an independent-study 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, BA’s air fares turned out cheaper (shown by analysis of a typical flight from

London to Malaga). This realisation would serve a new marketing campaign to inform

the consumer of this fact and improve BA’s 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

BA’s 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”

37

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Appendix

A1.0 Airline Use in the UKDeparture to Arrival - the Air Experience - UK - August 2010 - Airline UseFigure 21: UK airlines flown with in Britain, June 2010

%

British Airways 51EasyJet 46Monarch 29Thomson/First Choice 27Thomas Cook 26Virgin Atlantic 22Bmi 17Bmibaby 14Flybe 10Jet2 7Loganair 2Air Southwest 1Eastern Airways 1None of these 9I have never flown 7

Base: 2,000 internet users aged 16+Source: Source: GMI/Mintel

(GMI/Mintel, 2010)

43

A2.0 British Airways Price Quote London to Malaga

44

A3.0 EasyJet Price Quote London to Malaga

45

A4.0 Ryanair Price Quote London to Malaga

46

management consultancy report

Documents

airline industry

ba profile

easyjet price quote

ryanair price quote

easyjet profile

malaga mawer

airline use

airline profiles