British Airways

In the modern era of industrialization and capitalism, the capitalist thrives hard to enhance and advance their business and come with the fragility and strong strategies to cope up with all the phenomenal changes. It has been observed that the proliferation of capitalism made the ground for globalization as an economic system is the globalization of economic, cultural, and political spheres.

British Airways is engaged in air service or more specifically we can say that pertain to the aviation industry doing operations both in the international as well as in the domestic air freight. The airline provides a number of corporate services ranging from commercial flights service for passengers around the globe, its services include cargo freight, mail, and other luxury services to their passengers. Before commencement, the business in England the airline ran its business in Europe and in the United States but the famous they got in England is simply unmatchable. British Airline is one of the biggest firms in the United Kingdom, which contributes largely to the Gross Domestic Production of the country. Because of the volume of the organization, it often envisages some political and competitor threats, so the SWOT analysis has become a benchmark for them to analyze the company’s strengths and weaknesses in a reasonable fashion, but to analyze a company that consists of more than 42,000 employees is an uphill and hectic task, let’s see each aspect of the SWOT analysis in details in terms of British Airways.

STRENGTHS OF BRITISH AIRWAYS

The foremost characteristic of the British Airline is its reservation style and customer-oriented approach. British Airways facilitates the passenger by flight reservation and booking through the online services which can be easily accessible to the customers. The thing which gives it a periphery over its competitors is their integrity and uprightness towards the customer. The Airline has a wide and strong network spreads in more than 134 countries across the globe and such a wide magnitude of operations offers their customers with the multiplicity of destination with a world-class service which attracts the customer ranging from explorers to executives.

British Airways has the accolade to launch the first-rate new fleet of aircraft that provides immense tranquility for their passengers while traveling. The previous fleet of aircraft made their life exacerbated and loses customer momentum rigorously, but the recent action allows them on pro over their competitors by the newly launched and serving the passenger through an extensive variety of Excellency.  The second competent thing the company has, its Human staff, study shows that the analytical skills of the members as well as the employees of the British Airways are so strong and termed as an integral part of their strengths. The online service approach and customer focus add four moons in their productivity which ultimately induce the peoples to do business with the company.

WEAKNESSES OF THE COMPANY:

Nobody is perfect in this world. If we took the same into consideration and look forward to the weaknesses of British Airways then we would realize that there is a lack of marketing strategy in their long-term planning. No doubt that the company has a great infrastructure but the company has to come up with a proper marketing strategy to facilitate their customers in an appropriate manner, it can be done if they expand their business through different territories and focus on all types of customers. One thing which I personally observe is that a disaster plan is still missing from the company, although the organization has tremendous and intelligent management on its head. I declared that particular thing because the company was dominating for a number of years over its competitors but in the year 2008, another aviation company Easy Jet broke their monopoly and come up with new and excellent strategies, and at the end of the day, they succeed, they shrank the quantity of the British Airways passenger with their great services and brutal marketing strategies that’s why the company suffered a severe loss in the financial year 2009, Yes! A financial crisis is one of the main factors which influenced British Airways to surrender in front of the success story and the advantage earned by the Easy Jet Company, which evades all the negative strategies, and overcome their loopholes efficiently, and pulls out the cap of success and monopoly from the head of the British Airways. In order to mitigate the threats accordingly the management of the organization has to be vigilant and cautious towards the loopholes and lack of marketing strategies of the company, which is the only way to eradicate the adverse effect of the hazard they recently visualized. 

THREATS FOR THE BRITISH AIRWAYS:

It is really a state of stigma for a big multinational company to have the elements of threats within the organization. Research and study reveal that the management of British Airways is unable to cut down the agitation and different disputes from the organization. Almost all school of thoughts observes that the threats found outside of company’s environment but, the concept totally contradicts in the case of British Airways. Apart from that intensifying situation, there is another threat that adversely affects the company, which is poor decision-making due to the lack of stringency among the head headers. To run a company is literally neither a piece of cake nor an austere, but inevitably a rigorous thing to perform impeccably. British Airways usually focus on national and local problems regardless of the global problems that are why they suffered a severe loss in the preceding year. This is very true indeed that the global problems greatly put forward tremendous threats if and when companies will ignore such problems recurrently. Everything should be in limit because if the organization only emphasizes globalization then the jeopardy may escalate for the entity if they are not keen and vigilant of their tricks and treachery. One lacking which I personally observe in the British Airway’s management is that they are unconscious to endow their organization with the latest technology and knowledge and by God forbid, any problem arises then it ashamed the management because they are unable to provide rehabilitation of the problem. 

OPPORTUNITIES FOR THE ORGANIZATION:

The availability of gigantic services and products pose an opportunity to utilize them properly and urged management to overcome on its competitor. The global or universal changes can be an opportunity to work with while ignoring certain opportunities which latterly can be a weakness for the company. In British Airways, virtual reality could provide a new use for simulation and recreation, obtaining share expertise and network software through special interest groups are opportunities that can be utilized appropriately which in due course accused the company’s business to augment.

Technological trends are one of the essential opportunities by which the organization can find a definite edge over its competitor. Technology provides ample opportunities to various business domains and also provides opportunities for British Airways, however, if it will be taken for granted, opportunities can be a threat or weakness. Maximizing the global trends is a great opportunity to hold on to.

PESTLE ANALYSIS OF THE COMPANY:

We have already discussed the applicability and benefits of the PESTLE analysis. Now we are supposed to analyze our company British Airways from a totally different aspect. We are well aware of the acronym of PESTLE analysis, which is Political, Economical, Sociological, Technological, Legal, and Environmental. Let’s see our company from the aspects of each one.

POLITICAL ISSUES WITH THE BRITISH AIRWAYS (BA):

It has been observed that the airline and the aviation industries made their own monopoly in the market and try to intervene the travel bilaterally. Specifically, if we talk about the BA, then through the analysis we have observed that there are operating restrictions in their premises and they are unwilling to join the alliance with that of other airlines. This is the thing I pointed out before, that such things hike the monopoly rate within the country. The company has to think hard to do alliances with other airlines operating in the country or outside the country, which can make the routes easy otherwise it totally unreachable.

ECONOMICAL FACTORS WITH THE BRITISH AIRLINE (BA):

Cost-effectiveness is one of the major mulling issues, which nowadays organizations are merely emphasized. Every organization has the objective to sag its expenses and increase its surplus. The buying power of every individual unmatched with each other, and in the current depleting situation of the economy due to global economic slump, peoples are more towards the things which are less costly for them. It has been observed that the fare rate of the British Airways is so high and they approach only the executive class person, it means that a common man world is crushing wretchedly that’s is the main reason of their flight cuts FY 2009 by 1-2 percent as compared with the same period of last year, which is really a heavy margin for a service sector company. British Airways loses its customer orientation which was their crown of excellence some years before, due to the economical factors influence. By contrast BA’s most perilous rival Easy Jet (EJ) grabs the customer’s attention pertinently because EJ feels the agitation of the people, and came up to target both the customers both the leisure one and the business personals as well. Easy Jet is known as the lowest cost airline of British with a world class service and ticketless environment, which made it dominate on the big fishes like BA. In the year 2009, due to the flight cuts BA suffered a severe loss of £358 Million, because of the lacking of a disaster management plan regarding the financial crisis and due to the tendency of not incise the fare prices.

SOCIAL FACTORS WITH THE BRITISH AIRWAYS (BA):

I have discussed before that BA merely targets and approaches the executive class because of their high fare from which they are well aware that a specific lobby can bear its expense in a proper fashion. Analysis reveals that BA doesn’t bother to target with the age profile, it good for them if they look forward to students and the people with tiny incomes. No doubt that the services of BA are totally outclassed, but what would be the remedy for the people who are reluctant to travel in it because of the unaffordability. The thing which we declared earlier regarding the inadequacy of marketing plan can be seen here clearly, that the management doesn’t make any niche marketing plan yet to focus the low-income social group.     

TECHNOLOGICAL FACTORS WITH THE BRITISH AIRWAYS (BA):

Technology is one of the essential ingredients to make the curry of a successful organization. BA is using wonderful technology to run their business but there is some lacking in their technology. I again want to mention the example of Easy Jet which uses an online ticket tracking system, which resultantly made them able to captures the attention of their customers.

Now we are about to start the most important part of our analysis, which is a financial analysis of our company British Airways.

FINANCIAL ANALYSIS OF BRITISH AIRWAYS (BA):

Financial analysis is used to measure the financial health and stability of an organization. Organizations and especially brokerage firms hire financial analysts on hefty compensation because they are the ones who can visualize the company from a financial aspect and will provide the remedies accordingly. There are a lot of contradictions found in the analysis of a firm from a business aspect and from an investor standpoint; we have to analyze our company from the investor standpoint to evaluate a meaningful result regarding the investment in the company. To analyze an organization from an investor viewpoint, the usage of Piotroski’s work is really credible; we will use the same to analyze our organization. According to Piotroski if the firm gains 5 points out of 9 analysis ratios then the idea if an investment is appreciable and if not, then it would be better not to plunge your foot in the investment. Piotroski revealed the fact that the quantity of the companies which bankrupts, mostly those ones, which scores below 5 points. Let’s start our analysis from Piotroski’s assumptions.

NET INCOME AFTER TAX (NIAT):

According to Piotroski, the firm’s bottom line after-tax profits is an important factor in determining a firm’s financial health if the net income after tax of the company is increasing from the last year then award one point to it. Look at the table below to analyze the result.

Figures in the table manifest that the company was performing extremely before the year 2009. We can observe easily that NIAT had been increasing continuously year to year, A little downfall was envisaged FY 2007 because the company showed a relatively low profit as compared to the same period of last year and the Net Income deteriorated by 5.98%. A surge of almost 80% had been seen in the balance sheet of the BA. The year 2008 was the most powerful year from the company’s viewpoint because the organization enjoyed a huge profit of 256 Million (GBP) or spurred by 60% as compared to the preceding year. By contrast, the year 2009, was not at all a stagnated one for the BA, because the organization reported a severe loss of 305 Million (GBP), mainly due to the increment in the oil prices and due to the depleting economy, which suffered from a ruthless economical downturn. Due to the negative NIAT, we are not rewarding a point to the company.

OPERATING CASH FLOW:

Net income results from a variety of accounting decisions, while operating cash flow measures whether the company made money on a cash basis, the table illustrates the result more clearly.

 It can be seen clearly that the OCF shrunk consistently year to year except FY 2006, where it hiked by 397 million (GBP) or 38% from the period of last year, although the OCF is in positive FY 2009, so we are rewarding 1 point for this ratio.

RETURN ON ASSETS (ROA):

Return on Asset (ROA) measures how effectively the firm’s assets are used to generate profits net of expenses. This is an extremely useful measure of comparison among a firm’s competitive performance, for it is the job of managers to utilize the assets of the firm to produce profits. If ROA decreases from the previous year to the current year then it shows, that there might be some investment activity that has been taken place within the premises of the organization. ROA is computed by dividing the net income by the total assets. Award one point if the figure comes in positive of the most recent year.

Volatility found in the percentage of the Return on Assets, as it increased in 2006 by 1.5% and then condensed with almost the same amount of 1.2% FY 2007. A sharp increase in FY 2008 has been envisaged, which really diverted the mind of the investors towards investment in BA, but look at the number, written under the head of 2009, it is negative 3.6%, pathetic! Isn’t it? Can’t give a point on this performance even.

RETURN ON EQUITY (ROE):

In a real sense, ordinary shareholders are the real owners of the company. They assume the highest risk in the company. The rate of dividend varies with the availability of profits in the case of ordinary shares only. Therefore ordinary shareholders are more interested in the profitability of a company and the performance, which should be judged on the basis of return on equity capital of the company.

Likewise the ROA, the ROE manifested the same ratio of acceleration and deceleration as the company grew with an exceptional pace FY 2006, wherein it superfluous by almost 15% as compared with the same period of the prior year, but afterward the percentage abridged chaotically and declined by 5.05% and 3.24% respectively FY 2007 and 2008. The year 2009 was just like a disaster for BA, which pushed it hard towards the brink of bankruptcy. Here we are not rewarding a point to the company.

GROSS PROFIT MARIN RATIO:

Gross & Operating profit margin both comes under the umbrella of profitability ratios. Gross profit is the one, which is computed by subtracting the cost of the sales from the total revenue which is earned by the entity in the financial year while Operating Profit goes one step further and it is calculated by subtracting all the administrative, general, and selling expenses from the gross profit (Bossaerts, 2006). Operating profit can also be linked as Earning before interest and taxes (EBIT). Award one point if the figure of the margin comes in positive.

Gross Profit Margin = Gross Profit/Sales

Volatility founds in the gross profit margin as it showed a bit of increment in the year 2007 and 2008 by 0.8% and 2.4% respectively, but in the year 2009, it slipped drastically. We have simply no concern regarding the causes of such slump, because we analyze the company from an investor viewpoint, and hereafter see the situation of the Gross margin, I am reluctant to reward a point on this ratio as well.

CURRENT RATIO (CR):

The current ratio shows a company’s ability to meet short-term obligations or short-term financial promises. The higher the ratio than it means the company has a higher liquidity. Now let’s have a glance over the current ratios of all three banks. Award one point if the CR’s figure manifests a positive result. If the BA fails to get a point in this ratio then we will not calculate more ratios because the company can not touch the minimum even. Look at the table below to foresee the result.

As per the prudential regulations, the company is impeccable, whose CR is 1:1. From the table, we can assess that 2006 was the only year, where the BA came closer to the regulations. Fluctuations have envisaged in the years 2007 and 2008 but the real problem lied in the year 2009, wherein the CR drops dramatically and eventually the result constrains us not to reward a point for this ratio as well.

WEIGHTED AVERAGE COST OF CAPITAL (WACC):

Firms are made to create a surplus, this is possible to finance the firm entirely by total equity but from the scarcity of bankruptcy, most firms include different types of capital to finance the Corporation. Usually, common stocks, preferred stocks, and debt are the three most often use types of debts. The investors who invest their money in the firm in the hope to get a return on their investment are called stockholders or shareholders. In other words, the evaluation of a proposed project should be based on the project’s cost of capital. This is because when a company raises capital, there is usually no direct link between the return to the supplier of the company’s capital and the return on the individual project. The corporations then use the weighted average of these capitals for mixing in the firm’s overall equity to analyze the capital budgeting decisions. It’s taking into consideration the weighted average of all the capital and thus referred to as the weighted average cost of capital (WACC).

We have estimated the WACC of British Airways, which is,

WACC = 12.02%

It means the company BA has to invest in such a project which offers them a return of more than their WACC figure, only then it would be a beneficial trade for BA.

SOME CONCLUSORY WORDS FOR THE INVESTORS:

We have analyzed the balance sheet of BA critically and found some interesting results regarding the organization. Albeit the organization has a wonderful story of success from the past number of years, but the year 2009 evident them a really costly one. The main cause behind this decline is global financial turmoil which compelled a number of industries and financial institutions to be the default and triggered hundreds of thousands of people to be unemployed. Apart from that, the organization has to be cautious and vigilant and must work extremely hard to overcome those threats which we have discussed earlier. Well regarding the investment, then I must say that the new investors who really wish to put their money in BA’s stock and expects a good return then it will be good for them to abrogate the idea of investment because of the uncertain financial market conditions and severe volatility because all the indicators are against the company. Well for the existing customer I should wish a very best of luck because they literally are in severe mental stress, but don’t worry my friends there would be downturn after a huge hike and that downturn will be for a shorter period, so better for you people to hold your positions till the right time comes or concerned with your brokers to hedge your trade pertinently. The forecasted balance sheet of BA also manifests the same jeopardy and makes the life of the company catastrophic, the company has to come up with strong strategies to emancipate itself from this severe downturn.

The forecasted tables are presenting a horrible picture for the existing and new investors. The company has taken the suggestion into account to mitigate such threats accordingly. Some intensity will automatically ease with the departure of the current financial crisis, which probably would be in the 3^rd quarter of the current financial year (According to International Monetary Fund), so the management of the company keeps their finger cross and dives in the sea with brutality with the propensity to defeat these threats as soon as possible.