British Airways Performance and Global Financial Crisis Essay

Introduction

Economic scholars contend that the 2007-2008 global financial crisis was the worst since the 1930s great depression. However, valid explanations of what caused it have been postulated. For example, according to Wray, economists who are inclined to the Minsky school of thought believe that the disaster was caused by ‘money manager’ entrepreneurship, which led to capitalistic gaps in terms of economy management.⁵

The crisis resulted from misguided financial policies that led to the taking of excessive uncalculated risks. Irrespective of the validity of all possible explanations, the last global financial crisis had negative ramifications to many organizations across the globe. For example, SkyEurope collapsed in 2009 while British Airways received an immense shock due to a reduction in consumer spending. This paper analyzes the performance of British Airways’ leadership in the wake of the global financial crisis. Its focus is on actions that the British Airways corporate leadership took to respond to the international economic disaster.

British Airways (BA) and its Leadership

British Airways dominates the United Kingdom airline industry.¹ It is a major flag carrier in terms of fleet size and international operations. Measuring the company’s operations from the context of passenger carriage capacity, BA ranks second after easyJet. The company’s main offices are located close to Heathrow Airport. As Duffy reveals, the inauguration of the BA administrative centers was held in 1998.²

The company operates centers such as London municipality and Gatwick. British Airways offers airline services in over 160 destinations that are distributed around the globe. Heathrow forms the main operations base for BA, although it has other chief operations in Gatwick. BA CityFlyer, which is a subsidiary of the British Airways, dominates operations in the London municipality airport. BA also operates flights from Manchester Airport. However, due to the reduced profitability, operations within and outside London were closed when BA Connect was sold out. This situation forced people who were traveling to international destinations, especially the UK, to apply for transfers to London. Over 40 percent of all operations at Heathrow are reserved for BA. This observation suggests that the company dominates airline operations from the airport.²

Upon the company’s privatization in 1987, it acquired immense privileges in comparison with its competitors. The privileges included a reservation of 43% of landing openings and departures at Heathrow Airport. Thus, BA a major airline brand in the UK.

Effects of the Global Financial Crisis on British Airways

The global financial crisis influenced all sectors of the UK economy, including the air travel industry. Oprea states that the United Kingdom experienced a sharp decline in the number of air travel passengers, especially in routes that connected the US and Spain.⁴

Tourists usually connected to these nations via the UK. A decrease in consumer spending due to financial hardships that were experienced even at the household level reduced travel rates. Therefore, airlines, including British Airlines registered the lowest number of customers. Indeed, Oprea says that the company resorted to survival tactics, which involved the provision of incentives such as fair reductions to encourage loyal customers to continue using the airline.⁴ Using this approach, amid the increasing operational costs due to oil price fluctuations, the company was aware that the survival tactics would not yield profitability. The main concern was not only breaking even, but also ensuring that it retained its clients while waiting the recession to end.

In the first half of 2008, oil prices hit $146 per barrel. British Airways reveals how this situation had the implication of upward growth of fuel costs for all couriers, including the BA.¹ Therefore, the profit margin of the company was exposed to immense pressures. Although the prices fell to about 33% later, the recession began to take control over economic performance of airlines, this prompting many of them to incur heavy financial losses. Thus, with the challenges of the recession, BA did not anticipate any relief in its price volatility. IATA’s data revealed how the worldwide air travel traffic decreased by about 2.8% in 2008. After the onset of the recession, within the first 3 months of 2009, the decline was about 19%.¹ This finding indicated slimmer fortunes for the British Airways during the recession.

British Airways’ Corporate Leadership during the Global Financial Crisis

Upon recognizing that the recession would take longer than anticipated, BA began to look for mechanisms for ensuring that it came out of the global financial crisis ready to face a promising future. The organization’s corporate leadership began scanning the environment to determine the most appropriate corporate level strategy to ensure success during the uncertain times. According to the British Airways, the organization realized, “For both business travelers and individuals, airline brands that are trusted to be robust and reliable are more sought after in tough economic times”.¹

It also noticed that passengers wanted to seek travel services from airlines that could assure them of their safety and smoothness of flights. They also focused on traveling less while maintaining the usual progress of their business activities. Their idea was to save on air travel costs.

During the recession, BA leaders realized that most customers became price sensitive. As the British Airways confirms, the organization noted that clients were “looking for value for money by demanding excellent levels of service and high-quality standards at lower costs”.¹

Some of them even lost their loyalty to the BA brand in search for cheaper alternatives. This situation presented an agile condition for air travel business operations, which if well managed, had the implications for attracting new clients. The most challenging issue was that while consumers wanted value for their cash, they also demanded superior quality of service and consistency. When selecting their appropriate airlines, they also based their decisions on information that they had gathered. More than before, they used the internet to make price comparisons for different airlines.

The global financial issue presented a business predicament. During this time, effective leaders played the role of setting visions and the desired outcomes to foster organizational prosperity. In any organization, visions, goals, missions, and objectives guide the daily operations. Leaders endeavor to ensure that people believe and work towards the achievement of these aspects. During a crisis, leadership has the role of scanning the environment to provide information on the appropriate strategy to drive an organization forward to overcome the crisis. British Airways leadership managed to scan the environment. It also developed appropriate strategies to cope with the financial crisis. Indeed, coming up with strategies for succeeding during times of uncertainty encompasses an important role of leaders. Such a role is enshrined within their duty to set vision, mission, and objectives to guide the daily organizational operations. How did BA approach this role?

In the financial year 2008/2009, British Airways made its worst loss since its privatization. Milmo informs the company made a loss of £401million. The company had a bill of about £3billion to pay.³ To make the matter worse, the value of the pound had deteriorated and had lost its most crucial markets due to the reduction in consumer spending for transatlantic business people. The shares of the company had also fallen by 6.6 percent. What was next for the airline?

British Airways CEO, Willie Walsh, took the unexpected corporate decision. While the general economic logic suggests that an organization that is struggling with high costs of doing business needs to increase the prices of its products and services to help in offsetting its fixed costs, the CEO announced a no-fare hike policy. He claimed that the demand had shrunk while the banking crisis made customer choices fragile.³ Thus, any increase in prices would have the implication of damaging the already shaking customer base of the airline industry. To avoid any possible collapse, BA leadership decided to provide price offers to its struggling customers. It sought to attract loyal customers to other airline brands that sought high-quality air travel services and value for their money.

The above strategy was most appropriate in dealing with the implications of the global recession. Amid registering high losses, more challenges were experienced elsewhere. The company’s cash pile, which helped in self-defense against financial crisis, had dropped by 25% to stand at £1.4billion.³ This slump was after the consumption of £483million of the reserves in the effort to keep the organization running in a trying economic time. The company also struggled with a pension deficit that amounted to £2billion, which delayed its merger with Iberia. Its net debts were somewhere between £1.1 and £2.4billion. This finding suggests that the leadership needed to look for an alternative for ensuring that the company kept on running.

In the bid to address its increasing financial problems, BA leadership also resorted to another farfetched strategy-payment freezing. The company decided to implement a payment freeze by not paying management their 2009 bonuses. The CEO also informed that a pay deal with the company’s engineers had to be reconsidered. Walsh had the faith that all employees understood the organization’s hardships.

Hence, they embraced any changes in organizational policies to protect the organization from collapse so that it could continue serving their interest in the future. The company also scrapped dividends, amid having been reestablished in 2008. This observation means that the company mainly focused on strategies for minimizing expenditure of financial resources to help it to come through the recession. Indeed, it abandoned keeping fares high by claiming that this plan could not sufficiently compensate the reduction in passengers. Thus, the company pursued the strategy for increasing passenger base.

Conclusion

The 2007-2008 global financial crisis had negative implications on the performance of many organizations in all the affected nations. BA suffered immense challenges. It reported a net loss of £410million in the 2008/2009 economic year. To deal with the crisis effectively, the company’s leadership deployed the unthinkable strategies. It held the payment of bonuses to its managers and recalled a pay deal with its engineers. Instead of increasing fares to help in offsetting the increasing costs, the company decided to provide price offers to its customers. It reduced prices in a bid to increase the number of loyal customers who were looking for value for their money. With the CEO’s corporate leadership strategies, BA ultimately became the clients’ choice.

References

1. British Airways. 2008/2009 Annual Report and Accounts. London: Word Press; 2009. Web.
2. Duffy, F. British Airways at Waterside: a new model office? Architectural Research Quarterly 2004; 3(2): 125-140. Web.
3. Milmo, D. British Airways Makes Worst Ever Loss. The Guardian 2009. Web.
4. Oprea, M. The Effects of Global Economic Crisis on the Air Transport of Passengers in Europe and in Romania. Geo Journal of Tourism and Geosites 2010; 1(5): 52-61. Web.
5. Wray, R. The rise and fall of money manager capitalism: a Minskian approach. Cambridge Journal of Economics 2009; 33(4): 807–828. Web.