3. Confronting Strategies 1 Competitiveness in the 1990’s

Competitive success lies in the capability to change and to accomplish key tasks by using resources more efficiently and more effectively. Airlines must be innovative and, at the same time, control their costs. Sustainable competitive advantage, however, needs the whole organisation to be focused, fast, flexible and friendly.

Lord King wanted BA to become the first truly global airline, a vision the company pursued through most of the 1980s. In the mid-1990s, after King has been succeeded by Sir Colin Marshall, and then Robert Ayling the vision is partly close to fruition. For several years BA has promoted itself as “The World’s Favourite Airline”.

A vision has to be translated into a mission statement, containing key result areas by which organisational effectiveness could be estimated.

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  focusing on customers’needs, expectation and safety;
  
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  continually striving to improve the quality of the service provided;
  
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  looking for cost savings which can be passed on to customers as lower prices but which do not threaten safety and quality standards;
  
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  empowering and rewarding employees to ensure the service is delivered.
  

British Airways’ mission statement is about becoming the first true global carrier in the world and can be summed up as:

Virgin Atlantic’s mission statement is about the development of an intercontinental network concentrating on those routes with a substantial established market and clear indication for growth potential. It sticks with the “small is beautiful” concept and says:

There is a critical mass below which world airlines cease to compete effectively as global carriers. In the pursuit of its global strategy British Airways operates on a world-wide basis participating in major geographic markets, with its own resources and a network of franchisees and allied who extend its global reach.

The long term pressures will push airlines further towards mergers, acquisitions and partnership agreements. Yields (revenues received per each mile a passenger is carried) are in long term decline and are expected to reduce further in real term and since the 80s fares have been kept low by competition. Despite expectations for traffic growth (2 billion in 2015) the pressure to cut costs will continue. Purchase of aircraft is one of the main area where to reduce costs through bulk purchase as both British Airways (30 new orders plus 30 options) and Virgin (£3 billion worth of aircraft for about 24 aircraft) are supposed to do within the next months. But the main solution will be found in further efforts to combine individual airlines’ strengths to develop profitable synergies. Airline partnership, in its various forms, can enable carriers to eliminate the number of aircraft flying on a route, rationalise the use of their resources, extend the range of destinations offered and access new pools of customers.

Organic growth is reached through expansion based on the airline own resources. For both British Airways and Virgin Atlantic organic growth has been pursued in the first stage of their life as a key element for growth. Today’s saturated markets have left less opportunities for organic growth and airlines are looking for alternative paths for growth, usually characterised by the opportunity to rationalise the use of resources within growth.

Direct acquisition can be both in the form of a 100% ownership, as when British Airways acquired Danair to strengthen its UK-based domestic and European services and reinforce its presence at Gatwick in addition to Heathrow, or in the form of a major shareholding (>50%), as Virgin Atlantic is about to buy a 80% stake in the European carrier European Belgian Airlines (EBA). Direct acquisition is less viable nowadays both for the huge amount of money implied, which however a cash rich company as Virgin can afford, or for legal restriction to foreign ownership posed by some countries (U.S. legislation provides a ceiling of 25% to foreign carriers owning a stake in US carriers).

Mergers are not very frequent in the airline industry, the most likely obstacles being cultural differences between single airlines, its more a world of take-overs of small or bankrupted carriers and strategic alliances. British Airways was a result of a merger in 1974 between the home and European operations (BEA) and intercontinental operations (BOAC). In 1987 BA merged with British Caledonian which was operating as Caledonian Airways.

Franchising consists of an airline flying with the colours of another airline, maintaining independence apart from the obligation to provide a level of standards in line (consistent) with that of the franchiser.

The advantage for franchisees is that they are given access to the things that make the franchiser unique in the minds of the customers - logo, livery, products and service standards. The advantage for the franchiser is to quickly expand its network without devoting too many resources. But the risk remain high as failure to meet franchiser’s standards could result in major damages for its image. The selection of suitable airlines and follow up policing are therefore key to ensure airline and customer expectations are met fully.
British Airways’ attempt to increase its presence in all six markets involve massive growth that BA on its own could not achieve. Franchising is especially used in smaller markets, the domestic market to provide feeder services to those of BA itself and to complement BA’s own services in certain geographic locations, and permits BA to spread its name and branding more widely and rapidly without incurring costly overheads and creating an unwieldy structure. Franchising gives partner airlines access to British Airways’ unique livery, products and service standards, and especially its name. It also includes taking BA flight code, ground handling, selling, revenue accounts, computer systems and services, and the frequent flyer package. The use by such airlines of the BA aircraft livery and of cabin crews in BA’s uniform effectively communicate BA service standards to potential customers.
British Airways has franchising agreements with Gatwick based City Flyer Express and Scottish carrier Loganair, which operate as British Airways Express and Maersk, which operates from Birmingham as British Airways and Manx Airlines. In addition, Plymouth based Brymon Airways, though wholly owned, is managed as a franchise. Together, the franchise partners operate a total of 46 domestic and European routes with a fleet of some 30 aircraft.

A form of franchising technically called “wet lease” is also undertaken in conjunction with the American partner USAir, where few flights (4 in 1995) are equipped with

Strategic alliances are sometimes an attempt to obtain the benefits of integrating two businesses without the potential drawbacks of a full merger (minority equity participation). In the same time it reduces the risk of highly damaging break-ups which are more likely to happen with simple marketing alliances (see code-sharing, joint frequent flyer schemes and other joint promotions). The difference between strategic and marketing alliances been meant in terms of long versus short-term commitment. Strategic alliances however are often underpinned by marketing ploys such as joint frequent flyer schemes and code-sharing

The acquisition of a stake in USAir followed strategic considerations about the need for British Airways to increase its presence in the US after the two leading carriers, United Airlines and American Airlines and it gave BA access to 60, recently extended to 85, new destinations and contribute to BA feeding in the equivalent of a full 747 every day.

When in November 1995 both US companies announced they didn’t see this as a suitable marriage BA has been forced to revise alternative solutions and it also scrapped in January the option to buy a further stake in USAir. The most likely alternative is an alliance with American Airlines which would give BA stronger ties with the lucrative Latin American market and complement Qantas’ coverage of the Pacific through American Airlines’ allied Japan Airlines. It also has more opportunities of success because of a better cultural fit. At the end of 1995 BA was supposed to be in secret talks to form a triple alliance with KLM and American Airlines. United Airlines would be the hardest choice to implement for its codesharing deal with BA’s archi-rival Lufthansa and its competition on West Coast-Pacific routes BA’s ally Qantas. In addition United has already access to Heathrow. A previous attempt to enter an agreement with United through an acquisition of a 15% stake and an already established marketing alliance failed in 1989 when United acquired Pan Am routes and therefore started to compete directly against BA. An alliance with Delta would make more sense for BA despite its links with Virgin.