INDEX

Introduction to British Airways` expansion plan (case study) Facts of the case study Problem Areas Recommendation Question & Answer

Introduction to British Airways` Expansion Plan

In the given case study we are going to detail with British Airways` expansion plan: its introduction, facts, problem areas & recommendation on the same. British Airways (BA) is the flag carrier airline of the United Kingdom, based in Waterside, near its main hub at London Heathrow Airport. British Airways is the largest airline in the UK based on fleet size, international flights and international destinations. BA is the largest European airline & serves 230 destinations in 94 countries. Throughout the 1990s British airways has been seeking to merger with a US airline to create a giant transatlantic alliance. At that time there were only three dominant airlines in the US: American, Delta, & United. The others were either small carriers or were facing big financial problems. In mid 1992, it BA announced it was entering an arrangement with US Air. The big three asked the US government to block this arrangement because it gave to much of US market to a foreign company. Thus, the merger of BA/us air was blocked. In 1997, BA announced it would seek an alliance with American airlines. But it failed to do so because of the rival US airlines & also because it failed to agree upon the demands put forth by EU antitrust authorities. The two airlines mutually particated in the Oneworld international alliance. Four years later BA/AA alliance once again tired to win antitrust immunity. They approached regulator claiming that the new set of factors had emerged to support their case. These factors included: the continued expansion of Open Skies agreement between the US & many other European nations that had increased competition; the emergence of international alliances that provide global networks; the relative decreasing Heathrows European dominance as airports in Frankfurt, Amsterdam, & Paris increased traffic; & the development of similar alliances among competitors. US competitors, delta, continental and north west ,once again asked the US department of transportation to hold a judicial hearing that most of the concerns were the same As in 1996 and that the case must be evaluated by the independent arbiter. Ironically, two of the three companies opposing the deal have similar deals of their own with other European carriers. The delta air France and KLM northwest alliance are very similar to what BA/AA are proposing.

BA is the largest European alliance with $13.7 billion in revenue in 2000 and AA is the second largest airline in US with$19.7 billion in revenues in 2000. The alliance would create a company with control over the transatlantic flights. In Europe, the UK office of fair trading and European commission competition directorate are examining the proposal. The loudest opposition by the competitor comes from Britains virgin Atlantic. News of the new proposal resurrected virgins no way BA/AA campaign. Virgin contends that BA/AA hold 60 per cent of Heathrow US service and fly 50 per cent of all passengers travelling between US and UK. Together BA /AA fly 9 million passengers between UK and US the next biggest carrier flies 3.5 million passengers between UK and US. Virgin claims that this dominance would effectively eliminate smaller airline from transatlantic. If the deal with AA goes through, BA/AA would have total assess through US and EU market. US carriers have opposite problem only two US airlines American and united have access to Heathrows airport for US. For years the US and the British government have being negotiating an Open Skies agreement without much progress. The proposed alliance has added momentum to Open Skies agreement if the BA/AA is granted antitrust immunity. Though some of the US & UK market, they criticize the use of Open Skies as a bargaining chip for the proposed BA/AA deal. They contend that Open Skies would be irrelevant if the BA/AA agreement gives one company a virtual monopoly in the US-UK market & the competition would be better served by preventing the merger. In 2002, the US government approved the merger of BA & AA on condition that the merger company surrenders over 200 slots in the Heathrow Airport. Both airlines announced that they would not merge due to the excessive cost imposed by regulators.

Facts of the Case study

Throughout the 1990s British airways has been seeking to merger with a US airline to create a giant transatlantic alliance. In mid 1992, it BA announced it was entering an arrangement with US Air. The big three asked the US government to block this arrangement because it gave to much of US market to a foreign company. Thus, the merger of BA/us air was blocked. In 1997, BA announced it would seek an alliance with American airlines. But it failed to do so because of the rival US airlines & also because it failed to agree upon the demands put forth by EU antitrust authorities. The two airlines mutually particated in the Oneworld international alliance. Four years later their initial proposal, BA/AA once again tired to win antitrust immunity. They approached regulator claiming that the new set of factors had emerged to support their case. US competitors, delta, continental and north west ,once again asked the US department of transportation to hold a judicial hearing that most of the concerns were the same As in 1996 and that the case must be evaluated by the independent arbiter. Ironically, two of the three companies opposing the deal have similar deals of their own with other European carriers. The delta air France and KLM northwest alliance are very similar to what BA/AA are proposing. The BA/AA alliance would create a company with control over the transatlantic flights. In Europe, the UK office of fair trading and European commission competition directorate are examining the proposal. The loudest opposition by the competitor comes from Britains virgin Atlantic. News of the new proposal resurrected virgins no way BA/AA campaign. Virgin claims that the dominance of the BA/AA alliance would effectively eliminate smaller airline from transatlantic. If the deal with AA goes through, BA/AA would have total assess through US and EU market. For years the US and the British government have being negotiating an Open Skies agreement without much progress. The proposed alliance has added momentum to Open Skies agreement if the BA/AA is granted antitrust immunity.

Problem Areas

In mid 1992, it BA announced it was entering an arrangement with US Air. The big three asked the US government to block this arrangement because it gave to much of US market to a foreign company. Thus, the merger of BA/us air was blocked. In 1997, BA announced it would seek an alliance with American airlines. But it failed to do so because of the rival US airlines & also because it failed to agree upon the demands put forth by EU antitrust authorities. Four years later BA/AA alliance once again tired to win antitrust immunity.

The proposed alliance has added momentum to Open Skies agreement if the BA/AA is granted antitrust immunity. Though some of the US & UK market, they criticize the use of Open Skies as a bargaining chip for the proposed BA/AA deal. They contend that Open Skies would be irrelevant if the BA/AA agreement gives one company a virtual monopoly in the US-UK market & the competition would be better served by preventing the merger.

In 2002, the US government approved the merger of BA & AA on condition that the merger company surrenders over 200 slots in the Heathrow Airport. Both airlines announced that they would not merge due to the excessive cost imposed by regulators.

Recommendation

The BA/AA alliance should be granted antitrust immunity just as been granted to DeltaAir France & KLM- Northwest alliance.

The British government should not use Open Skies agreement as a bargaining chip for the proposed BA/AA deal.

The US government should give some relief to both the airlines in the excessive strategic cost imposed by the regulators.

Question & Answer

Q. Is the BA/AA alliance going to use a polycentric, ethnocentric or geocentric solution to handling operations? Ans. EPG Model is an International Business model including three dimensions Ethnocentric, Polycentric and Geocentric. It is a framework for a firm to better pinpoint it's strategic profile in terms of International Business Strategy. Ethnocentrism is characterized by or based on the attitude that ones own group is superior to others. It is a natural tendency for people to act ethnocentrically because it is what they feel comfortable with. It is based on past experiences and learned behaviors and norms. The ethnocentric attitude is a centralized approach. Polycentrism identifies one of the attitudes or orientations toward internationalization that is associated with successive stages in the evolution of international operations. Polycentrism can be defined as a host country orientation; which reflects host countries goals and objectives with respect to different management strategies and planning procedures with regard to international operations. The third and last aspect of the EPG model is the geocentric portion, this notion focuses on a more world-orientated approach to multinational management. The main difference of geocentrism compared to ethno and polycentrism is that is does not show a bias to either home or host country preferences but rather spotlights the significance of doing whatever it takes to better serve the organization. The sole goal of geocentrism is to globally unite both headquarters and subsidiaries. According to us, BA/AA alliance should use the geocentric solution to handle operations as its a more world-oriented approach to multinational management. It does not show any bias to either home or host country preferences but rather spotlights the significance of doing whatever takes to serve the organization. Therefore, the BA/AA alliance should go for the use of geocentric solution to handle operations.

Q. If the two carriers complete their merger & the US dollar then weakens against the British pound, how will this effect the financial statements of the company? Ans. As business becomes increasingly global, exchange rate changes (volatility) become more important, even for a purely domestic firm operating in a global market. Firms have to pay more attention to exchange rate risk, and devise hedging strategies to manage and control currency risk. On the merger of BA/AA, if the US dollar weakens against British pound it will have a positive impact on the financial statement of BA. For example, 1USD/GBP=0.6340, if the USD depreciates against GBP say by 0.0022$. Now, 1USD/GBP=0.6318. This shows that on merger if USD weakens against GBP, the BA can earn more profit then it had expected during the merger.

Q. If BA believed that the British pound was going to appreciate in relation to the German mark, how could the company use a lead & lag strategy to its advantage? Ans. The lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive strategy with the goal of luring customers away from the companys competitors. The possible disadvantage to this strategy is that it often results in excess inventory, which is costly and often wasteful. Lag strategy refers to adding capacity only after the company is running at full capacity or beyond due to increase in demand (North Carolina State University, 2006). This is a more conservative strategy that decreases the risk of waste but may result in the loss of possible customers. BA can use both the strategy to its advantage: it can use lead strategy to increase its customers & luring customers away from the competitors when the british pound appreciates in relation to german mark, it can use also use lag strategy when its demand is very high.

Q. How great is the political risk that BA faces in the US? Explain.

Ans. The political risk that BA faces in the US is quite high. As the government is not in the favour of BA merger with AA. If the deal with AA goes through, BA/AA would have total assess through US and EU market. US carriers have opposite problem only two US airlines American and united have access to Heathrows airport for US. For years the US and the British government have being negotiating an Open Skies agreement without much progress. The proposed alliance has added momentum to Open Skies agreement if the BA/AA is granted antitrust immunity. Though some of the US & UK market, they criticize the use of Open Skies as a bargaining chip for the proposed BA/AA deal. They contend that Open Skies would be irrelevant if the BA/AA agreement gives one company a virtual monopoly in the US-UK market & the competition would be better served by preventing the merger. Another major reason for the political risk to BA is that BA/AA hold 60 per cent of Heathrow US service and fly 50 per cent of all passengers travelling between US and UK. Together BA /AA fly 9 million passengers between UK and US the next biggest carrier flies 3.5 million passengers between UK and US. This dominance would effectively eliminate smaller airline from transatlantic.