Analysis of the Macro and Micro Environment at British Airways Essay

British Airways is the largest international scheduled airline in the UK. The company was founded in 1919, and has continued to grow and expand since privatisation in 1987, until the global recession hit in 2008. On 23rd January 2009 the UK was officially declared to be in recession following two consecutive quarters in 2008 during which economic growth dropped (BBC, 2009). Many businesses, including British Airways, have found it increasingly difficult to survive in the resulting testing macroeconomic environment. The Recession  A recession will often occur when inflation grows rapidly; goods become more expensive at a time when consumers have less money to spend. As consumers spend less money, supply begins to exceed demand within the markets. This causes businesses to produce less of their goods, and so require less staff. The unemployment that results from this creates a situation whereby people do not trust the markets and have less money, so stop spending, thus creating a vicious circle. UK unemployment figures up to March 2010 show that unemployment has risen to 8%, the highest figure since 1996. For many people, air travel is a luxury good. This means that in times of hardship, where the consumer is reducing their spending, air travel will be an area that is very hard hit, as many people are not taking holidays. For some consumers, air travel is for business purposes, as opposed to recreational. This area of the market has not been hit as hard, although many people are now flying in economy class, where they might previously have flown in business or first class. Business and first class passengers have played a large part in BA’s profitability, as they account for a large proportion of the company’s profit. Low-cost, budget airlines such as Ryan Air have done comparatively well, producing profits in a market where very few businesses have been able to. Budget airlines are supplying an â€Å"inferior good†. This means that as consumer income decreases, a demand for the service will increase as the service is seen to be more affordable. Production Costs Over recent years the cost of fuel has increased dramatically, and as each airport has only one fuel supplier, BA is working within a limited market, where there is a lack of price competition to drive the price of fuel down. With demand continuing to exceed the supply of fuel the equilibrium point of the supply and demand curve is continually changing, this allows the fuel suppliers to increase their costs. As demand for air travel has dropped and production costs have increased, BA has found that an increasing number of flights are running with too few passengers to make the flight profitable. However, if BA were to decrease the number of flights they would risk losing their slots at the major airports, which would be disastrous when the market begins to pick up and demand for flights increases again. Willie Walsh, chief executive of BA, believes that a compromise must be found between surviving throughout this difficult climate, and growing the business so that it can prosper once the economy has recovered. Iberia Merger BA has recently signed a merger with Spain’s Iberian Airlines. This will promote the business to being one of the largest international providers of air travel. It is predicted that the merger will allow the two companies to save around ? 50 million per year, which will greatly benefit shareholders as the profit will be seen to increase, and also benefit customers as the synergy between the routes and aircraft used should offer more choice at a more competitive price (Price, 2010). Government Policy As a result of the recent recession, the government has taken steps to increase consumer spending. Increased consumer spending is necessary in order to increase the UK’s GDP (gross domestic product) and so ensure that the recovery from the recent recessi on will continue. Some of these policy responses from the government included lowering VAT from 17. 5% to 15% as of December 1st 2008 (Finch, 2008). This was a move which was aimed at lowering the price of goods and so encouraging the public to spend more. This would start to regain consumer trust, and also start to put money back into the market. The major downside to this policy change is that due to a lower governmental income from VAT, the government has been forced to increase the UK’s national debt and run a larger budget deficit in order to keep national services running. There has been considerable debate as to how much this policy actually helped to bring the UK out of the recession, but it did encourage consumers to have more faith in the government and the economy and to spend more money. By encouraging a higher rate of consumer spending, the economy is starting to recover; this is a positive sign for British Airways as it means that customers are beginning to increase again. As the consumer is regaining faith in the economy they are becoming more likely to pre-book a holiday as they have more money available to them. This cut in VAT has also allowed companies such as BA to either increase their profit margins slightly or lower their prices slightly (BBC, 2009). The Bank of England Since the start of the recent recession, the pound has weakened considerably. With the UK economy struggling and consumers having borrowed heavily before the recession, currency traders have flooded the market with sterling, resulting in the pound dropping in value. In an attempt to maintain monetary stability the Bank of England dropped the national interest rates from 5% down to as low as 0. 5% (Bank of England, no date). This also caused currency traders to attempt to trade their sterling to a currency returning a higher profitability, such as the Euro (Bank of England, 2010). However, this move was needed in order to attempt to keep inflation low and encourage banks to continue to supply loans, overdrafts and mortgages. This was a move which was needed in order to try and maintain consumer trust, but the weakening pound has made business increasingly difficult for international companies as importing goods needed to provide their surface has increased thus increasing their production costs, although it does make the service cheaper for foreign consumers. Leadership Theories Willie Walsh became CEO of British Airways in 2005; since then he has faced numerous challenges as the global economy has been hit hard by the recent recession. Walsh was brought in by British Airways as CEO following his success as CEO of Aer Lingus, where he helped to bring the company out of the financial difficulty that it suffered as a result of the terrorist attacks in 2001, by cutting 2000 jobs and finding new ways to cut costs (Saunders, 2008). In the current economic climate, where the industry has been severely hit by the recent recession, a leader is needed who is able to react to an ever-changing dynamic environment. Walsh has proved his ability to do this, and has been quick to react with BA by cutting many jobs as the recession hit, and working out new ways in which the company can be run more efficiently, such as by reducing the number of aircraft and raising the efficiency of staff. This style of leadership is known as transformational leadership; it relies upon a leader who has a concept of the direction he wishes the business to take, and has the ability to motivate and inspire his employees in order to attain this goal. Motivation – Content and Process Theories Motivation theories have been developed so that leaders and managers can understand the theory behind the different methods of motivating their workforce and thus work out the most productive and efficient of these methods. It is a common belief that leaders are born and not made; this is supported to some extent by motivation theories as the best leaders will be more perceptive as to how change is affecting his workforce, and the areas in which improvements could be made, as they will have a natural empathy. The best leaders will also be able to use this to the advantage of their company; they will be able to motivate their workforce to a higher work capacity level and so promote productivity. Motivation theories work on the basis that employees carry out work for a variety of reasons, which are weighted in terms of their importance. Maslow’s Hierarchy of Need (shown in the diagram below) suggests that there are 5 levels at which a person must be fulfilled before they will perform at their optimal capacity, with the lower levels being the first to be fulfilled and the most important. BA has recently asked its employees to consider working unpaid for up to one month, in a bid to keep the company afloat. Many employees have resisted this change, with only 800 out of 40,000 staff asked agreeing to this. Other options were also put forward to staff, including the option to take unpaid leave or to work part-time; these proved more popular with employees. A reduction in salary would affect employees at the bottom two levels on Maslow’s Hierarchy as with reduced income some may struggle to provide for their physiological needs. This in turn will affect the employee at several levels up the hierarchy; they will feel less secure within their job and society, and consequently on a higher more emotional level. Content theories of motivation suggest that there are three main components which motivate people; these are direction (what they want), intensity (how much they want it) and persistence (how far they will go to attain this). Following on from his, it is assumed that people will work for rewards. These rewards can then be split into two main areas; intrinsic and extrinsic. Content theories place a higher emphasis upon the intrinsic factors, such as the internal drives which motivate people to work. Maslow’s Hierarchy of Need is one example of this, and Herzberg’s 2-factor theory is another. Herzberg’s theory relies upon hygiene (extrinsic) and motivators (intrinsic) and suggests that extrinsic factors are important in preventing job dissatisfaction, whereas intrinsic factors are more concerned with self-respect and achievement, thus promoting job satisfaction. Process theories such as J Stacy Adam’s Equity theory, suggest that people are more productive when they perceive that they are receiving fair treatment, and will tend to act if they believe they are being unfairly treated when they compare themselves to others within their social network. Vroom’s Expectancy theory also works upon a basis of fair treatment, but focuses upon the worker’s belief that if they put more effort in, their performance will improve, and their manager will reward them fairly, with a reward that is of value to the individual worker. Managers must therefore identify the rewards that workers will place a high value upon, and attempt to minimise any undesirable outcomes. British Airways needs to focus more upon employee satisfaction, particularly within this economic climate, as this will encourage workers to perform at a higher capacity and thus increase efficiency of the company. Threat of future redundancies is a big motivating factor for many employees; if process theory is applied, so that employees believe increased effort will lead to fair reward (ie. keeping their job) they may be more likely to perform better. Management of Change Theories regarding management of change focus on minimising resistance to change, as this is more likely to make the proposed change viable. Force field analysis requires managers to assess the pro’s and con’s of change, and the movement that will be needed to effect this change. For example, with BA’s pay freeze and request for unpaid work, there will be resistance to this change, based upon a fear of lower income, but, for some, the fear of redundancies and dismissal will outweigh the risk of a month unpaid (BBC, 2009). Resistance to change is often natural due to a fear of the unknown; employees often fear that if they work at a higher capacity this will become the expected normality, which may be difficult to sustain, and can encourage workers to thus work at a lower performance level. Lewin’s 3-step change process identifies unfreezing (where the status quo is disturbed), movement (where new behaviour is adopted) and refreezing (where the new patterns are established as normal) as the three stages. Unfreezing is perceived to be the most difficult to implement, as this is where a fear of the unknown will have the greatest impact. For managers to overcome this they must show empathy, communication and participation. Willie Walsh shows an example of this as he has ensured that all BA employees are kept well informed of all plans towards cost-cutting and voluntarily agreed to work for July without receiving his ? 61,000 monthly salary in a bid to encourage workers to do the same. This also uses process theories of motivation, as it encourages workers to feel that they are receiving fair treatment. Unfortunately for BA, many employees feel that they are being treated unfairly, leading to numerous recent strikes, which have caused massive further losses to the company.