ReachX logo

Why British Airways is experiencing turbulent times

Publication Date: 01 May 2018 - By Market Mogul By Market Mogul
Actionable
Differentiated

Technical Analysis Equity Fundamental Multi Asset Equity EU ex-UK USA Asia ex-China UK China MENA Consumer

In a recent consumer survey released by Which? in December 2017, British Airways (BA) was ranked the third worst long-haul economy airline – behind only American Airlines and United Airlines. Here, some of the performance can be explained by cost-cutting projects, such as cramped business class seats, aimed at competing with the Gulf Airlines (Emirates, Etihad, and Qatar Airways) and maintaining profitability.

The Threat of the Gulf Airlines

The large Middle-Eastern airlines have brought choice and value to customers worldwide – Emirates was named “Airline of the Year” at the 2018 Air Transport Awards. Yet, they pose a considerable threat to traditional carriers. Competing with the Middle-Eastern three (ME3) on price whilst maintaining similar levels of quality might prove difficult. For multiple years now, complaints and allegations have been made by rival airlines that the ME3 have benefitted from government subsidies.

Since 2015, American, Delta, and United Airlines have made such claims; supposedly, the ME3 have been fueled by as much as $50bn in subsidies. At the same time, Gulf carriers benefit from an often-highlighted geographical advantage. The traditional hub and spoke airline model means that the city-states are conveniently located for long-haul travel. Their advantage is highlighted by the fact two-thirds of the world’s population live within eight hours of Emirates’ Dubai position, making it an ideal transfer location.

What Now?

Even domestically, traditional airlines – particularly in Europe – have faced “ferocious competition” from cut-price carriers such as Easyjet and Ryanair. So what can they do?

From a qualitative perspective, one area of potential differentiation is to carve out a niche in more luxurious travel. While it may be difficult to challenge the Gulf airlines on cost, it would be wiser to target less price-sensitive customers such as those willing to pay for better service and, importantly, direct flights – especially in business travel. Indeed, there could be viable demand, for it has not been perfect for the ME3. Airlines act as a “bridge between nations” or even as a “flying ambassador” for their home nations and can inevitably be caught up amidst political tensions. Security concerns regarding travel to the US and UK may have placed them at a disadvantage and whilst the laptop bans of 2017 have since been lifted, it would be a challenge to say for sure such a similar situation would not arise again.

This high-end strategy is one Singapore Airlines has implemented, winning “Best Economy Cabins” and “Best First-Class Cabins” during the 2018 TripAdvisor Travellers’ Choice Awards. The Southeast Asian carrier offers ergonomically designed backrest contours, adjustable footrests with three separate positions, a six-way headrest, along with power outlets and USB ports to go with the usual in-flight entertainment systems as standard for even the cheapest seats. Cathay Pacific too, which like Singapore Airlines and BA also faces the same long-haul threat from the ME3, has explored areas of differentiation – partnering with Pure Yoga to launch in-flight yoga programmes to make travelling more comfortable.

Yet BA seems to be going in the opposite direction. Launching carry-on only fares for long-haul flights led to accusations that they were becoming a “budget airline“. After ending free food on some of its flights, they plan to introduce another economy seat in their Boeing 777’s. The company claims this brings it in line with the ME3. However, Which? data suggests seat pitches are currently the same size as Etihad and Qatar, and smaller than Emirates.

Not all doom and gloom

Nevertheless, reforms are also being made to make business-class more comfortable and fleets refurbished. Plans have also been put in place to revamp business class lounges across the globe.

At the same time, despite customer protests, the company remains profitable. BA’s parent company, IAG, reported an operating profit of 3bn before exceptional items for 2017. Ultimately, customers speak with their wallets and as Michael Skapinker has pointed out, BA’s competitive advantage lies within London’s Heathrow Airport – with rival carriers having to face slot restrictions which contributes enormously to BA’s financial success. The company intends to build on this by expanding aggressively in Gatwick airport through the acquisition of landing slots previously used by Monarch.

Yet other carriers are establishing convenient routes from other large UK airports – Cathay Pacific launched a now daily direct Manchester to Hong Kong flight. Will Heathrow’s dominance remain completely unchallenged? Time will tell whether their hold on key UK airports is something they can continue to rely and potentially build on, or if increasing consumer choice will mark the decline for a company once credited for bringing luxury travel to the skies.

This post appeared first on The Market Mogul.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Market Mogul

 

Most read

ReachX
1-15 Clere Street, EC2A 4UY
London, United Kingdom
info@reachx.co
ReachX
1-15 Clere Street, EC2A 4UY
London, United Kingdom

info@reachx.co
Sign up to our newsletter