Subject: Competitive Strategy Case study British Airways hopes it’s third time lucky for low-cost plan When British Airways moved its short-haul flights from Gatwick to Heathrow last year to survive the pandemic downturn, some wondered if the UK’s flag carrier would ever return in full force. The UK’s second largest airport, home base of low-cost rival easyJet, had always been a tougher challenge than Heathrow, its main hub of operations and the link to its once lucrative transatlantic routes. “It was always seen as a difficult business because of [BA’s] cost structure,” said Chris Tarry, aviation consultant at Ctaira consultancy. Over the past decade, easyJet’s share of flights from Gatwick increased by 25 per cent, while BA’s declined by a third, according to Tarry. Now BA is aiming to return to short haul flying from Gatwick and, according to two people close to the subject, has been in negotiations with unions for several months over more flexible terms and conditions to support a new, lower cost airline operating from the airport. However, lower cost does not mean low cost. People with knowledge of the situation said that the group was looking at setting up services “in line with BA brand guidelines”. This suggested that the airline would not try to replicate the offers and models operated by Ryanair, easyJet and Wizz Air, but focus instead on leveraging advantages such as brand, reliability, flight times and loyalty, said analysts. Sean Doyle, BA chief executive, suggested in late July that the group would have to find a lower cost model if it was to operate a sustainable business out of the airport best known for its leisure traffic. Doyle was referring not just to the inevitable price competition that will intensify as airlines seek to woo passengers on to their aircraft, but to the stated ambitions of the most aggressive low-cost carriers to snatch market share as demand comes back. Ryanair has some 200 737 max single aisle Boeing aircraft on order and chief executive Michael O’Leary has been bellicose about his plans to grow quickly while competitors are still recovering from the financial damage wrought by the pandemic. Wizz Air, the Hungarian upstart, has declared its own ambition to take 20 per cent of the take-off and landing slots at Gatwick. BA has 18 per cent of the slots, while before the pandemic easyJet had about 45 per cent. C11CS Semester 1 – 2021/22 Page 2 of 7 BA had a choice, said Stephen Furlong, aviation analyst at Davy, the Irish stockbroker and asset manager. “The choice is to cede and go back to Heathrow, or to hold their ground, keep their slots and compete,” he said. But competing with low-cost operators is notoriously difficult for legacy carriers. BA has twice tried and failed to run a low-cost operation of its own. “Low-cost carriers drive down overheads by sweating assets more efficiently,” said Martin Chalk, acting general secretary of the pilots union Balpa. “Aircraft don’t go there and back; they tramp around Europe. Network airlines don’t have that ability because their routes are designed as an integrated network product . . . marrying up waves of European flights with waves of Atlantic flights. Network airlines will always struggle to compete on price against the low-cost carriers for that reason.” Chalk, who is not involved in the discussions with BA, said the union welcomed the prospect of a new airline that could re-employ the pilots who have been grounded by the pandemic. It may mean different terms and conditions, but increased flexibility was already a feature of labour agreements at several airlines, he said. At easyJet, for example, some pilots work full time in peak summer periods and 50 per cent in the slower winter months. People with knowledge of the discussions said this kind of flexibility was among the topics being discussed by BA and unions. It is expected that there will also be a shift in balance from fixed pay to remuneration based on the hours flown. In the end, returning to Gatwick — where customers mainly expect to fly directly to their destination rather than connect to another flight — would pitch BA head-to-head with easyJet, and potentially in future with Wizz. Relying on brand, reliability and loyalty would not be sufficient, said Furlong. “The only way they can compete is to have some version of labour agreement and flexibility that their competitor set has,” he said. “Most short-haul flights at Gatwick are point to point . . . and those more traditional BA differentiation features are not sufficient. You have to be competitive on the cost side.” Q.1) Discuss the potential difficulties British Airways would confront pursuing a hybrid strategy.
Subject: Competitive Strategy
Case study
British Airways hopes it’s third time lucky for low-cost plan
When British Airways moved its short-haul flights from Gatwick to Heathrow last year to survive the pandemic downturn, some wondered if the UK’s flag carrier would ever return in full force.
The UK’s second largest airport, home base of low-cost rival easyJet, had always been a tougher challenge than Heathrow, its main hub of operations and the link to its once lucrative transatlantic routes.
“It was always seen as a difficult business because of [BA’s] cost structure,” said Chris Tarry, aviation consultant at Ctaira consultancy.
Over the past decade, easyJet’s share of flights from Gatwick increased by 25 per cent, while BA’s declined by a third, according to Tarry.
Now BA is aiming to return to short haul flying from Gatwick and, according to two people close to the subject, has been in negotiations with unions for several months over more flexible terms and conditions to support a new, lower cost airline operating from the airport.
However, lower cost does not mean low cost. People with knowledge of the situation said that the group was looking at setting up services “in line with BA brand guidelines”.
This suggested that the airline would not try to replicate the offers and models operated by Ryanair, easyJet and Wizz Air, but focus instead on leveraging advantages such as brand, reliability, flight times and loyalty, said analysts.
Sean Doyle, BA chief executive, suggested in late July that the group would have to find a lower cost model if it was to operate a sustainable business out of the airport best known for its leisure traffic.
Doyle was referring not just to the inevitable price competition that will intensify as airlines seek to woo passengers on to their aircraft, but to the stated ambitions of the most aggressive low-cost carriers to snatch market share as demand comes back.
Ryanair has some 200 737 max single aisle Boeing aircraft on order and chief executive Michael O’Leary has been bellicose about his plans to grow quickly while competitors are still recovering from the financial damage wrought by the pandemic. Wizz Air, the Hungarian upstart, has declared its own ambition to take 20 per cent of the take-off and landing slots at Gatwick. BA has 18 per cent of the slots, while before the pandemic easyJet had about 45 per cent.
C11CS
Semester 1 – 2021/22
Page 2 of 7
BA had a choice, said Stephen Furlong, aviation analyst at Davy, the Irish stockbroker and asset manager. “The choice is to cede and go back to Heathrow, or to hold their ground, keep their slots and compete,” he said.
But competing with low-cost operators is notoriously difficult for legacy carriers. BA has twice tried and failed to run a low-cost operation of its own.
“Low-cost carriers drive down overheads by sweating assets more efficiently,” said Martin Chalk, acting general secretary of the pilots union Balpa.
“Aircraft don’t go there and back; they tramp around Europe. Network airlines don’t have that ability because their routes are designed as an integrated network product . . . marrying up waves of European flights with waves of Atlantic flights. Network airlines will always struggle to compete on price against the low-cost carriers for that reason.”
Chalk, who is not involved in the discussions with BA, said the union welcomed the prospect of a new airline that could re-employ the pilots who have been grounded by the pandemic. It may mean different terms and conditions, but increased flexibility was already a feature of labour agreements at several airlines, he said.
At easyJet, for example, some pilots work full time in peak summer periods and 50 per cent in the slower winter months.
People with knowledge of the discussions said this kind of flexibility was among the topics being discussed by BA and unions. It is expected that there will also be a shift in balance from fixed pay to remuneration based on the hours flown.
In the end, returning to Gatwick — where customers mainly expect to fly directly to their destination rather than connect to another flight — would pitch BA head-to-head with easyJet, and potentially in future with Wizz. Relying on brand, reliability and loyalty would not be sufficient, said Furlong.
“The only way they can compete is to have some version of labour agreement and flexibility that their competitor set has,” he said. “Most short-haul flights at Gatwick are point to point . . . and those more traditional BA differentiation features are not sufficient. You have to be competitive on the cost side.”
Q.1)
Discuss the potential difficulties British Airways would confront pursuing a hybrid strategy.
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