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 “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 £350 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 recession will continue. Some of these policy responses from the government included...