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Wednesday 27 June 2012

British Airways and Last major Aviation Recession

Over the past decade or so, British Airways has evolved from a loss making, state-owned national carrier into a customer focused, publicly listed, and consistently profitable airline. This transformation, a testament to a clear vision and a strong management team, has been achieved against a turbulent operating environment.

The air travel business is highly sensitive to economic cycles. British Airways reacted quickly and effectively to the last major recession which was precipitated by the Gulf War. So, while the airline industry as a whole lost GBP 10 billion during the period, which is more than its total combined profits since commercial aviation began in 1947, British Airways remained profitable.

The airline industry is a global business. British Airways is the world's largest international passenger carrier, flying 36 million people to 194 scheduled destinations in 89 countries in 1994. But cross-border ownership and landing rights are tightly controlled and in order to expand its global presence, British Airways has developed partnerships through airline investments in America, Australia, France, and Germany and through non-equity franchise links in the UK.

While recognising that British Airways has been successful in the past, it is dangerous to assume that current strategies will remain valid in an increasingly complex and changing business environment. British Airways is capital intensive, operating a fleet of 293 jets with long-term commitments to some 53,000 staff. Management must be able to recognise and interpret external events so that any major shifts in the environment which make current strategies vulnerable are anticipated and possible responses formulated. The airline cannot rely solely on quick reactions.

Given the immediacy of the airline business, however, it is difficult for managers to tear themselves away from the day-to-day running of the operation to take a longer-term view. The existing planning processes, the budget and the business plan look at the coming year and the next three years respectively. They tend to reinforce the assumption that the future will not vary significantly from the present, and plans tend to focus on operational improvements. A process for developing and testing strategies in light of future uncertainty was missing.

Making it Happen

British Airways' Chief Economist, DeAnne Julius, proposed the use of scenarios to the Chairman's Committee in February 1994. Because the expected benefits were somewhat intangible the decision was made to treat the exercise as an "experiment" to see if the process was suitable for use within the company.

The exercise was divided into two phases: scenario development and scenario workshops. Each phase was led by a senior member from the Corporate Strategy department. The aim was to link the scenario workshops to the business plan from April 1995.

Phase 1: Scenario Development

The first phase of the project was led by the Chief Economist. The development team included eight staff from the Corporate Strategy, Government Affairs, and Marketing departments, and an external consultant. Work began in mid March 1994 and was completed by the end of October 1994. Individuals' time spent on the project varied with no-one working full time. An equivalent of 2 man-years was expended.

In an effort to gain top level support and guidance for the project a “Halo Group” was established. This group of 14 directors and senior managers represented the major departments in the company. Their advice was solicited following the completion of each of the main tasks in the project.

The first task was to determine the significant external issues facing the airline. Over 40 individual interviews with manager throughout British Airways were conducted, each lasting between 1 and 2 hours. Five group interviews were held with staff specialists covering topics such as information technology and air transport regulation. Several interviews with academics, government officials and aircraft manufacturers were also completed. Most interviews were conducted by two development team members from a standard set of questions which had been designed in advance. Detailed notes were taken on the condition that the anonymity of participants would be maintained.

From the interview notes the development team were able to compose a story of the “Official Future” which summarised the working assumptions British Airways managers were making about the future environment and highlighted potential blind spots. The important external issues were identified and classified into three categories: predetermined elements (such as population growth), key uncertainties (issues of high importance and high uncertainty such as airline deregulation), and driving forces (such as changes in information technology which could fundamentally affect the airline business).

The development team spent a day debating the issues and 11 were selected for further research. It was not obvious from the interviews what the organising issue, around which the scenarios would be built, should be and so this was left until further research was completed. These findings were presented to the Halo Group who confirmed that the Official Future was an accurate reflection of thinking within the company and approved the preliminary research agenda.

The second task was to develop challenging yet plausible outcomes for each of the issues. This required an in-depth understanding of each issue and the identification of the critical events which would bring about each outcome. The issues were allocated among the development team who carried out desk-based research and consulted with experts to develop the arguments. The research was condensed into a briefing pack for each issue.

In mid June 1994 the development team spent two days sharing their findings and exploring inter-connections between the issues. A decision was made to focus on the relationship between growth and governance as the organising issue and to develop two stories, each covering a 10-year time horizon. Outputs from the 2 days, together with the briefing packs, formed the basis from which the stories were written.

Story writing began in July 1994. A full outline was drawn-up by three members of the development team. Draft scenario stories and presentation slides, which showed the main points pictorially rather than as text, were produced. These went through several refinements as they were tested on fellow team members and other experts, and included a presentation to the Chairman’s Committee to secure their approval. To ensure a consistent style, the final versions of the stories were drafted by the external consultant and finalised by the Chief Economist. Writing was completed by mid-September 1994 and approved by the Halo Group.

Whilst the stories were being written, the numerical data on economic growth, passenger traffic and aircraft supply data was produced. Historical data was retrieved, and models were built to determine how the data would be affected by the events in each story. It was decided that at the end of the 10-year period overall world economic growth levels would be similar in both scenarios. This was to avoid a high case – low case dichotomy, which the team felt, would not stretch thinking. However, the “boom and bust" economic cycles in one scenario would lead to much higher passenger traffic demand than the slow, steady economic growth and increased product substitution of the second scenario.

Always remember Takeoff is optional Landing is compulsory 

Many Happy Landings ........

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