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ANSWERS TO CFG EXAM CASE STUDY 

PEST ANALYSISPolitical:

  Deregulation - As the market increases in size, therefore economies of scale may arise.

  Liberalisation of skies - Ownership rules relaxed, EU and US forcing this through

increasing the size of the market.

  Deal has not yet cleared government, regulators and pension trustees for BA

  Possible political conflict as it took them 2 years to reach agreement

  Could lead to split Board of Directors, Chairman - Spanish, CEO - English

Economic:

  Decrease in passenger and cargo numbers due to economic slump.

  Competition from low cost airlines and price cutting from other airlines

  Consolidation of Airlines as mergers are taking place or have took place

  Synergies and economies of scale possible for airlines that have merged earlier

  Increase in cost i.e. Insurance, Fuel,

  Deregulation has exposed airlines, previously operating at inefficient cost levels

  Supplies to the industry are also experiencing sharp downturn, e.g. Rolls Royce

Social:

  Possible culture clash between English and Spanish working styles, management styles,etc.

  Conflict of interests and cultures between the 2 companies as they each keep their

identity.

  Reluctance to fly due to fear of terrorist acts, tedious airport security,

  Economic slump has made many people more frugel in spending money

Technological:

  Economies of scale in production due to expanding market size

  E-commerce method of selling tickets, therefore less infrastructure required, overhead

savings

  New planes that can carry more passengers but cost less per mile are coming online.

PORTER'S 5 FORCES ANALYSIS ON AIRLINES

Threat of New Entrants - Moderate 

  Easy access to Credit - Credit can be found to create a new airlines,

  Deregulations on airline licences would allows for new entrants as long as it meets it

criteria.

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  Many Major or national carriers creating new Low-cost airlines to compete in the

budget travel market

Power of Suppliers - High

  Plane Makers - As there are only 2 commercial airlines makers, Boeing and

Airbus, and the cost of purchase, training and maintenance very high, Airlines

bargaining power becomes weak once they have committed to a type of aircraft

  Jet Fuel - There are only a few commercial jet fuel manufacturers in the world

and rising cost of jet fuel is becoming a major operations issues for all airlines

worldwide

  Pilots and Crew - Strong BA and Iberia Pilot and Crew Unions bargaining power.

Employee expenditure constitutes a significant portion of an airline’s total cost. Airlines

need to cautious as industrial actions by employees can seriously affect revenue.

Power of Buyers - Moderate

  The internet allows buyers (fare paying passengers) to have close to full

disclosure on prices charged by all airlines and allow them to pick the best value

for money route when travelling.

  For those travelling short haul or regional routes, the entrance of Low Cost

Carriers allow buyers even more options, however, for long-haul or international

flights, these options may be less.

Availability of Substitutes - Moderate

  For long distance, air travel is probably still the fastest. However, development greater

connectivity via roads and rail, e.g., Channel Tunnel and High Speed Rail, does allow forsome substitution.

Competitive Rivalry - High 

  Low Cost Carriers - With over 40+ low cost airlines in Europe alone, not including

Major and national European carriers, and those coming from outside of Europe,

LCCs are competing aggressively for business.

  Lots of loyalty programs, travel perks, and discounts between airlines travelling

the same routes

  Growth of Mega Carriers - Mergers between Major airlines to stay competitive

allows these new mergers possible synergies and economies of scale.

INDUSTRY AND MARKET ANALYSIS

Industry Segmentation and position

BA and Iberia are both considered Major Carriers, offering both international and domestic routes

within their respective countries of origins. They would be considered as the #1 carrrier for their

respective country.

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Characteristics of Market Segment 

BA and Iberia operates in an Oligopoly for their respective markets

  High Barriers to Entry

  Few Sellers operates in the same market

  Products are similiar between airlines

  Substantial economies of scale can be enjoyed

  Have perfect knowledge of their own costs

  interdependence among airlines, e.g., alliances and code-sharing

  Selles are able to set their own prices, but buyers have price transparency via the

internet

PORTER'S VALUE CHAIN FOR THE AIRLINE INDUSTRY 

VALUE DRIVERS

Sales Growth Rate (SGR%)

Operating Profit Margin (OPM % sales)

Cash Tax Rate (CTR % of OPM)

IFCI (% incr sales)

IWCI (% incr sales)

Weighted Average Cost of Capital

Depreciation (% of sale)

RFCI (= depr)

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VALUING THE BUSINESS STRATEGIES

Value Creation performance