British Airways Plc

SWOT Analysis

SWOT ANALYSIS

British Airways is engaged in the operation of international and domestic scheduled air services for
the carriage of passengers, freight and mail, and the provision of ancillary services. The company
operates international route network comprising around 147 destinations in 75 countries. Strong
international operations help the company to not rely on any one market for a majority of its revenues
and this substantially reduces the business risk for the company. However, the rising fuel prices
could directly impact the company’s profit margins.

Strengths Weaknesses

International operations Declining profitability

Strong presence at Heathrow Unfunded employee post retirement benefits
International airport Employee productivity Sluggish revenue growth from key
geographic regions
Penalty claims

Opportunities Threats

Global passenger airline market Rising aviation fuel prices

Global travel and tourism industry Increasing competition from low cost airlines
Global air freight and logistics Economic slowdown in US and the Europe

Strengths

International operations

British Airways is one of the largest international airlines in the world today. In terms of revenues
and market capitalization, it is among the top-five airlines in the world. The company operates
international route network comprising around 147 destinations in 75 countries. During fiscal 2007,
British Airways carried about 33 million passengers. The company also operates one of the world’s
biggest air cargo businesses and carried 762,000 tons of cargo during 2007.

The company divides its geographic division as the UK, Americas, Continental Europe, Far East
and Australia, and Africa/Middle East. The company generated 62.6% of its total revenues from
Europe (48.9% of the total revenues from the UK, 13.6% from Continental Europe), 20.4% of its
revenues from Americas, 9.4% from Far East and Australia, and remaining 7.6% from Africa/Middle
East. The company witnessed significant growth in revenue across majority of its geographical
divisions. The international operations and diversified revenue base ensures that the company does
not rely on any one market for a majority of its revenues and substantially reduce the business risk
for the company.

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SWOT Analysis

Strong presence at Heathrow International airport

Heathrow is one of the world’s busiest international airports and is central to the UK’s economic
activities.The geographic position of London and Heathrow, as the gateway to the European continent,
strengthens its position as a major international hub.

Heathrow is British Airways’ principal base, and the company carries an estimated 41% of the slots
at this airport. In 2008, the company expects to move the majority of its Heathrow operations into
its newly built Terminal 5. The company plans to carry out the transfer of its operations to Terminal
5 in two planned stages. The company will locate a few services (around 8 %) with oneworld alliance
partners in Terminal 3. British Airways is likely to be the only airline to be stationed at the terminal.
Presence at Heathrow gives British Airways significant advantage over its competitors which in turn
would benefit its top-line and bottom-line growth.

Employee productivity

British Airways posted strong revenues in proportion to the total number of employees. For the fiscal
year ended March 31, 2007, the group recorded total revenues of £8,492 million with a total of 42,755
employees. The revenue per employee of the company stood at approximately £198,620.0
($388,200.9,) higher than some of its competitors such as Lufthansa, and Continental Airlines. For
instance, the revenue per employee of Lufthansa stood at $263,915.5. The revenues per employee
of Continental Airlines stood at $299,931.5 million in 2006, significantly lower than the revenue per
employee of British Airways. The strong revenue per employee indicates the company’s ability in
employing efficient and effective people for its operations. This could further enhance the net revenue
growth for the company in future.

Weaknesses

Declining profitability

The company has recorded weak profitability in the fiscal year 2007. During the fiscal year ended
March 31, 2007, the revenues of the company grew at a rate of 3.4% to reach £8,492 million from
the revenues £8,213 million in 2006. Though the revenues of the company grew at a moderate rate,
its profitability position has declined significantly. The company recorded an operating profit of £602
million during fiscal year 2007, as compared to an operating profit of £694 million in 2006. The net
profit of the company was £290 million in fiscal year 2007, as compared to a net profit of £451 million
in 2006. Further, the operating profit margin of the company declined from 8.4% in 2006 to 7.1% in
2007. The net profit margin of the company also declined to 3.4% in 2007 from 5.4% in 2006.
Moreover, the company’s cash from operations have declined from £1,339 million in 2006 to £756
million in the year 2007. The declining profitability was primarily driven by cancellation of 1,300 flights
in January 2007 as a result of strike by cabin crew. This strike was happened, as negotiations
between British Airways and union officials representing nearly 11,000 flight attendants collapsed

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SWOT Analysis

in confused circumstances in January 2007. The weak profitability would affect the future growth
plans of the company and reduced its investor confidence.

Unfunded employee post retirement benefits

The company provides pension benefits and other post-retirement health and life insurance benefits
to employees primarily in the UK and Germany. During 2007, the company incurred a total of £1,142
million as the post retirement benefit expenses. The company also paid a total of £1,803 million for
the post retirement benefit plans during 2006. Further, at the end of March 2007, the company's
projected pension and postretirement benefit obligations stood at £1,716 million as compared to the
planned assets of £116 million, resulting into an unfunded status of £1,600 million. Sizeable unfunded
post retirement benefits would force the company to make periodic cash contributions toward bridging
the gap between post retirement benefits obligations and plan assets, which would reduce cash
available for growth plans.

Sluggish revenue growth from key geographic regions

The company reported sluggish revenue growth in its key market of Europe, which accounted for
more than 62% of its revenues during fiscal 2007. The revenues from the Europe (including UK and
Continental Europe) reached £5,316 million ($10,390.1 million) in 2007, from the revenues of £5,117
million ($10,001.1 million) in 2006, registering a growth rate of 3.7%. In fact, the company’s revenues
from the Continental Europe market (accounting for 13.6% of the company’s revenues during 2007)
declined by 2.4%.

In addition, the revenue growth of the company in the Europe division is significantly lower than
some of its prime competitors such as Lufthansa and Air France. Lufthansa‘s revenues from Europe
division reached E12,127.0 million ($15,239 million) in 2006, an increase of 8.7% over 2005. Where
as Air France revenues from Europe ( Also includes North Africa) division reached E15,610.0 million
($20,816.1 million) in 2007, an increase of 8.7% over 2006.The sluggish revenue growth from the
key geographic markets such as the UK and Continental Europe affected the overall revenue growth
of the company.

Penalty claims

British Airways faced two big penalty claims in 2007. In August 2007, British Airways announced
collusion over the price of long haul passenger fuel surcharges (surcharges) and will pay a penalty
of £121.5 million to be imposed by the UK's Office of Fair Trading (OFT), thus enabling the OFT to
close its civil investigation and resolve this case. The company has admitted that between August
2004 and January 2006, it colluded with Virgin Atlantic over the surcharges which were added to
ticket prices in response to rising oil prices.

In the same month, British Airways pleaded guilty in US court in a transatlantic price fixing conspiracy
and was fined $300 million. British Airways admitted to colluding with rivals on surcharges on
passenger fares and cargo between 2002 and 2006 to help ease the impact of sharp increases in
fuel prices. The company reached a separate agreement with British authorities and agreed to a

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$247 million fine. These penalty claims not only drain out the cash from the company but also tarnish
the company's reputation. This may lead to decline of the company’s business.

Opportunities

Global passenger airline market

The global passenger airline market primarily comprising of passenger transportation witnessed
stronger growth during the five year period 2002-2006. The revenue of global airline market grew
at a CAGR of 8.7% to reach $345.7 billion in 2006. Further, it is estimated to reach a value of $525.7
billion by 2011, an increase of 52.1% compared over 2006. The passenger volume is also estimated
to reach 2.9 billion people in 2011, from the passenger volume of 2 billion people in 2006, representing
a CAGR of 7.6% for the five year period 2006-2011. In view of this growing trend, the company is
planning to expand its global fleet size. For instance, in February 2007, the company announced its
investment in four Boeing 777-200 ERs to be delivered in 2009 for its long haul business. During
the same period, the company also ordered eight Airbus A320 family aircraft for its short-haul business
and replaced its older Boeing 737s with Airbus A319 aircraft from Heathrow. With the expansion in
the fleet size, the company could be in a position to benefit from the growing airline industry.

Global travel and tourism industry

The airline industry is strongly influenced by the travel and tourism trends. According to World
Tourism Organization, a total of 842 million international tourist arrivals were recorded globally in
2006, a year-on-year increase of 4.5%. According to the World Travel & Tourism Council's (WTTC)
Tourism Satellite Account (TSA) research, world travel and tourism is expected to generate over
$13 trillion for the period 2008-2017, with an average growth rate of 4.3% per annum. This increase
in world travel and tourism will in turn enhance airline business and generate additional revenues
for the company.

Global air freight and logistics

The global air freight and logistics market primarily comprising of air freight witnessed stronger growth
during 2002-2006. This industry generated total revenues of $99.9 billion in 2006, representing a
compound annual growth rate (CAGR) of 5.6% for the five-year period spanning 2002-2006. Further,
it is estimated to reach a value of $145.4 billion by 2011, an increase of 45.6% compared to 2006.
The global air freight and logistics sector volume is also estimated to reach 211.2 million FTKs (freight
ton kilometers) in 2011, from the global air freight and logistics sector of 164.8 billion FTKs in 2006,
representing a CAGR of 5.1% for the 2006-2011 period.

The growth in this sector was primarily driven by growth in Asia-Pacific, particularly in the economies
of China and India. The Asia-Pacific region accounts for 31.9% of the global sector’s value in 2006,
as compared to the US, which accounts for 26.7%, and Europe with a 24.3% of the sector’s value.
Low labor costs make many Asia-Pacific countries popular locations for outsourcing manufacturing

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from more developed economies; however, the finished goods must be delivered to customers,
which will tend to drive demand for air freight and other transportation in the region.

British Airways operates a worldwide air cargo business in conjunction with its scheduled passenger
services and has a strong presence on the trans-Pacific route. In fiscal 2007, the company’s cargo
transportation services carried 762,000 tons of cargo to destinations in Europe, the Americas, and
throughout the world. The positive market outlook provides an opportunity for the company to further
strengthen its market position in the trans-pacific route.

Threats

Rising aviation fuel prices

Due to the rising oil prices globally, the prices of aviation fuel have gone up substantially in the past
few years. The average cost of a gallon of commercial jet fuel in the Rotterdam has more than
doubled since 2001, from $0.77 per-gallon in January 2001 to $2.07 per-gallon in June 2007. Also,
the Air Transport Association (ATA) averaged the jet fuel cost as $70 per barrel or $1.67 per gallon
in 2006, a 90% increase from 2001. As a result of increased aviation fuel prices, the company’s fuel
and oil costs increased by 22.1%, £1,581 million in 2006 to £1,931 million in 2007. The rising fuel
prices are likely to have a direct impact on the group’s margins since price volatility in fuel costs may
cause an increase in operating expenses of the group disproportionately to its sales volume.

Increasing competition from low cost airlines

The emergence of low cost carriers such as Flybe, Ryanair, BudgetAir, and Walker Airlines in the
European markets; Southwest Airlines, American Trans Air in the US; and China Airlines, Hong
Kong Flights, Japan Flights, Jetstar Asia, Air Asia in the East Asian region, has intensified competition.
The low fare charged by these budget airlines makes the group’s airline operation less competitive.

In the long-haul market, the company is confronted with the competition from local operators in most
geographical areas including the Middle Eastern airlines, China and India. The company also faces
stiff competition from restructured US airlines on transatlantic routes. In the medium-haul market,
low-cost carriers established strong market positions and continue to grow. For instance, low-cost
carriers represented approximately 30% of the European market capacity during the fiscal year
2006. The low cost airlines market share stood around 50% in the UK, 37% in Germany, 10% in
Spain, and 5% in France during 2006.

Further, As a result of increasing business travel, a number of customers are increasingly looking
towards other air travel options, which allow them to minimize stoppage time at airports caused due
to various reasons including baggage handling and refueling. This has lead to an increasing number
of business organizations to invest in private jets, which are partly owned along with certain airlines,
or completely owned. The growing number of low cost, and low fare airlines and increasing number
of private jets could impact the group’s market share across all its geographic regions.

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SWOT Analysis

Economic slowdown in US and Europe

British Airways derives a large proportion of its revenues from the US and European market. In the
fiscal year 2007, the company generated revenues of £5,316.0 million from the Europe, representing
62.6% of its total revenues. Also, the company generated £1,731.0 million from the Americas, with
significant amount from the US.The airline business is dependent on the performance of the economy
in which the company operates.

According to the IMF world economy outlook, the real GDP growth of the US and the Europe is
expected to slowdown in 2008. While the GDP growth of the US economy is forecasted to slow
down from 3.3% in 2006 to 2.8% in 2008, the GDP growth of the Europe is forecasted to decline
from 2.6% in 2006 to 2.3% in 2008.

Healthy economic growth is a precondition for positive growth rates of airline business.The company’s
particular focus in this regard is the economic performance of the US, Europe, two major geographic
segments of the company. Therefore, a weak economic outlook for the US and the Europe would
put pressure on the revenues of the company.

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