British Airways Valuation

Global Economic

There is increasing confidence that the world economy is enjoying a classic cyclical recovery. Global economy is on a recovery path aided largely by the quick end to the Iraqi war, which generated positive outlook among markets and built up business and consumer confidence.

GDP growth rate was 0.2% in the first quarter of 2003 in UK, growth rate for the second and third quarter went up to 0.6%, pointing to a growth rate of 2.0% end 2003. Unemployment rate has been decreasing to a rate at 4.7% according to the National Statistics with Inflation falls (September: CPI now 1.1%, RPI 3.1%) in 2004. UK government increases the interest rate to avoid inflation during past years. HM-Treasury in November 2003 forecasted the economy to grow by 2.6% form 2004 to 2005 and slow down marginally to 2.4% from 2006 to 2007.

Section 1

Company Profile

British Airways Plc (BA). The Group's principal activities are the operation of international and domestic scheduled and charter air services for the carriage of passengers, freight and mail and the provision of ancillary services. The Group's global alliance includes new code share arrangements agreed with Finnair, Iberia and Cathay Pacific. The Group operates in such geographical areas as The United Kingdom, Continental Europe, The Americas, Africa, Middle East, Far East, Australasia and Indian sub-continent. For the fiscal year ended March 2004, the company generated revenues of Ј7,560 million. This figure represented a decrease of 1.7% on the Ј7,688 million in revenues posted by the company for fiscal 2003. Net profit was Ј130 million in fiscal 2004, up 80.6% from Ј72 million in fiscal 2002.

1.1 Position in the sector

British Airways (BA) is one of Europe's largest international airlines and a FTSE 100 company. BA's worldwide route network covers about 220 destinations in over 90 countries. The airline also carries freight and mail and ranks as one of the biggest cargo airlines in the world. The company is classed as the world's second largest international airline, but because its US competitors carry so many passengers on domestic flights, BA is ranked as the fifth biggest airline in the world in overall passenger carryings.

The airline's fleet is comprised of around 310 aircraft, which is one of the largest fleets in Europe.

BA Vs Airlines in the UK

Although the UK airlines market performed poorly in the 1998-2002 timeframe the market is predicted to recover looking forward to 2003, experiencing the third strongest growth in the region.

As the leading airline in the UK, British Airways worldwide network covers over 156 destinations in 75 countries and gained revenues of $12.1 billion in 2002. Recently BA signed a global marketing alliance with American Airlines and a number of other airlines. Named Oneworld it aims to become a transnational airline, and in its first phase will introduce more than 100 new destinations to the BA network later this year. In order to maintain its position as the UK's market leader the company has also established a highly developed Internet site.

BA Vs Global Airlines

Compare to Global airlines, British Airways still hold one of the strongest position in this sector. The airline industry has performed inconsistently over the last five years, with a 7% rise in value in 2000 followed by a fall of 5% in 2001. The fall was caused by the September 11 attacks impacting industry sales. However, since then the industry has started to recover, with passenger numbers slowly increasing and driving the market's value.

The global airline industry grew by 1.8% in 2003 to reach a value of $254 billion. Europe accounts for a further 29.4% of the industry's value, making it the second largest market globally (the largest market globally for the airline industry is the US). For the fiscal year ended March 2003, British airways generated revenues of Ј7,688 million (proximally $1.3 billion). This figure represented a decrease on the Ј8,340 million in revenues posted by the company for fiscal 2002. BA's total revenues can be split into four main revenue streams - scheduled passenger revenues, non-scheduled passenger revenues, cargo and other, each of which accounted for 85.1%, 0.6%, 6.3% and 8% of 2003 revenues respectively. The company's other activities include its range of aircraft maintenance, package holiday and airlines service offerings.

1.2 Competitors

Porters 'five forces' competition model

New Entrants

Threat of new entrants

Industry competitors

Suppliers Buyers

Bargaining power Intensity of rivalry Bargaining power

of suppliers of buyers

Substitutes Threat of substitutes

Source: Porter (1985)

British Airways PLC (BAY-LN) focuses on international and domestic scheduled and charter air services for the carriage of passengers, freight and mail. The Group's is globally allied and holds code share arrangements agreed with Finnair, Iberia and Cathay Pacific. In an attempt to compete backwards in order to better control competition.

Analysis of the Airline Industry

In order for a company to be able to compare itself with its rivals in terms of competition intensity and profitability, the five forces model can be used. This model is consisted of three 'horizontal' sources of competition these are the threat of substitutes, the threat of new entries and the competition among rivals. The other two 'vertical' sources of competition are the power of suppliers and also the power of buyers. These forces can be further grouped into the following areas:

Porter's Five Forces