Accounting Project Analysis of the Aviation Industry
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1.0 Introduction
There are a wide variety of factors in the airline industry which affect companies within the industry. Companies have to deal with changes within the industry and external environment. The way they adapt to these changes can have a major effect on their profitability and eventual failure or success. This project will look at the key factors affecting the aviation industry and analyse five companies. The project shall focus on how the companies differ from each other and look at factors which make certain companies more successful than others. The report shall cover the rationale for the chosen industry and companies. Furthermore there will be an environmental scan of the industry and I will decide which ratios to use in order to determine which companies are more successful than others.
2.0 Rationale for Industry Choice
The airline industry is one of the biggest industries in the UK. From October 2007 to November 2008 there have been a total of 238,912,000 passengers flying from UK airports (CAA 2008). Over recent years there has been an increase in the number of airlines going into liquidation. Most recently XL Leisure, which was the UKs third largest travel operator, went into liquidation in the summer of 2008. This left tens of thousands of passengers stranded at home and abroad.
Since the start of the 21st century there have been many events which have affected the industry. According to Doganis (2006) the downturn which some airlines were feeling in 2000 turned into disaster in 2001. The attacks in the USA in September 2001 had affected the industry globally. This brought about a lot of changes in the way the general public flew. This crisis was followed by a major increase in the price of fuel in 2004. According to Doganis (2006) this had a major effect on airlines, some worse off than others. Many airlines lost millions of dollars, some collapsed and some had to be rescued by their governments.
I am a keen traveller and am constantly using different airlines to travel to different parts of the world. When asked to choose an industry to research I felt it best to research an industry which I am interested in. I had also been affected when XL airlines went into liquidation and was stranded in Egypt. Therefore the opportunity to analyse the industry is one which I believe I should take.
3.0 Rationale for Chosen Companies
British Airways PLC – The UKs largest international scheduled airline, taking off and landing at over 300 central destinations. Their main area of business is London Heathrow Airport, which is one of the busiest principal airports in the world.
easyJet PLC – Based at London Luton Airport it is one of the leading low cost airlines in Europe flying to over 250 different locations. Their aim is to be the best low fare airline in the world.
Flybe – One of Europes largest and most profitable airlines. Their business model is unique and differs from low cost airlines. They view themselves as a niche airline and fly over 470 flights each weekday.
Virgin Atlantic Airways Ltd – The UKs second largest long haul carrier. Its main base is at London Heathrow Airport and it flies over 6 million people to over 100 destinations.
Ryanair – was founded in 1985 by the Ryan family, flying a single route with one aircraft. They are now one of the biggest low cost airlines in the world. Their aim is to be the Wal-Mart of the airline industry and to never be beaten on price.
These companies that have been selected are the leading airline companies in the UK and Europe. I have decided to choose both low cost carriers and long haul carriers to provide a wide view of the market. The companies vary in size but in all are very similar. This will allow me to see why one company is performing better than the other, which is my aim from this project. Due to the size of the companies I should not have trouble obtaining information on them. This is a great advantage and will allow me to analyse them in great detail.
4.0 Prior Research (PEST Analysis)
There are a wide variety of factors which can influence certain companies within an industry. These factors can be external or internal. A PEST analysis can be used to analyse the external environment of an industry. It also allows users to look at certain factors which are affecting the industry and subsequently the companies within that industry. According to Sloman and Scutliffe (2004) PEST analysis is used by a large majority of businesses to review their environment and to help them create a positive approach to their business decisions. This therefore means that businesses can look at factors which are affecting their industry and from these factors they can then make business decisions which will lead the business forward. In order to conduct a PEST analysis for the airline industry it is imperative that research is undertaken.
4.1 Political
Political decisions taken by the government will no doubt have a direct effect on companies. Sloman and Scutliffe (2004) stated that these can be large decisions affecting businesses in general or smaller decisions affecting certain industries.
One of the major political factors which affected the airline industry was deregulation of the EU airline industry. The EU started to create a deregulatory aviation policy towards the end of the 80s. However complete liberalization of the industry was not fulfilled until 1993 (Schipper and Reitveld [n.d.]). Before this the industry was highly regulated mainly because governments wanted to provide protection to their own national flag carriers. The effect of liberalization was to minimise barriers to entry for new airlines and open up new routes. Due to this liberalization two companies have successfully exploited the market opportunities: Ryanair and easyJet.
Another major political factor facing the aviation industry is the expansion of airports and building of new runways. This is obviously directly connected to airlines as the building of new runways means that more flights can take off. Very recently Heathrow opened its new Terminal 5. This was a £4.3 billion project and is estimated to take an additional 35 million passengers per year (Heathrow Airport 2008). The government also plans further expansions at different airports. This is very important for airlines but at the same time also receiving a lot of negative press. All expansion means increased pollution at a time when most people are environmentally aware.
One major project which the government has approved is the building of a third runway at Heathrow Airport. However this has been met with huge criticism from environmentalists. They believe that the building