18 / British Airways 2008/09 Annual Report and Accounts Our business The global airline industry is fiercely competitive, heavily regulated and highly exposed to changes in customer behaviour and consumer confidence. The current economic environment presents a new challenge. We must concentrate our efforts to seize long-term opportunities for growth. British Airways 2008/09 Annual Report and Accounts / 19 The markets we operate in Overview Market overview already begun in earnest, forcing many Global premium airlines into financial loss. demand in key markets The pace of economic slowdown during Even at these lower levels, fuel remains North Atlantic the year was faster than most had +1.2% a much bigger proportion of airline costs predicted. What had first been expected -17.9% to be a downturn in key developed compared to a few years ago, and the Within Europe economies turned into a global recession prospect of renewed volatility in prices -9.5% remains a long-term concern. in the autumn of 2008. With record oil -24.1% and commodity prices, sterling collapse The most significant impact of the Within Far East and an unprecedented financial crisis all downturn has been on premium -6.6% striking at once, even those emerging passengers, with businesses looking to -26.3% economies that had been expected to cut back sharply on travel to save money. Europe – Far East go untouched by recession saw sharp Our business IATA’s latest figures show that global -2.8% declines in growth. premium traffic fell in 2008 by 2.8 per -20.3% In the UK, growth began slowing in the first cent. The rate of decline is increasing, and Europe – Middle East half of the year, whilst the US economy IATA has indicated that the year to date +6.9% went into recession in the last quarter. In decline for the first three months of 2009 -10.3% both economies, consumer and business was around 19 per cent. The rate of Total Market confidence plummeted due to rising decline varied across the world, with trans- -2.8% unemployment, uncertainty in the capital Pacific traffic and routes within Asia most -19.0% markets, a continuing squeeze on credit, severely hit. the erosion of household budgets and The impact on business travel is likely to 12 months to December 31, 2008 falling house prices. Growth also slowed continue for some time. A recent survey 3 months averaged to dramatically in many Asian economies. suggested that 47 per cent of businesses March 31, 2009 Government attempts – nationally and will take fewer trips in the year ahead. Source: IATA Corporate governanceCorporate Financial statements internationally – to halt the financial Individual customers are also looking to crisis through bank bailouts and credit make savings on travel, increasingly seen as guarantees staved off what might have an item of discretionary spend. Consumer been an even more serious collapse. confidence the world over has tumbled. Subsequent efforts to stimulate economic Though many customers continue to see “The airline industry acts activity are expected by most economists a first holiday as an essential rather than as an economic barometer. to take longer to take effect. a luxury, most are cutting back on second Like our competitors, It is hoped that these steps will kick-start and third holidays and short breaks. we feel the full force the US and UK economies which will For both business travellers and provide some economic growth in 2010. of falling confidence individuals, airline brands that are trusted quickly and, on this This should, in turn, provide some basis to be robust and reliable are more sought occasion, dramatically.” for a recovery in our own business. after in tough economic times. Customers seek assurance that their journeys will go Impact on the industry smoothly. If they travel less, each trip they The airline industry acts as an economic do make is all the more important. barometer. Like our competitors, we feel the full force of falling confidence quickly The downturn is also making customers and, on this occasion, dramatically. much more price sensitive. They are looking for value for money, demanding During the first half of the year, oil prices excellent levels of service and high-quality hit a record high of $146 a barrel, forcing standards at lower costs. Less loyal to up the fuel costs of all carriers to brands than in the past, they are now unprecedented levels and putting margins willing to try out new ones which offer real under enormous pressure. Although fuel value. This presents agile operators with an prices subsequently fell to about a third opportunity to attract new customers, but of that level, the onset of recession had 20 / British Airways 2008/09 Annual Report and Accounts The markets we operate in continued “Some 35 passenger and cargo carriers have either makes it vital that they keep offering value Taxation gone out of business for money, reliability and superior service. Governments are increasingly looking at aviation for additional tax revenues under or been absorbed into Customers are also making more informed the auspices of making airlines pay for other airlines.” choices. They have become more self- environmental costs. By March 2011, reliant, thanks to the proliferation of new APD in the UK will have increased by up to information channels such as the internet 210 per cent from current levels and the and mobile phones. They are using price EU will be looking to introduce a system comparison sites and seeking out personal of payment for carbon emissions. recommendations on service and quality before booking their trips. We expect this trend to increase during the downturn. Competition Metrotwin, our new online community, is In response to the worsening economic an example of how we are responding to conditions, the airline industry is in the this social media trend. The new website process of change in a number of areas. ‘twins’ London and New York and publishes recommendations of the best Consolidation places to visit in both cities. Metrotwin is Weaker customer demand coupled successfully attracting a young, affluent with record fuel prices, has sped up and influential audience. consolidation in the airline industry. Some 35 passenger and cargo carriers have either Corporate responsibility gone out of business or been absorbed into While recession is the overriding concern other airlines. In Europe, five independent for most customers, the environment airlines have been, or are in the process of and corporate responsibility remain very being, taken over by competitors. important issues to them. It is clear from research that those companies with a In an effort to protect their airline industry clear and open commitment to behave from the effects of the financial crisis and responsibly and to manage their global recession, some governments have environmental impact have a far greater resorted to bailout programmes. This has chance of building a trusted relationship been particularly true in a number of major with their customers. emerging markets, most notably China, India and Russia. Metrotwin, our new online community, is an example of how we are responding to social media trends. The new website ‘twins’ London and New York and publishes recommendations of the best places to visit in both cities. Metrotwin is successfully attracting a young, affluent and influential audience. British Airways 2008/09 Annual Report and Accounts / 21 For both business travellers and individuals, airline brands that are trusted to be robust and reliable are more sought after in tough economic times. Customers seek assurance Overview that their journeys will go smoothly. If they travel less, each trip they do make is all the more important. Our business Increased competition Longhaul market Most of the markets in which we operate Deregulation has had a significant impact are highly competitive. Levels of on our longhaul business. The first phase competition vary, route by route. On a of the EU-US Open Skies agreement has few international routes competition is altered the competitive landscape on restricted to national airlines and fares are transatlantic routes. While seat capacity regulated. At the other extreme there is in the summer of 2008 rose by just 3 per a free market for internal flights within cent, the new regime has provoked a sharp Europe allowing any European airline to transfer of capacity from Gatwick (down operate any route and set its own fares. 39 per cent) to Heathrow (up 19 per cent). Three airlines have introduced the new Four new US airlines have now won slots Airbus A380 at Heathrow Shorthaul market governanceCorporate Financial statements at Heathrow. There have also been new in 2008, with a total of On shorthaul routes, we face competition entrants from Africa and India. Air France 24 departures a week. in the air and on the ground. Train The aircraft offers them temporarily established a US service operators in the UK are taking a bigger the chance to enhance from Heathrow, at a time when our share of the air/rail travel markets, now their products. own OpenSkies subsidiary launched that infrastructure improvements have direct services to the US from Paris cut journey times on key lines such as the and Amsterdam. West Coast mainline. Eurostar overcame disruption caused by the tunnel fire and Three airlines have introduced the new carried 10 per cent more passengers in Airbus A380 at Heathrow in 2008, with 2008, at a time when demand for flights a total of 24 departures a week. The from London to Brussels and to Paris fell aircraft offers them the chance to enhance by 20 and 13 per cent, respectively. their products. Budget airlines are continuing to grow, but However, the economic downturn have switched their priorities to growth at wreaked havoc in two emerging sectors in continental airports.