V

POLYTECHNIC OF NAMIBIA

SCHOOL OF MANAGEMENT SCIENCES

DEPARTMENT OF MARKETING AND LOGISTICS

MARKETING SECTION

STRATEGIC MARKETING MANAGEMENT: ANALYSIS ... & DECISION MAKING

BACHELOR OF MARKETING & HONOURS PROGRAMMES-21 BMRK & 08HMAR

COURSE CODE: SMG811S

NQF : 8

DATE: June 2015

DURATION: 3 Hours

MARKS:

EXAMINERS: Mr. V. Somosu & Ms. C. Chipeio

MODERATOR: Prof. A. Ghamsari

15r OPPORTUNITY QUESTION PAPER

(This Question Paper consists of 2 pages (front page included); this does not include the main case study and its appendices)

INSTRUCTIONS

Answer all questions and sections in this question paper

Use the case-study given to you earlier which is also provided herewith plus its appendices (35 pages in all) to this question paper as your guide to answer this paper

Be as precise as possible in your answer by going straight to the point.

Read each question very carefully for a proper understanding of it before attempting it.

The use of calculator is allowed

Please note that there is no box to think outside of!!

AN OPEN BOOK EXAMINATION!!! SMG8115151 OPPORTUNITY-EXAM-2015-QUESTION PAPER 2/2

CASE ANALYSIS --BA 100 MARKS

Question 1:

Using relevant theoretical framework/model (s), critically evaluate British Airways existing sources of competitive edge, core competences and value proposition. 30

Question 2:

From your pre-worked audit and SWOT analyses, critically assess 3 (three) strategic marketing options available to British airways in the context of key issues facing the industry, in order to maximise profitability and growth. 30

Question 3:

Recommend, with justifications, 1 (one) strategic option British Airways should adopt. 10

Question 4:

Critically evaluate 3 (three) organisational constraints and risks that may limit British Airways' ability to compete, and propose relevant strategies to deal with these constraints and risks. 18

(1.5 marks for each constraint (3) and risk (3) =9 and 1.5 marks for each relevant strategy to constraints (3) and risk (3) =9)

Question 5:

Calculate the comparative market strengths of the 2"d, 3rd and 4th largest UK /operators for the year 2012 (their relative market shares in terms of number of passengers). 12

(4 marks for each operator's comparative market strength)

Total paper marks

Best of Luck ANALYSIS AND DECISION Contents

CASE STUDY Background - The UK Airline Industry 8

British Airways 8 Candidate brief Vision and organisational culture 10 Scenario Strategy 11 You are a self-employed Marketing Consultant who has been hired by British Airways. Key trends facing the British airline industry 12 You have been asked by British Airways (BA) to undertake a strategic marketing audit to analyse both internal and external factors impacting the future of the organisation, Including Customer behaviours and preferences 13 consideration of core competences, competitive advantage and value creation. Changes in value proposition 14 You should also consider the changing nature of the airline industry and the key issues and risks that would impact upon BA in developing its future vision and strategy. External global issues 16

BA is seeking insights into how it can maximise profitability and growth and maintain its British Airways' main competitors 16 competitive position as a brand leader and successful innovator. You have been asked to consider how the organisation can work with its stakeholders to maximise opportunities. Risks to British Airways' and competitors' future performance 20 Consideration should be given to the organisation's financial position, its strategic risks, organisation risks and mitigating strategies to overcome risks. Appendices 22

Grade descriptors 40

Page 5 Page6 Appendices The UK Airline Industry

Background 1 Headline financial details for British Airways and competitors 22-23 Overall, the airlines industry continues to experience a financially uncertain period. Global 2 Passengers uplifted at UK airports, 2007- 2012 24 recession has reduced passenger demand - although there are promising signs of recent recovery and while costs have gone from representing 10% of an airline's operating 3 Passengers uplifted, by UK airport, 2007-12 25 costs just over a decade ago to nearer 35% now. 4 Most popular overseas travel destinations for UK residents, 2007 - 12 26 To survive, some smaller airlines have had to merge with financially solvent competitors, resulting in a much smaller marketplace. Taking just the US market as an example, ten 5 Purpose of flights taken over the past 12 months, April 2013 27 airlines controlled more than 90% of capacity in 2000, but by 2012 a 'Big Five' -largely created through mergers- now fly 85% of passengers. 6 Number of times flown in the last 12 months, April 2013 27 Airlines continue to cut flights to reduce capacity, especially on smaller aircraft. Other ways Destination regions, types of airline and classes of travel flown in the 7 28 airlines are ensuring they stay in the black are fare increases and ancillary - or 'add-on'- last 12 months, April 2013 charges like bag fees, where additional costs are added to the headline or advertised price. The good news for travellers is that there are fewer flight delays and cancellations. 8 Important factors in choosing an airline, April 2013 28

9 Likely incentives for choosing a particular airline regularly, April 2013 29 Many industry experts seem to be agreeing that changes in the number of airlines controlling the industry, fare increases, and capacity reductions that began in 2008 are not a Length of time people are prepared to spend travelling by budget brief phase, but rather perhaps new 'normals' that could remain for years to come. 10 30 airline, April 2013 British Airways 11 Agreement with attitudes towards air travel, April 2013 30 British Airways is the UK's airline and its largest, based on fleet size and number 12 British Airways Plc twelve month results 2012 31 of international flights. It is not, however, the largest based on total numbers of passengers flown - a title lost to easyJet in 2008. Since its inception, British Airways has been centred 13 British Airways Plc consolidated balance sheet 31-32 at its main hub at , with a second major hub at London . 14 British Airways Plc consolidated cash-flow statement 33-34 British Airways was launched as a state-owned company in 1974, with full privatisation 15 British Airways Plc consolidated 34-35 following in 1987. Its roots stretch back to the earliest years of commercial airlines, when four pioneer airlines - Handley Page Transport, British Marine Air Navigation Co Ltd, Daimler New uses of digital technology: BA uses new tech for outdoor Airways and Instone Air Line Ltd -joined together to form Limited, which 16 36 campaign began operations in 1924. The airline developed routes throughout the British Empire, from the UK to India, some parts of Africa and later to Australia. Introduction of new bigger planes: British Airways details A380 and 17 37 787 plans for 2014 In 1939, the UK government joined Imperial Airways together with British Airways- originally a collection of much smaller private aviation companies - to form the nationalised 18 Airports Commission reveals expansion shortlist 38-39 British Overseas Airways Corporation (BOAC). Further government rationalisation led to the ------merger of BOAC with (BEA) to form the single national carrier British Airways from 1 April 1974.

By the 1990s, following privatisation and the global impact of using the supersonic Concorde, British Airways had become the world's most profitable airline. However, the coming of budget airlines, a strong pound and the rising price of oil all took their toll, with British Airways' turnover and profitability dropping accordingly. In 2010, it was confirmed that British Airways and Airlines had agreed to merge, making the combined commercial airline - known as International Airlines Group (IAG) -the third largest in the world by revenue. The two airlines agreed to retain their separate brands and, at the time of the merger, the newly formed group had over 400 aircraft and flew to more than 200 destinations across the globe.

Page7 PageS British Aitways' strong brand image gives it a significant competitive advantage and has Fuel prices remain volatile and are likely to increase in the medium-to-long term. Kerosene helped drive higher sales growth in both domestic and international markets. However, jet fuel accounts for a major element of operational expenditure, so the fact that fuel prices intense competition remains a threat to its operating margins. are expected to rise from $12.7 per million British thermal units (btu) in 2009 to $23.7 per million btu in 2017, and $27.6 per million btu in 2030 can only threaten to impact seriously As well as being the UK's largest international scheduled airline, British Airways is one of the on British Airways' profitability and margins over the period. world's leading global airlines. It retains a carefully-built strong brand image, winning first place, for instance, in the 'Favourite Airline' category of 2012's Global Travel Awards. It has All airlines are subject to a variety of extensive regulatory and legal compliance also won recent British Travel Awards for best short-haul airline and best airline for requirements across the world. Additional laws and requirements, often connected with customer service. Such brand recognition allows British Aitways to charge higher premium governments' aspirations to environmental sustainability, remain likely, and in turn would prices than its competitors, and this supports relatively higher margins. impose increased obligations on British Aitways.

In 2012, British Aitways derived 44% of its revenues from the UK market, 20% from the Vision and organisational culture USA and Canada, 16% from continental , 10% from Africa, the and India, 7% from the Far East and Australasia and the remaining 3% from the rest of the British Aitways is now part of International Airlines Group (IAG), following its merger with Americas. Such diversity offers the company more routes to future revenue growth, while Iberia Airlines in 2010. IAG is one of the world's largest airline groups, with over 400 aircraft also reducing its exposure to risk in any particular market. flying to more than 200 destinatiqns and carrying more than 54 million passengers every ｹ･｡ｾ＠ · With its large unionised workforce, British Airways has found it hard to avoid regular conflicts over wage and labour issues. For instance, in 2010, the company faced its first In its 2012 Annual Report and Accounts, IAG describes its mission as: national strike since 1997, following a dispute over pay and conditions for its cabin crew. The dispute escalated as British Aitways withdrew staff travel concessions from workers who 'to win the customer through service and value, deliver higher retums to our shareholders, joined strike action, and began to sack or suspend crew members, including many union attract and develop the best people, provide a platform for future consolidation and retain representatives. Unite, the union representing the majority of the company's workforce, held the brands and cultures of the individual airlines which make up JAG. ' 22 days of strikes, resulting in losses to the company of over £150 million. The last phrase confirms that British Aitways and Iberia Airlines will continue as separate Later, in 2012, a group of non-UK based cabin crew accused the airline of discrimination customer-facing brands, despite operating under one company structure. IAG Chief over the withdrawal of travel concessions during the 2010 strikes. This group of 30 sought Executive Willie Walsh, in the same report, talks of the company's vision for the future: redress from British Aitways because they lived outside the UK and relied on discounted fares to commute into and out of Heathrow Airport. 'Our simple vision is to be a ｭｵｬｴｩＭｮ｡ｴｩｯｮ｡ｾ＠ multi-brand organisation. The combination of British Airways and Iberia is just the start, not the full ambition of the organisation and we Such actions disrupt operations and inevitably affect the reputation of British Aitways, believe we can add additional brands. That's the thinking behind our proposed acquisition of leaving the company incurring higher expenses to meet the expectations and demands of its **, a low cost brand that, as a third independently-run operation within the Group, workforce. can successfully add to our performance and add value for our shareholders. So it's a very simple vision and were determined to deliver on it We've made a good start and I'm very Following a period of stagnation, the UK airlines industry is forecast to grow by 13.2% optimistic we can continue to build on our progress to date in 2013.' between 2012 and 2016. Since the recent takeover of British Midland Limited (bmi) by British Airways' parent company IAG, the company now owns an additional 56 daily slots at (**Vueling was Spain's second largest airline, in which Iberia had a minority stake. IAG Heathrow, giving an excellent opportunity to respond to and accommodate this new growth. bought the remaining shares to become outright owner later in 2013.)

Similarly, the global industry has recovered well since being hit by recession in Pressures within the industry, coupled with British Airways' own consolidation adventure 2008. According to the World Tourism Organisation, international tourism arrivals grew by through the IAG initiative, have helped define a new organisational culture. Not only has it 4% in 2012, with a further 3-4% growth expected globally in 2013. Also, the global air been essential to create a leaner, flatter organisation (in management terms), but British freight sector is forecast to achieve fair growth in the period up to 2017. With its strong Aitways has seen an opportunity to mark itself out as an airline that promotes and delivers operational base and expertise, British Aitways is well positioned to benefit accordingly. distinctive high performance. Its 'Complete 2012' programme aimed to transform the way staff and suppliers interacted with each other, how they measured individual performance The airlines industry is likely to see continued intense competition - across many factors, and how they developed and rewarded talent. It also focused on achieving ambitious not just fares - and price discounting. British Aitways faces direct competition on all of its environmental targets and supporting communities 'in useful and imaginative ways'. routes as well as from pre-arranged, or 'charter'*, services and other modes of transport. A relatively small change in pricing or passenger traffic could have a disproportionate effect on the airline's operating and financial results.

• A 'charter' service is a flight that takes place outside normal schedules, usually through a hiring arrangement. Typically, tickets are not sold directly by the charter airline to the passengers, but by holiday companies who have chartered the flight.

Page9 Page 10 Strategy Many airlines, including British Airways, developed strategic partnerships and consolidation activity during 2012. A Joint Business Agreement with Japan Airlines Co. Ltd (JAL) With passenger numbers rising again and future trends looking more promising than in commenced in October 2012. The two airlines share revenue on applicable flights between recent years, British Airways was able to look back on 2012 with some satisfaction. It Japan and Europe, and there has been an expansion in codeshare arrangements (a completed the acquisition and integration of bmi, played a major role in showcasing the UK codeshare is when a flight operated by one airline is marketed by two or more airlines as to the world through the London Olympics, and saw customer satisfaction levels reach part of an agreement between them). Frequent flyers are reaping the benefits of the historically high levels. reciprocal loyalty schemes and better aligned schedules. New codeshare arrangements with British Airways acquired British Midland Limited (bmi) from Deutsche Lufthansa AG the Canadian carrier WestJet began in September 2012, allowing BA's customers to buy (Lufthansa) in April 2012 and completed its full integration into British Airways by the end of connecting services from key cities to Victoria, Edmonton and Ottawa. 2012 with minimal customer disruption. British Airways was able to operate 20 new routes The North Atlantic Joint Business Agreement with Iberia Uneas Aereas de Espaiia S.A from Heathrow for the winter 2012 season, with the coming years seeing opportunities to (Iberia) and celebrated its second anniversary in October 2012. British convert some of the former bmi slots from short-haul to long-haul operations. Airways has stated it will continue to deepen other partnerships through the extension of codeshare relationships and the development of joint businesses. The airline continues to The bmi acquisition saw a further 25 short- and mid-haul aircraft enter operations for British back the future development of the ' alliance', and in October 2012 sponsored the Airways, enabling the airline to grow its presence at Heathrow. Delivery of 12 Airbus A380s introduction of Qatar Airways to the alliance: and 24 787 Dreamliners to the fleet began in the summer of 2013. With the sustained high price of fuel, British Airways has paid considerable attention to Customer satisfaction improved in 2012, reflecting the airline's renewed attempts to develop managing controllable costs. The airline has prioritised short-haul improvements in its drive its business around customer expectations. Departure punctuality in 2012, a primary to secure a competitive cost base, such as implementing a transformation plan at Gatwick. measure, saw 55% of flights 'Ready to Go' being prepared for departure at three minutes During 2013 it continued to drive more revenue per flight through ancillary services, before the scheduled departure time. 79% of flights departed within 15 minutes of schedule. exploiting under-utilised assets such as Avios (a travel rewards programme for customers) and maximising the value from major supplier contracts. International Consolidated Airlines iPads were issued to more than 2,000 senior cabin crew, providing them with information Group S.A. (IAG, British Airways' parent company) has also committed to deliver €560 about customers' preferences across a whole range of areas, from special meal requests to million in synergies across the combined business within five years. onward travel plans. Furthermore, any customer service issues arising in the air could be relayed by cabin crew to ground-based colleagues in good time to allow action to be taken For many years, British Airways has been known for its approach to high-profile advertising, quickly to resolve any problems. perhaps the most famous example being 'The World's Favourite Airline' campaign launched in the 1980s. 'The Flower Duet' by Leo Delibes, together with the launch of the iconic 'Face' British Airways is investing £5 billion over five years in new aircraft, smarter cabins, elegant advertisement, became globally successful branding associations. The slogan was dropped lounges and new technologies, to make life more comfortable in the air and on the ground. in 2001 after Lufthansa overtook British Airways In terms of passenger numbers. The Flower A large-scale refurbishment programme of the long-haul fleet is underway, which includes Duet is still used by the airline, and has been through several different arrangements since new cabins and technology being fitted on-board eighteen of the airline's older Boeing 777- 1989. The most recent version of this melody was broadcast in 2007 with a new slogan: 200 aircraft, a refresh of fourteen Boeing 767s, and the installation of business class 'lie-flat' 'Upgrade to British Airways'. Other advertising slogans have included 'The World's Best beds in the seven Airbus A321s acquired from bmi. Airline', 'We'll Take More Care Of You', and 'Fly the Flag'.

World Traveller Plus customers now have a choice of meals from the Club World cabin, British Airways purchased the Internet domain ba.com in 2002 from previous owner Bell further enhancing the service customers receive in premium economy. Short-haul customers Atlantic, 'BA' being the company's acronym and its lATA Airline code. In 2011, British are enjoying new catering, with a focus on quality and choice. Customers flying to New York Airways launched its biggest advertising campaign in a decade, including a 90-second through Newark Airport have access to the new lounge which opened in 2012, modelled on cinematic advert celebrating the airline's ninety-year heritage and a new slogan 'To Fly. To the highly popular Galleries Lounge complexes in Terminal 5 at Heathrow. Serve'.

British Airways' sponsorship of the London 2012 Olympic and Paralympic Games provided Key trends facing the British airline industry the backdrop for a number of successful advertising and brand awareness campaigns. The airline flew more than 2,250 athletes from 28 countries to London, and helped more than Airline travel to and from the UK, in common with most other areas of national and 2,400 British athletes, and their coaching teams, to travel around the world to train, international economies, has been adversely affected by global recession since 2007/08. In compete and qualify. The London Games TV campaign saw 92% of British Airways staff say the six-year period between 2007 and 2012 overall passenger numbers declined, together they felt proud to work for British Airways having seen the advertisement. Engagement with with visits to most international destinations, and anticipated future growth rates have customers via social media also proved a success, with more than six million people slowed. International air travel has largely held its market share compared with trips by sea interacting with the advert by 'taking an aircraft down their own street'. The highest or through Eurotunnel, but more domestic travellers are driving or taking the train. Many UK awareness of the British Airways brand for five years was achieved as a result of the Games regional airports have handled fewer passengers compared with the relative stability at sponsorship, and the campaign delivered a 30% increase in people who were 'inclined to fly London Heathrow, still the country's biggest and busiest airport. Taxing and charging with British Airways'. regimes have been an issue, although these may be moderated under government regulation and legislation in future years.

Page 11 Page 12 The volume of passengers to fly from UK airports fell by 11.2% between 2007 and 2010, as Nearly six in ten took low-cost or budget flights. Just under one-half flew with full-service an immediate impact of the global economic recession. Despite recovering each year since airlines and nearly one quarter took a charter flight. By far the largest proportion (over 2011, passenger volumes in the early months of 2013 remained 4.6% below 2007 levels. A 90%) travelled in when flying. relatively static pattern was expected to continue through 2013 and into 2014, with UK economic recovery still uncertain and the Eurozone economy entering its sixth quarter of Whilst price was the dominant factor for those selecting a particular airline (78% said it was recession between January and March 2013. an important factor for them), flight times and locations of airports- both for departure and destination - were considered important factors by more than half of those who flew. Leaving domestic travel aside, all overseas destinations have seen a decline In numbers of travellers from the UK between 2007 and 2012. The sharpest drop has been in numbers Flyers have a number of preferred loyalty incentives, without any one option being dominant travelling to North America and what might be termed 'near-Europe'- the original 15 in their minds. The three most popular among flyers as a whole are the ability to have more members of the European Union, largely those nearest the UK in the west of the continent. seating choice, upgrades to a higher class of travel, and a free flight after a certain number Spain and continue to be by far the most popular destinations for UK air travellers, of trips. although both have seen sharp declines during the period. Interestingly, the Middle East appears to be one area of the world receiving slightly more visitors from the UK, with While low-cost airlines are the most popular overall, customers seem reluctant to extend numbers travelling to the United Arab Emirates and Pakistan showing a five-year increase of their no-frill tolerance into longer-haul travel. Large numbers (90%) will travel by budget 13.1% and 1.7% respectively. This general trend has left the market share of each of the airline for up to three hours, but for journeys of four hours or more the percentages fall off leading destinations relatively unchanged since 2007. rapidly. \

While air travel accounts for around four out of five overnight trips abroad from the UK, Research shows consumers divided on the question of whether to trade service for price. Six shorter journeys across the Channel have proved good business for other modes, especially in ten flyers say they do not mind a reduced service on-board if it makes the flight cheaper. Eurotunnel operators. Eurostar has built up an estimated market share of 80% of combined However, half would rather pay a little more for an inclusive ticket than for a budget flight. rail/passenger volumes on the London to / routes. Additional direct train routes from London to the Netherlands and are scheduled to start in 2016. Overall, some 41% of flyers feel that the air travel experience has got worse in recent years, while 42% say they are deterred from flying by the rising cost. London Heathrow is one of the few UK airports to have seen even modest passenger growth during the period 2007-12. Its 3.1% rise in numbers contrasts markedly with drops of Changes in value proposition 18.1% at , 22.6% at Newcastle and 51.6% at . While London's third airport, at Stansted, saw a similar decline in traffic of 26.5%, the overall trend is one of Holidays represent the largest segment of the UK outbound air travel market, accounting for consolidation at the country's largest city 'hub' airports, especially in London, and steep 64% of all air trips abroad in 2013, declining slightly from 66% in 2007. Business travel decline in the smaller regional 'spoke' centres. accounted for 12% of trips abroad by plane in 2012, again down slightly from 13% in 2007. While both have recovered slightly from the depths of recession, neither customer segment Perhaps the most striking trend affecting British Airways directly is the continued rise In is showing sustained recovery. By contrast, trips by air to visit family or friends abroad fell power and prominence across the whole market of 'low-cost' airlines such as easy Jet and 18% between 2008 and 2010, but recovered by 11% between 2010 and 2011. Many . While numbers travelling in such carriers rose by 56% between 2007 and 2012, 'full consumers view this segment as less discretionary than holiday travel and now appear to be service' airlines such as British Airways saw their passenger numbers fall by 5% over the making up for lost time, with many important family visits having been postponed during the same period. initial period of recession.

Customer behaviours and preferences The popularity of charter flights shows long term decline. The number of passengers choosing a charter flight dropped by 37% between 2007 and 2012. This forms part of a UK Recent research (April 2013) reveals the following aspects of airline customer behaviour, trend away from charter flights to independently-booked travel, accelerated by the sharp whilst also indicating current and developing trends in the market: reduction in capacity by UK tour operators that took place as the economic downturn began to bite in 2008/09. During the same period, and by contrast, scheduled passenger volumes Just over half of UK consumers flew in the 12 months ending in April 2013. Almost half flew only fell by 1%, a robust performance, given the economic context. on holiday; almost one in five to see friends or family, and around 1 in 12 flew on business. Perhaps unsurprisingly, proportions flying declined across the socio-economic categories, The march of the low-cost, no-frills airline has been remarkable. Between 2007 and 2012, with 68% of ABs (largely people in managerial and professional occupations) taking to the low-cost airlines increased their passenger numbers by 56%, compared with a 5% decline in skies, compared with just 34% of DEs (semi-skilled and unskilled workers, pensioners). numbers carried by full service airlines over the same period. easyJet accounts for most of this large increase in the volume carried by budget airlines. Most air travellers are occasional flyers. Over a third who flew abroad during the 12 months took just one return trip (most likely to be for a holiday). Around one third took three or In the longer term, according to UK Department for Transport data, the three largest budget more return flights during the year. airlines operating in the UK- easyJet, Ryanair and Flybe - carried 35% of all UK airport passengers, compared with just 10% in the year 2000. Over this period, the share of passengers at UK airports using British Airways fell slightly, from 21% to 19%.

Page 13 Page 14 The overall expansion of budget airlines as a whole conceals a mixed picture for individual outcome. Evidence also suggests that while those concerned say they are prepared to make airlines. Scale and consolidation have become striking features, in common with many changes to their daily life, different rules apply when they go on holiday. markets, as the sector has matured. At an international level some low-cost airlines have failed as high fuel prices and subdued demand have reduced company bottom lines. Flybe External global issues has been the most prominent casualty of the recession-affected downturn in air travel, while the two European giants - easy Jet and Ryanair- have used their size and strength to build Some global issues are not directly within the industry's control or even influence, but market share. continue to provide an important context for economic viability in the future.

Consumers are fairly evenly divided when it comes to the issue of trading off service for Firstly, there is the pressure on oil prices. Kerosene jet fuel is such a major constituent of price. As mentioned above, just over half say they do not mind reduced service if it means any airline's expenditure that even minor fluctuations in price have major implications. While cheaper tickets, but only a slightly smaller proportion say they would rather pay a little more world prices have been volatile in recent years, mainly due to the impact of global recession, for an inclusive ticket, one that includes checked-in bags and in-flight food. the long-term trend undoubtedly points upwards.

Those who say they are happy to tolerate poorer service for cheaper tickets show little Kerosene prices first plummeted in 2008, before recovering by mid-2011. As global positive attachment or loyalty to the low-cost airline brands. Only 28% of flyers agree with economic conditions have again deteriorated, pressure on oil prices has reduced. the statement 'I like the low-cost airline price structure', with 36% actively disagreeing. Nevertheless, the International Air Transport Association (lATA) still expected oil to account Almost three-quarters agree that 'budget airlines are not so cheap when you take into for 33% of global airline costs in 2013, compared with only 13% a decade earlier. Looking account all the hidden charges'. further ahead, the UK's Department for Trade expects oil prices to reach $123 per barrel by the year 2030. Those who are most likely to take advantage of low-cost flights are young people (especially men), either with a young family or no family. Flyers over 55 are the least enthusiastic. So In the UK, ongoing currency weakness sees the still trading against the euro while price is paramount for most travellers most of the time, a substantial proportion of at €1.20, some 20% lower than in pre-recessionary times before 2008. Sterling's weakness flyers - especially those with higher household incomes - are prepared to pay more if they is helping to depress demand for overseas leisure travel, but bolstering the appeal of the UK are convinced they will receive clear value for money. Business travellers are keen on the for inbound visitors. low-cost pricing structure, but are also more likely to say they would rather pay a little more for an Inclusive ticket and also to be able to fly at times that suit them. Carbon trading, an international response to concerns about the impact of greenhouse gas emissions on climate change, is still awaiting a global solution, which is bound to affect Those who fly most often are most likely to say that the flying experience has got worse. airlines' operations and profitability. The longer-term expectation is that costs and fares will Occasional flyers still enjoy air travel as part of their holiday adventure, although some will rise, given growing emerging market demand for oil and no realistically viable kerosene admit to finding the airport experience increasingly trying. In summary, the more often alternative on the horizon for many years. As the effects of climate change accumulate, people fly the more negative their experience. there will be growing regulatory and political pressures to make emissions trading work, which may lead to an increased market price of carbon. Airlines will also be under pressure Many older flyers yearn for tradition and nostalgia. They are not impressed with the decline to invest capital in more efficient aircraft: technology. in what they might call 'old-fashioned service', and indicate that they would tolerate slightly higher prices if features like in-flight entertainment, more legroom and in-flight meals were British Airways' main competitors brought back. They are clear that they do not want- and are certainly not prepared to pay for - luxury travel, but they may well show loyalty to the airlines able to offer more The UK airline market is dominated by three main operators: Ryanair, easyJet and British traditional features which their age-group used to take for granted. For them, it may make Airways. In 2012, these three carried 76 million, 51 million and 36 million passengers the difference between choosing one airline over another. respectively throughout their global operations. The next biggest carrier operating in the UK market - Thomson Airways - carried 11 million passengers globally, with a number of other Some 42% of flyers say 'the rising cost of flying puts me off travelling by air'. Female flyers operators carrying passenger numbers in the single millions. This clear domination is set to are more likely to be deterred than male flyers. Some 49% of flyers with children say they continue for the foreseeable future, sustained by intense competition in each segment of the are put off, compared to 38% of those without children. Flyers aged over 55 are also less market. likely than the 16-44 age group to be put off by rising costs. easyJet is the largest UK-based airline in terms of global passengers carried. It achieved Environmental concerns about flying are a worry for some, although they do not necessarily impressive growth across its network of 68% between 2007 and 2012, reaching a total of encourage them to fly less. In recent years surveys have revealed a fairly consistent picture 50.5 million passengers carried, 44% of this number being flown to or from the UK. Its of around a quarter of flyers expressing concern about the environmental impact of flying. greater expansion in the non-UK market is mirrored by Ryanair which - despite global They are unlikely to be cutting back significantly on flying, let alone stopping altogether, but expansion- saw a 10% drop in its UK traffic between 2008 and 2012. may be harbouring a level of guilt. Airlines offering lower emissions from their planes, for example, may have an opportunity to gain market share, although the evidence so far British Airways saw its global passenger numbers fall by 8% between 2007 and 2010, suggests that customers are reluctant to pay higher prices simply to guarantee this followed by an 11% increase in 2011 and a further 8% rise in 2012. This was partly due to the Integration into British Airways of British Midland's (bmi) Heathrow flights.

Page 15 Page 16 Jet2.com, a new low-cost, short-haul carrier, has expanded strongly in recent years, with market. This appears to be a tacit acknowledgement of Ryanair's continued strength. 55% growth in passengers between 2009 and 2012. easyJet is also looking to maintain its cost advantage, and ensure a disciplined use of capital through the sale and leaseback of aircraft. The rest of this section looks in more detail at British Airways' main competitors in the UK air travel market. Thomson Airways

Ryanair Thomson Airways has roots going back to 1962. It is the world's largest charter airline, offering scheduled and charter flights from the UK and Republic of Ireland to destinations The Irish airline Ryanair, which is based in , is the largest operator in the UK market. across Europe, Africa, Asia and North America. Launched in 1985 to fly between Waterford, Ireland, and London Gatwick, Ryanair today flies over 1,600 routes across 29 countries. Ryanair is also Europe's largest airline and the Thomson Airways has its origins in several predecessor airlines. Euravia, which was founded sixth largest in the world. in January 1962, was renamed Britannia Airways in December 1964. Orlon Airways, founded in 1979 by Horizon Holidays and later owned by the large brewing firm Bass Brewery and According to Ryanair's own Investor Relations material: InterContinental Hotels Group, was sold and merged into Britannia Airways in 1989. Britannia Airways was rebranded as Thomsonfly in May 2005. 'Ryanair's objective is to firmly establish itself as Europe's leading low-fares scheduled passenger airline through continued improvements and expanded offerings ofits low-fares The airline is a subsidiary of TUI Travel, formed by the merger of the travel division of TUI service. Ryanair aims to offer low fares that generate increased passenger traffic while AG and First Choice Holidays Plc in September 2007. The two companies' respective airlines, maintaining a continuous focus on cost-containment and operating efficiencies. ' Thomsonfly and First Choice Airways, were merged under the former's Air Operator's Certificate from May 2008, and were rebranded as Thomson Airways on 1 November 2008. Ryanair is looking to refresh and expand its fleet by a third by 2018, from 305 to 400 planes, by buying -800 jets. Ryanair has been frustrated by the European The airline carried 10.7 million passengers in 2012, making it the third-largest UK airline by Commission in its attempts to take over Irish rival , in which it already holds a total passengers, after easyJet and British Airways. 30% stake, on the grounds that it would risk damaging competition. Flybe Ryanair aims to grow towards 110 million passengers by March 2019 and achieve more than a 20% share of the European short-haul market over the same period. This new target Flybe was founded as European Airways in 1979 and rebranded as British European replaces a previous growth target of 100 million passengers, as Ryanair aims to step up its in 2000. The airline underwent a dramatic transformation in 2002 and was reborn as a low- annual growth rate to 7% a year. cost , Flybe. It took over BA Connect in 2007 to create Flybe Group.

The company has expanded to become the largest airline by passenger volume over the Flybe operates over 180 routes to 65 European airports, and is Europe's largest regional past 12 months in and Poland, and sees significant future opportunities in Germany, airline, carrying over seven million passengers during 2013. The Flybe Group is a public Scandinavia and Central Europe. company and employs around 2,600 people. easyjet In the UK, Flybe's largest base is Airport, with other large bases at , , and airports. It has a total of 14 crew and aircraft bases across the easyJet was founded in 1995 by Stelios Haji-Ioannou and is the largest UK-based carrier in , the and the . terms of UK and global passengers carried. easyJet operates 605 routes globally, including 340 from the UK. The airline made an operating loss of £34.3 million for the year ended March 2013, following a loss of £4.9 million in 2012. The company blamed a combination of a flat-lining UK easyJet Plc is listed on the London Stock Exchange and is a constituent of the FTSE 100 economy, high fuel costs, passenger taxes and the depreciation of sterling against the US Index. As of 7 March 2013, it employs over 8,000 people, based throughout Europe but dollar for these increased losses. In May 2013, Flybe sold its slots at Gatwick airport to mainly in the UK. easyJet for £20 million. easyJet has seen rapid expansion since its establishment in 1995, having grown through a combination of acquisitions and base openings, fuelled by consumer demand for low-cost air travel. The airline, along with subsidiary airline easyJet , now operates over 200 Monarch Airlines was founded in 1968 and operates scheduled and charter flights on behalf aircraft, mostly Airbus A319s. It has 23 bases across Europe, the largest being Gatwick. In of its own group brand, Cosmos Holidays, as well as other tour operators. The group's 2012, easyJet carried over 50 million passengers. It is the second-largest low-cost carrier in scheduled operations fly mainly to short-haul Mediterranean, canary Island and winter ski Europe, behind Ryanair. destinations from six UK bases, with total capacity in 2012/13 of 7.4 million seats.

One of easyJet's strategic objectives, reported in 2013, is the ambition to continue driving up demand to become and sustain a position as 'number 1 or 2' in the European short-haul

Page 17 Page 18 In its early days, Monarch operated with just two aircraft, but in the early 1970s the airline Risks to British Airways' and competitors' future performance began to meet the requirements of an evolving travel market by committing to an all-jet fleet. By 1972 it was carrying 500,000 passengers per year. The future of airport infrastructure and capacity is a hot topic in the UK at the moment. All airlines have a close interest in how this debate develops, although British Airways, because The advent of mass market independent travel saw Monarch launch its scheduled division of its style and prominence, has more to gain or lose than most. with increased routes in 1985. The Airbus A330 was added to the fleet in 1999, featuring a new Premium cabin and a range of upgraded passenger benefits, followed in 2001 by the The Davies Commission was set up by the UK government in 2012 to make launch of Monarch's first online booking tool. By 2007, online reservations had grown to recommendations on options for maintaining the UK's status as a global aviation hub. over 90% of total bookings. Headed by Sir Howard Davies, former businessman and Director of the London School of Economics, the commission presented its short-list of options in December 2013: adding a third runway at Heathrow; lengthening an existing runway at Heathrow; and constructing a new runway at Gatwick. They said they will 'look again' at the viability of a completely new Virgin Atlantic was founded in 1984 and is 51% owned by Sir 's Virgin airport to the east of London, but have ruled out expansion, in the short-to-medium term at Group, with the American company Delta Airlines owning the remaining 49%. The airline least, at any of the UK's regional 'spoke' airports, such as Birmingham. operates flights to 36, primarily long-haul, destinations from London's Heathrow and Gatwick airports. The Commission will produce its final recommendations by the summer of 2015. British Airways has been lobbying the Commission hard to back the case for extra hub capacity, In 2012, Virgin Atlantic carried 5.4 million passengers, making it the seventh-largest UK and to fully analyse the detail of all financial and economic costs. It considers that the case airline in terms of passenger volume. for extra hub airport capacity for the UK is overwhelming and that the increase is long overdue. This debate runs in parallel with concerns over whether the UK economy as a Virgin Atlantic has been a rival of British Airways since its inception, as British Airways had whole should build and develop mainly in London and the southeast, or whether more can been the only airline from the UK operating long-haul routes to destinations in North (and should) be done to promote economic development and diversity in the other regions America, the Caribbean, and the Far East since the late 1980s. This rivalry culminated in the of the UK. 'dirty tricks' affair of the mid-1990s, which saw British Airways settling out of court when its lawyers discovered the lengths to which the company had gone in trying to kill off Virgin New aviation taxes have been a significant factor both in airlines' expenditure and air travel Atlantic. British Airways had to pay a legal bill of up to £3 million, damages to Richard popularity. Since its introduction in the UK in 2006, Air Passenger Duty (APD) rates have Branson of £500,000, and a further £110,000 to his airline. Branson donated the proceeds been increased several times, most significantly in 2012, when they shot up by 8% across from the case to Virgin Atlantic staff. the board; in other years they have risen by at least the rate of inflation. The APD band structure has been criticised by many for being unfair and for having a In June 2006, however, a tip-off from Virgin Atlantic led US and UK competition authorities negative economic impact. The Caribbean Tourist Organisation, for example, complained to investigate alleged price-fixing between Virgin Atlantic and British Airways over passenger that travellers visiting the western were being charged at a lower rate than fuel surcharges. In August 2007, BA was fined £271 million by the UK Office of Fair Trading those visiting the Caribbean, even though the latter is nearer the UK. This was because APD (OFT) and the US Department of Justice; it could have been more, but the figure was rates are calculated between capital cities. During 2012, UK outbound trips to the Caribbean upheld in recognition of a guilty plea. Virgin Atlantic was not fined, as it was given immunity region decreased by 12%, compared with a 7% fall in trips to the US. Otherwise, the for reporting the cartel to regulators. evidence that APD rises are affecting demand is mixed.

Jet2.com The future of APD is unpredictable, although taxes once introduced rarely go away. With 42% of flyers saying they are put off air travel by rising costs, pressure to identify more Jet2.com is a subsidiary of Dart Group Plc, which also includes operator precise benefits and impacts of APD is likely to intensify. and distribution business Fowler Welch. ｔｨｾ＠ airline was founded in 1978 as commercial airline Express Air Services, which went on to become Channel Express in 1983. As well as APD, airlines in the UK have also had to contend with the regime of airport The company name was changed to Dart Group Plc in 1991 and listed on the London Stock charges. In April 2013, the Civil Aviation Authority (CAA) proposed that airline charges at Exchange, switching to the Alternative Investment Market in 2005. Heathrow should be capped at a lower rate than most of the industry was anticipating (RPI inflation minus 1.3% for the period 2014-19). A slightly higher, although still relatively Profits and passenger numbers for Jet2.com rose sharply between 2011 and 2012 as modest, increase is proposed for London's Gatwick airport. Jet2.com took advantage of the gap in the market created by the departure of .com (a subsidiary of bmi that shut down in 2012). In 2012, Jet2.com launched eight new routes The airline industry has welcomed the CAA's intervention, but argues that price reductions at for the winter 2012/13 and summer 2013 seasons. Heathrow should go further, citing a tripling of charges over the past decade which has made Heathrow less competitive with other hub airports, such as Paris, and .

As fuel costs and airport charges have mounted and passenger demand has slowed, many airlines - both full-service and budget- have turned to ancillary sales above and beyond the

Page 19 Page 20 basic fare, in order to generate revenue and maximise profits. These ancillary sales APPENDIX 1 represented 5.4% of global airline revenue in 2012, up from 4.8% in 2010. This figure rises to 7.2% of total revenue for traditional full-service airlines, and falls to 2. 9% for the low- Headline financial details for British Airways and competitors cost airlines. Ryanair Research shows that airlines are increasingly risking their reputations through imposition of 2011(mY 20127m) 2013 (m) %change perceived 'stealth charges'. These are a more negative description of the 'ancillary' charges Revenue (in €*) - 4.324.9 4.884.0 +12.9 described earlier. Almost three-quarters of all flyers in the UK agree that 'budget airtines Operating profit (in €) - 617.9 718.9 +16.2 aren't so cheap when you take into account all the hidden charges'. Pre-tax profit (in €) - 567.7 650.9 +14.7 Operating margin (%) - 14.3 14.7 +0.4% New legislation came into force in April2013, designed to stop the practice of'excessive' Number of passengers - 75.8 79.3 +4.6 card surcharging for online booking across a wide range of industries. Such charges must now be included in the headline price of the product. Staff numbers - 8.069.0 8 500.0 +5.3 Staff costs - 415.0 435.6 +5.0 The UK airline industry has been seen as one of the worst offenders in connection with this particular charge with, according to UK government figures, up to f350 million in card flybe payments charged to customers in 2010. Following an investigation by the Office of Fair ｾ＠ 2011(m) 20127m1 2o13 -ern) %change Trading (OFT), 12 airlines operating in the UK agreed to include credit card surcharges in Revenue (in £) - 615.3 614.3 -0.2 their headline prices. Operating profit (in £) - -4.9 -34.3 -600.0 Pre-tax profit (in f) - -6.2 -40.7 -454.0 Number of passengers - 7.6 7.6 - Staff costs - 85.4 90.3 +6.0

easyJet 2011(m) 2012 (m) 2013 (m} %change Revenue (in f) 3,452 3,854 - +11.6 Operating profit (in £) 269 331 - +23.0 Pre-tax profit (in £) 248 317 - +27.8 Number of passengers 54.5 58.4 - +7.2

IAG (British Airways) 2011(m) 2012 (m) 2013 (m) %change Revenue (in £) 9 987 10 827 - +8.4 Operating profit before exceptional 518 274 -47.1 items (in£) - Op_eratil!g margin(%) 5.2 2.5 - -2.7% Number of passengers 51.7 54.6 - +5.6 Staff costs 2 172 2 345 - +8.0

Thomson Airways 2011(m) 2012 (m) 2013 (m) %change Group revenue (in £) 14 687 14,460 - -1.5 Group operating profit (in £) 255 301 - +1.3 Pre-tax profit (in £) 144 201 - +39.6 Group operating margin (%) 1.7 2.1 - +0.3% Staff numbers 39,198 38,235 - -2.5 Staff costs 1,701 1,734 - +1.9

t Please note that the same yearly figures are not available for all carriers *Please apply the following conversions: 2011 £1 = €1.15; 2012 £1 = €1.15; 2013 £1 = €1.18 Source: HMRC

Page 21 Page22 Headline financial details for British Ailways and competitors continued APPENDIX 2

Thomas Cook Airlines Passengers uplifted at UK airports, 2007-2012 2011(m) 2012 (m) 2013 (m) %change Revenue (in £) 3,255.0 3 109.4 - -4.5 All passengers I All passengers All passengers Operating profit (in £) 34.1 12.7 - -62.8 ·uplifted uolifted uolifted·. ·· Profit margin(%) 1.0 0.4 - 0.4% International Domestic Total Number of passengers 7.8 6.6 - -15.4 (million) (million) (million) Staff numbers 17 227.0 18 066.0 - +4.9 2007 192.0 25.5 217.5 Staff costs 1,123.3 1,151.2 - +2.5 2008 189.8 24.3 214.1 Monarch Airlines 2009 176.3 22.4 198.7 2011(ml 2012(m) 2013 (m) %change 2010 172.7 20.4 193.1 Revenue (in e) 757.8 825.1 - +8.9 2011 181.4 20.3 201.7 Operating profit (in €) -54.1 -25.3 +53.2 2012 183.1 20.2 203.3 Pre-tax profit (in €) -70.2 -33.4 - +52.4 2013 (estimate) 185.3 20.0 205.3 Staff numbers 2,832 2 847 - +0.5 2014 (forecast) 187.4 19.8 207.2 Staff costs 120.3 168.8 - +40.3 2015 (forecast) 189.9 19.4 209.3 2016 (forecast) 192.4 18.9 211.3 Virgin Atlantic 2017 (forecast) 194.9 18.4 213.3 2011(m) 2012 (m) 2013_(m) %change ｾｯｲ･｣｡ｳｴＩ＠ 197.5 18.0 215.5 Revenue (in £) 2,271.3 2 402.1 - +5.8 OQ_erating p_rofit (in £1 9.7 -92.1 - -1049.5 Source: Mintel, adapted from Airlines- UK, July 2013 Pre-tax profit (in £) 0.7 -98.6 - -14185.7% OQ_erating margin _f%1 0.4 -- - Number of passengers 5.3 5.4 - +1.9 Staff numbers 7 643.0 8 145.0 - +6.6 Staff costs 270.1 298.4 - +10.5

Jet2.com 2011(m) 2012 (m) 2013_(m) %change Revenue (in £) 542.9 683.0 - +25.8 Operating profit (in £) 26.9 28.5 - +5.9 Pre-tax profit (in £) 26.2 28.1 - +7.3 Operating margin (%) 5.0 4.2 - -0.8% Number of passengers 3.4 4.3 - +26.5 Staff numbers 1507 1,957 - +29.9 Staff costs 104.2 123.4 ｾＱﾧＮＮＱ｟｟＠ ----

Source: Mintel, Airlines- UK, July 2013

§Please apply the following conversions: 2011 El = €1.15; 2012 El = €1.15; 2013 El = €1.18 Source: HMRC

Page 23 Page24 APPENDIX 3 APPENDIX 4

Passengers uplifted, by UK airport, 2007-2012 Most popular overseas travel destinations for UK residents, 2007-2012

Ofo ' 0/o change change 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 ｾＮ＠ 2011 2012 2007- 2007- 12 12 {000) (000) {000) (000) (000) {000) (000) {000) (000) (000) (000) (000) Heath row 67,852 66,907 65,907 65,745 69,391 69,983 3.1' Spain 13,869 13,819 11,582 10,383 10,654 11,110 -19.9 Gatwick 35,165 34,162 32,361 31,342 33,644 34 219 -2.7 France 11,201 10,855 9,764 9,058 8,932 8,781 -21.6 Manchester 21892 21063 18 630 17 663 18,807 19,654 -10.2 us 3,923 4,003 3,187 3,240 3,231 3,011 -23.2 Stansted 23,759 22 340 19 950 18,562 18,047 17,465 -26.5 Irish Republic 4,205 3,921 3,549 2,972 3,372 2,827 -32.8 Luton 9,919 10,174 9115 8,734 9,510 9,614 -3.1 Italy 3,569 3,372 2,610 2,248 2,334 2,630 -26.3 9,037 8,992 9,043 8,594 9,384 9,194 1.7 Germany 2,686 2,703 2,127 2,082 2,234 2,307 -14.1 Birmingham 9,134 9,577 9,093 8,564 8,608 8,916 -2.4 Portugal 2,177 2,531 1,809 1,867 1,940 1,900 -12.7 Glasgow 8,726 8135 7,213 6,522 6 858 7,150 -18.1 Netherlands 2,239 2,008 1,840 1,758 1,868 1,900 -15.1 5,884 6,229 5,615 5 723 5 768 5,_916 0.6 Greece 2,511 2,096 1,881 1,672 1,935 1,824 -27.3 (John Lennon) 5,463 5,330 4,879 5,008 5 247 4,459 -18.4 Beloium 1,870 1,787 1,392 1,370 1,454 1,664 -11.0 Newcastle 5,624 5,017 4,569 4,346 4,336 4,355 -22.6 Poland 1,552 1,578 1,554 1,443 1,446 1,573 1.4 Belfast International 5,236 5,223 4,536 4,011 4,102 4,312 -17.6 1,532 1,936 1,622 1,815 1,604 1,419 -7.4 East Midlands International 5,407 5,616 4,653 4,111 4,208 4,068 -24.8 Switzerland 1,194 1,158 870 890 846 865 -27.6 3 411 3,290 2,984 2,763 3,083 3 329 -2.4 1,275 1,279 981 882 934 821 -35.6 London Ci!Y_ 2 912 3,260 2,797 2,781 2,993 3,017 3.6 India 972 956 847 850 914 794 -18.3 Leeds Bradford 2,860 2,860 2,553 2,724 2,937 2,969 3.8 United Arab Emirates 513 651 549 499 554 580 13.1 Belfast City (Georoe Bestj 2187 2,571 2 622 2,740 2,397 2 246 2.7 696 800 709 600 515 512 -26.4 Southampton 1,965 1,946 1,789 1,734 1,762 1,693 -13.8 478 511 369 439 456 459 -3.9 Prestwick 2,421 2,414 1,817 1660 1,296 1,067 -55.9 Pakistan 409 404 394 430 362 416 1.7 Cardiff 2 094 1979 1625 1,398 1,208 1,013 -51.6 Egypt 510 664 749 671 516 407 -20.2 Top 20 total 57,381 57,033 48,385 45,170 46,102 45,801 -20.2 Source: ｍｩｮｴ･ｾ＠ Airlines- UK, July 2013 Total world 69,450 69,011 58,614 55,562 56,836 56,538 -18.6

Source: Office for National Statistics, ｍｩｮｴ･ｾ＠ Airlines- UK, July 2013

Page 25 Page 26 APPENDIX 5 APPENDIX 7

Purpose of flights taken over the past 12 months, April 2013 Destination regions, types of airline and classes of travel flown in the last 12 Base: 2,000 internet users aged 16+ months, April 2013 Base: 1,124 internet users aged 16+ who have flown in the last 12 months Any flight 5

Overseas flight to Europe

Holiday flight OVerseas flight beyond Europe

Business flight Domestic UK flight Flight to visit friends or family

Flight for other purposes Budget/low-cost flight (eg, easyJet, Ryanair) Scheduled full-service flight (eg, Br1tish Airways, Virgin Allantlc)

I have travelled l:1)t airline but not in the past 12 months Charter flight (eg, Thornson Airways, Thomas Cook Alrines) I have never travelled l:1)t airline

0 10 20 30 40 50 60 Economy ftight 91 % or respondents Premium economy flight

Flrsllbuslness class flight

0% 20% 40% 60% 60% 100% Source: Mintel, Airlines - UK, July 2013 % or respondents

Source: Mintel, Airlines - UK, July 2013 APPENDIX 6 APPENDIX 8 Number of times flown in the last 12 month, April 2013 Base: 1,124 internet users aged 16+ who have flown in the last 12 months Important factors in choosing an airline, April 2013 Base: 1,124 internet users aged 16+ who have flown in the last 12 months

I Price 78 I Flight times 54 Locations of departure/destination airports 53 Satisfactory experience in the past 31 No fees for checking in baggage 30 Onboard comfort 26 Being able to choose a seat 25 Quality of customer service 23 Food/drink included in ticket price 18 Quality of on board services Punctuality record ｾ＠ -17 .. - 15 Frequent flyernoyalty programme 9. Being able to sit away from childrenfbabies ...7 Environmental efficiency of the airline .. 7 Source: Mintel, Airlines - UK, July 2013 Availability of first/business class • 4 1--·······y······ 0 10 20 30 40 50 60 70 80 90 % of respondents

Source: Mintel, Airlines- UK, July 2013

Page27 Page 28 APPENDIX 9 APPENDIX 10

Likely incentives for choosing a particular airline regularly, April 2013 Length of time people are prepared to spend travelling by budget airline, April Base: 1,777 internet users aged 16+ who have flown in the past 2013 Base: 1,777 internet users aged 16+ who have flown in the past I I Upgrades to a higher class of travel 37 ｾＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭ I 120 Choice of seal 37 l ＱｯｯｲＭＭＭＭＭＭＭｾｾＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭ A free night alter flying X times with that airline 36 ｾ＠ Priority check-In/security check/boarding 34 ｾ＠ 80 ｴＭＭＭＭＭＭＭＭＭＭＭＭＭｾｾｾＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭﾭ I Extra baggage allowance 32 aw I ｾ＠ ｇｯｲＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭｾｾＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭ Fare discounts for frequent travellerstramilles 31 0 ｾ＠ ｾ＠ ｔＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭｾＭＭＭＭＭＭＭＭｾｾ＠ Use of VIP waiting lounge at airport - 21 0 Points awarded for other retail purchases In shops/online - Ｑｾ＠ ＲＰｲＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭＭｾｾｾＭＭＭＭｾ］］ＭＭ Premium dining on board 12 l 0 ＫＭＭＭＭＬＭＭＭＭｾＭＭＭＭｾＭＭＭＭｾＭＭＭＬＭＭＭＭＭｲＭＭＭＭｾＭＭＭＭｲＭＭＭｾＭＭＭＭｾ＠ Complimentary dining In restaurants in destinations 12 1+ hours 2+ hours 3+ hours 4+ hours 5+ hours 6+ hours 7+ hours 8+ hours 9+ hours 10+ hours I Complimentary tickets to concerts/sporting events In 11 destinations Source: ｍｩｮｴ･ｾ＠ Airlines - UK, July 2013 Discounts on luxury goods bought at airport 9 I Points awarded for using a specific hotel chain/car hire firm ｾＭＸ＠ I -1------+--+-- APPENDIX 11 10 15 20 25 30 35 40 % of respondents Agreement with attitudes towards air travel, April 2013 Base: 1,777 internet users aged 16+ who have flown in the past Source: ｍｩｮｴ･ｾ＠ Airlines- UK, July 2013 I I Budget airlines not so cheap in view of hidden charges I I Don\ mind reduced service if i! makes flight cheaper 60

Rather pay more for an inclusive ticket 50

Rat het pay more to fly at times that suit me 47 I Flying is an enjoyable part of the trip 44 I The rising cost of flying puts me off travelling by air 42

Air travel experience has got worse in recent years 41

I like the low-cost airline price structure 28 I Worry about environmental Impact 27 I Luxury is Important to me when flying 21

10 20 30 40 50 60 70 80 % of respondents

Source: ｍｩｮｴ･ｾ＠ Airlines- UK, July 2013

Page 29 Page30 APPENDIX 12 British Airways Plc consolidated balance sheet continued

As at 31 December 2012 2011 British Airways Plc twelve month results 2012 £million £million 12 months to 31 December Continuing operations 2012 2011 TOTAL CURRENT ASSETS AND RECEIVABLES 2,634 2,774 £million £million TOTAL ASSETS 11.837 11,369 Revenue 10 827 9,987 Operating profit before exceptional 274 518 SHAREHOLDERS'EQUrrY items Issued share capital 290 290 Operating profit 233 518 Share premium 937 937 (Loss)/profit before tax (139) 679 Other reserves 1.331 1,355 (Loss)/profit after tax (70) 672 TOTALSHAREHOLDERS'EOUrrY 2,558 2,582

Source: Adapted from British Airways Plc annual report and accounts 31 December 2012 NON-CONTROLLING INTERESTS 200 200

TOTAL EQUrrY 2,758 2,782 APPENDIX 13 NON-CURRENT LIABILffiES British Airways Plc consolidated balance sheet Interest-bearing long-term borrowings 3,226 3,358 As at 31 December 2012 2011 Employee benefit obligations 238 232 £million £million Provisions for deferred tax 721 778 NON-CURRENT ASSETS Other provisions 244 179 Property, plant and equipment: Derivative financial instruments 67 62 Fleet 5,909 5 765 Other long-term liabilities 185 295 Property 831 856 TOTAL NON-CURRENT LIABILffiES 4.681 4,904 Equipment 202 207 CURRENT LIABILffiES Intangibles: Current portion of long-term borrowings 466 385 Goodwill 40 40 Trade and other oavables 3 600 3 117 Landing rights 655 242 Derivative financial instruments 31 21 Emission allowances 39 12 Current tax payable 9 12 Software 85 53 Short-term provisions 292 148 TOTAL CURRENT LIABILffiES 4.398 3,683 Investments in associates 174 232 Available-for-sale financial assets 39 39 TOTAL EQUrrY AND LIABILffiES _l ---- 11,83u=:_ 11,369 Employee benefit assets 1,194 1100 Source: Extracted from British Airways Plc Annual Report and Accounts 31 December 2012 Derivative financial instruments 8 6 Other non-current assets 25 28

TOTAL NON-CURRENT ASSETS 9,201 8,580 NON-CURRENT ASSETS HELD FOR SALE 2 15

CURRENT ASSETS AND RECEIVABLES Inventories 117 139 Trade receivables 488 460 Other current assets 393 273 Derivative financial instruments 37 73 Other current interest-bearing_ deposits 1,118 1259

Cash and cash equivalents -- - 418 570 I

Page 31 Page 32 APPENDIX 14 British Airways Plc consolidated cash-flow statement continued British Airways Plc consolidated cash-flow statement For the year ended 31 December I 2012 I 2011 For the year ended 31 December 2012 2011 -1 £ million I £ million £million £million CONTINUING OPERATIONS DISCONTINUED OPERATIONS I I CASH FLOW FROM OPERATING ACITVillES Net cash flow used in discontinued operations 1 -{107) I Operating profit 233 518 Depreciation amortisation and impairment 720 683 Net decrease in cash and cash eauivalents I {143) I (255) Operating cash flow before working capital changes 953 1,201 Net foreign exchange differences I 541 46 Movement in inventories trade and other receivables 89 (113) Cash and cash equivalents at 1 January 1 570 I 779 Movement in trade and other payables and provisions 203 397 Cash payments to pensions schemes (net of service costs) (303) (351) CASH AND CASH EQUNALENTS AT 31 DECEMBER ｬ｟ｾｬＮｬ｟＠ 570 Payments in respect of restructuring (35) (11) Payments in settlement of competition investigation {60) (147) Source: Extracted from British Airways Plc Annual Report and Accounts 31 December 2012 Other non-cash movement 10 11 Cash generated from operations 857 987 APPENDIX 15

Interest paid (139) (147) British Airways Plc consolidated income statement Taxation {3) (4) For the year ended 31 December 2012 2011 NET CASH GENERATED FROM OPERATING ACTIVillES 715 836 £million £million

CASH FLOW USED IN INVESTING ACTIVillES CONTINUING OPERATIONS Acquisition of subsidiary, net of cash acquired (7) Traffic revenue Purchase of property, plant and equipment {702) (702 Passenger 9,499 8 721 Purchase of intangible assets (79) (67 Cargo 737 739 Purchase of shares in available-for-sale financial assets _(16 Loans made to related parties (92) (21 Other revenue 591 527 Repayment of loans from related parties 6 10 REVENUE 10,827 9 987! Proceeds from sale of non-current assets held for sale, property, 20 24 plant and equipment Employee costs 2.345 2153 Proceeds from sale of business acquired exclusively with a view 36 12 5 Restructurino to resale Depreciation, amortisation and impairment 720 683 Proceeds received from loan notes 2 4 Aircraft: operating lease costs 98 73 Interest received 23 28 Fuel, oil and emission costs 3,712 3 246 Decrease/(increase) in other current interest bearing deposits 141 (86) Engineering and other aircraft: costs 625 543 Landino fees and en route charaes 726 691 NET CASH USED IN INVESTING ACITVillES {683) (826) Handling charges, catering and other operating costs 1.213 1,052 Selling costs 466 436 CASH FLOW USED IN FINANCING ACTIVillES Currency differences {1) 13 Proceeds from long-term borrowings 430 236 Accommodation ground eauipment and IT costs 613 567 Repayments of borrowings (258) (188) TOTAL EXPENDITURE ON OPERATIONS BEFORE EXCEPTIONAL 10,553 9,469 Payment of finance lease liabilities {224) (296) ITEMS Issue of share capital 1 Distributions made to holders of perpetual securities (16) (18) OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS 274 518 Business combination costs {71) NET CASH FLOW USED IN FINANONG ACITVITIES (68) (265) Settlement of competition investigation 30

Net decrease in cash and cash equivalents from continuing (36) (255) operations

Page 33 Page 34 British Airways Plc consolidated income statement continued APPENDIX 16

For the year ended 31 December 2012 2011 BA uses new tech for outdoor campaign £million £million Marketing Week, 19 November 2013, by Branwell Johnson OPERATING PROFIT 233 518 British Airways (BA) has created an outdoor campaign using new technology to Gain on bargain purchase 58 interact with aircraFt flying overhead. Gains/(losses) on fuel derivatives not qualifying for hedge 8 (11) accounting BA is daiming the technology for the 'Magic of Flying' campaign is an "advertising first".The Finance costs (173) (161) ' advert, developed by the airline's global creative technology Ogilvy 12th Floor, aims to Finance income 25 32 remind people how magical flying can be. Net financing (expense)/income relating to pensions (215) 160 Retranslation credits on currency borrowings 5 2 The ads are located on digital billboards in Chiswick and Piccadilly and interact with aircraft Loss on sale of property, plant and equipment and investments (3) (3) in the sky thanks to custom built surveillance technology. The system tracks the aircraft and Share of post-tax (losses)/profits in associates accounted for interrupts the digital display just as it passes over the site, revealing the image of a child (66) (6) using the equity method pointing at the plane, accompanied by its flight number and destination it's arriving from. Revaluation of convertible bond derivative liability (10) 169 Net charge relating to available-for-sale financial assets (1) (21) For example the screen may read: 'It's the BA0234 from Los Angeles'. This will then be (LOSS)/PROFIT BEFORE TAX FROM CONTINUING OPERATIONS (139) 679 followed by a message relevant to that flight, such as 'Fly the new A380 to Los Angeles. Tax 69 (7) ba.com/lookup' or information on the lowest available fare or the temperature at the (LOSS)/PROFIT AFfER TAX FROM CONTINUING OPERATIONS (70} 672 destination.The destinations can also be updated immediately depending on changing focus DISCONTINUED OPERATIONS routes for the airline. The ad placement and execution is being managed by Clear Channel LOSS AFTER TAX FROM DISCONTINUED OPERATIONS (30) UK's premium digital brand Storm. (LOSS)/PROFIT FOR THE PERIOD (100) 672 British Airways head of marketing Abigail Comber says: "This is a first, not just for British Airways but for UK advertising. We hope it will create a real 'wow' and people will be Attributable to: reminded how amazing flying is and how accessible the world can be." Equity holders of the parent (116) 654 Non-controlling interest 16 18 BA is currently reviewing its lead agency roster with a decision expected soon. (100) 672 Parent company IAG has just raised its profit target by 12.5% for 2015 based on strong Source: Extracted from British Aitways Plc Annual Report and Accounts 31 December 2012 projections for BA.

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Introduction of new bigger planes Airports Commission reveals expansion shortlist

Air Transport World, 11 December 2013, by Victoria Moores BBC News online, 17 December 2013

British Airways details A380 and 787 plans for 2014 New runways at Heathrow and Gatwick are among the options that have been short-listed by the Airports Commission for expanding UK airport capacity. British Airways (BA) plans to deploy its Airbus A380s on its London Heathrow-Washington Dulles service from next year, while its Boeing 787s will be rolled out on Calgary, Chengdu, The three short-listed options include adding a third runway at Heathrow, lengthening an Hyderabad and Philadelphia routes. existing runway at Heathrow, and a new runway at Gatwick.

BA has taken delivery of three Airbus A380s, which currently serve Los Angeles and Hong The commission, led by businessman Sir Howard Davies, will also consider a new airport in Kong. Johannesburg will join BA's A380 network in February 2014, followed by Washington the Isle of Grain in north Kent**. Dulles from Sept. 1 next year. A final report is due by summer 2015. British Airways' 787 fleet now stands at four aircraft. These will debut on Hyderabad from March 30, Chengdu from May 5, Philadelphia from June 5 and Calgary from July 5. This will The commission has not shortlisted proposals for expanding Stansted or Birmingham, but take both Chengdu and Hyderabad to an all-787 service. BA began 787 long-haul operations said there was likely to be a case for considering them as "potential options" for any second this fall on services from Heathrow to Toronto and New York Newark. new runway by 2050. "We're receiving great customer feedback on our new aircraft so we're delighted to be able to roll them out across more of our network and hope our customers enjoy them on these Sir Howard was asked in 2012 to investigate the options for expanding the UK's aviation important Indian, Chinese and American routes. More destinations will follow as we will capacity and try to come up with a plan. receive 12 A380s and 24 787s over the next three years," BA head of UK and Ireland sales Richard Tarns said. He said the Commission's analysis showed one net additional runway was needed by 2030.

Next summer, British Airways will also step up frequencies on its Cape Town, Chengdu, "The capacity challenge is not yet critical, but it will become so if no action is taken soon," Haneda and Mexico City routes. Cape Town will switch from daily to !OX-weekly. Chengdu, he added. which launched in September, will go from 3X- to 5X-weekly from May 5. Tokyo Haneda will be re-timed and moved from SX-weekly to daily from May 6 and an extra frequency will be The Commission has short-listed the following proposals to investigate ahead of its final added on the Mexico City route, taking it to 6X-weekly from April 27. report:

A new runway at Gatwick Airport more than 3,000m in length

A new 3,500m runway at Heathrow Airport constructed to the north-west of the existing airport

An extension of Heathrow's existing northern runway to the west to at least 6,000m, enabling it to be used for both take-offs and landings

In other developments:

The commission has not short-listed the Isle of Grain option, but will look at it in the first half of 2014 and "will reach a view later next year on whether that option offers a credible proposal for consideration alongside the other shortlisted options"

Stansted and Birmingham expansion will not be taken forward at this stage, although they could be options for expansion in 2050

The Mayor of London, Boris Johnson, has said that putting a new runway at Heathrow would be a "catastrophe".

•• east of London

Page 37 Page38 Following the commission's report, Mr Johnson said he continued to support the creation of the Isle of Grain airport in north Kent.

"A new airport in the inner estuary is the only credible hub option left. By keeping it on the table, Davies is saying you have a choice - between a damaging U-turn or a radical new vision for expansion, n he said.

But supporters of Heathrow's expansion say it will be quicker and cheaper than other options and will help to maintain the UK as an international aviation hub.

Heathrow's owners submitted evidence to the commission arguing that a new runway could be in place by 2029, allowing 260,000 more flights.

Colin Matthews, Heathrow chief executive, told the BBC: "The case for Heathrow is strong. It's important that businesses can get around the globe to where economies are growing."

Heathrow is one of the world's busiest hub airports, handling 70 million passengers in 2012. A third of those travellers were transit passengers transferring to other flights.

Analysis

Richard Westcott BBC transport correspondent

There are three interesting elements of today's report: it's Heathrow-heavy; it hasn't written off the ambitious, expensive idea of building a new mega-airport on the other side of London in the Thames Estuary; and it misses off Stansted.

When I first took over the transport job, around two years ago, the government told me straight away that they would not expand Heathrow.

One of the first things the coalition did when it came to power was to cancel Labour plans for a third runway at the airport.

I've gone through my old notebooks and found this phrase written down, "dead and buried".

But after a great deal of lobbying from the airport's owners, other business leaders, airlines and the unions, as well as support from the Transport Select Committee, Heathrow is emerging once again, as a front-runner in the fight to get a new runway.

Sir Howard has set a deadline of 2030. But believe me, tpere are plenty in the industry- like Willie Walsh at British Airways, for example - who still don't think that in the end, anything will actually ever get built.

Source: htto:llwww.bbc. eo. uk/news/business-25402007

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