Management/An Individual Report to the Management in BA (British Airways) term paper 41558

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Abstract

This paper aims to the role of Management in British Airways Company. In this paper, we will comment in summery on the specific information that was required for within British Airways to be able to have completed the budget for 2006-7. We will then comment briefly on the unforeseen events that occurred that would have disrupted the budgetary plans for 2006-7. Then in the light of this information we will evaluate briefly the results as published in the 2007 preliminary results, due to be published in web site in May 2007 and in the light of this analysis we will aim to the world press release to comment on the results for the year.

Specific information

"Passenger revenue" is initially recorded as a liability for sales in advance of carriage, with revenue from ticket sales recognised at the time that the Company provides the transportation. In respect of unused ticket revenue recognised, estimations are needed based on historical trends regarding liability for tickets sold but not yet processed, the timing and amount of tickets used for travel on other airlines and the amount of tickets sold that will not be used. These are used to determine the timing and amount of unused ticket revenue recognised. Changes to these estimation methods could have a material effect on the presentation of the financial results. Periodic evaluations are performed of the estimated liability for tickets sold but not yet processed. Any adjustments, which can be significant, are included in results of operations for the periods in which the evaluations are completed. These adjustments relate primarily to differences between the statistical estimation of certain revenue transactions and the related sales price as well as refunds, exchanges, interline transactions and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other

than the original sales price. These amounts have been generally consistent from year to year.

The Company�s "cargo" business is operated as a contribution centre. The majority of its cargo is carried in the holds of passenger aircraft, the balance on leased or part-chartered freighter aircraft where market conditions allow their deployment. This allows the maximisation the use of its scheduled route network to provide a worldwide cargo service. The management group utilises trucks to feed cargo to its major hubs in Europe and the United States.

"Revenue" is recognised when the transportation service is provided. Passenger ticket and cargo waybill sales, net of discounts, are recorded as current liabilities in the �sales in advance of carriage� account until recognised as revenue. Unused tickets are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and historical trends. Other revenue is recognised at the time the service is provided.

Commission costs are recognised at the same time as the revenue to which they relate and are charged to cost of sales.

"Employee benefits", including pensions and other post-retirement benefits (principally post-retirement healthcare benefits) are presented in these financial statements in accordance with IAS 19 - 'Employee Benefits'. For the Group's defined benefit plans, post-retirement obligations are measured at discounted present value whilst plan assets are measured at fair value at the balance sheet date. The cost of current service costs are recognised in the income statement so as to recognise the cost of providing the benefit on a straight line basis over the service lives of the employees using the projected unit credit method. Past service costs are recognised when the benefit has been given. The financing cost and expected return on plan assets are recognised within financing costs in the periods in which they arise. The accumulated effect of changes in estimates, changes in assumptions and deviations from actuarial assumptions (actuarial gains and losses) that are less than 10% of the higher of pension benefit obligations and pension plan assets at the beginning of the year are not recorded. When the accumulated effect is above 10% the excess amount is recognised in the income statement over the estimated average remaining service period. Amounts paid to defined contribution post-retirement schemes are recognised within the income statement when the payments fall due. Other employee benefits are recognised when the obligation exists for the future liability.

"Depreciation" is calculated to write off the cost, less the estimated residual value, on a straight-line basis. Changes to the Group�s policies relating to the revaluation of assets, estimation of useful lives, residual values or other policies could have a material effect on the presentation of the Group�s financial position and results of operations.

The amount included in the cost of tangible fixed assets represents the aggregate of the capital elements payable during the lease or hire purchase term. The corresponding obligation, reduced by the appropriate proportion of lease or hire purchase payments made, is included in creditors. The amount included in the cost of tangible fixed assets is depreciated on the basis described in the preceding paragraphs and the interest element of lease or hire purchase payments made is included in interest payable in the income statement. Total minimum payments, measured at inception, under all other lease arrangements, known as "operating leases", are charged to the income statement in equal annual amounts over the period of the lease. In respect of aircraft, certain operating lease arrangements allow the Group to terminate the leases after a limited initial period, normally 5 to 7 years, without further material financial obligations. In certain cases the Group is entitled to extend the initial lease period on pre-determined terms; such leases are described as extendible operating leases.

The estimated direct incremental cost of providing free redemption services, including British Airways' flights, in exchange for redemption of miles earned by members of the Group's 'Executive Club' is accrued as members of the scheme accumulate mileage. These costs are charged to "selling costs".

Certain statements included in this Report and Accounts may be forward-looking and may involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements include, without limitation, projections relating to results of operations and financial conditions and the Company's plans and objectives for future operations, including, without limitation, discussions of the Company�s business and financing plans, expected future revenues and expenditures and

divestments. All forward-looking statements in this report are based upon information known to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future

events or otherwise. It is not reasonably possible to itemise all of the many factors and specific events that could cause the Company�s forward-looking statements to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operating

in the global economy.

The commercial airline industry is highly competitive and the market for air travel has experienced, and will continue to experience, significant structural change. Further, the Group�s future performance is likely to continue to be subject to a variety of factors over which the Group itself has little or no control including, by way of example only, governmental regulation whether domestically within the United Kingdom, within the European Union or worldwide, fluctuations in the price of jet fuel, acts of terrorism, changes in economic conditions, the availability or otherwise of financing and fluctuations in currency and interest rates. The Group�s results may also be affected by information technology risks as well as by the uncertainties inherent in labour relations and the uncertainty of pension costs. There may well be other risks which emerge from time to time including war, changes in liquidity and capital resources and

restrictions in the availability and scope of insurance.

Certain business disruption risks

Loss of systems � infrastructure/data

The Group is substantially dependent on IT systems for delivery of its functions. It believes its IT systems and the systems provided by third parties to be reliable and well protected but they require regular updating and maintenance and are under constant threat from hackers/viruses.

Security

The Group believes its operations to be safe and secure but security matters have in the past and have the potential in the future to disrupt the business on temporary or longer term grounds.

Supplier failure

The Group is dependent on third parties for important aspects of its operation. It is essential that critical supplies should be maintained; if this were not so operations would be disrupted and the business and results would suffer.

Fleet grounding or restriction

The Group operates a number of aircraft types. An accident or discovered defect even where this applied to another airline, could ground significant portions or all of the fleet.

Insurance Market failure

After the events of September 11, 2001, there was a market failure of the airline insurance market in the UK. It is possible that a further failure could occur, either wholly or in part.

Constrained operating infrastructure

Most UK airports, and Heathrow in particular, are constrained and operating beyond their build capacity. This can impair operations and adversely affect the business and its results.

Health concerns, epidemics and pandemics

Epidemics (e.g. SARS) and pandemics as well as other health risks may occur and would be beyond the Group�s control. Health concerns are one of the factors that can adversely affect demand for air travel. For example, in the Spring of 2003, an outbreak of SARS caused concerns among many travellers about the spread of the disease and related health issues. This resulted in a decline in demand for certain of the Group�s routes, most notably in routes involving the Far East. Future health concerns that affect the demand for air travel generally, or the demand for air travel involving a geographic area, could have an adverse affect on the Group�s operations and financial results.

Loss of key buildings/airport infrastructure

Loss of access to or function of key infrastructure components such as terminal and hangar facilities would disrupt the business.

Evaluating the results

1. Profitability/Operating Margin

The Group achieved an operating margin of 8.3 per cent in financial year 2006, up from 7.2 per cent in 2005. This is still short of the rate of ten per cent that the Group has set itself as a target to deliver an adequate return to shareholders over the long term.

2. Customer Advocacy

This year�s results were 61 per cent Highly Recommend. This figure was heavily impacted by the disruption to our customer experience in August, 2006 resulting from the industrial action at Heathrow.

The key elements of the journey that need focus on to improve customer recommendation are the operational basics (especially punctuality and baggage delivery), providing a speedy departure experience through the terminal and providing a quality onboard experience, including from Cabin Crew, catering, cabin environment and in-flight entertainment.

3. Safety and Security

The target for safety and security is that 95 per cent of customers feel safe with the Company. Clearly the Company aims to be 100 per cent safe � no other target is acceptable. However, in setting targets for measuring the perception among people who fly, the Company has acknowledged that some passengers do not enjoy air travel, even if they are experienced or frequent flyers. External events beyond the control of the airline, such as terrorism and war, impact customers� perceptions of safety, as do events that we control, such as a strike or well-publicised disruption.

4. Respected Company

The target for �Respected Company� is that 80 per cent of community, social and environmental stakeholders respect the Company. The Company aims to be respected by these groups for the way in which it deals with them and with the issues affecting them. Research is conducted by an independent Market Research agency, Opinion Leader Research, with 100 community stakeholders from the following groups:

� Politics/Government,

� Policy and Non-profit organisations,

� the Media,

� Environment and sustainability groups,

� Local authorities and community groups around Heathrow,

� Groups representing minority interests,

� London and South East economic development organisations.

The research in August, 2006, concluded that 74 per cent of community stakeholders respect the Company. The follow on study in August, 2006-7 concluded that 83 per cent of our community stakeholders respect the Company.

5. Employee Motivation

The fifth and final �BA Way� goal for the year 2006/07 related to employee motivation. The target here is that 75 per cent of employees feel motivated to deliver the Company�s business goals. The review of the �BA Way� which was already underway at the time of this Report is likely to result in changes to this measure based on the new work carried out in conjunction with MORI.

6. Key Performance Indicators in Incentive Plans

For the year 2005/06 only, the annual bonus plan for senior executives also included performance against the Terminal 5 Transition Programme, known internally as �Fit for 5�, as a performance condition. After assessing performance on the hard measures and taking into account the progress made during the year, the Remuneration Committee judged the performance to be ten out of a possible 25.

The Company believes that its Key Performance Indicators must remain relevant to the needs of the business and they will therefore be subject to refinement from time to time in accordance with the needs of the business. As mentioned above, the �BA Way� is being reviewed and the Key Performance Indicators may be changed accordingly.

Below is a press release about the results of good management in BA.

"AIRLINE OF THE YEAR 2006 - RESULTS

British Airways has been announced as the 2006 Airline of the Year in the World Airline Awards. In second place is Qantas with the 2005 winner, Cathay Pacific, ranked in 3rd position for 2006.

BRITISH AIRWAYS Commercial Director, Martin George, said ... "We are delighted to have won the prestigious accolade of airline of the year. The World Airline Awards are judged by the people whose opinions we value the most - our customers. We thank them for their continued support of British Airways. The award demonstrates yet again that British Airways is offering the service our customers expect and considered among the best performing and popular airlines in the world. We will continue to invest in our people and products to offer the excellent service our customers have come to expect".

References

British Airways annual report, available at www.bashares.com

World Airline Awards, available at http://www.worldairlineawards.com/Awards-2006/AirlineYear-2006.htm

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