High Street Woes

The Economist, July 28th 2001

It's not just the prices that are coming down on Britain's high streets: it's the share prices, profits and reputations of some of the biggest high-street retailers. Marks & Spencer faced angry shareholders at its annual meeting this month. Its chairman and chief executive, Luc Vandevelde, gave a warning that, after 12 consecutive quarters of falling sales, he could not promise that things would get better. M&S's clothing sales are falling at an estimated l0% year on year. Last month Boots, a chemist chain, reported a drop in profits and underlying sales, and barely growing margins. At Kingfisher, a retail conglomerate, Woolworths' profits have slumped.

Yet Britain's retailers should be booming. With interest rates low and wages rising, consumers are spending at a rate not seen in almost 15 years. In June, retail sales rose in real terms by 5.6% over the previous year. The past months have seen the fastest growth rate since the peak of the previous boom in the late 1980s.

So why are so many of Britain's iconic shops doing badly? Increased competition is one reason. More foreign retailers are entering Britain, attracted by a relatively cheap workforce, a strong economy and a fashion-conscious capital city. As America's Gap, Sweden's Hennes & Mauritz, Spain's Zara and, soon, Japan's Uniqlo expand out of their saturated home markets, they tend to target Britain as an early bridgehead. And they bring with them a global fashion sense, just-in-time manufacturing and economies of scale that home-grown retailers find hard to match.

As the foreigners attack on one side, the supermarkets attack on the other. Supermarkets are improving their non-food offerings. Asda, now owned by Wal-Mart, was the first to expand aggressively into areas like stationery, videos and CDs and clothes-with a fashion range designed by George Davis, the founder of Next. The supermarkets' huge volumes and smallish range enable them to undercut the general retailers on price. A survey in April by Goldman Sachs showed that Tesco was selling a basket of DIY goods for 46% less than average DIY retail prices, while prices at B&Q, a large DIY chain, were 58% higher than average.

Growing competition is showing up the weakness in some retailers' management. Many chains have over-expanded: just count the number of Boots stores along London's Oxford Street. But, as some of the nation's biggest employers, they are fearful of a public backlash if they close shops and fire people. The result is that, while sales have been increasing, profit margins are falling. Gross margins in the sector fell from 30.1% in 1994 to 26.5% in 2000.

The managers of British retailers seem ill equipped to deal with a more competitive environment. Traditionally, the most powerful people in retail - and the ones who rose to board level - came from the buying departments. According to Richard Hyman of Verdict, a British retailing consultancy, "Old-guard retailers are a victim of their own success. They are not equipped to deal with this new focus on the consumer."

Tesco, with its advanced supply chain systems and loyalty card, or Gap, where assistants with microphone headsets are in instant touch with the storeroom, make use of technologies that allow their backrooms to respond rapidly to what customers are buying in the front of the shop.

Not all Britain's high street retailers are badly managed. There are some exceptions, such as Next and French Connection. But as the economy starts to slow, plenty of British retailers should give a thought to clearing unwanted stock out of the boardroom as well as out of the store.

Supermarkets seek key to future growth

Adapted from an article by Andrew Smith and Geoffrey Randall, The Sunday Times, 29 August 1999

As the millennium approaches, Britain's big four supermarket groups have achieved a position that is in some ways enviable and in other ways open to criticism. Despite some ups and downs, they have been able to produce sales and profit growth over many years. They are world class in many aspects of their operations and leaders in some. Consumers are generally happy with what they offer. It is extremely difficult for any newcomer to take them on directly. Suitable sites for stores are now expensive and hard to find, and it is often difficult to get planning permission for development. The share prices of the companies make them too expensive for most predators within the industry with the notable exception of Wal-Mart, the large US based supermarket chain, as it has just proved with its acquisition of Asda.

But the future is not all rosy for the big supermarket groups. Indeed, they may have reached a plateau. There are distinct signs that we may be seeing them at the peak of their power and influence. Food sales are not growing rapidly and as a proportion of total consumer spending have dropped by more than 10% (to just over 10.5% of all spending) in the past decade, according to 1998 figures from the consultancy Verdict. They are likely to remain flat, showing that this is indeed a mature market. Overall profit margins have been slipping in recent years, partly because of the entry of discounters and partly because the rivalry between the big chains is bringing them into direct competition with each other.

Significantly, British supermarkets have made little impact abroad while large foreign competitors such as Carrefour, Ahold, Metro and Aldi have been successfully building international businesses. If these international groups achieve real economies of scale and scope, they will have a competitive advantage that is just as deadly as the British supermarkets developed against their smaller competitors at home.

As the supermarket chains increase their coverage nationwide, the distribution of goods has become an increasingly complex process. With stores covering the UK mainland and, increasingly, Northern Ireland and the Republic of Ireland, it is vital that supermarket chains utilise the most sophisticated and reliable supply-chain management methods. Increasingly, the supermarket chains are choosing to centralise their administrative activities and consolidate their supply-chain management. Sainsbury's has succeeded in reducing costs by £20m in the last few years, by improving its ordering and supply control systems.

The rise of the home shopping market has put pressure on the supermarket chains to deliver orders as quickly as possible. Marks & Spencer recently awarded a contract for its same-day delivery service to Exel Logistics Ltd. Sainsbury's bought back a distribution centre previously sold to food distributor, Christian Salvesen PLC, in an attempt to improve both service levels and stock accuracy. Sainsbury's also hired Martin White, from logistics and cash and carry company, Booker PLC, as Director of Logistics and Distribution, in order to improve both these features of the supply chain.

Food manufacturers comprise one of the most important groups of outside suppliers to the industry. These range in size from small-scale local manufacturers of specialist products to major multinational producers. The supermarket chains have immense buying power, owing to the economies of scale involved. As a result of consumer demands and the immense diversity of the product lines carried in their stores, the large supermarket chains are able to source and receive goods from around the globe.

The massive importance of own-brand product lines and private-label markets is crucial to the relationship between the supermarket chains and the manufacturers. The leading producers of own-brand goods in the UK, including Dalgety PLC and Associated Foods PLC, derive a large proportion of their business from manufacturing own-brand goods for the supermarket chains. Overseas companies, such as South African-based Spring Valley Foods, provide stores such as Marks & Spencer with retail packs of fruit within 4 days of the fruit being harvested.

The supermarkets have been criticised for their effects on society and are under investigation for allegedly monopolistic practices. They have reached a new stage: their existing strategies will allow them to continue on their current paths for a while, but there are many new challenges that they will have to meet in order to survive and grow. Some challenges are common to all while others apply to specific groups. In the short term - the next two to three years - the British groups must keep their focus on current operations while also working out their responses to the longer-term challenges and outlining a distinctive strategic vision for the global food-retailing market.

The current investigation by the UK competition authorities will not help them to concentrate on their business. They know from their own histories that each of them has, at some time, taken its eye off the ball and each has paid the penalty, usually for quite a few years, in below average financial results. In food at least, any gain by one company has to come from someone else. They cannot afford a price war (given the high capital intensity of the industry) but nor can they afford to appear to offer poorer value than their rivals.

The short-term challenges lie in fundamental retailing skills - making their space work for them, squeezing out costs while maintaining availability, improving quality while preserving profit margins at attractive prices, innovating in the total mix of products and services. Perhaps the greatest (and least familiar) challenge is to make their information technology deliver a better understanding of consumers and using this to improve marketing.

The longer-term challenges fall into three broad categories: competition, changing consumer demands and regulation. There are several issues the big supermarket groups must tackle. First, there is the lack of a truly distinctive personality. The chains may have persuaded themselves that they are genuinely differentiated but it is unlikely that most consumers would agree. The reader is invited to try this test. If you were brought blindfolded into any superstore stripped of overt identification, would you really be able to say what store you were in? Asda claims to offer “service with personality” but there is little evidence of this on the ground. How different, really, are Tesco and Sainsbury? Even the once-great Marks & Spencer is finding it increasingly difficult to show the differences between itself and leading rivals. Fresh food and ready-made meals are the battleground, but any service innovation can be copied - and usually is if it is successful. All the groups are reintroducing craft skills across their product range but none can claim a great advantage. Indeed, despite the development of on-the-premises bakeries and butchers, the present trend suggests greater unhappiness than ever before about the quality and safety of Britain's food.

Second, shopping for food is much the same as it was 10, 20 or even 30 years ago - it is self-service. The supermarkets transformed our shopping experience in the late 1960s. Since then, any changes have been at the margin. A modern superstore has more car parking, strives to be both emotionally warmer and physically more pleasant and has a wider range of products - but the essential shopping experience is not really very different from that of 10 years ago. It is clinical and unexciting and being in one shop is much the same as being in any other. For most shoppers, the weekly trip to the supermarket is acceptable but it is a chore. The impression is of a mature industry that has learned all the tricks, believes there is little objective difference between its companies, but remains determined to maintain its satisfactory trading position for as long as it can.

If this is true, it is a dangerous posture to take in any business but especially in one as well populated with global innovators as food retailing. The relationship between consumer and store is dangerously shallow and impersonal. The fact that all the supermarket groups now make a much more serious effort to listen to customers and react to their needs and wishes may take more time to penetrate. To date it has been a defensive kind of recognition, arrived at perhaps with an unhappy sense of inevitability. But the current players recognise these issues and are confronting them. Differentiating a service business is difficult at the best of times, as ideas cannot be copyrighted.

For Tesco, the challenge is to stay ahead. It must remain, if not all things to all people, attractive to all main segments. Its scale gives it the opportunity to do this, so it should not get caught if it stays humble and innovative enough to lead as well as to respond to consumer demands, using its still embryonic but growing information technology and marketing skills. Its international strategy is distinctly unproven, but there is at least a coherent philosophy behind its intentions; it has patently learned from past errors and its track record is improving. Tesco would be a hugely attractive ally for any big continental group that wished to enter Britain.

Sainsbury has an entirely different challenge. Having been leader for so long, then lost the plot a little (only a little, but that is all it takes), it has to summon up new drive. It fell behind in a whole range of innovations, notably loyalty cards, and must rediscover the business authority and certain feel for food-standards leadership that once motivated it. Sainsbury has an abundant need to insert warmth into its company as well as genuine innovation in what it offers consumers. Its international strategy, if it had one, is now in tatters and must he rebuilt. Its scale and its still formidable skills make it a powerful competitor and should keep it in touch. Once again its size makes it a worthwhile partner but it is not negotiating from strength to the same degree as Tesco.

Asda has the clearest positioning of the big groups but has to deliver on its promises from a tightly controlled cost and staff base. It will have to negotiate a clever course, making sure the discounters do not grow, but keeping close to its main rivals in pricing perception across the range. Asda is the most similar to Wal-Mart of any of the British retailers, a fact that cannot have been lost on the American company's management when they bought the chain.

Safeway has a strategy but has a mixed store base on which to operate. The revitalised Somerfield has some of the same location tactics (small to medium local stores) and threatens to overtake Safeway in sales unless the latter can speed up its climbing sales density. This means attracting more shoppers, and that entails promoting offers and competitive prices to the public. Targeting the same family shopper as Asda will not make it any easier. Safeway has always been willing to be the most innovative in shopping experience, and in principle related well to consumer requirements - self-scanning and crèches are recent examples - but it will need to keep innovating with the pressure now very much more on the level of results it can achieve in a tougher market. Survival will be a challenge.

Table 1: Retail Sales of Food in Supermarkets and Superstores at Current Prices (£m), 1993-1998

	1993	1994	1995	1996	1997	1998e
Sales (£m)	51,689	54,920	59,362	63,400	67,096	70,786

Note: figures include some sales through convenience stores and food halls

e = Key Note estimates

Source: Business Monitor SDM28/Key Note

Table 2: Leading Supermarket and Superstore Chains in the UK Food Market by Value (%), 1997

Tesco PLC	15.2
J Sainsbury PLC	12.6
Safeway PLC	7.8
ASDA Group PLC	7.2
Somerfield PLC/Kwik Save Stores Ltd	4.5
Marks & Spencer PLC†	3.1
Wm Morrison Supermarkets PLC	2.3
Iceland Group PLC	1.7
Waitrose Ltd	1.3
Others	44.3
Total	100.0

† = food sales only

Source: Company information/Key Note

Table 3: Leading UK Supermarket and Superstore Retailers by Number of Outlets, 1998

Somerfield PLC/Kwik Save Stores Ltd	1,400
Tesco PLC	568
Safeway PLC	500
J Sainsbury PLC	391
Marks & Spencer PLC †	285
Co-operative Wholesale Society Ltd	268
ASDA Group PLC	218
Gateway Foodmarkets Ltd	132
Aldi Stores Ltd	130
Waitrose Ltd	113
Netto Foodstores Ltd	113
Budgens PLC	108
Iceland Group PLC	108

† = food sales only

Source: Company information/Key Note

Table 4: Analysis of the UK Grocery Trade by Turnover (number of companies and %), 1998

Turnover (£000)	Number of Enterprises	%
1-49	1,390	6.0
50-99	4,365	18.7
100-249	10,040	43.0
250-499	4,735	20.3
500-999	1,840	7.9
1,000-4,999	820	3.5
5,000+	155	0.7
Total	23,345	†100.0

† = does not sum due to rounding

Source: Business Monitor PA1003 — Size Analysis of UK Businesses

Table 5: Form of Transport Used to Travel to Regular Grocery

Purchasing Point (000 and % of adults), 1998

Form of Transport	000	%
Car	31,985	74.2
Bus	3,443	8.0
Train	113	0.3
Bicycle, motorcycle, moped	473	1.1
Walk	5,732	13.3

Source: Target Group Index, © BMRB International, 1998

Table 6: Forecast Sales by Supermarkets and Superstores (£m), 1999-2002

	1999	2000	2001	2002
Sales (£m)	74,326	78,042	82,724	87,274

Source: Key Note estimates

Table 7: Consumer Choice of Supermarket by Social Grade (% of adults), 1998

`At which, if any, of the following supermarkets do you shop for groceries on a regular basis?'

Social Grade	AB	C1	C2	D	E
Tesco	52	44	40	37	36
Sainsbury's	52	39	38	29	32
ASDA	22	30	29	38	20
Marks & Spencer	31	30	27	17	19
Safeway	24	28	24	23	17
Iceland	14	19	24	35	28
Co-op	19	14	20	25	20
Somerfield	10	20	16	16	17
Kwik Save	9	10	20	23	26
Wm Morrison	11	8	14	20	9
Aldi	4	7	12	15	11
Waitrose	18	9	5	2	5

Base: 1,015 adults aged 16+

Source: BMRB Access

Laura Ashley

The Early Days

Laura & Bernard Ashley's career in business began in the early 1950s with the design and printing of tea towels and scarves. Early success led to the formation of Ashley Mountney Ltd., which supplied a variety of printed fabric to departmental stores and even exported a small quantity of fabric abroad.

The Ashleys decided to move to Wales in 1960 and established a base at Carno in Powys. Initially they continued to produce printed fabrics using a variety of purpose built innovative machinery adapted by Bernard himself. By 1966 they company had a staff of 19 and an annual turnover of approx. £50,000. It was around this time that Laura Ashley designed her first garments. Initially these were created as a means of displaying the versatility of their designs and fabrics. The success of these items encouraged the development of company and the move in to clothing and fashion.

The company opened their first retail outlet in 1968; within two years the company had withdrawn from their wholesale activities and were concentrating on producing goods for sale in their own shops. The following years saw the retail side of the company expand throughout the United Kingdom and in to Europe, with the opening, in 1973/4, of shops in Geneva, Paris, Amsterdam and Dusseldorf. By the end of the decade the company had a total of 70 shops world-wide and a turnover of over £25 million.

The expansion of the retail portion of the company was supported by an increase in the productive capacity. The factory in Carno was expanded and a number of "making -up" facilities were opened close by. A production facility was opened in Helmond in the Netherlands to meet the demands from Europe.

The early success of the company was based on the popularity of its designs. The philosophy of the company's designs was based on the work of Laura Ashley herself. The floral designs and prints were said to evoke traditional English country values and appealed to customer's lifestyles. The clothing collections were seen as romantic and feminine. Laura Ashley was deeply involved in the creation of designs and the training of the companies wider design team. Despite her sudden accidental death in 1985, her philosophy remained central to the company's future activities. Shortly before her death Nick Ashley, her son, took over as Design Director.

When the company moved in to clothing /fashion retailing it did not fully abandon its past. It retained a home furnishings section whose product range included initially furnishings fabrics and wallpaper but which eventually included bed linen, furniture, tiles and lighting. These were designed to provide customers with a co-ordinated lifestyle concept.

It was estimated that before 1985 only 15% of sales were produced outside the company or their direct sub contractors and these were mainly items relating to home furnishings such as ceramic tiles. The company remained involved at all stages of the manufacturing process of clothing, from the "greige" cloth stage to the finished garment. Most of the production remained in Mid Wales close to the company headquarters at Carno.

The company had rationalised its warehousing and distribution system by the end of 1985, taking advantage of modern computer systems to control stock levels. The company had installed electronic point of sales technology (EPOS) in their retail outlets, which linked to central warehouses. In the UK these were situated in the Carno/Newton region of Mid Wales, it was from here all UK shops and those on Continental were serviced using the company's own fleet of lorries. Clothing for the North American market was distributed once per week by airfreight.

1985-1990

The death of Laura Ashley in 1985 at the age of 60 a few before the company was due to be floated on the Stock Exchange was a tragedy for her family and had an incalculable effect on the business. She was perceived by the outside world as being at the heart of the design philosophy that had been the source of the company's success in the late 1970s and early 1980s. However the flotation proceeded as planned and was a great success; the offer was oversubscribed 34 times and valued the company at £270 million despite the misgivings of a number of analysts who felt that there were signs of under-performance in Europe and a lack of business focus.

With the cash raised by the flotation the company began a series of acquisitions to broaden the range of products. These included retailers of leather goods, knitwear, outdoor clothing and perfumes. The rationale behind these acquisitions was that they could be marketed as extensions of the Laura Ashley brand and had the potential for future international expansion. In 1989 the company purchased a home furnishing company based in the US.

The company also began to invest heavily in its Welsh factories with a new textile factory, a vinyl wallpaper factory and computerisation of the original Carno factory to increase productivity.

During this period the company also pursued an aggressive expansion policy in the number and range of its retail outlets. Between 1986 and 1991 the number of outlets in the UK and Ireland increased from 87 to 182. By early 1991 there were over 500 outlets throughout the world with growth in continental Europe, North America, Australia and Japan. The mail order business also increased rapidly, more than doubling in volume between 1987 and 1990.

1989-1991

By 1989 Britain was facing a serious economic recession. High interest rates set to protect the Sterling exchange rate created a virtual standstill in the housing and construction industries. Many well-known clothing and furnishing retailers were hit hard by falling profits. Laura Ashley itself reported falling profits in January 1989 and a loss in January 1990. The company was faced with rising interest costs and exceptional costs. Delivery problems were causing major concern. The 1989 winter collection arrived in American shops too late and prices had to be cut in order to shift stock. There was also growing evidence that the core design style of the company was no longer as attractive to customers.

The severe cash crisis in 1990 was averted by a number of actions:

• the company's banks agreed to extend their loans

• the sale of several of the acquisitions

• the closure of some of the Welsh factories to reduce costs

• investment of £45m by the Japanese retailing giant Aeon in return for a 15% stake in the company.

Chief Executive John James left towards the end of 1990 after admitting that the company's management had been over-stretched by the rapid expansion since 1985.

By the end of 1991 the company was reporting falling sales as a result of the divestments despite attempts to modernise the designs. The overall economic conditions were still very uncertain but the company's cash position had stabilised.

1991-1995

The arrival of Jim Maxmin as Chief Executive in September 1991 brought a new style of management to the company. Maxmin was an American and had held senior positions in several large retail business - none of which had anything to do with clothing or furniture.

Maxmin carried out a thorough review of the Company including the first serious market research for many years. He came to the conclusion that the bureaucratic and fragmented structure of the business was preventing the company from having a clear strategy. He expressed the view that there had to be global marketing in order to focus clearly on the international brand image.

Maxmin simplified the structure of the company, removing 100 management jobs, introduced incentive schemes and encouraged managers to actually work at Laura Ashley shops for at least one day a month. He spent a considerable amount of time visiting all parts of the business to communicate his views to all employees. He also introduced a management development programme as well as changing the recruitment and training of store staff.

The company's rapid international expansion had created logistics problems because the IT systems and distribution had failed to keep pace with the changes required. This was the root cause of the stock problems mentioned earlier. The investment required to modernise systems was beyond the company's resources but Maxmin found a solution through the creation of an alliance with Federal Express Business Logistics. FedEx was a global carrier with modern transport and IT systems designed to offer rapid and cost effective distribution for intentional business such as Laura Ashley. As well as cost savings and improved delivery the alliance, created in early 1992, would permit Laura Ashley to concentrate on its core competencies.

The company reported a return to profit in January 1992 before exceptional items and a modest profit in January 1993. Although the company's position had stabilised stock and store management problems in the USA were still holding back the recovery. Problems with the US stores continued in 1993 with a major loss of trading due to severe weather. Once again stock could only be shifted by discounting. The heavy dependence of the company on its US stores meant that their under-performance severely affected the results of the whole business.

By late 1993 relations between Jim Maxmin and Bernard Ashley had broken down, partly due to problems in the US but also because Maxmin discovered that Ashley had approached Goldmann Sachs to sell the business behind his back. Although Ashley had reduced the family's shareholding to less than 50% and had retired as Chairman he still represented the largest shareholding in the company. Maxmin resigned in April 1994.

Between April 1994 and June 1995 the company began severe cost cutting and rationalisation. In January 1995 the company reported a loss of £30.6m including £34.4m of restructuring charges. With its share price less than half that at the 1985 float the company was perceived as being vulnerable to a hostile take-over.

1995-1997

Ann Iverson joined Laura Ashley as a non-executive director in early 1995. She had come to Britain from America in 1990 where she had worked for Bloomingdales, a retail group. She was credited with the turnaround of Mothercare and Bhs, both part of the Storehouse group, the UK retailer. She was offered the position of Chief Executive in May 1995 with the appointment being formally announced in June 1995.

The contrast between the demure, puritanical Laura Ashley and the glamorous, thrice divorced Iverson was remarkable. Newspaper articles reported how Iverson had been photographed for Vogue magazine wearing “a black leather coat and little else”. However her retailing background and strong personality impressed many within the company and the City. She was hired on a contract that made her the highest paid woman in the UK:

• a £450,000 salary

• a “golden handshake” of £350,000

• £50,000 professional fees and relocation costs

• a £2,000 a week housing allowance

• use of a £40,000 company car and driver

• an £85,000 yearly contribution to her pension

• generous stock options.

Ann Iverson's first review of the company confirmed the value of the brand and set out a plan for recovery over the following three years. While attention would be given to streamlining the product range and seeking efficiencies in manufacturing and distribution the main emphasis would be on developing the brand particularly in the USA and UK.

Over the following months a top designer and her team joined the company to revamp the company's image and attract back the customers that had deserted Laura Ashley for more fashionable brands. The target customer was around 35 years old. The average store size was increased, resulting in 25% more floor space in North America and 8% more in the UK. Iverson also planned to expand sales of home furnishings to two-thirds of total sales.

Although minor rationalisation of manufacturing was carried out it was announced that the company would still rely for the Welsh plant for around 25% of its products but cost savings were expected from the consolidation of the distribution alliance with Federal Express.

Iverson's management style was very forceful, as revealed in a BBC documentary filmed in 1996/7. She took personal charge of the launch of the company's new design range and was very demanding from staff. Her “retail, detail” philosophy, shown clearly in her fussing over things like the location of price tags on products, seemed at odds with her position as a highly paid chief executive of a large company. On the other hand these characteristics have been shown by all of the great retailers from John Sainsbury to Sam Walton.

The results to January 1996 showed an encouraging return to profit - indeed the highest profit since 1989. However, in announcing these results Ann Iverson said that delays in the launch of the 1996 home furnishing range in the US had caused a fall in sales for the first part of the year. Nevertheless press comment was largely favourable with many analysts believing that the company had “fallen into good retail hands”. The share price had risen from a low of 61p in April 1995 to over 130p in April 1996, mainly in the hope of even better performance in the future.

However one year later, in April 1997, the company issued a profits warning. Sales, particularly in the US, were not up to expectations and the products could only be shifted with heavy price discounts. The low sales has also resulted in high stocks. In addition deliveries of product that was being demanded were late so customers were going elsewhere. Despite Iverson's focus on “retail, detail”, the company was still making fundamental retailing mistakes. Two further profit warnings were issued over the next few months and Iverson admitted that the company had expanded “too far, too fast”.

By this time investor confidence in the company had declined and relations between Ann Iverson and Sir Bernard Ashley were said to be difficult. Ashley still held around a third of the company's shares and despite not holding an executive position was still a huge influence on decision-making. David Hoare, a management consultant, joined the company in September 1997 in the newly created post of chief operating officer, officially to stabilise the company's position which was threatening to run out of control. There was little surprise when Iverson's resignation was announced in November 1997, with Hoare taking over as chief executive.

1997-1999

Key events in Laura Ashley's recent history include:

December 1997	Banks agree rescue package and extend loans
April 1998	Loss of £49.3m announced including £23.8m charge for US restructuring. Malaysian United Industries (MUI) acquire 40% stake, injecting £44m cash
June 1998	Sir Bernard Ashley resigns as a non-executive director
August 1998	David Hoare resigns and is replaced by Victoria Egan who is associated with MUI
November 1998	Laura Ashley shuts two UK factories
January 1999	Pat Robertson, the American evangelist, joins LA as non-executive director. Victoria Egan resigns - replaced by MUI representative Kwan Chong Ng.
April 1999	Sale of US Division to management for $1. Move forced by banks. Losses of £31.9m announced. Rescue rights issue underwritten by MUI. Following poor take-up of issue MUI now owns 56% of company.
June 1999	Pat Robertson resigns from LA.
September 1999	The company announces the closure of its Welsh clothing factories and advanced talks to sell its two remaining home furnishing plants.
April 2000	Improved results to January 2000; sales fall from £288 to £247m, losses fall from £28.5 to £4.1m.
June 2000	Company announces that it has been unable to sell the home furnishing plants and has decided to retain them as there has been an improvement in demand. The company intends to sell its products on the internet from the autumn.
September 2000	Half-year results indicate a profit of £1.7m compared to a loss of £7m in the same period the previous year. The company intends to open up to 100 furnishing stores.

Table 1: Laura Ashley Chairmen

1953-1992	Bernard Ashley
1993-1996	Hugh Blakeway Webb
1996-1998	John Thornton
1998-Present	Dr Kay Pheng Khoo

Table 2: Laura Ashley Chief Executives

1953-1976	Bernard Ashley
1976-1990	John James
1990-1991	Mike Smith
1991-1994	Jim Maxim
1994-1995	Vacant
1995-1997	Ann Iverson
1997-1998	David Hoare
1998-1999	Victoria Egan
1999-date	NG Kwan Cheong

Table 3: Family Shareholding (Direct Holding plus Family Trust)

1985	Stock Exchange Floatation	72%
1990	Aeon investment of £39 million	59%
1993	Sir Bernard retires as Chairman	50%
1999	pre Rights Issue	19%

Appendix 1: Laura Ashley Holdings
Consolidated Profit and Loss Accounts 1987-99
Year End 31 January
(£m)	1987	1988	1989	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
Turnover	170.9	201.5	252.4	296.6	328.1	262.8	247.8	300.4	322.6	336.6	327.6	344.9	288.3
Cost of sales	65.6	78.2	108.0	136.0	158.7	#N/A	#N/A	#N/A	164.0	172.0	168.9	214.0	159.9
Gross profit	105.3	123.3	144.4	160.6	169.4	#N/A	#N/A	#N/A	158.2	165.0	158.7	130.9	128.4
Other operating expenses	83.9	99.5	120.8	154.4	#N/A	#N/A	#N/A	#N/A	194.7	156.0	144.3	166.9	146.5
Operating profit	21.4	23.8	23.6	6.1	3.4	-0.6	1.1	2.3	-36.5	9.0	14.4	-36.0	-18.1
Other income	1.7	1.7	1.7	0.9	0.1	1.9	1.5	1.8	7.7	3.0	2.5	0.5	2.0
Exceptional items				-3.1	-2.6	-8.1						-11.4	-14.0
Profit before interest	23.1	25.5	25.3	3.9	0.9	-6.8	2.6	4.1	-28.8	12.0	16.9	-46.9	-30.1
Interest paid	0.6	2.4	5.0	8.6	12.4	2.3	0.8	1.1	1.8	2.0	0.7	2.4	1.8
Profit before tax	22.5	23.1	20.3	-4.7	-11.5	-9.1	1.8	3.0	-30.6	10.0	16.2	-49.3	-31.9
Tax Paid	8.0	8.5	7.1	2.1	-2.5		1.0	1.9	0.9	3.3	6.1		1.1
Profit after tax	14.5	14.6	13.2	-6.8	-9.0	-9.1	0.8	1.1	-31.5	6.7	10.1	-49.3	-33.0
Extraordinary items				-1.4
Profit for the financial year	14.5	14.6	13.2	-8.2	-9.0	-9.1	0.8	1.1	-31.5	6.7	10.1	-49.3	-33.0
Dividends Paid	4.5	4.7	4.7	1.7	0.1	0.1	0.1	0.2		1.2	2.4
Retained profit	10.0	9.9	8.5	-9.9	-9.1	-9.2	0.7	0.9	-31.5	5.5	7.7	-49.3	-33.0
Earnings per share (pence)	7.2	7.3	6.6	-3.4	-4.4	-3.9	0.3	0.5	-13.4	3.0	4.1	-26.3	-10.5

Appendix 2: Laura Ashley Holdings
Consolidated Balance Sheets 1987-99
Year End 31 January
(£m)	1987	1988	1989	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
Fixed Assets	57.8	70.7	80.2	81.5	67.1	60.5	66.3	71.7	48.3	45.2	49.5	42.2	22.0
Current Assets
Stocks	45.5	66.8	75.8	104.8	64.6	#N/A	76.4	70.8	64.1	67.0	93.1	63.2	56.4
Debtors	12.1	15.3	21.0	27.6	33.1	#N/A	16.5	14.9	7.3	8.0	11.1	7.9	5.5
Short-term deposits and cash	5.5	4.4	4.3	1.9	17.1	#N/A	25.6	18.9	27.6	16.0	19.5	13.5	22.6
	63.2	86.6	101.1	134.3	114.9	#N/A	118.5	104.6	99.0	91.0	123.7	94.6	84.5
Creditors: Amounts due within one year
Borrowings	7.9	34.2	8.2	85.7	0.8	#N/A	5.9	0.8	14.4	6.0	1.2	10.4	1.0
Other	14.7	16.2	10.3	1.0	0.1	#N/A	7.0	3.9	10.0	30.0	31.5	24.1	19.9
Trade and other creditors	18.3	25.0	36.1	49.8	47.0	#N/A	51.7	49.7	30.9	29.0	41.3	32.5	26.9
	40.9	75.5	54.6	136.5	48.0	#N/A	64.5	54.4	55.3	64.0	74.0	67.0	47.8
Net current assets	22.3	11.1	46.5	2.2	66.9	52.8	53.9	50.2	43.7	27.0	49.7	27.6	36.7
Creditors: Amounts due after one year
Borrowings	8.7	6.6	42.1	3.0	39.4	#N/A	34.0	32.8	14.4	1.0	21.8	30.4	0.9
Other	3.0	3.7	4.7	3.4	2.4	#N/A	0.7	2.9	21.9	8.0	7.3	19.7	27.4
	11.7	10.3	46.8	6.4	41.8	28.5	34.7	35.7	36.3	9.0	29.1	50.1	28.3
Net assets	68.4	73.8	79.8	72.9	92.2	84.8	85.5	86.1	55.7	63.0	70.1	19.7	30.4
Called-up share capital	10.0	10.0	10.0	10.0	11.7	11.7	11.7	11.7	11.7	11.8	11.9	11.9	19.9
Reserves	58.4	63.8	69.8	62.9	80.5	73.1	73.8	74.4	44.0	51.2	58.2	7.8	10.5
Shareholders' funds	68.4	73.8	79.8	72.9	92.2	84.8	85.5	86.1	55.7	63.0	70.1	19.7	30.4

Rockware plc

Case written by John Hendry

In September 1983 Sir Peter Parker returned from a seven-year spell running the state-owned British Rail to resume his former role as Chairman of Rockware, a manufacturer of glass bottles and jars. With him he brought a newcomer to the glass container industry, Frank Davies, who had been head of the aluminium extrusion division at Alcan, and had now been appointed Managing Director of Rockware.

When Sir Peter had left Rockware, as plain Peter Parker, in 1976, things had looked pretty good. Demand for glass containers was booming. Rockware's sales were growing by around 15% a year in real terms, while operating profit had doubled in the past two years. By September 1983, however, the picture was very different. Having peaked in 1979, demand for glass containers had declined each year since then. Despite high levels of inflation, prices had remained static in money terms and had even started to fall slightly. Rockware, in common with other manufacturers, had been forced to close furnaces and make workers redundant, and by 1983 the workforce had dropped to just 4500 from a 1979 peak of 7600. The redundancy and rationalisation costs of £19 million had virtually wiped out the modest operating profits of the years 1980-82, and for the first six months of 1983 the firm had declared a loss of about £8.5 million. The full year figures would show an operating loss of over £6 million with further interest costs and exceptional losses of over £6.5 million. A successful placing of £10 million worth of convertible preference shares by the firm's merchant bankers in the summer of 1983 had given some breathing space. But although these shares had been placed without difficulty (Pilkington, the large British float and safety glass manufacturer who owned 20% of Rockware's ordinary shares, took up a large tranche of the preference shares, and this helped City confidence), the ordinary share price had collapsed to around 20-30p from 80p in the spring of 1982: before the year ended it would drop further to just 16p. Looking to the future, the prospects for glass containers were not encouraging. Capacity cuts across the industry were beginning to restore the balance between supply and demand with the prospect of a stabilisation of real prices. But there seemed little prospect of any growth in the market, and every prospect of a continuing shrinkage as glass containers lost market share to plastics, and in particular to polyethylene terephthalate (PET). Launched commercially in 1979, PET was still not an adequate substitute for glass in many applications, but technological development, funded by the large multinational petrochemical companies, was proceeding rapidly. PET bottles were already beginning to eat away at the glass bottle market, and this process looked likely to continue and accelerate. Rockware itself had had an interest in plastics containers for fifty years, and in 1980, after a series of acquisitions, these accounted for about 30% of its turnover. But a combination of management problems with overseas plants, continuous price squeezing in an intensely competitive market, and the need to raise extra cash to support the glass manufacturing rationalisation had since led to a series of disposals, so that by the end of 1983 plastics accounted for just 12% of turnover.

GLASS CONTAINER TECHNOLOGY AND MATERIALS

Modern glass container manufacture differs little in essence from traditional glass-blowing. The main raw materials are silica sand (about 70%), soda ash (12%), and lime (12%); these are heated with other additives in furnaces to about 720-750 ºC to make molten glass. After refining to remove impurities the molten glass is machine blown in blobs into hollow moulds and then cooled under controlled conditions. Each furnace feeds several bottle-making machines, each of which produces 10 or 12 bottles at a time. The furnaces are fuelled by natural gas. In Britain this is supplied by a monopoly supplier, British Gas, and accounts for about 60% of total production costs. Silica sand is supplied by BIS with about 70% of the market and soda ash by ICI with about 80% of the market. Both these companies have strong control over the available sources of supply.

The main feature of the manufacturing technology is its lack of flexibility. A glass container plant cannot be used for the manufacture of any other form of glass product (such as flat glass, or optical glasses). Nor does the technology allow transfer of operations between different types or colours of bottle glass. Thus a brown glass bottle plant is effectively dedicated to brown glass bottle manufacture, and similarly for green, clear or opal glasses. Because of the energy costs of keeping a furnace going, the costs of running a plant at under full capacity (i.e. with one or more of the bottle-making machines idle) are severe, as are the costs of switching from one product to another: to change the moulds is a significant and time-consuming operation, during which the furnace has to be kept going.

THE GLASS CONTAINER INDUSTRY

The British glass container industry has traditionally been very fragmented, but by the mid-1970s it had become concentrated into six major companies of which Rockware, with a market share of about 25%, was the largest. The others were Redfearn (about 14%), Beatson Clark (9%), and three subsidiaries of major bottle users who had integrated backwards: United Glass (owned jointly by Distillers and Owens-Illinois, 25%), Canning Town (Arthur Bell, 9%) and the glass division of the Co-operative (9%). Of these Beatson Clark specialised in brown glass pharmaceutical containers, and Rockware in opal glass. But both Rockware and Redfearn supplied a wide range of bottles and jars in clear, brown, and green glass, and with United Glass they dominated the open market for glass food and drink containers.

Elsewhere in Europe, and in the US, the industry structure tended to be rather different, with each national market being dominated by one or two glass manufacturers, each diversified across a range of different glass process technologies and products. Although diversified, most of these companies were much larger glass container producers than Rockware. Thus the glass container business of Saint Gobain in France, for example, was one-and-a-half times the size of the entire British glass container industry. The bottling business of BSN, a French brewing, mineral water, and soft drinks company which, like Distillers and Guinness, had integrated backwards, was even bigger. Part of this difference of scale was due to a much larger demand for glass bottles in Europe, primarily for the packaging of wine, mineral water, and bottled beers, than existed in Britain.

In the late 1970s there had still been very little overlap between national glass container markets, and given the high transport costs of empty glass containers this situation had been expected to continue. From a base of about 4%, however, imports to Britain had grown to 11% in 1982, and were still rising as customers, uncertain of the future of the precariously placed British industry, placed orders with the diversified European manufacturers as a precaution against the possible bankruptcy and closedown of the British firms. Meanwhile, imports of ready-bottled products were also increasing, at the expense of bulk shipments for local UK bottling, and though difficult to measure this was clearly having a significant impact on the British bottle market.

THE CONTAINER MARKET: GLASS, CARDBOARD, PVC AND PET

As a container material, glass has many distinctive advantages. Rigid as a material it is flexible as a design medium. It is strong, attractive, chemically inert, and almost totally impervious. It is also recyclable. Against this, it is breakable and, above all, heavy, and in the early 1980s it was losing ground to three substitutes: cardboard, PVC, and PET.

The use of cardboard was restricted largely to the packaging of milk and fruit juices, but nevertheless posed a serious threat to the bottle manufacturing industry, especially in the case of milk. In Britain milk has traditionally been delivered by the dairies in glass bottles, which are then returned and recycled. Although a glass bottle costs about twice as much as a cardboard container to manufacture, the fact that it call be used 20 or more times makes the delivery system extremely cost effective. Glass is much less suitable, however, for packaging milk for sale in supermarkets and other retail outlets. Although the weight of a pint milk bottle has been halved in the last 50 years, it still adds almost half as much again to the overall weight of the milk, and this is a nuisance to both shoppers and stock-handlers. Glass bottles are less easily packed in bulk than square cardboard containers, and the supermarkets do not find it cost effective to accept empty returns, which both destroys the cost advantage of glass and creates an extra nuisance for the customer who has to dispose of the bottle. During Sir Peter's absence from Rockware, the supermarkets' share of milk sales doubled to about 15%, and a move towards the European and American situation, where all milk is sold in retail stores with no deliveries, was a distinct possibility. On the other hand, some of the supermarket chains had no wish to carry large stocks of milk. The dairies had an interest in maintaining the delivery system, as foreign experience showed that its demise was accompanied by a drop in milk consumption, and consumer research indicated that customers believed milk tasted better from bottles and kept fresher in them.

Of wider significance was the increasing use of plastics, in particular PVC and PET, both of which were cheaper, lighter, and less breakable than glass. As yet this use had been limited by the technical properties of these materials, which did not share glass's imperviousness. In the early stages of their development, they could not be used for fizzy drinks, wines, beers, or sauces subject to oxidisation because of the migration of gases through the containers. The technology was improving all the time, however, especially in respect of multi-layer PET bottles. By 1983 these had been developed sufficiently to allow for their use as large soft drinks bottles, where the high volume-to-surface ratio minimised the problem of gas containment, and there was every reason to expect that they would in due course provide potential substitutes for the great majority of glass container applications. Work was even progressing on a recyclable PET. When PET products did become available they would certainly be cheaper than glass (because of much lower energy costs - about half those of glass), lighter and easier to handle: significant advantages to retailers and consumers alike.

THE SITUATION AT ROCKWARE: GLASS

The Rockware group had been built up in the 1960s and early 1970s through the acquisition of three long-established independent glass manufacturers, Garston, Forster, and Jackson, and glass manufacturing had remained a decentralised activity. The four sites (five plants), scattered right across Britain, retained their individual characters and loyalties, and although group marketing was centralised in the wake of the acquisitions they had continued to operate in most respects as independent companies. During the boom years of the mid-1970s this had resulted in a healthy spirit of competition, but with the industry recession the limited degree of centralisation had been abandoned and, with closures threatening, competition between the sites had become more pointed and less friendly, with accusations being made of factories stealing each other's customers. As with other long-established craft-based industries, there was still a strong craft tradition, with long periods of training and with firm and industry loyalties built up over lifetimes and generations. This personal, emotional investment made the recession both harder to accept and harder to bear.

Throughout the industry there remained a deep-seated conviction that things must get better and that the current downturn could only be a temporary phenomenon. As the recession bit, workers had to be made redundant and furnaces closed, but this process lagged well behind the fall in demand and overcapacity continued. The situation was not helped by the economics of bottle manufacture, discussed above, which encouraged firms to run their furnaces at full capacity even if the demand was not there to meet it. Price-cutting had inevitably followed, and although Rockware had tried to hold out against this they had lost market share as a result and had ended up having to follow the market. They had, however, led the move to rationalisation. By September 1983 Rockware had spent £19 million on rationalisation, closing furnaces, making workers redundant, and eventually closing down the original Rockware factory at St Helens. United Glass and Redfearn were also on the point of closing down factories, and the overcapacity problem looked to be coming to an end. But Rockware were still manufacturing on negative margins, the glass container market was still declining, and imports were still rising.

THE SITUATION AT ROCKWARE: PLASTICS AND ENGINEERING

Besides its dominant glass container business, Rockware also manufactured in two other areas. The engineering businesses, Burwell Reed and Kinghorn, and the Birstall Foundry, served primarily to provide moulds and other equipment for use in Rockware's own container manufacture, though they also traded outside the group. Plastic container manufacturing had begun under Sir Peter's earlier tenure as Chairman and had grown to form a major part of the group's overall business before being cut back again during the downturn in the glass business.

The main growth in Rockware's plastics business had come in the late 1970s. In late 1978 they had taken over Alida, a producer of flexible plastic film packaging, for £4.7 million. The following year they had bought the overseas plastic bottle-making concerns of Dart Industries Inc of America, with a book value of £6.4 million, for £2.94 million, and paid £0.75 million for two small plastics companies. This gave them a total of 12 plastics factories in Britain, Spain, Holland, Belgium, and Australia. The move into plastics had appeared to make solid strategic sense, but in a highly competitive industry all the Rockware plastics operations experienced a chronic squeeze on prices and margins. Some of the businesses also experienced technical and managerial problems, and far from boosting group profits, plastics proved a severe drain on resources at just the time the core glass manufacturing business was running into serious problems. In 1981 the overseas Dart operations were all disposed of, and in late 1982 negotiations began with the Alida management on a management buy-out of that company. This was agreed upon in 1983 and the sale finally took place at the end of that year. The agreed price of £2.9 million was in real terms under half what Rockware had paid for the company, but with glass manufacturing losses the money was badly needed.

With the sale of Alida, Rockware was left with three plastics divisions specialising in clean air injection blow moulding and extrusion blow moulding, and supplying PVC bottles primarily for the pharmaceuticals and cosmetic markets. Two of these, at Norwich and Kingston, were expanding, profitable businesses, but the other two, at Golborne and Reading, were encountering serious problems at both the technical and the managerial levels, and their losses more or less cancelled out the others' profits.

BACK FROM THE BRINK

Despite the capacity cuts being made by all the leading British glass container manufacturers in 1983, the industry had not yet come fully to terms with a declining market. Many people still treated the recent problems as a temporary aberration, and thought in terms of `reserves of capacity to meet an upturn of business', rather than of overcapacity in a declining business. Right across Europe, the overwhelming response was still to cut prices rather than capacity, while at the same time planning on the basis that they would soon rise again.

To Frank Davies, this was ludicrous. Coming into the industry as an outsider, he saw a 27% decline in the UK glass container market in the previous four years and a level of prices at which no one in the industry could make a profit. As PET development continued, the best that could be hoped for was a stabilisation of the glass container market, while a continued decline looked more realistic. In any price-cutting war, the continental manufacturers, with their diversified product ranges and much greater corporate resources, would inevitably be the victors. Rockware could only be a heavy loser.

Faced with this view of the situation, Frank Davies and Sir Peter Parker determined on a package of short-term measures to save the company. The £10 million issue of convertible preference shares, arranged by Sir Peter in anticipation of his return to the company, provided then with necessary resources and breathing space, but with losses running at £1 million a month they had to move very fast.

The first step, taken by Davies on his first day, was to raise prices by 7.5%. Nobody followed, and the company lost volume in the short term. But the move was necessary if losses were to be stabilised, and it was well-timed to coincide with plant closures at both Redfearn and United Glass. A strike at United Glass also helped. Within a month or two it was becoming clear that Rockware's customers would stick with the company and shortly afterwards their competitors also began raising prices. Six months later, in May 1984, Davies raised prices again, this time by 8%, and this time the industry followed.

The second measure taken was to make a further 1000 Rockware staff redundant and, at the same time, negotiate a six-month wage freeze (in the face of wage increases elsewhere in the industry of about 6%) with the remaining employees. This step was made possible by very generous redundancy packages (helped by the £10 million of new finance), and by the personal skills of Parker and Davies. Sir Peter Parker is a warm, approachable, and extremely articulate mail, with a strong sense of public justice. When, on leaving British Rail, he chose to return `fully committed' to the relatively small Rockware company rather than take up one of the more lucrative and prestigious appointments that would have been his for the taking, the Rockware workforce responded by returning his loyalty. He believes in being open and straightforward with his firm's employees, treating them as `citizens', and his powers of communication were such that no-one in the company could be in any doubt as to the seriousness of the position they were in. Frank Davies is also a friendly and approachable figure, who shares Parker's commitment to honesty and plain speaking, and though an outsider to both firm and industry he was quickly accepted on the basis of these qualities, reinforced by Parker's own recommendation.

Alongside these two very drastic measures, Davies also set about putting the company together, improving its cohesion and tightening controls. The separate companies in the group (including the three glass bottle companies) continued to be run at local level, with a large degree of operating autonomy. But a new Marketing Director, Don Fairley, was recruited from Britain's largest packaging company, Metal Box, to build up a central marketing organisation and co-ordinate between the different factories, and between the glass and plastics groups, which were previously quite isolated: `don't think glass, think customer' was the new message. Group financial controls were also strengthened, and the practice of running over orders so as to improve capacity utilisation was stopped: a directive was made to the glass factories to manufacture to orders only, and stocks were cut dramatically as a result, freeing up further capital. To increase productivity and cut down oil energy costs, the existing programme of furnace modernisation was accelerated. An improved ordering and order call-off system was introduced. A strategic group, comprising heads of business units and of staff functions, was set up.

These measures between them enabled Rockware to turn in a profit of £3.2 million in 1984, as against a loss of £12.8 million the previous year (see Exhibit 1), but with the basic problem of industry-wide overcapacity unresolved they could afford only a temporary respite. Rockware needed a strategy.

Exhibit 1 Rockware 10-year summary.
(£thousand)	1975	1976	1977	1978	1979	1980	1981	1982	1903	1984
Sales
Glass	52630	67697	80794	96684	106178	116178	112971	103980	101310	107410
Plastics	3165	4146	7134	9826	33812	48919	46221	33163	26914	15240
Engineering	668	711	1295	1910	3261	4668	2388	4610	3246	1521
Total	56463	72554	89223	108419	143251	169765	161580	141853	131470	124721
Operating profit (loss)
Glass								4504	(8344)	5700
Plastics								935	537	0
Engineering								(384)	(84)	300
Total	5748	7155	8014	7970	7893	5773	5558	5215	(6216)	5909
Interest and exceptional losses	(442)	(1230)	(603)	(951)	(2709)	(5301)	(4659)	(4610)	(6611)	(2741)
Profit before taxation	4306	5925	7411	7019	5184	472	899	605	(12827)	3168
Capital expenditure	6863	5234	9549	10778	13901	10829	5369	9593	6569	7053
Average number of employees	6321	6238	6955	7048	7643	7595	6593	5174	4541	3669
Share capital and reserves	17839	32317	40517	43905	58698	56559	49420	49412	30437	33050
Preference shares										10700
Loans etc.	22060	6353	10505	16001	31650	39266	42447	41524	29107	20706
Fixed assets plus net current assets	39099	38670	51022	59906	90340	95815	91867	90936	70244	64536
Inflation rate (RPI 1.1.1974 = 100)	134.8	157.1	182.0	197.1	223.5	263.7	295.0	320.4	335.1	351.8

Exhibit 2 Proportion of glass bottles recycled (selected European countries, mid-1980s).
Holland	53%	Italy	24%
Belgium	36%	Denmark	20%
West Germany	31%	Great Britain	9%
France	25%

Exhibit 3 Estimated non-glass packaging turnovers of selected UK companies (1984 £ million).
Metal Box	850	DRG	200
Reed	300	Rockware	16
Lin Pac	280

Exhibit 4 UK glass container market.
	1980	1981	1982	1983	1984
Million units	6800	6500	6100	5925	5976
£ million	384	381	386	366	376
Imports (%)	6%	7%	11%	12%	14%
By end use (million units)
Drink					3180
Food					1920
Chemicals and pharmaceuticals					515
Toiletry and perfumery					361
Note: these figures do not allow for indirect imports, e.g. wines, waters, and beers bottled in country of origin.

Exhibit 5 Forecast UK PET container market.
	1985/86	1986/87
Million units
Carbonated soft drinks
1 litre bottles	139	166
1.5 litre bottles	147	164
>1.5 litre bottles	314	395
Other	93	117
Total	693	842
Turnover (approximate)	£85 million	£105 million
Market shares
In-plant operations*	46%
Fibrenyl	23%
Redfearn	11%
Metal Box	10%
Lin Pac	10%
*Aggregate of ten firms manufacturing and bottling products who have backwards integrated to make their own bottles.

AOL Time Warner -The Biggest Merger in History

Based on an article by Garth Alexander, The Sunday Times, January 16 2000

When the biggest merger in history was announced last week, Bob Pittman, who turned America OnLine (AOL) into a media giant and will be largely responsible for ensuring the success of the £158 billion mega-merger with Time Warner, was scarcely noticed by reporters at Monday's press conference. But his brilliant management since he joined AOL in 1996 has rescued the online service from a series of disasters and turned it into one of the great success stories of modern times. Pittman has been the architect of AOL's transformation from a subscription-based company to one that derives an increasing proportion of revenue from advertising, marketing and e-commerce. He has brought lots of cash to AOL by selling its subscriber base to marketers, and has built up a series of successful services, including ICQ, an instant messaging service with 50m subscribers.

The merger will force other Internet companies to transform themselves into media and distribution giants like AOL. Technology is causing big changes on the Internet. The text and simple graphics of today's web sites will be replaced by films, live video and rich interactive content, blurring the distinction between television sets and personal computers (PCs). This revolution is expected to trigger a fresh surge in the number of people using the Internet. The fear of being left behind and losing customers was what compelled AOL to merge with Time Warner. AOL urgently needs to obtain access to a rapid (broadband) distribution system to keep its place as the top Internet service provider (with 22m subscribers). It hopes to use Time Warner's cable-television network (reaching into 13m homes) to deliver to PCs the rich content everyone will soon demand. Time Warner's library of films, television series and music will also give AOL a wealth of broadband content.

The merger of Time Warner, an old-style media company with AOL, a 14-year-old Internet company, marks the coming of age of the Internet. It is a leap of faith by Gerald Levin, Time Warner's boss, the first media chief to dare to exchange his company's solid assets for the spectacularly rising stock of a Internet company. AOL's shares have increased in value 31 times since Pittman joined three years ago, giving it at the start of last week a market value of $163 billion, compared with Time Warner's $76 billion. The ownership of the new company will be split so AOL shareholders get 55% and Time Warner investors own the other 45%. This provides a formula for other traditional "bricks and mortar" companies to value Internet companies, many of which may want to swap their highly priced shares for more solid assets before the bubble bursts.

It is a vindication of Pittman's pursuit of a vertically integrated company that will offer consumers everything they need in the interactive world of the future, from media to films and music. Rupert Murdoch, chairman of News Corporation, was quick to applaud the deal. He said: "It validates the value of content and it also validates what we have been trying to do in our company by being vertically integrated. Vertical integration is the way forward. AOL is a distribution company that found itself with a high stock price and took the chance of buying a huge amount of content."

Levin, like Pittman, had strong reasons for wanting to do a deal. He recognised the Internet presented opportunities, as well as threats, for his company. But Time Warner's repeated attempts during the past seven years to develop interactive television and an Internet strategy failed. By tying up with AOL Levin admits he is attempting to solve that problem. "We could have gone it alone," he said, "But I came to the conclusion that merging with AOL would accelerate our own development."

Most big media companies have faced the same problems as Time Warner and may now feel the same incentive to merge with a successful Internet business. Analysts say Disney, with a $65 billion market value, may be bought by Yahoo, the second-biggest Internet company, with a $100 billion value. Other companies that could seek partners include NBC, the television network, and Viacom. One potential combination could be Microsoft and a telephone company, such as AT&T. A prominent media executive said he thought the next wave of mergers could see phone companies buying media groups.

But the volatile movement of Internet and media stocks last week indicated investors were far from certain the AOL Time Warner merger would bring the $1 billion of benefits promised. The technology-heavy Nasdaq index shot up 4.3% on Monday, when the news was first announced. But it fell 3.2% on Tuesday and 1.8% on Wednesday. AOL's stock fell more than 20%. Investors seem to have concluded the deal was fraught with risk and would put an end to AOL's days of fast growth.

Yahoo's chief executive denied that he was interested in a merger, further depressing the market and his own shares. He said: "We do not see the necessity to pursue a similar merger. We already have strong relationships with content providers world-wide and we believe that we can attract larger numbers of visitors by offering them a wide choice." Viacom's boss voiced similar reservations and another media magnate dismissed speculation that media companies would be powerless to prevent being snapped up by Internet predators. He said that most big media concerns had share structures that protected them from predators.

For consumers the early impact of last week's deal will be an acceleration of the introduction of broadband services - at least in America where four technologies are being developed to distribute them. More exciting and versatile interactive products are becoming available every day. Pittman thinks interactive television will become increasingly like the computer, and vice versa.

When AOL made the initial approach to Time Warner Levin was intrigued by the offer but he was worried by the difference between AOL's value and Time Warner's. Both companies had to confront the valuation disparity between media companies and Internet companies. Pittman wanted AOL investors to have 70% of the new company. Levin wanted a 50-50 split and was also worried about accepting AOL stock without securing protection against a sudden share price drop. For a while it looked as though no deal would be possible. But Levin said he felt intuitively "that the strategic idea was not only worthy but compelling enough to pursue".

He also liked the fact that Pittman said he did not want control of Time Warner. Levin takes seriously the social responsibility of heading the publishing empire founded by Henry Luce in 1923. He said he "would not surrender control of that journalistic heritage to anyone". Pittman understood this point, and said he only wanted to be chairman, in charge of policy and technology. As talks continued Levin became convinced there was a "fit between the companies". He said: "They have the same value system, blue-chip board, very consumer-brand orientated, very aggressive in building market position and they are both subscription-based companies."

Those similarities convinced him AOL would make a perfect partner. Yet Pittman and his advisers were worried they were giving too much power to Levin, who is seen as a wily operator. Despite the fall in AOL's shares Levin said he was confident the deal would be completed this year (assuming there are no objections by regulators). "The volatility that occurs after the announcement of a transaction this size is quite understandable. I think we have a very strong conviction that the two companies can grow a lot faster together than either could individually," he said.

CNN, the 24-hour television news network owned by Time Warner, is expected to play a central role in increasing AOL's subscriber base outside America. Analysts said CNN would be promoted to Internet users by AOL, and CNN would promote AOL's services during its programmes. Similar cross-promotion is expected between every AOL Time Warner unit. Yet some analysts doubt that the synergies will be as great as predicted. One said: "Time Warner is a company of battling fiefdoms. There is almost no communication between the different units and you will never get them to co-operate in marketing and advertising."

By merging with AOL Levin has found an Internet strategy and may have got the best of the deal. One analyst said: "This deal is far better for Time Warner than it is for AOL. Levin immediately got a 70% appreciation of the stock. He gets an Internet strategy. And he keeps his title and power. AOL, on the other hand, is sacrificing much of its future growth. It did not have to buy Time Warner to gain access to its cable system or its content. It could have just formed an alliance."

Ultimately the success of AOL Time Warner will depend on Bob Pittman and his ability to cross-promote the company's many brands and reduce its dependence on subscriptions. Some analysts believe the threat of new free Internet service providers (ISPs) was a big factor forcing AOL to merge. "Unless they got better and richer content they could not keep their subscribers or their subscription fees. Free ISPs are growing much faster than anyone else. Within two to three years I think 50%-60% of all American users will be using a free service." Although AOL has introduced a free service in Britain it is committed to maintaining fees elsewhere. Those fees provided 69.5% of its $4.78 billion of revenues last year. Advertising, by comparison, contributed only 21%.

But the biggest problem for Pittman will be the inevitable defection of bright AOL engineers, who have grown accustomed to seeing their options multiply in value many times every year. As AOL settles down to a much slower rate of growth, those options will look less attractive and the best technicians will inevitably be tempted to jump to Internet companies whose shares continue to rocket into the stratosphere.

British Airways plc

Tony Purdie

Introduction

In May 1997 British Airways (BA) announced pre-tax profits of £640 million on revenue of £8,359 million. The British Airways Group, which included the Deutsche BA and Air Liberté subsidiaries, carried a record total of 38.2 million passengers during the year 1996/7. With most visible performance measures showing regular year on year growth chief executive Bob Ayling could justifiably claim that British Airways that it was the world's largest passenger airline as well as being one of the most successful. Yet in August 1999 the airline announced first quarter profits of just £23 million and some analysts were suggesting that the company might even record a full-year loss. Evidently BA was experiencing some turbulence as it journeyed towards its stated goal of being “Truly Global”; as the share price descended from a high of 692p to 391p shareholders wondered whether or not Ayling would be able to steer the company back onto its originally planned flight path.

Company History 1924-1987

The origins of British Airways can be traced back to the early 1920s. At the end of the First World War Britain, like several European countries, possessed the technology to build aircraft able to carry passengers in reasonable safety and comfort; with experienced aircrew to fly them and suitable airfields to operate from, a number of commercial passenger services began. In 1924 a number of these amalgamated to form Imperial Airways. The new airline, although privately owned, received regular government subsidies as it built up a route structure which stretched to the eastern and southern extremities of the British Empire - India, South Africa and Australia. Imperial Airways could be seen as representing Britain and the British government.

In the early 1930s the main aircraft used by the airline were the Short flying boats (which had the useful merit of not requiring airfields) and the Handley Page HP42 (which did). Although photographs show elegant passengers being served meals to restaurant standards, it is easy to forget how primitive aircraft and other equipment were compared to today. The aircraft were slow (90 knots for the HP42), noisy and, as they flew quire low, subject to weather. Navigation was very basic, with very few radio navigation aids. Flying was a luxury, available only to the wealthy and government officials.

While Imperial Airways concentrated on routes to the colonies, another airline, British Airways Ltd, was formed in 1935 from a merger of three smaller companies. The new company operated mail and passenger services to destinations in northern Europe. In 1939, following a review of the two airlines, the government decided to nationalise and merge them in order to form a single airline which would better serve national/government interests and be strong enough, through government subsidy, to withstand growing competition from other national airlines. The new company, the British Overseas Airways Corporation (BOAC), began operations in 1940 and almost immediately came under the control of the Royal Air Force and remained so until after the Second World War.

In 1946 the Labour Government published the Civil Aviation Act which redefined the role and structure of the state airline. Two separate airlines were formed: BOAC would be the flag carrier for intercontinental routes while British European Airways (BEA) would be the flag carrier for domestic and European routes. (A third airline, BSSA, was soon reabsorbed into BOAC). There were two key elements of the Act that affected the operations and development of both airlines:

• they were granted monopoly rights on profitable routes and were encouraged to cross-subsidise unprofitable ones.

• they should, wherever possible, use British built aircraft.

This arrangement continued with only minor modifications to the monopoly status until 1971 when the British Airways Board was created to oversee the management of the two airlines; and in 1974 they were merged to form British Airways. At the same time the government formally designated the privately owned British Caledonian Airways (BCal) as the second force carrier offering some competition to BA. However real integration of long-haul and short/medium haul operation did not begin until 1979; the inevitable culture clashes and job losses which followed contributed to a difficult period as the Company adjusted to the changes.

The changes of the early 1980s were driven by the Conservative government led by Margaret Thatcher. Unlike the previous Labour governments, Thatcher was opposed to state owned monopolies and encouraged greater competition from the private sector. Thatcher also sought to sell off state owned companies to the private sector, partly to raise money but also because she believed that these companies would be better managed in a normal commercial environment. However BA in the late 1970s was not an attractive candidate for privatisation so Thatcher brought in Sir John (later Lord) King, an experienced and tough industrialist, as Chairman in 1980. King carried out a major rationalisation of the company's operations which resulted in over 20,000 job losses. In 1983 Colin Marshall was appointed Chief Executive; he led the redefining of the brand name, focusing on customer service. Marshall is also credited with implementing the major cultural change within the company which was required to meet the company's new goals. By the time BA was privatised in early 1987 it was well on the road to becoming the world's most profitable airline with no debt and an enviable international route structure.

The Growth of International Competition

The origins and development of British Airways are mirrored by those of other European and American airline companies. However there are some key differences between Europe and America which have had a significant impact on world airline development.

In all major European countries (and even a few minor ones) commercial aviation developed soon after the end of the First World War. With a well-developed rail and road infrastructure within Europe air transport offered little advantage over surface travel; on the other hand governments welcomed the opportunity to develop links with their colonies spread around the world. After a period of consolidation, by the early 1930s the pattern of European flag carriers that we recognise today had emerged; each airline had a characteristic international route structure which reflected that country's colonial past. These structures can still be detected even today. Furthermore these airlines were required to use aircraft built by that country's aircraft industry. Thus most European airlines functioned as a de facto arm of each national government.

In order to protect each airline from competition from other national airlines governments created a system of bilateral agreements. In order to operate commercial services between, for example, London and Paris an airline had to hold a licence for that route. Only the state airline of each country would be permitted to hold the licence and the two airlines usually co-operated and shared the profits. These airlines were known as the designated flag carriers. Thus by the 1950s European commercial aviation operated in a highly regulated environment, usually with each country having a single flag carrier, and with prices set by national agreements.

The evolution of the airline industry in America was rather different. The first key difference was that all American airline companies were privately owned. Instead of direct government subsidies there was a substantial indirect subsidy in the form of profitable mail carrying contracts which exceeded the direct subsidies paid to European airlines. The second key difference was that due to the large geographical size of the country a strong, viable route network could be established without crossing national boundaries. Thus the US airline industry was built on a domestic base while the European industry was built on an international base.

In the early days the US industry was unregulated. However in 1938 the Civil Aeronautics Board (CAB) was established to regulate the number of carriers between destinations and fix fares. Although this seems at first sight to be identical to the type of regulation in Europe the reasoning behind the regulation was subtly different. In Europe regulation was designed to protect national flag carries from competition. In America it was argued that in order to counter the oligopolistic nature of the industry which could lead to either collusion and excess profits or else instability caused by price wars - nether of which would benefit the customer - some form of control was necessary. Thus until 1978 both the US and European industries were subject to government regulation.

In the US the CAB could only regulate interstate routes. Within states there was no regulation and by the 1970s there was a marked disparity between intrastate and interstate fares even for similar journey lengths. The view that regulation was keeping fares artificially high led to the 1978 Airline Deregulation Act. The aim of the Act was to permit the entry to the market of new carriers and thus create much greater competition, and hence cheaper fares. This is exactly what happened in the first two or three years after deregulation but what was not foreseen was that the established carriers were able to react quickly to the new competition by reducing costs and using aggressive pricing and similar tactics to counter the threats. During the mid-1980s many of the new entrants were either forced to leave the industry or were taken over by the established carriers. This concentration has left the industry marginally more oligopolistic than immediately before deregulation and US airfares have risen considerably faster than average consumer prices.

The internationalisation of the US industry began in 1927 with the award of a government air mail contract from Florida to Cuba. This was a deliberate policy of the US government which was concerned at the growing presence of European airlines serving Latin America. The new service was operated by Pan American Airways, a newcomer to the industry led by the entrepreneurial Juan Trippe. Within five years Pan American was the designated US flag carrier on routes to Latin America and across the Pacific; by 1937 Pan American services extended to Hong Kong and Trippe began planning a transatlantic service - the next step in his vision of a global airline. But before such a service could be established Trippe had to overcome two barriers; the resistance from the British and French governments and the fact that other than lighter-than-air machines there were no suitable passenger carrying aircraft able to cross the Atlantic Ocean non-stop. The latter problem was removed when Boeing developed the giant Type 314 flying boat in 1939; Europe had nothing to compete and delayed permission for Pan Am to start direct services to northern Europe until the outbreak of war removed the possibility of normal commercial transatlantic traffic.

Aircraft and Navigation Technology

If the development of the airline industry has been linked on the one hand to government regulation then on the other hand the development of new aircraft had had an even more significant effect in the industry. The First World War gave the first real impetus towards the design of aircraft that were more than toys for daredevil pilots. The single most successful aircraft between the wars was the American DC-3 which dominated commercial aviation in the 1930s. By the Second World War aircraft had become much larger, faster and more reliable and were used as a principal means of transporting passengers and cargo. Huge numbers of aircraft were built between 1939 and 1945 - 125,000 in Britain and over 300,000 in America. With the end of the war aircraft could be purchased very cheaply - less than a tenth of the cost before 1939. America had a virtual monopoly in building transport aircraft and new designs became available rapidly. The newest aircraft had pressurised cabins so were able to cruise at altitudes above rough weather. By 1947 aircraft such as the Douglas DC-6 and the Lockheed Constellation could fly from New York to European capitals and land at conventional airfields. The era of the flying boats had come to an end.

For the first time European Airlines were faced with new, aggressive competitors led by entrepreneurs of great vision, using aircraft that were considerably more advanced than those being manufactured by the European aircraft industry. In order to compete on the prestigious and profitable transatlantic routes BOAC and Air France were forced to abandon the “buy national” policy and purchase American aircraft. Worse still, none of the European aircraft manufacturers had the resources available to design and build anything comparable to the Americans. The reason for this was simple; since most European airlines were compelled to buy aircraft manufactured in their own country no manufacturer could expect to receive a large enough volume of orders to justify the investment required. In America these new aircraft were based on military designs which had been paid for by the US Government and once in the lead Boeing and Lockheed could expect orders both from US airlines and European airlines.

However Britain had technical leadership in one area - the design of jet engines which potentially offered much higher power and smoother, quieter operation than conventional piston engines. The Vickers Viscount (a turboprop) proved highly attractive on short haul flights following its first flight in 1948 and in 1952 BOAC launched the world's first scheduled service in a turbojet aircraft when the Comet 1 flew from London to Johannesburg. With longer-range variants of the Comet able to cross the Atlantic Europe seemed to have a lead over the Americans. This lead proved short-lived when three Comets crashed mysteriously in 1953/4; investigations showed that the aircraft had broken up in flight due to metal fatigue induced by repeated pressurisation and depressurisation. The jet age came to a premature end until the technology to build suitable airframes was developed.

The aircraft that really launched the jet age was the Boeing 707 derived from a military transport prototype first flown in 1954. Boeing gambled heavily on this aircraft and the design work and prototype manufacture went ahead with no secured orders. Boeing learned from the Comet disasters and the 707 proved to be a highly successful and reliable aircraft. Although a redesigned Comet 4 entered transatlantic service in 1958 around the same time as the Boeing 707 it was the American aircraft which was successful with over 800 sold in the 1970s and 1980s. Although some European designed short/medium haul aircraft were moderately successful noone was able to challenge the dominance of the Americans until the 1980s.

In the early 1960s US and European thinking was moving in opposite directions. American airlines discovered that the long haul market was very price elastic; demand increased when cheaper fares were offered. In order to make a profit the airlines sought larger and larger aircraft. In Europe the belief was that the future lay in faster aircraft able to offer a premium service at high price. This divergence led to different design approaches. In 1969 the first prototype of the Boeing 747, with a capacity of over 400 passengers, made its maiden flight. One month later Concorde, a joint venture between Britain and France with a capacity of 100 passengers and able to cruise over twice as fast as the 747 made its maiden flight.

Although a technical success Concorde was a commercial failure; only 14 aircraft were manufactured. The aircraft is still in service offering a premium service at very high prices but manifestly did not revolutionise air transport. The Boeing 747 and its variants have since become the most successful commercial transport aircraft following its entry to service in 1970. The greatly reduced costs per passenger mile allowed airlines to charge fares that were within reach of a much larger number of people and generated a huge increase in the number of passengers flying to long haul destinations.

There have been a large number of advances in aircraft technology since 1969 but these are mostly incremental in nature. Aircraft have become safer, more reliable and cheaper to operate but even the most up-to-date models are based on the technology developed in the 1950s. Until a radically new form of propulsion becomes commercially viable in seems unlikely that the nature and economics of air travel will change significantly. In a similar manner navigation systems have improved immeasurably since the pioneering days of air travel. The two most important developments have been inertial (more recently satellite) navigation systems which allow an aircraft to follow a route with great accuracy without requiring ground based aids and radar which allows air traffic controllers to accurately monitor flights en route and near airports. Such developments have enabled the growth of air traffic while increasing safety and reliability but no dramatic changes to the industry are expected from this direction for the foreseeable future.

International Linkages

As with any business wishing to expand its international markets an airline may pursue a variety of methods. Although most of these can be directly compared to a conventional business there are some additional factors which have to be taken into account in selecting the best option. As BA has pursued most of these options we shall review some of them briefly.

Network Development without a Partner

This is the simplest form of expansion; the airline flies passengers to and from its domestic base to a larger number of foreign airports. With small numbers of passengers the airline may use an agent at the foreign airport but for very large numbers it may build its own terminal as BA has done in JFK, New York. As has already been discussed the airline may have to obtain permission to operate the service from its own government as well as the foreign government.

Airlines tend to concentrate their international operations at one domestic airport; for example BA at London Heathrow and KLM at Amsterdam Schipol. Within their home country they can operate domestic feeder routes to convey international passengers to and from the main airport - a simple form of the “hub and spoke” system used by US airlines for internal services. However the opportunities to operate feeder services in the foreign country are normally very restricted. International agreements for air services are negotiated between governments within the framework of the Chicago Convention which defined five “freedoms” which could be granted to an airline. These freedoms include rights to overfly a state, convey passengers to and from the state and convey passengers to another state via the first. A further freedom which lies outside the framework is the right to operate feeder services within a foreign state, also known as “cabotage”. Very few states permit cabotage because of the potential competition with domestic airlines. Thus although BA can fly passengers from London to Pittsburgh via Philadelphia it is not allowed to pick up passengers in Philadelphia and fly them to Pittsburgh. On the return journey the ultimate destination of passengers who embark at Pittsburgh must be London, not Philadelphia. Thus the airline loses the opportunities both to fill empty seats in the internal US sector and generate more passengers for the international services. Although there is some relaxation of these restraints within the EU most other governments are reluctant to permit open competition.

Acquisition

At first sight this might seems a good alternative to international expansion without a partner. In practice it is difficult to implement. The simplest case is an airline based on one country acquiring another airline based in the same country. As already mentioned the airline industry tends to be oligopolistic and governments may be reluctant to sanction such an acquisition if it is likely to significantly reduce competition in the domestic market even if the effect of concentration on a global scale is insignificant. This puts European carriers with their small domestic markets at a disadvantage to the much larger US carriers.

Most countries also have restrictions on the degree of ownership of a national airline by a foreign airline which effectively prevents a controlling interest being acquired. Even if a controlling interest can be bought the foreign government may still not permit cabotage as the acquired airline is under foreign control.

In view of the restrictions discussed above airlines with large scale international ambitions have pursued some kind of alliance with one or more partners with the aim of offering to their customers a much more extensive international network than is otherwise possible. Three of the most popular forms of alliance are pooling, franchising and code sharing.

Pooling

This is an agreement between two flag carriers operating on a single route to share capacity and revenue. The total number of seats and the prices that will be offered by each airline is agreed and the total revenues are shared. The airlines do not attempt to compete with one another and can therefore enjoy orderly growth. This arrangement was very common in Europe in the early 1960s where most international routes were regulated and operation restricted to two airlines. It is much less common following the partial European deregulation of the industry.

Franchising

In this arrangement one airline, the franchiser, gives another airline, the franchisee (usually a much smaller airline), the right to use the franchiser's name, aircraft livery and uniforms. The franchiser may or may not hold shares in the franchisee. Since to passenger it appears that he is flying with the franchiser, the franchiser appears to operate a larger network than it actually does with feeder services at foreign airports. The franchisee benefits because the franchiser normally markets the franchisee's services on behalf of both airlines.

Franchising is very well developed in the US and is becoming more popular in other countries. For the arrangement to be successful the franchisee must be able to offer standards of service, reliability and safety comparable to those of the franchiser.

Codesharing

In this arrangement two airlines agree that flights operated by one of them can use the flight number of the other and vice versa. Thus a flight operated by Sabena from Brussels to Paris may be known both as SN105 (a Sabena code) and DL2050 (a code used by Delta, one of Sabena's codesharing partners. Sabena also operate the passenger check in and baggage handling services at Brussels for Delta. The airlines also agree to co-ordinate flight times. From an American passenger's point of view the ticket for a flight from the US to Brussels then on to Paris will carry only the Delta codes, again giving the illusion that Delta operates a much more extensive network than it actually does. In contrast to franchising the codesharing partners may be of similar size.

Codesharing is very common in America and is becoming more common in Europe. One curious side effect of this is the clutter of flights on airport departure displays; the author was amused to note on a recent visit to Brussels International airport that the forty departures shown on the display at one point represented only eighteen aircraft movements with some flights carrying three separate codes!

Computer Reservation Systems

The overwhelming majority of flights are booked through travel agents who use a computer reservation system (CRS) to display flight combinations which meet the customers requirements and make reservations. The first CRS was designed by IBM for American Airlines and installed in 1962. The system was known as the “Semi-Automated Business Reservations Environment” or SABRE and cut the reservation process time from 45 minutes to three seconds. The system was extended to allow travel agents to sell tickets on other airlines; every time this was done American received a fee. Thus SABRE became a major and highly profitable source of revenue for American.

Following deregulation the competition between US airlines intensified and a useful benefit of the CRS to the owner airline became apparent. The CRS could be programmed to always display American's flights before those of its competitors thus giving American a significant competitive advantage. In response the other US airlines set up their own CRSs. Although regulations were introduced in the US and Europe to prevent airlines owning CRSs from gaining unfair advantages over other airlines there is no doubt that owning or being part of a group of airlines owning a CRS is essential for international airlines. Within Europe the major systems are Galileo and Amadeus.

BA after Privatisation

The flotation of BA in February 1987 was a triumph for the Company, in particular the Chairman Lord King and Chief Executive Colin Marshall. It was also a great success for the Thatcher government; a business which 10 years before was an inefficient, consistent loss maker was now a profitable enterprise, able to compete with even the giant US airlines. The revenues from the flotation were used to pay off the large debts owed by BA, a classic “debt for equity” swap on a grand scale. However there was a contradiction at the heart of the privatisation; as with many of the other privatised state companies such as British Telecom and the utilities, in competitive terms all that had happened was that a state-owned monopoly had been converted into a privately owned monopoly. In domestic terms BA dwarfed its competitors and was very happy to use its size to beat off anything which might remotely threaten its competitive position. The situation was remarkably similar to that in America during the early 1980s when the burst of free competition following deregulation gradually fizzled out as the smaller carriers either went out of business or else were acquired by the larger carriers.

The US pattern was repeated in Britain. The first casualty was BCal which had been officially designated as BA's main competitor. By the early 1980s it was clear that in order to survive BCal had to acquire more international routes. This could only be done by the government taking them away from BA and giving them to BCal because of the restriction imposed by bilateral agreements permitting only one designated flag carrier on each route. The government decided against this as it did not want to risk any damage to BA as privatisation approached. Within six months of the BA privatisation the merger of the two airlines was announced; although the merger was referred to the Monopolies and Mergers Commission (MMC) it was approved because BCal could no longer survive as an independent airline. In 1992 BA acquired Dan-Air, another UK independent airline. Once again the MMC approved the acquisition despite the fact that BA would now be the sole carrier on a large number of domestic routes.

UK based Competitors

Although the demise of BCal and Dan-Air reduced competition for BA the relaxation of the regulatory climate permitted other UK based airlines to compete with BA on its domestic and international routes. British Midland Airways first major challenge to BA was in the Glasgow-London route in the late 1970s. This was BA's most important route which it operated as a “shuttle” service. In its original form passengers could not either prebook nor prepay; instead the airline guaranteed that provided a passenger checked in around 15 minutes before the scheduled departure time they were guaranteed a seat, even if a second or even third aircraft had to be used for the journey. Payment was made during the flight so that instead of serving drinks and food the cabin staff wheeled around cash machines. BCal also operated from Glasgow to London but to Gatwick rather than Heathrow so did not offer direct competition. When British Midland started its service between Glasgow and Heathrow it was a prebook, prepay service but with a good standard of catering. This service proved very popular, especially the early morning flights where passengers could enjoy a substantial breakfast. Eventually BA had to withdraw the “pay on board” element of the shuttle and the cabin staff reverted to serving drinks and snacks.

Although British Midland has a very small international route structure compared to BA it has made full use of codesharing to offer passengers easy access to a wide range of destinations. The airline could be classed as an “irritant” to BA, particularly as its Chairman, Sir Michael Bishop, has constantly sought to influence public and government opinion in an effort to reduce BA's monopoly position.

On long haul routes BA's only real UK based competitor is Virgin Atlantic Airways. Owned by Richard Branson it started operation between London Gatwick and Newark, New Jersey using refurbished Boeing 747s flown by a substantial proportion of ex-BA pilots in the late 1980s. Although the threat to BAs prestige Heathrow-JFK route was only indirect the low price but good service offered by Virgin was successful at attracting economy class passengers who might otherwise have flown with BA. Furthermore Branson showed great ambition by starting other services across the North Atlantic and even to Far Eastern destinations which were some of BA's most profitable routes. What BA found even more threatening was that Virgin also began attracting business class passengers with its “Upper Class” service and even succeeded in obtaining landing slots at Heathrow.

BA and in particular Lord King greatly underestimated the threat posed by Virgin. King did not regard Branson as a serious businessman and assumed that Virgin would soon collapse as Freddie Laker's undercapitalised airline had done ten years earlier. But although Branson was a highly unconventional owner the actual running of Virgin was carried out by experienced managers while Branson concentrated on publicity stunts which kept the brand name constantly in public view. Branson also had substantial capital available from the sale of other business interests. When it became apparent that Virgin would remain a serious and growing competitor BA tried to lure the lucrative business class customers back by using what the courts later ruled to be illegal tactics. BA was forced to compensate Virgin and Lord King issued a public apology. Shortly after, in February 1993, Lord King retired as Chairman of BA is what many saw as a decision to take the blame for the mishandling of the Virgin threat.

BA Aircraft

The explicit link between the earlier incarnations of BA and the British Aircraft industry have already been mentioned. This link was not explicitly broken until the late 1970s when the airline began to pursue a policy of standardising on one manufacturer, Boeing. Figure 1 shows the percentage of the long and short/medium haul fleets which were British.

In the period up to 1965 the only non-British aircraft in the short/medium haul fleet were US DC-3s. When these were sold the fleet became 100% British. There were some advantages in this; customers liked to “fly British”. But although these aircraft were technically advanced in some ways (the Trident pioneered the use of automatic landing systems in commercial aircraft) they were considerably more expensive to run than American aircraft due to higher fuel and maintenance costs. As BA came under greater pressure to reduce costs aircraft purchases from 1977 onwards were mainly from Boeing.

The long haul fleet always had a smaller proportion of British aircraft because apart from the Comet and the VC10 in the 1960s there were no British aircraft capable of operating on transatlantic routes. From 1973 on the Boeing 747 has gradually become the dominant aircraft in the fleet and the small percentage of British aircraft from 1981 onwards consists of seven Anglo-French Concordes.

From the early 1980s the official policy of BA has been to standardise on Boeing aircraft to reduce maintenance and pilot training costs and take advantage of advantageous financial terms. Although it owned 10 Airbus 320 aircraft in 1997 these were acquired following the acquisition of BCal which had placed orders for them before the take-over. In 1999, however, BA announced that it would replace older Boeing 757s with smaller Airbus A319s and A320s as part of its revised fleet strategy to concentrate on higher yield markets. From BA's point of view the operation of a modern, reliable and standardised fleet has been a key component of its strategy to reduce costs and offer an attractive product as it attempts to compete on a global scale.

BA: From International to Global Airline

In the years after privatisation BA set itself the target of becoming the world's best and most successful airline. In order to achieve this ambitious goal the Company believes that it has to become a global airline, able to operate services to and from destinations all round the world. Robert Ayling, the current Chief Executive has stated that he expects that the industry will follow the pattern of several other service industries and become dominated by a small number of very large companies; it is BA's objective to be one of these. In this section we shall examine how BA has developed since privatisation, but we shall consider briefly one of the main sources of the airline's competitive advantage - its domination of London airports.

London Airports

Heathrow Airport first opened for international commercial traffic in 1946 and BOAC immediately moved its operations there from Croydon with BEA following suit in the early 1950s. Between them the two carriers dominated the airport which steadily grew into the busiest international airport in the world. Heathrow has a pivotal position in international aviation because of its geographical position relative to North America and Europe and most major international airlines operate services through the airport. This position has been challenged in recent years by Amsterdam Schipol and even Manchester but with limited success.

As a result of this growth the airport is so busy at peak periods that departures and landings have to be controlled through a process of slot allocation. Any new entrant has to obtain a slot; although the airport allocates a small number of slots each year to new entrants BA has “grandfather rights” to a large percentage of slots. Thus the only way for other airlines to increase market share is for the UK government to take slots away from BA. This has been done on a small scale to allow British Midland and Virgin Atlantic to build up a challenge to BA. However the 1996 position where BA accounted for around 40% of passenger movements has not altered very much and BA can be relied upon to mount a spirited defence of its rights to retain control of as many slots as it can. Since privatisation BA has continued to invest heavily at the airport; as well as its own terminal for long haul services the airline also owns substantial maintenance, training and cargo facilities.

Although in many ways Heathrow resembles the “hub” airports dominated by large US airlines, the degree of domination by BA of Heathrow is somewhat less that that of, for example American Airlines at Dallas/Fort Worth (70%) and Delta at Atlanta (76%). Flights are not co-ordinated in the way that Sabena operate at Brussels with a large number of flights arriving during a short period followed by a large number of departures soon after. BA essentially operate a linear route network with Heathrow as its main base.

Following its take-over of BCal and Dan-Air, BA acquired routes from Gatwick which had developed in the early 1960s as London's second airport. In recent years BA has extended its operations at Gatwick and some of its franchise airlines are based there. Gatwick itself has grown considerably and is forecast to be approaching capacity in the next few years unless a second runway is built. The airline has also begun operations at Stansted which has been designated as London's third airport, through its go subsidiary.

Building a Global Brand - a new strategic direction

There are two elements to the creation of a brand image for an airline; the first is the image of the airline itself and the second is the various levels of service that it offers and which can be marketed separately.

The BA image was somewhat tarnished by the late 1970s; the airline had acquired a (justified) reputation of mediocre service delivered by rather aloof and uncaring staff. The original Shuttle service between Glasgow and London discussed earlier exemplified this. One of the great achievements of the new management in the 1980s was to change the culture of the company to customer focus. New livery for the aircraft and higher quality of service gradually transformed the competitive position of the airline.

The airline also established brand names for each of the classes of service that were provided making them more distinctive than the standard first, business and economy classes offered by other airlines. Indicative fares for each class of service are shown in Table 3. Each service is regularly reviewed; major changes are planned during 1999.

• Concorde Only two airlines fly Concorde, BA and Air France, giving them a unique form of competitive advantage which can be used to create a very positive image for the airline as a whole. The supersonic London - New York service arrives at New York at an earlier local time than the departure time allowing customers to carry out a full day's business before returning. Apart from luxurious standards of service on board, very rapid check-in and arrival facilities at either end of the journey maximise the time savings. As might be expected for such a unique service the price is high - some 12% higher than first class .

• First Class This is the brand name for the conventional top-class service. It is only available on intercontinental flights and offers a very high standard of on-board service (including beds) and facilities at departure and destination airports.

• Club World, Club Europe The brand name for business class on intercontinental and European flights. Both brands offer exclusive check-in facilities and special lounges at airports. Service on intercontinental flights is of a high standard, while that on European flights is lower as flight times are shorter.

• World Traveller, Eurotraveller The brand name for economy class. BA claims that the service offered is higher than on other airlines with more space and good catering.

In June 1997 BA announced what it called a major change to their corporate identity:

Based on what is believed to be the largest consumer research exercise in the history of the travel industry, the aim is to establish British Airways as the undisputed leader in world travel as it flies into the 21st century and to build on its British strengths.

The changes were explained in a speech by Robert Ayling:

Like every successful company, we need to grow and increase shareholder value. We cannot do this and cannot prosper as a company if we restrict ourselves to taking people to and from the UK. Our existing livery has served us well. It helped transform our company in preparation for privatisation. Now all of our research is telling us we must change again, to prepare for the exciting new era that the new millennium will bring. We need a corporate identity that will enable us to become not just a UK carrier, but a global airline that is based in Britain. British Airways remains proudly British, but perhaps we need to lose some of our old-fashioned Britishness and take on board some of the new British traits. Abroad, people see this country as friendly, diverse and open to other cultures. We must better reflect that.

The key element in this new strategic direction is summarised in the phrase “a global airline that is based in Britain”. Before June 1997 a design incorporating elements of the Union Jack were incorporated in the tail livery of all BA aircraft - a welcome sight for British travellers in airports far from home. Now the company wanted to create a new image which would be recognisable and attractive to non-UK as well as UK travellers. A new range of designs was created by a design consultant with fifty “world images” based on ethnic art styles in a wide range of countries; these images would appear on aircraft, vehicles, tickets, baggage tags - anything that currently bore the British Airways name.

The reaction to the new designs, prominently featured on aircraft tailfins, was somewhat mixed. Passengers could no longer identify a BA aircraft at a distance and many UK travellers found the designs ugly and garish. Some practical problems emerged: air traffic controllers and other pilots had difficulties identifying BA aircraft on the ground, especially at night; if rudders needed changing the replacement did not match the design on the rest of the tail. Other UK airlines mocked the changes and the irrepressible Richard Branson announced that Virgin aircraft would in future carry a design in which the Union Flag would be very prominent.

Although BA defended the new image vigorously it could not avoid some embarrassment when a newspaper revealed that Robert Ayling was colour blind and may not have realised how jarring the new designs were. Although no formal announcement was made it seems likely that the ethnic designs will be quietly dropped except for one loosely based on the Union flag. It is too early to tell what the longer-term effect of the changes will be.

Franchises

As part of the rationalisation required to reduce costs in the early 1980s BA cut down on many loss making domestic routes in order to concentrate on strengthening its international activities. The licences for these routes were acquired by other airlines some of whom have since become BA franchises, even though they may be owned by BA's competitors. These small airlines with reduced overheads and using aircraft which are more suited to short haul, low density routes can compete with surface transport and offer feeder services to BA's international services, mainly in the UK but more recently in South Africa and Denmark. The franchise operations are managed through British Airways Express. Table 1 lists BA's franchise airlines in 1999.

The precise relationship between BA and the franchise airlines varies; for example Brymon Airways is a fully owned subsidiary of BA and it was announced in 1999 that BA would acquire CityFlyer Express.

Acquisitions/Partnerships

Following privatisation, with few debts and the ability to raise large amounts of capital, BA was in a strong position to make major acquisitions to build a truly international airline. The obvious target was one of the major American airlines; such an acquisition would have given BA access to that airline's domestic route network and the opportunity to offer transatlantic passengers connections both within Europe and North America. In this way BA hoped it could overcome the ban on operating US domestic routes imposed by the US government discussed earlier.

• BA and United Airlines announced a marketing partnership in 1987 and this was extended to a proposal for BA to participate in a buyout in collaboration with a number of third parties which would have left it with 15% of United. The bid was withdrawn later when the other partners failed to raise sufficient finance.

• In 1992 BA announced a conditional agreement to acquire up to a 44% ownership of USAir. In return BA would inject much needed capital into USAir. The proposal was withdrawn after the US government demanded concessions by the UK government which would have given US airlines traffic carrying rights within Europe. In early 1993 a revised agreement was announced which stopped short of the full integration envisaged in the earlier proposals but did include BA directors joining USAir's board. A full programme of co-operation including codesharing and sharing aircraft was announced at the same time. This “strategic alliance” was approved by the US government and proceeded apace. However the alliance came under strain in 1994 as USAir's losses mounted. Despite a brief return to profit in 1995 it became apparent that BA was seeking an alternative partner. BA disposed of its shareholding in USAir in early 1997.

• In June 1996 BA announced plans for a “broad alliance” with American Airlines, the second largest US airline. It was estimated that between them BA and AA would control over 20% of transatlantic routes as well as having a significant share of total world traffic. The alliance required approval of both the UK and US governments as well as the EU and rival airlines lost no time in lobbying against the proposal which they perceived as a major threat. Prominent among these was Virgin Airways; Richard Branson placed large advertisements in British newspapers arguing that approval of the alliance would lead to a reduction in competition and eventually much higher fares across the Atlantic. Although both BA and AA proceeded with some elements of the alliance it became apparent that Brussels and the US government would require BA to give up a significant number of slots at Heathrow as a condition for approval. The proposals were quietly shelved in mid-1999.

Thus BA's attempts to build an integrated partnership across the Atlantic have so far been fruitless. However BA has had some success in other countries, albeit on a limited scale. Table 2 lists BA's subsidiaries and associated undertakings. Of these the Qantas shareholding is the most significant as it represents a foothold in Australasia. Even this partnership was delayed until the Australian equivalent of the MMC approved the investment. Ownership of the two French airlines gives BA access to domestic routes in France and up to 22% of landing slots at Paris Orly airport.

The oneworld Alliance

In February 1999 BA announced the formation of an alliance between BA, American Airlines, Canadian Airlines, Cathay Pacific and Qantas (joined in August 1999 by Finnair and Iberia). The purpose of this alliance is to offer passengers many of the benefits of a global airline even if the alliance members remain independent. Passengers travelling on a ticket issued by one of the members can share frequent flyer points, change tickets to another member at any member's ticket office, use each members' airline lounges and obtain assistance during transfer from staff of any member. The stated purpose of the Alliance is to offer more convenient and seamless global travel to passengers. It is expected that other major airlines will join the Alliance in the near future.

It seems likely that until government restrictions on foreign ownership of national airlines are lifted that this “global alliance” is the nearest that we are going to get to a truly global airline. There is already one competing alliance recently announced; the “Star Alliance” between Thai Airlines, Lufthansa, SAS, Ansett Australia, Air New Zealand, Varig, Air Canada and United Airlines. No doubt the next few months will see other such alliances formed. The test of their success will be whether or not they can attract and keep passengers within the member airlines.

It is interesting to consider the comments made by Robert Ayling to a conference on deregulation in 1993:

“National interest is no longer the same as producer interest. The producer is less an arm of the state and more of a normal international business that happens to be based in the country. If the choice boils down to what is good for the consumer against what is good for the indigenous airlines, how is a nation to decide? And if a country wishes to maintain a multi-airline policy, but its market is too small to support one airline efficiently, should airline competitiveness or national policy be sacrificed? .... the nationality principle is weaker today than it ever has been.”

Current Issues

The airline industry as a whole is experiencing difficult times and BA is not immune. Two signs of these problems are the decline in profits in 1998 and 1999 shown in Table 4 coupled with the decline in the BA share price shown in Figure 2. Since mid-1997 BA's share price has under performed the rest of the stock market. The initial trigger for this was the collapse of the Far Eastern economies in mid-1997 which severely reduced demand for air travel to and from that region. The effects of this are still being felt with no growth in that market for BA in 1998/99. There are however a number of other reasons why profits have declined:

• Growing competition stimulated by further deregulation throughout the world reducing entry barriers. Some routes, particularly those across the Atlantic, are suffering from over-capacity, leading to fare discounting.

• General economic conditions throughout the world have resulted in lower growth than expected. Furthermore passengers are tending to downgrade and fly economy class rather than business class, reducing profit margins.

• Fuel costs have begun to rise sharply during 1999.

• Start-up losses at the new go subsidiary.

The company is responding to these threats in a number of ways, outlined by Robert Ayling:

• focusing on the “premium” end of the market (first and business class passengers) which has much higher margins than the low fare economy market. In order to do this older Boeing 747s and 757s are being phased out to be replaced by smaller Boeing 777s and Airbus A319s and A320s. The effect will be to reduce capacity for economy passengers.

• raising the standards of service, particularly to Club Word passengers.

• continuing the Business Efficiency Programme which is expected to have achieved overall savings of £1 billion between March 1996 and March 2000.

• ensuring that through staff recruitment and training that the company has the correct mix of skills to deal with a wider range of passengers

• continuing to build the network of alliances to create a global airline.

During the 1990s BA has sold off what it considers to be non-core activities, such as engine overhaul, aeronautical chart production, in-flight catering and its stake in the Galileo International CRS. The refocusing strategy outlined above is consistent with this. However there is a curious anomaly in the creation of the go subsidiary. go is a low cost, no frills airline competing in the “rock bottom” end of the market which was fiercely opposed by competitors when it was launched in 1998. It is based at Stansted airport and uses leased aircraft to operate services to a limited number of popular European destinations.

"I think the public should seriously consider boycotting Go if there is an Easyjet plane or a Ryanair plane supporting an independent carrier. Unless BA say: 'We can afford the same fares at Heathrow and the same fares at Gatwick', I think that what they're doing is blatantly anti-competitive. If you look at the history of BA you will see the airlines that have been driven out of business - Laker, BCal, Dan-Air, Air Europe and others in the past - and see what happens when one of these airlines goes out of business - BA shoves its fares up almost immediately to high levels until another competitor comes along."

Richard Branson, March 1988

Perhaps BA is opening a “second front” in a different market where the key success factors are different to those in its core market.

Although growth is forecast in most segments it is unlikely to be sufficient to restore the profitability of the industry. With the news in October 1999 that Debonair, one of the pioneers of low price European flights, had ceased trading and that Virgin Airways is seeking partners willing to inject capital it seems likely that in the next couple of years further consolidation is likely to occur.

Tables and Figures

Figure 1: BEA/BOAC/BA Fleet

Source: Annual Reports

Figure 2: British Airways share price (UK pence) relative to FTSE all-share index

Source: Datastream

Airline	Destinations	Since
BASE	Holland	1998
British Mediterranean Airways	London, Beirut, Amman, Damascus, Tblisi, Alexandria	1994
British Regional Airlines [Manx Airlines (Europe) and Loganair]	Internal Scottish services	1995
Brymon Airways [100% owned by BA]	Plymouth, Bristol, Newcastle, Aberdeen, Southampton, Channel Islands, Eire, Paris	1994
CityFlyer Express	Gatwick, Newcastle, Leeds, Jersey, Guernsey, Antwerp, Dublin, Dusseldorf, Rotterdam	1993
Comair	Cape Town, Durban, Harare, Windhoek, Johannesburg	1997
GB Airways	Gatwick, Valencia, Nurcia, Jerez, Seville, Malta, Gibraltar, Madeira	1995
Maersk Air (UK)	Birmingham, Newcastle, + other European destinations	1994
Sun-Air of Scandinavia	Denmark and Southern Scandinavia	1997

Table 1 : BA Franchise Airlines, March 1999

Source: British Airways Annual Report

Airline	Country	Equity	Date
Qantas Airways	Australia	25%	1992
Air Liberté	France	100%	1996
Deutsche BA	Germany	100%	1992
TAT	France	100%	1997

Table 2: BA Major Subsidiaries, March 1999

Source: BA Annual Report

Class of Service	Fare
Concorde	£6,342
First Class	£5,590
Club World	£3,396
World Traveller (Standard)	£880
World Traveller (Advanced Purchase)	£239

Table 3: BA return fares from London to New York in October 1999 (including taxes)

Source: British Airways

£ million	1999	1998	1997	1996	1995
Turnover	8,915	8,642	8,359	7,760	7,177
Cost of Sales	(8,296)	(7,978)	(7,663)	(6,903)	(6,436)
Gross Profit	619	664	696	857	741
Administrative Expenses	(177)	(160)	(150)	(129)	(268)
Operating Profit	442	504	546	728	473
Other Income	214	243	262	206	167
Exceptional Items	51	164	145	(1)	0
Profit before Interest	707	911	953	933	640
Interest Paid	(482)	(331)	(313)	(348)	(313)
Profit before Tax	225	580	640	585	327
Taxation	(19)	(133)	(90)	(112)	(77)
Profit after Tax	206	447	550	473	250
Extraordinary Items	0	13	3	0	0
Profit for Period	206	460	553	473	250
Dividends	(191)	(176)	(154)	(131)	(119)
Retained Profit	15	284	399	342	131

Table 4: British Airways Group profit and loss accounts (Year end March 31)

Source: FAME and BA Annual Reports

£ million	1999	1998	1997	1996	1995
Fixed Assets
Property	1,331	1,181	988	866
Equipment	301	259	263	234
Fleet	8,207	7,227	5,726	5,726
Tangible Assets	9,839	8,667	7,588	6,826	6,163
Investments	402	388	684	531	471
	10,241	9,055	8,272	7,357	6,634
Current Assets
Stocks	84	75	78	104	70
Cash at bank and in hand	112	50	76	48	64
Debtors	1,336	1,432	1,412	1,374	844
Short-term loans and deposits	1,051	688	598	1,158	1,451
	2,583	2,245	2,164	2,684	2,429
Creditors: amounts falling due within one year
Trade Creditors	(1,010)	(1,000)	(983)	(1,024)	(845)
Short Term Loans & Overdrafts	(603)	(375)	(572)	(361)	(321)
Other Current Liabilities	(1,468)	(1,446)	(1,605)	(1,439)	(1,154)
	(3,081)	(2,821)	(3,160)	(2,824)	(2,320)
Net Current Assets (Liab.)	(498)	(576)	(996)	(140)	109
Total assets less current liabilities	9,743	8,479	7,276	7,217	6,743
Creditors: amounts falling due after more than one year
	(6,356)	(5,128)	(4,208)	(4,664)	(4,653)
Provisions for liabilities and charges	(32)	(30)	(58)	(59)
	(6,388)	(5,158)	(4,266)	(4,723)	(4,653)
Total Assets less Liabilities	3,355	3,321	3,010	2,494	2,090
Shareholders Funds
Issued Capital	268	260	251	240	239
Reserves
Share Premium Account	764	650	565	471	464
Revaluation Reserves	290	294	297	302	304
Profit (Loss) Account	2,033	2,117	1,871	1,481	1,083
	3,087	3,061	2,733	2,254	1,851
	3,355	3,321	2,984	2,494	2,090

Table 5: British Airways Group balance sheets (Year end March 31)

Source: FAME and BA Annual Reports

Bibliography

BA Annual Reports

Dienel H-L and Lyth P Eds: Flying the Flag - European Commercial Air Transport since 1945 Macmillan Press Ltd, London 1998

Hanlon P: Global Airlines - Competition in a Transnational Industry Butterworth-Heinemann, Oxford, 1996

Marriott L: British Airways Second Edition, Ian Allen Publishing, Shepperton, Surrey 1997

Rendall I: Reaching for the Skies BBC Books, London, 1988

Sm352 Handbook September 2001 Page 26

---