The Effect of Political Factors on the Airline Industry and the Brewing Industry, 2005
Politics has a huge impact on all businesses, and the range of its influence is broad. Political factors include statutes which may be implemented because of a UK governmental decision or a decision in Europe, or by the UK being a signatory to an international agreement. Other legislation arises in response to issues such as terrorist threats.
Other political influences include trade agreements, restrictions and opportunities arising from foreign governments’ policies or opposition groups in the form of political parties or pressure groups formed by the public to address specific issues, who may challenge, delay or obstruct government plans.
This essay looks at the impact of recent political factors on the airline and brewing industries.
The Airline Industry
In a speech delivered in June 2005, Derek Twigg, the Transport Minister outlined progress on the Aviation White Paper. He recognised issues with capacity, particularly with recent increases in demand for low-cost flights (Twigg 2005).
A fifth terminal at Heathrow Airport is being constructed, and additional runways are planned at Stansted and Heathrow. However, there is opposition, focused on noise pollution, fuel pollution, the strain on roads and rail links to airports, and the destruction of countryside to accommodate airport expansion. The government’s pursuit of its policies depends, stated Twigg, on the ability to meet strict environmental standards, and airlines’ increased expansion depends on successful implementation of these policies.
The UK government has secured a commitment from airlines to improve fuel efficiency and reduce emissions, but this will require investment from the airlines. The industry must strike a balance, spending on initiatives to become more ‘green’ in return for an infrastructure development policy from the government.
The 9/11 terrorist attack on the US had immediate consequences, with a drop in demand. This has had particular impact in the US, where a number of airlines have survived only because of Chapter 11 of US bankruptcy laws, which allows continued trading with protection from creditors until profitability is achieved.
United Airlines has been operating under Chapter 11 for 3 years. Delta and Northwest are entering Chapter 11, and will probably follow a similar policy to United, focusing on international flights and disposing of smaller planes used for domestic flights (Field 2005). They will therefore continue to compete in the international market with protection: UK airlines would probably be forced out of business if they were to find themselves in a similar position.
US anti-terror legislation requires foreign operators to undergo an audit by the Federal Aviation Administration, and to have a Part 129 Licence. Demand for transatlantic charters has been difficult to meet at times, due to many carriers not having the necessary authorisation (Wastnage 2005). Meeting new legislative demands has an economic effect on businesses due to the additional financial and human resources required.
Terrorist attacks in holiday resorts are considered by many to be a response to foreign policy, particularly that of the UK and US. Consumer response is to book a holiday in an area considered safe, rather than to forego the holiday altogether, suggesting that airlines carrying holidaymakers should consider a portfolio of varied destinations.
The instability of the market due to international politics has encouraged some airlines to carry out work through contractors (for example, Air Atlanta), who will provide aircraft and crew without the demand for the level of commitment required with an airline’s own staff and aircraft investment.
The Influence of Europe
The UK is required to adhere to European laws which may affect airlines. For example, UK legislation is being broadened to encompass an EC directive on Age Discrimination. From October 2006, one of its effects will be to outlaw forced retirement before age 65 unless it can be justified (www.agepositive.gov.uk). Current practice at British Airways is to retire pilots at 55: as many transfer to other airlines, it would appear unjustified. Salaries are much higher for pilots with long service at BA and the effect of having to keep them rather than employing cheaper new pilots could affect profits.
The Iraq war has impacted on oil prices. It has been argued that the agenda behind the US/UK decision to go to war was oil-influenced, with the US increasingly reliant on Gulf oil and hence having a particular interest in control of oilfields in the region (Cable 2003).
Airlines are particularly sensitive to changes in oil prices due to their large amount of fuel consumption, and all airlines have recently had to choose between reflecting rising fuel costs in ticket prices or accepting reduced profits.
The ‘BRIC’ nations – Brazil, Russia, India and China – are set to become more economically influential in coming decades.
China has recently removed the barriers to private airline companies. Domestic flights in China have increased by 20% over a year, which equates to 17,000 extra flights per month (Brown 2005), as planes replace trains as the preferred method of domestic transport. This generates business for aeroplane manufacturers but places additional demands on the world oil supply. It is also part of a larger trend of China engaging more with the global economy, with the consequence of boosting wealth and consumption among its population.
The Brewing Industry
Brewing, as with airlines, is affected by green issues. In July 2005, the British Beer and Pub Association reported a continuing fall in the energy used to produce a pint of beer to achieve double the industry’s target, reducing CO2 emissions by 13.9% (www.beerandpub.com, press release 16/2005). Although reducing emissions requires investment, meeting targets qualifies the industry for a rebate on the Climate Change Levy.
Changes in Student Funding
The student market is important to the brewing industry. Changes to student finances over the last 15 years have seen a switch from non-repayable grants to repayable loans to support study, with tuition fees added to student costs. This has not reduced student spending as might be expected. The average student spends ?7000 per year and 70% of students have part-time jobs (Turner 2005). Debt is accepted as the norm to meet study and living costs, with a wide range of lending sources available. Money for drinking is hence readily available, and Reachstudents, an independent marketing consultancy, claims that 29% of student spending is on entertainment (www.reachstudents.co.uk), including drinking.
Extension of Licensing Hours
The UK Government has proposed extended licensing hours in England and Wales: however, legislation is being opposed by the Conservatives and LibDems as well as medical bodies and organisations working to reduce alcohol problems. Implementation in November is threatened which could affect permissions granted for Christmas and New Year and reduce takings during the most profitable trading period of the year (Wintour 2005).
Initial plans to implement a smoking ban only in pubs where food is served have been changed in favour of an outright ban on smoking in all pubs (e.g. Carr-Brown 2005).
Spirit is the UK’s largest pub chain and owns brands including Chef and Brewer. It suggests a gradual transition to pubs becoming non-smoking, anticipating that an immediate implementation could result in 5000 pub closures and 75,000 job losses across all pub companies. The chain JD Wetherspoon has already begun introducing a complete ban on smoking in a number of its pubs. However, it has recently reported a 4% drop in profits, with an even higher figure of 7% among its non-smoking pubs (Anon 2005).
Binge drinking is somewhat double-edged for the brewing industry. On the surface, the increase in drinking to excess would appear to bode well for brewing industry profits. However, drinking large volumes often takes place in conjunction with drinks promotions, where lower prices mean a higher quantity must be consumed to give the same profit.
JD Wetherspoon, responding to a recent drop in profits, suggested that the proliferation of binge drinking was keeping many consumers away from town centres and pubs (Anon 2005).
Government policy on binge drinking has been criticised for its reluctance to take more extreme measures (e.g Plant 2004): however, there is pressure on the government to take steps to tackle binge drinking and the consequences for the brewing industry are uncertain. Could it open up a more profitable market by creating a more pleasant drinking atmosphere, encouraging more people to drink moderately? Or could the amount drunk in the UK drop significantly, or measures be too little to impact on the current situation?
The brewing industry is affected by the increase in fuel prices caused in part by the Iraq conflict, discussed previously. Transport and distribution costs have been increased by the rise in fuel costs, and consumer spending is also impacted by increased petrol and diesel costs reducing disposable income.
While world oil prices affect fuel costs to some extent, a far greater proportion of the cost of a litre of petrol or diesel is the tax – both fuel duty and VAT – which are set by the Chancellor: domestic policy is having more effect than global oil price trends.
From the above, it can be seen that politics both in the UK and around the world impact on the airline and brewing industries in many different ways. While the industries can have some impact through lobbying the government, or by encouraging public support for industry-friendly policies, a significant proportion of political influences cannot be impacted by the industry, and potential threats and opportunities must therefore be addressed in each organisation’s business strategy.