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An Analysis Report on Barriers to Globalization and External Factors Affecting Kenya Airways

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An Analysis Report on Barriers to Globalization and External Factors Affecting Kenya Airways

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Executive Summary
Stiff competition, technological changes and the political and legal environment are the main factors determining the success of a company operating in the airline industry. Kenya Airways is subject to these factors and must find the best solution to help mitigate the adverse effects of these factors. It will help improve efficiency, effectiveness and the competitiveness of the company.
Liberalization of many economies accompanied by globalization has turned the face of doing business across the globe. It has led to the essence of competition among organization for prosperity and survival. Technological aspects have also improved communication across the globe leading to integrated systems connecting companies and businesses.
The report is an overview of the external environmental factors affecting Kenya Airways that is in the service sector in the Airline industry. The service sector requires up to date technology and is easily affected by the external environmental factors. These factors relate to the political stability, legal environment, social, cultural well-being, and the state of technology.

Table of Contents
Executive Summary…………………………………………………………….2
1.0 Introduction………………………………………………………………….4
2.0 Task 1 ………………………………………………………………………….5 2.1 Macro Environment analysis for Kenya Airways…………………………………..5 2.1.1 Political and legal factors………………………………………………………….5 2.1.2 Economic factors…………………………………………………………………….6 2.1.3 Social Factors………………………………………………………………………….7 2.1.4 Technological factors……………………………………………………………….8
3.0 Task 2……………………………………………………………………………..9 3.1 Barriers to globalization faced by Kenya Airways…………………………………..9 3.2 Kenya Airways Responses to barriers facing Globalization and their effectiveness ……………………………………………………………………………………….....12 3.2.1 Collaboration alliance strategy…………………………………………………13 3.2.2 Expansion of routes………………………………………………………………..14 3.2.3 Improvement of technology……………………………………………………..15 3.2.4 Fleet modernization and expansion…………………………………………..15 3.2.5 Hedging of fuel prices………………………………………………………………16
4.0 Conclusion………………………………………………………………………..16
5.0 Recommendations………………………………………………………………17
6.0 Reference List...................................................................................19
7.0 Appendix…………………………………………………………………………………………..20 7.1 Appendix 1: Company Profile……………………………………………………………..20

1.0 Introduction
The macroeconomic factors affect the well-being of Kenya Airways in several ways. The firm made a £ 42.8 million in 2008 due to the after effects of the political turmoil in Kenya as well as the global economic crises. Ebola, the outbreak caused closure of flights in some West African countries; leading to a loss of £26.5 million. Kenya Airways faces various globalization challenges such as stiff terrorism competition, variation in oil prices as well as changing consumer preference.
In the financial year 2014/2015 Kenya Airways posted the highest corporate loss in the nation by recording a loss of £ 169 million before taxation that is the highest in Kenya’s history. The great loss was greatly attributed to decrease in tourism in Kenya due to insecurity precipitated by the Al Shabaab Militia group and the Ebola epidemic that hit West Africa (Mutegi, 2015).
The airline is set to borrow Ksh. 4.2 billion from the government of Kenya as a cheap financing to help in mending its cash flow problems. The government is set to achieve this through a supplementary budget plan (Mwaniki, 2015). Before the airline would be given the bail out the government of Kenya demanded the restructuring of the company.
The report is an analysis of the factors macroeconomic and their significance to Kenya Airways as well as the barriers to globalization affecting the firm. The report analyzes the effectiveness of the company’s strategy to counter globalization, as well as providing necessary recommendations.

2.0 Task 1 2.1 Macro Environment Analysis for Kenya Airways.
The macro environment of a company denotes the external factors that influence the business of the company. To scan the macro environment for Kenya Airways PESTEL analysis will be reviewed considering the political and legal influence, the social influence as well as the technological and social influence. The PESTEL analysis is a crucial tool for the analysis of the market position of the company and the possible future it faces.
2.1.1 The Political and Legal factors
The political factors relate to the political stability, government regulation as well as the rules and regulations under which the company operates. Political stability, laws and regulations in Kenya and its neighbors affects the wellbeing of Kenya Airways. The rules and regulations relating to passenger safety, employee, corporate governance and other international regulation also affect the
The loss of £ 42.8 million by the Kenyan Airline company in the year 2008 was associated with the 2007/2008 post-election violence and its aftermath in Kenya. It was due to the collapse of the tourism sector in the period because of the ravaging violence that had hit the African nation. Many countries had lost confidence in the political stability in Kenya and countries issued travel advisories to their citizens.
The ban of miraa (khat) trade in the UK has fueled a loss of more than £3.2 million to Kenya Airways that strained its poor financial performance further. The Airline Company transported about 50 tons of the products to the United Kingdom through Heathrow Airport per week translating to above 2000 tons per annum (Mutegi, 2015).
Airways travel into Kenya is currently low due to a trail of terrorist attacks by the Extremist Al Shabaab Terror Network. After 147 students from Garissa University were murdered in cold blood and a series of terror attacks most countries including the UK issued travel advisories against the country. The UK advised its citizens to take precaution while visiting Kenya and avoid certain areas prone to terrorism. It added woes to the airline company leading to huge losses only for the Kenyan government to bail it from the economic crisis.
2.1.2 Economic factors
The economic aspect is related to prices to the customer as well as the costs incurred by the company. The Airways travel market in Kenya and Africa is becoming highly competitive with many airlines determined to woo the growing market. It has led to cutthroat competition that has adversely affected the airline. There is stiff competition from the Middle East Airlines such as Qatar Airways, Etihad Airlines, and the Fly Emirates that offering very low prices to tap the African market. Virgin Airlines that is famed for its great customer service is also present in the Kenyan and African market. Most customers opt for the cheaper airlines thus sidelining Kenya Airways planes.
Varying oil prices, as well as the 2008 economic recession, have also greatly affected the company. The year was marked by the devaluation of the Kenyan currency accompanied by the rising oil has led to the increasing cost to the Airways carrier leading to low profitability and reducing revenues. The global economic crisis coupled with increasing oil prices in 2008 contributed to the £ 42.8 million loss in 2008. There was an increase in fuel prices from $60 for a barrel to about $140 in the year.
2.1.3 Social factors
The social factors related to the demographic, culture and customer perception on quality. The factors have a crucial effect on the customer needs and trends. The social factors relating to the lifestyle changes and demand for quality by the customers has substantially affected the operations of Kenya Airways. Though Kenya Airways has boasted to be the pride of Africa, the airline has been linked with delays and unexpected cancelation of flights.
The outbreak of Ebola in the West African nations affected Kenya’s Airline West Africa nations to reduce its spread. There was a travel ban on Kenya Airways flights to Freetown in Sierra Leone and Monrovia in Liberia during for more than a year. The impact of the cost of not flying to these destinations from August 2014 to September 2015 is estimated to be between 3-4% lost revenues that are about £26.5 million (Miriri, 2015).
Changing tastes and preferences among customers who are difficult to predict have also affected the Kenya Airways market. The customers also complain of high flight costs accompanied by low-quality services. With the emergence of other airliners in the market such as Qatar Airways, Etihad Airlines and the Fly Emirates, the quality of services have changed coupled with efficiency and cost. These have proved difficult to determine customer’s changes of fashions and tastes.
2.1.4 Technological factors
Adoption of new technology means increasing the efficiency in production while reducing costs to offer affordable rates to the customers. It also involves improvement if effectiveness in handling customer queries as well as timely service delivery. The rapid development of technology is affecting the businesses all over the world hence there is strong need to react quickly to maintain a competitive advantage by offering the same innovative and modern services that competitors in the industry are offering.
In the world of digital migration, business operations have much diversified for instances currently in Kenya Airways internet booking for tickets and holidays have business as much time, and money is saved through the process. Currently, passengers wishing to travel can book their flight in advance online, and it’s the appreciation of technology that have made such services available to customers. Also online discussion platform has improved the firm's public image as interactions and complaints regarding various issues can now be addressed through such platforms. All this are products of improved technology.
Despite such positive feedbacks, Kenya Airways face inefficiencies in its services due to the high cost making its flight charges to be higher than those of the competitors. It is evident in subsequent losses of the company in the financial years ended 2014 and 2015. Also despite improved technology, concerns have been raised with increase incidences of successful drug trafficking and other illegal goods that have paved ways into countries unnoticed despite massive investment in security technology. It is a key concern in Kenya Airways.
Kenya Airways face inefficiencies in its services due to the high cost making its flight charges to be higher than those of the competitors.

3.0 Task 2
3.1 Barrier to globalization faced by Kenya Airways
Globalization is the new inevitable way of doing business; characterized by volatility, unpredictability, and competitiveness. Various challenges affect many firms in their ambition to go global, and Kenya Airways cannot be left out. It operates nationally, regionally and internationally hence there are numerous aspects affecting its efforts to go global.
Kenya Airways faces various globalization challenges, worst among them being terrorism. Other significant challenges facing the Airline are cut throat competition in air transport, change in technology and the fluctuating and volatile oil prices (Kamau, 2008). Other challenges affecting the Airline are the changing trends in customer tastes and preferences that have attracted new quality demands and expectation (Gichira, 2007). * Terrorism has posed a great threat to the airline travels to the country due to the adverse effect on tourism. Political instability and terrorism in the region has adversely hit the Airline business. Series of attacks in Kenya by the Al Shabaab militia group that is an Islamic extremist group from its neighboring country Somalia led to fall of tourism by 25% (Morris, 2015). The volatile security situation in the country led to countries such as Britain to issue travel advisories against Kenya. The cost of terrorism has an indirect negative impact on the air transport because there is the decrease in the air travels. It led to the decline in revenues for Kenya Airways; also, the company had an extra cost of hiring security personnel to enhance security (Morris, 2015). * It’s very expensive to run an airline industry, and thus such motives of cut throat competition prove costly for firms with a small capital base such as Kenya Airways. With its current financial problems, the company cannot focus on such motives rather on actions that will facilitate quick recovery from operating losses. Such marketing motives can only be used by well-established airlines whose capital base is large such as Qatar Airways, Etihad Airlines, and the Fly Emirates. With a strong push for trade liberalization in African countries, fear of entrance of well-established foreign airlines will use cut throat competition as their entrance strategy, and this makes future of such companies like Kenya Airways risky unless a quick rescue strategy is put in place (Stanley & Kamau, 2015). * Cut throat competition refers to instances in trade whereby competitors use strategic pricing and heavy promotions to eliminate or undermine their rival firms in the market (Stanley & Kamau, 2015). It’s mainly practiced by firms with such objectives: to increase their market power as well maintaining loyal and potential customers. With increased competitions firms are always in the move of maintaining their market share and formulations of strategies that will improve their market share. Cut throat competition requires well-established firms for its implementation to bore fruits. * With technology, the world has become a global village. Businesses have found themselves in a highly competitive working environment. There is reduced information asymmetry to consumers about the producers (Irungu, 2012). Firms are dealing with better-informed consumers whose information availability is at their fingertips. With the smartphone in the current world, all relevant information consumers’ needs are made accessible through the internet (Stanley & Kamau, 2015). The outcome is, firms are pressurized to change their operations, products, and services delivery to appeal to the ever-changing consumer demands. To companies like Kenya Airways, this has somehow proved difficult as such changes come with an additional cost and with its current financial distress it becomes impossible. * It’s approximated that fuel cost 50 percent of Kenya Airways to direct cost. Fluctuations in oil prices forced the company to write down the value of its fuel hedging contract worth £ 10.36 billion in the financial year 2014-2015. With such fluctuations, it proves increasingly difficult for Kenya Airways to compete favorably with such airlines especially in the Middle East that are world producers and suppliers of global oil. They are naturally endowed with the essential oil resources, and this tends to give them such markets advantages opposed to Kenya Airways and most of other airliners that their expansions are inhibited by the volatility and ever-changing oil prices. * Globalization has facilitated trade liberalization in most world nations due to the strong urge to economic development. It was noted in the conference held by Africa Airline Association (AFRAA) in South Africa that such liberalization has facilitated the entrance of richer and more foreign airlines that uses more advanced technology compared to those in African aviation industries. It raised concerns as such motives could lead to the collapse of national carriers caused by the advantage foreign airlines have strong capital base coupled with more advanced technology that is limited in African airlines (Stanley & Kamau, 2015). * It was noted taste and preference of consumers towards the use of African carriers would fall, and instead demand for foreign airlines would rise. Kenya Airways, for instance, have been strongly affected due to its limited capital that has reduced its competition in the market. It has impacted on its profitability as demand has fallen hence massive loss (FY 2014/15). The challenge becomes competing in an unattractive industry characterized by diversified consumer tastes and preferences.
3.2 Kenya Airways responses to barriers facing globalization and their effectiveness
To eliminate the barriers to globalization Kenya Airways need to come up with a comprehensive plan that covers all areas to ensure that it has its competitive edge in an uncertain, volatile and very competitive industry. To succeed in the airline market, Kenya Airways should focus on three Key strategies of growth, focus and cost efficiency (University of Nairobi, 2015). Kenya Airways has adopted various strategic responses to ensure that it correctly responds to the challenges facing globalization.
Kenya Airways has come up with strategies that are fairly effective and incomplete to stay competitive in the market. It is evident that there is ineffectiveness in these strategies because the company is on the verge of making losses with the highest loss in the financial year ended March 2015. Installation of safety management system, forming strategic alliances and use of loyalty programs are among the strategies that the airline company has adopted (Kamau, 2008). These strategies are effective with proper planning, control, coordination, and execution. The strategies that the airline has adopted are in details below:
3.2.1 Collaborative alliances strategy
Entering into strategic alliances with other airlines to help curb competition in the market as well as increase the customer royalty. The strategy has created new opportunities for the airline as it has enhanced flights in new markets (Gichira, 2007). The major reason for entering in these collaborative alliances is to give their esteemed customers the chance to use Kenya Airways travel in new destinations not offered before. The strategy enhances that customers have a variety of routes to choose to travel with their favorite Airline. The Airline offers the Flying Blue Program to its customers in which it has partnered with KLM a Dutch Airline. It mad Kenya Airways the first African Airline to join the Sky team in 2010 (Center for Asia Pacific Aviation, 2013).
In October 2012, Kenya Airways entered into a strategic alliance with Etihad Airways. The move was a mutual benefit to create the access of Kenya Airways to Asia and access of Etihad Airways to Africa (Center for Asia Pacific Aviation, 2013). The partnership greatly favored the Kenyan Airline because of its new access to Abu Dhabi as well as other 32 destinations that Etihad Airways reached at the time. The two partnerships are part of the Kenya Airways 10 year growth mission to transform Nairobi into the gateway for Africa while traveling to and from Asia with a major focus on China and India (Center for Asia Pacific Aviation, 2013).
3.2.2 Expansion of routes
Kenya Airways has also embarked on a mission to expand its routes initiating flights to new destinations such as Asia, Eastern Europe and other destinations within Africa (Gichira, 2007). New routes that the company has adopted include Kuala Lumpur, New Delhi, Bangalore, Toronto, Abu Dhabi, Shanghai, Sao Paulo and Berlin (CAPA, 2012). The airline offers affordable and competitive prices in several of these routes; there was also the acquisition of 49% shareholding of Precision Air incorporated in Tanzania (Gichira, 2007). There is the plan to expand the airlines functions to all the continents by 2017. The projected routes to the year ended March 2021 are in Table 1 below | FY2015/16 | FY2016/17 | FY2017/18 | FY2018/19 | FY2019/20 | FY2020/21 | City, Boeing and times a week | Toronto, 777-200LR, 3x | Chengdu, 787, 3x | Washington Dulles, 777-200LR, 3x | Xiamen, 787, 3x | Kunming, 787, 3x | Prague, 787, 3x | City, Boeing and times a week | Abu Dhabi, 787, 3x | Perth, 787, 3x | Hyderabad, 787, 3x | Moscow, 787, 3x | Dhaka, 787, 3x | Urumqi, 787, 3x | City, Boeing and times a week | Shanghai, 787, 3x | Chennai, 787, 3x | Chongqing, 787, 3x | Ahmedabad, 787, 3x | Seoul, 787, 3x | Hanoi, 787, 3x | Table 1: New projected routes for the Kenya Airways Flights | Extracted from: (CAPA, 2012) |

3.2.3 Improvement in technology
KQ has acknowledged the rapid changes in Technology and tried to ensure that its systems and services are up to date. The company set a modern internal communication system to digitalize all its internal integrated systems for efficient functioning (Gichira, 2007). The company staff is tech savvy; it is achieved by offering training based on technology. The company was among the first airlines follow the IATA guideline for the adoption of digital ticketing (Gichira, 2007).
The airline was globally recognized as an excellent service provider. The recognition earned its technical team a deal with the Embraer's global network to maintain its planes in Nairobi. The company ids one of the largest aircraft manufacturers in the world and is incorporated in Sao Paulo in Brazil (Standard Digital, 2015). The Engineering team for Kenya Airways has the ambition to be the most recognized in Africa. The deal will assist the company to increase its revenue as stipulated by its CEO Mr. Ngunze.
3.2.4 Fleet modernization
The company is on a mission to ensure that it maintains a state-of-the-art fleet through a modernization program has the new Boeing 787. The Company is also embarking on a fleet expansion program to serve better its customers. However the new Boeing 787 Dreamliners ordered by the Airline in 2006 did not actualize their dream of expansion (Business Daily, 2015).
The project ‘Mawingu’ had received nine Dreamliners at the cost of $225 million each by May 2005; however, none is in use. It led to serious cash flow problems that the airline could not afford to pay its employees (Business Daily, 2015). The planes had very high maintenance costs that were unaffordable to the extent that the manufacturers swore to confiscate them in case the left the Kenyan air. The solution was to sign a leaseback agreement with the AWAS a Dublin-based company, which agreed to repurchase the Boeing and lease it to Kenya Airways (Business Daily, 2015).
3.2.5 Hedging of fuel prices
To mitigate the risks that are caused by the oil prices, Kenya Airways hedges these prices. However, according to the Senate Committee report tabled by Professor Nyongo in the Senate the airline’s fuel hedging arrangements were drastic to the company due to the fall in the oil prices. The company’s ticket prices remained high because of the high fuel prices while other airline companies had low prices thus affecting the company (Daily Nation, 2015).

4.0 Conclusion
The PESTEL analysis is a crucial tool for the analysis of the market position of Kenya Airways and the possible future it faces. These macroeconomic factors have affected the well-being of Kenya Airways in various ways. One being the loss of £ 42.8 million by the Kenyan Airline company in the year 2008 contributed to the aftermath of the post-election violence and the increasing oil prices. Moreover, the other slap was he ban of miraa (khat) trade in the UK has fueled a loss of more than £3.2 million to Kenya Airways. The Ebola outbreak in West Africa was another aspect that led to the loss of 3-4% of revenues equated to £26.5 million in between August 2014 and September 2015.
Kenya Airways faces various globalization challenges, worst among them being terrorism. Other significant challenges facing the Airline are cut throat competition in air transport, change in technology and the fluctuating and volatile oil prices. Other challenges affecting the Airline are the changing trends in customer tastes and preferences that have attracted new quality demands and expectation.
Kenya Airways has entered into strategic alliances with other airlines to help curb competition in the market as well as increase the customer royalty. The strategy has created new opportunities for the airline as it has enhanced flights in new markets. Kenya Airways has also embarked on a mission to expand its routes initiating flights to new destinations such as Asia, Eastern Europe and other destinations within Africa. The ambitious project ‘Mawingu’ to acquire Dreamliners was unsuccessful. These planes go for about $225 that led to serious cash flow problems due to the very high maintenance costs that were unaffordable. The airline’s fuel hedging arrangements were drastic to the company due to the fall in the oil prices. These reasons led to the unsuccessful strategic plans.

5.0 Recommendations
The Airline should enhance that it should mitigate factors that have led to the adverse effects of macroeconomic factors and the barriers to globalization. The company as well as the Kenyan government should take necessary steps to help cope with the challenges.
Kenya Airways should ensure that its employees get comprehensive customer care training to ensure customers get the best service. It will guarantee very effective and efficient services that are up to the required standards as well as improve the competitive edge of the company. There should also be a complete restructuring of the company to enhance the efficiency of management. The £ 169 million loss should mean a complete change in the company’s management.
The company should also outsource independent management consultants and qualified auditors to help install strong management and internal controls. It will ensure that the company sets out new policies, practices and procedures that will enhance low costs, efficiency, effectiveness and its competitiveness in the market.
The government of Kenya should also ensure that the company gets tax free fuel rates. The aspect will reduce the dependence in hedging that is so expensive for the company. Moreover, fuel costs account for 50% of the company’s costs and reducing them will be of great advantage to the company. The company should also terminate the fuel hedge contracts before maturity. The amounts fined for the breach of contract will be lower than the losses accounted by hedging because of the reduced fuel prices.

6.0 Reference list
Business Daily, 2015. KQ signs leaseback deal for last three 787-8 Dreamliners. Business Daily, 9 December.
CAPA, 2012. Rapidly expanding Kenya Airways charts growth with plan to serve every inhabited continent by 2017 16-Apr-2012. Centre for Asia and Pacific Airlines (CAPA) Aviation Analysis, 16 April.
Center for Asia Pacific Aviation , 2013. Kenya Airways-Etihad alliance will create a powerful force in Eastern Africa, challenging Ethiopian. Center for Asia Pacific Aviation (CAPA), February February.
Daily Nation, 2015. Why Kenya Airways made Sh26bn loss. Daily Nation, 3 August.
Debrah, Y ; Toroitich, O, 2005. The making of an African success story: The privatization of Kenya Airways. Thunderbird International Business Review, 47(2), pp. 205-230.
Gichira, C. N., 2007. Challenges of Globalization and their Impact on Kenya Airways Limited, Nairobi: s.n.
Irungu, I. W., 2012. Influence of Information and Communication Technology on Performance of Aviation Industry - A Case of Kenya Airways Ltd , Nairobi, Kenya: University of Nairobi.
Kamau, G. W., 2008. Strategic Responses To Challenges Of Globalization By Kenya Airways, s.l.: s.n.
Massey, A., 2010. Lessons from Africa: New Public Management and the Privatization of Kenya Airways. Public Policy And Administration, 25(2), pp. 194-215.
Morris, H., 2015. Kenya visitor numbers fall 25 per cent as terrorism hits tourism. Telegraph, 12 June.
Mutegi, M., 2015. UK’s ban on miraa costs Kenya Airways Sh500m. Business Daily, 9 December.
Mwaniki, C., 2015. Kenya Airways gets Sh4.2 billion Treasury bailout. Business Daily , 8 December .
Standard Digital, 2015. Kenya Airways gets global recognition as service centre. Standard Digital, 8 July.
Stanley, K. & Kamau, M. W., 2015. Factors Affecting Strategic Choices in Airlines in Kenya: A Case Study of Kenya Airways. The International Journal Of Business & Management, May, 3(5), pp. 83-97.
University of Nairobi, 2015. Strategies Adopted By Kenya Airways Limited To Cope With Challenges of International Strategic Alliances, s.l.: University of Nairobi.

7.0 Appendix 7.1 Appendix 1: Company profile.
Kenya Airways Limited mostly referred to as KQ is a company established in Kenya and operates in the aviation industry. It opened doors in January 1977 after the winding up East African Airways and commenced business in February the same year (Debrah, Y; Toroitich, O, 2005). The company operated as a parastatal since its establishment until April 1995 and privatized in 1996.
The Airline is a public-private partnership with the Kenyan government owns majority of shares with (29.8.%) Stake, KLM comes second with a 26.73% stake in the company (Debrah, Y ; Toroitich, O, 2005). The other shares are owned by other private shareholders, the company’s shares traded on the Nairobi Stock Exchange (Massey, 2010). The company is based at Jomo Kenyatta International Airport, Nairobi. It operates a widespread link between regional services within Kenya and Africa as well as flights to the Middle East, Asia, and Europe. Domestically, the company operates 67 flights a week to Mombasa, Kisumu, Malindi and Nairobi. Internationally, Kenya Airways operates a scheduled passenger and load services to 24 international destinations with 45 flights a week. It serves 11 destinations in Sub-Saharan Africa, 7 in Europe and 6 in Asia, North Africa, and the Middle East. Additional to their services is the setting up of ground management services to other airlines and the handling of imports and exports. The company has an employment base approximating to 3986 employees with total assets amounting to £794.05 million as per the 2013/14 financial year.
The company made a loss of£ 169 million before taxation that is the highest in Kenya’s history in the financial period ended March 2015. This downward trend was attributed to increased instances of terrorist threats in recent years in Kenya as well as increased completions in the aviation industry.

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