Question

What are the forces driving competition in the airline industry? evaluate each of the six forces in the task environment to ascertain what drives the level of competitive intensity in this industry.

Which of these forces are changing?

Answer 1

answer-

The forces which are driving competition in the airline industry are-

• buyer
• supplier
• new entry
• substitutes
• rivalry
• Economic

Buyer Power

With the proliferation of online ticketing and distribution systems, fliers no longer have to be at the mercy of the agents and the intermediaries as well the airlines themselves for their ticketing needs. Apart from, the entry of low cost carriers and the resultant price wars has greatly benefited the fliers. Moreover, the tight regulation on the demand side of the airline industry meaning that passengers and fliers have been protected by the regulators means that the balance of power is tipped in their favor. All these factors make the airline industry cede power to the consumers and hence, the power of buyers is moderate to high as per Porter’s Five Forces methodology. Apart from this, the buyers can engage in “price discovery” meaning that price fluctuations do not deter them as they have multiple channels through which they can book their tickets.

Supplier Power

The power of suppliers in the airline industry is immense because of the fact that the three inputs that airlines have in terms of fuel, aircraft, and labor are all affected by the external environment. For instance, the price of aviation fuel is subject to the fluctuations in the global market for oil, which can gyrate wildly because of geopolitical and other factors. Similarly, labor is subject to the power of the unions who often bargain and get unreasonable and costly concessions from the airlines. Third, the airline industry needs aircraft either on outright sale or wet lease basis which means that the airlines have to depend on the two biggies, Airbus, and Boeing for their aircraft needs. This is the reason the power of the suppliers in terms of the three inputs needed for them is categorized as high according to the Porter’s Five Forces framework.

New Entry-

The airline industry needs huge capital investment to enter and even when airlines have to exit the sector, they need to write down and absorb many losses. This means that the entry and exit barriers are high for the airline industry. As entry into the airline industry needs a high infusion of capital, not everybody can enter the industry, which in addition, needs sophisticated knowledge and expertise on part of the players, which is a deterrent. The exit barriers are also subject to regulation as regulators in the United States do not let airlines exit the industry unless they are satisfied that there is a genuine business reason for the same. Moreover, the airline industry leverages the efficiencies and the synergies from the economies of scale and hence, the entry barriers are high. Therefore, applying Porter’s Five Forces framework, we find that the airlines pose significant entry and exit barriers, which means that the impact of this dimension is quite high.

Threat of Substitutes

The airline industry in the United States is not at threat from substitutes and complementarities as unlike in the developing world, consumers do not necessarily take the train or the bus for journeys. What this means is that flying is a natural phenomenon for the consumers and hence, the substitutes in terms of the train and bus is minimal in its impact. Of course, many Americans motor down (use their cars for longer travel as well) which means that there is the threat of this substitute. As for complementarities, the provision of services like free Wi-Fi, a la carte meals, and passenger amenities offered by the full service airlines does not really translate into more passengers as in the recent past; fliers have been induced more by lower fares than these aspects.

Intensity of Competitive Rivalry

As mentioned in the introduction, the airline industry in the United States is extremely competitive because of a number of reasons which include entry of low cost carriers, the tight regulation of the industry wherein safety become paramount leading to high operating expenses, and the fact that the airlines operate according to a business model that is a bit outdated especially in times of rapid turnover and churn in the industry. Apart from anything else, the airline industry is regulated on the supply side more than the demand side, which means that instead of the airlines being free to choose which markets to operate and which segments to target, it is the fliers who get to be pampered by the regulators. This is the reason why low cost carriers have literally grounded the full service airlines and when combined with the intense competition that was always the case in the United States, the result is that the sector is one of the most competitive in the country.

Economic Factors

Economic factors have a deep influence on the airline industry. The recent economic recession made the travel market to see its lowest period. Both economy and premium travelling declined. Additionally, airlines were also under the pressure to cope up with the increasing fuel prices. These factors made it difficult to generate profits. Moreover, airlines also struggled with increasing labour demands from the part of employees. All these economic factors resulted in increased bankruptcies of major airline companies.

The factors which are changing are new entry because the entry of business in airline industry is very capital intensive and entry one made then remain in the competition is tough when economy may result bankruptcy to new entries and decrease the competition to old companies in the industry.