Airline industry analysis by Porter’s Five Forces Essay
Airline industry analysis by Porter’s Five Forces
The Airline industry provides a very unique service to its customers. It transports people with a high level of convenience and efficiency that cannot not be provided by any other industry or substitute. Airline companies pride themselves on the way they treat their customer during the flight. They have things such as food, drinks, entertainment, and a welcoming staff. The service of transportation is provided in other industries but the airline surpasses all of them when it comes to timeliness. The geographic scope of the airline industry is at a global level. Some firms are able to fly their planes all over the world while others focus on smaller geographic areas.
The five forces model is one way to answer the first basic question in strategic management; “Why are some industries more attractive than others?” This model shows the five forces that shape industry competition; threat of new entrants, bargaining power of buyers, threat of substitutes, bargaining power of suppliers, and competitors. In order to analyze the airline industry we have look at each of these forces.
Bargaining power of Buyers
The airline industry is made up of two groups of buyers. First, there are individual flyers. They buy plane tickets for a number of reasons that can be personal or business related. This group is extremely diverse; most people in developed countries have purchased a plane ticket. They can do this through the specific airline or through the second group of buyers; travel agencies and online portals. This buyer group works as a middle man between the airlines and the flyers. They work with multiple airline firms in order to give customers the best flight possible. Between these two groups there is definitely a large amount of buyers compared to the number of firms.
There are low switching costs between firms because many people choose the flight based on where they are going and the cost at the time. This is some loyalty to firms but not enough for high switching costs. Each customer needs a lot of important information. They need to know the details of what is provided during the flight. Buyers need to understand the timing of the flight and the safety aspects of flying in general. The service provided is unique. Each airline has a niche. Some airlines focus on cost, while others focus on having the best amenities, etc. Overall the bargaining power of buyers has an extremely low threat in this industry.
Bargaining Power of Suppliers
Next we look at the bargaining power of the suppliers. In this case the major suppliers are the airplane manufacturers. The top two manufacturers in the world currently are Boeing and Airbus(Odell,Mark). In this industry the inputs are extremely standardized. Airline companies only seem to differentiate with amenities. The planes are very similar. Currently some manufacturers are trying to make their plans more ecofriendly.
Airline companies cannot easily switch suppliers. Most firms have long term contracts with their suppliers. Planes are such high capital products that firms probably make long term loan agreements and have more favorable credit terms when they don’t switch companies. It is difficult to enter into the plane manufacturing industry because of the capital needed to enter. The amount of money and expertise needed to make even one plane is around 200 million dollars. For this reason there are very few suppliers in the airline industry. Airline firms are the only source of income for these manufacturers so their business is extremely important. Based on these things the bargaining power of suppliers has a low threat as well.
Threat of New Entrants
Threat of new entrants is another major aspect of the five forces. This aspect has a low threat for the airline industry. There are two aspects that do however raise the threat level. First, there are extremely low switching costs. Second, there are no proprietary products or services involved.
Even with these two aspects the industry still has a very low threat overall. Existing firms have a large cost advantage. This industry requires a large amount of capital and without a strong customer base there will be little to no profit in the first few years. Existing firms can and will use their high capital to retaliate against newer firms with whatever means necessary such as lowering prices and taking a loss.
Although there are low switching costs between brands, consumers tend to only chose well-known names. Airline tickets are expensive so people don’t want to give that money to firms they don’t trust. There is also a huge safety aspect involved and most consumers feel safer with firms that have been around for a long period of time. This industry requires plane and flying experience which also lowers the threat of entry. When firms decide to enter the market they first have to become licensed which can take about a year. After that they are constantly being regulated by several organizations such as the Federal Aviation Administration and the Department of Transportation. The time and money spend to solely open an airline company is enough to prevent most people from entering the industry.
Threat of Substitutes
After looking at the threat of entry it is important to also consider the threat of substitutes. This industry has a medium substitute risk level. There are substitutes in the airline industry. Consumers can choose other form of transportation such as a car, bus, train, or boat to get to their destination. There is however a cost to switch. Some means of transportation can be more costly than a plane ticket. The main cost is time. Planes are by far the fastest form of transportation available. Airlines surpass all other forms of transportation when it comes to cost, convenience, and sometimes service. Consumers do sometimes choose other methods for various reasons such as cost if they are not traveling very far which raises the risk.
Rivalry among Existing Players
The last area of the five forces is the rivalry among existing players. The rivalry in the airline industry is very intense for many reasons. The industry is currently very stagnant. It seems to be in the mature stage of the business cycle. The number of competitors stays the same in the long run and it doesn’t seem to be under or over capacitated. The fixed costs are extremely high in this industry. This makes it hard to leave the industry because they are probably in long term loan agreements in order to stay in business. The products involved or the planes are highly complex which also heightens the competition.
The competition is lessened by the brand identities of different firms. For example, Jetblue is known for its amenities and Southwest is known for its low prices. The market share seemed to be equally distributed because each company has its own part of the market and because switching costs are low none of the firms can really hold a large percentage of the market.
The strongest forces in this industry are the competition of existing firms and the power of suppliers. The rivalry of existing players is high and will push out any firm that doesn’t have enough capital. Suppliers are strong forces because planes are so costly to make. If the suppliers changed the credit terms by even a small amount it could mean a significant loss for the firm. On the other hand the other forces involved seem to have a weak threat. It is costly and time consuming to enter the market which lowers the risk of entry. Buyers have a weak force because of the low switching costs and substitutes are weak because they are usually too costly.
The profit in this industry is high because for most people flying in necessary. It is not a trend which makes this industry profitable for the long term. Airlines that are more profitable are in a better position because they usually have more planes and a larger variety of flights which provides further convenience for the consumer.
Recently there have been some changes in some of the forces. Some airplane manufacturers have been making ecofriendly planes, which is a change in the bargaining power of suppliers. This would differentiate the products, raising the threat of suppliers. Another recent change is the use of web portals such as Expedia to book flights. This positive change creates a whole new group of buyers and makes purchasing flights faster and easier. The increase in gas prices has also been a positive change for the industry because it lessens the power of substitutes. People are more willing to fly to their destination if driving would be more expensive.
After looking at the Five Forces Model firms should make dealing with the competition their main priority. The other areas in the model seem to have an overall low threat so existing firms don’t have to focus on those areas as much in their business strategy.
Now that we have brought you through our Porter’s Five Force analysis, the last thing that is important to consider when exploring an industry, are the dominant economic features. The next section of our report will give you an overview of what features affect the airline industry most.