Comapring Porters 5 Forces for the Airline Industry
Comapring Porters 5 Forces for the Airline Industry
1. Score each competitive force in the airline industry and provide a brief rationale for your assessment. ·Rivalry Among Existing Firms: (High)
When one major company in an industry makes a change in costs or services that could potentially increase their clientele, a major competitor almost always follows suit. Price matching is a prime example of that, therefore the threat is high. West Jet is one company that offers flights at a discount and forced Air Canada to create new banners to compete with the discounted prices. All major companies and firms in an industry watch each other’s every move very carefully, and match any move with a countermove. During slow season in the airline industry, a firm can only grow by taking some of another competitor’s market share and customers. When someone has to book a flight, they have to book a flight. Most people these days use the internet to book flights and compare services and prices from rival firms with relative ease.
Accessibility and price are the key factors in driving rivalries. The deregulation of the Canadian airline industry in 1984 created a very intense rivalry between two of the biggest airline companies in Canada; namely, Canadian Airlines and Air Canada. Canadian Airlines built its strength in the industry by making a few key acquisitions of companies in Western Canada. Air Canada recently became a publicly traded corporate entity, building capital through public offering. When these two powerhouse companies created a difficult situation, such as the offering of less expensive options and discount flights, they both lost revenue and nearly crippled them financially.
·Relative Power of Other Stakeholders: (High)
Other stakeholders such as governments have a relatively large amount of power over most national airlines in Canada, because they are partially owned by them. Taxes on flights out of Pearson International Airport are some of the highest in the world and these taxes are regulated by the government. Taxes, policies and regulations are some reasons why the government has power in this industry. They can limit the entry to the industry within the region by restricting access to important things, like raw materials and licensing requirements. In Canada the government has foreign ownership limits in almost all transportation services, and the government always has and always will regulate the airline industry.
The Canadian government has used its power in the past by protecting local companies in the industry, such as Air Canada, from companies based in other countries attempting to acquire them. Other regional stakeholders, in particular those in the tourism industry, have some indirect power over the airlines by creating and perpetuating the demand for flights. An example of this is when a tourism organization advertises international destinations and attractions. Marketing initiatives of those organizations are meant to whet the appetite of the consumer, thus increasing the demand for flights to those destinations and, accordingly, the airline industry is then obliged to increase the supply for flights.
·Threat of Substitutes: (Medium)
In almost every industry the threat of substitutes are apparent. Marketing and R & D are a huge part in minimizing a company’s threat of substitutes. The more the public sees, hears or reads about your company the better. The threat of substitution in the airline industry is inevitable. Substitute products have the potential of creating a strong competitive force when they enhance the value for the customers, especially in the airline industry. Also, substitutes improve the price-performances of each firm within the industry.
When booking a flight to a destination close in proximity, people often compare their options. For example, the cost of a return flight to Newark, New Jersey from Toronto may exceed $ 1,500 per person; the same trip via automobile would cost less than $500 for all occupants of the vehicle combined; the trip by train would cost roughly $230; and, by bus the cost would be $125. Therefore, the threat of substitution is a significant factor in the airline industry. However, if a customer has to travel very quickly or a significant distance, that person would most likely choose the flight option instead of a cheaper alternative. ·Bargaining Power of Buyers/Distributors: (Medium)
Bargaining power is a tricky one because it can work both ways. Buyers have a certain level of power in any industry. A buyer may switch suppliers very easily if there are no penalties and it is cost effective for them. If a large firm makes a large purchase of goods from another firm, it may be mutually beneficial and if serviced well, have the potential for repeat business. However, the buyer then has the power to use a substitute or competitor which would negatively affect the seller.
Buyers are always the more powerful of the two because some buyers have the ability to put pressure on lower costs from suppliers, while demanding an increase of the quality of products or services provided to them. Also, the bargaining power in industries with high fixed costs like the airline industry can play a big factor. On the other hand, things like jet engines, tires and other key safety devices on aircrafts can cause severe consequences if this equipment malfunctions. For that reason, the buyer has a reduced amount of bargaining power with suppliers in this industry. The bargaining power of buyers is both high and low, so I ranked it medium.
·Bargaining Power of Suppliers: (Medium)
Suppliers or sellers do not have a vast amount of power in the Canadian airline industry. Aircraft manufacturing is a highly specialized industry with a limited customer base. If a supplier raises costs or their quality decreases, they have the potential to lose a customer, which may be extremely difficult to replace that lost revenue in such a specialized industry. Compare the market for aircrafts with the market for automobiles: Aircrafts are unique and there are just over 18,000 commercial aircrafts traveling the skies; when the number of automobiles just breached the 1 billion mark a few years ago. Compared to the suppliers in the auto industry who have an increased amount of power, the suppliers in the airline industry don’t have nearly as much. Buyers have only a minimal amount of options in this industry, therefore sellers or suppliers can be more demanding in regards to their prices, scheduling and other key components of the industry. This force is both high and low as well.
·Threat of New Entrants: (Low)
The threat of new entrants is low because there is already a large amount of competition on a very big scale. Air Canada is a prime example of an airline company that offers flights and services on a globalized level, which would be hard to match without massive capital. A second reason I believe the threat is low is because of the high cost of breaking into this market, the airline industry is one of the most expensive industries to get into. For example, Boeing’s cheapest commercial aircraft is just less than $80 million costing upwards of $350 million. The aforementioned economic threats and entry barriers are far greater than most potential market entrants would want.
The brand name factor is a big one here too, as a consumers selection process has much to do with brand recognition and pricing. Society gets comfortable and used to boarding certain airlines and receiving what they have to offer such as good customer service. The security, health and safety aspect of the industry are very difficult to observe and maintain, as those fields of the industry are subject to harsh regulations which can be tough for a new entrant in this industry to maintain and comply with.
2. Which of these forces are changing? How will this affect the overall level of competitive intensity in the airline industry in the future? Would you invest or look for a job in this industry? What do recent financial results of Canadian airlines indicate about the attractiveness of this industry? Industry evolution is a never ending process, especially in the airline industry. The power of other stakeholders will change in years to come because of the industry growth expected in the next decade and a half. The number of aircrafts is expected to double by the year 2025, which is great evidence that all forces will evolve and change with the business. With the expected growth in the Canadian airline industry all of these forces are due to change and as the industry grows, so does the threat of new entrants as more corporations and firms will see the success of the current ones in the industry and want to break into the industry. With enough capital and a great group or process of strategic planning and environmental scanning the threat of new entrants grows.
The rivalries will become more intense with the globalization of corporations. The high exit barriers will be a big factor for larger corporations as the smaller organizations will have extremely difficult decisions to make on whether or not to opt out of the industry. The threat of acquisitions and company takeovers will increase and larger firms with more capital will have an advantage here, while the smaller firms will stay small without achieving great levels of success through analyzing and strategic planning. Therefore, the competition and rivalry will increase immensely between both successful and less successful firms. The struggle for bargaining power between purchasers and suppliers in this industry will likely continue, with that power shifting back and forth due to various market conditions. Factors such as the cost and supply of fuel, the availability and quality of supplies, ever-changing government regulations and fluctuating consumer demand can cause variances in the flow of bargaining power.
Other stakeholders such as unions, the government, creditors, shareholders and other key groups involved with the industry, can change and play a big factor in the near and extended future. Power of the government will increase exponentially, creating higher taxes, greater measures of safety, security and regulations, as the industry adapts and evolves. The level of intensity will grow rapidly and the rivalries will always be there, but they will be different with each rival. The competitiveness will intensify greatly in the future, because of the expected boom in the industry. More flights mean more aircrafts, employees, security and security measures, prices and innovative thinking. Some firms have been known to scout some of their future and current associates and team members, hence the rivalry among experienced employees in the industry. Another reason the intensity will grow, is because the internet is being used more, and more often by customers booking flights, future employees seeking new positions and marketing techniques.
The hyper competition of the industry will affect the intensity and moving forward, new strategic tools will need to be used to keep up. The key success factors such as, booking accessibility, diverse classes of service offerings and aircraft type and seating space, will create loyalty and repeat customers. This will intensify the industry as it expands in the future in a very positive way. Also, successful financial management of each corporation may enable airlines to increase their influence and power. The high fixed costs of the industry, force corporations to offer cheaper standby fares when a flight has not reached its capacity. The flight still needs to get to its destination, so cheaper flights are offered just to fill the seats in this case. This will always create an intense rivalry. I would invest in this industry because I believe the overall growth of airlines and aircrafts in Canada and globally will be tremendous.
A company like Bombardier would be a great one to invest in. They have been expanding rapidly by acquiring top firms and companies in the industry with the goal of being the market leaders in all aspects. There are 18,000 commercial aircrafts traveling the skies and that number should double within the next 12 years. In addition with the price of purchasing aircrafts rising and the need for them in the near future, moreover, companies outside of Canada in the aircraft manufacturing industry such as Boeing and Air Ambulance would be successful ones to invest in. With the projected heights of the industry, it would be an intelligent idea to invest in what the general public rated the top airline company in North America, Air Canada, because, the larger they become the greater their revenues increase. Air Canada is involved in all transportation categories of the industry, such as internationally, nationally, regionally and the transportation of cargo for other corporations.
As the global population increases at an extremely intense rate, additional customers will be using their services and in turn expanding a business’s potential. The more firms in the airline industry grow, the more flights and services will be offered. This means better rates because of the increase in airports, flight times and options, accessibility and many other aspects. WestJet is currently looking at purchasing 40 new aircrafts, with the top two competitors being Italian based company ATR Aircrafts and Bombardier. Bombardier will be leaning heavily on the fact that they are a Canadian based manufacturer with the hope of winning this extremely lucrative and positive contract. Economically, this may have a large affirmative influence on the Canadian industry, another key factor in why I would invest in the Canadian airline industry.
After reviewing the financial results of some airline companies in Canada, I found that the net earnings have been rising for the past 2-5 years on a consistent and large scale. The revenue and available seat miles (ASM), are increasing quite rapidly, however, the costs of aircrafts, other specialized equipment and fuel are increasing almost as rapidly. A statement made by Gregg Saretsky, President and CEO of WestJet, contained in the company’s recent financial statements outlined that profitable growth continues as they expand their reach. I interpret this as a very positive message from an important stakeholder in the Canadian industry. It means that as the company expands more and more, so do the profits, brand name and other large factors in any successful business in the second largest country in the world. This is a very attractive industry to get involved with because of the growth potential. Expert analyst and great strategist have predicted the airline industry to be one of the top grossing and earning industries in the world.
There are over 230 different airline companies in Canada with less than ten dominating forces in the industry. The larger the company, the larger the profit, so the attractiveness is more appealing with larger companies or firms. Porter Airlines is a small company that launched in 2006, however, the first year they recorded financial gain was 2011. This company has been steadily expanding since they set to the air. The founders of Porter airlines spent five years building their business plan. With the precise and meticulous environmental scanning and strategic planning, they have grown their company in a great way, with greater expectations in the future.
The most unattractive aspect of this industry is the cost of fuel and according to the Air Transportation Association (ATA) is an airline’s second largest expense. According to the financial report of Air Canada, they spent $723 million on fuel in 2011, an increase of about 27% from the previous year. Right now, jet fuel consumption is exceeding 6 million barrels daily and with that number increasing in the future, demands will increase even more then they are now, driving the cost of this essential commodity in the industry. Air Canada’s operating income in 2011 was more than $50 million down from the year prior. They reported a decrease in net loss of just less than $250 million.
The cause of their loss was from foreign exchange and internal investigation. Another unattractive aspect is that globally, the level of carbon dioxide and other emissions is expected to rise 50% by the year 2050. Aircrafts emissions contribute to climate change three times as fast as they do from cars, which is extremely harmful to the environment. Most companies in the industry are putting enormous focus on their environmental scanning, trying to find options to decrease and minimize this major factor.
Overall, the financial results suggest that the Canadian airline industry will continue to grow on exponential levels in the future and will be extremely beneficial for the Canadian economy in many ways.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 30 December 2016
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