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Product that able to represent other product function can be defined as substitute product (Wheelen and Hunger, 2002). Currently, there are no perfect substitutes for airline service, as airline service has the best range of destination, time-efficient and convenience. However, the fact that trains and air-transports are substitute is true, but the threat will only be high if it’s applied in domestic travel. Currently, the threat of substitutes for airline industry is low. In regards to the threats, Airline Company should keep innovate their service to prevent a perfect substitute.
The power of buyer can be defined as the ability of customers to affect an industry. This view has been supported in the work of Coulter (2008). The bargaining power of buyer in airline industry is relatively low because the number of buyers for this service is enormous and keeps increasing (IATA, 2010). Additionally, due to different specialty of countries, customers tend to go overseas for particular purpose that the destination country is good at (i.
e. Singapore good at Medication), subsequently, going overseas somehow is becoming part of the lifestyle today. Hence, this can also be seen as the service is essential for particular customers which further down the bargaining power of buyer. Looking at another factor which is internet, it allows customers to easily make a comparison through information and price transparency and switch to other airline service. Overall, the bargaining power of buyer is still moderate to low, so organization can take this opportunity to provide excellent service and charge premium price.
According to Collis and Montgomery (1997), power of supplier can be defined as the ability of suppliers to affect an industry. The power of suppliers in airline industry is relatively high, as fuel is one of the important attributes for airline service. This can be seen as the price of jet fuel price has risen 8% from January while the usage of airline keeps increasing (IATA, 2010). In addition, as the availability of substitute for fuel has not been found the bargaining power of supplier is still high. However, the availability of jatropha-based- fuel will soon be available substituting the jet-fuel-based which will reduce the bargaining power of supplier in the future (Bloomberg Energy Finance, 2012). Moreover, the bargaining power of suppliers in airline industry is also reduced by the availability of internet. By the use of internet, one can purchase their supplies from suppliers around the world without any geographical boundaries. Hence, currently the power of supplier in this industry is high. In this case, airline firms may want to create good and long term relationship with their suppliers to gain advantages.
Threats of new entrants are the effect from possible entrants that affects an industry. According to Lynch (2009), potential entrants often come to marketplace when the barrier to entry is low and when profit margins are great. In airline service industry, the barrier is relatively high due to requirements of high capital in entering the industry (i.e. investment on terminal and airplane). Furthermore, as there are already several strong players in the industry, it is hard to enter and established at the market because brand identity in airline service need to be good and clear as it is involved with safety (customers will not use unknown airlines as it would be risky). Therefore, it will force the new entrants to spend extra capital to advertise more to fight the strong existing player. Overall, the threat of new entrants is low. Hence, seeing this barrier, existing firms may want to strengthen their branding to further increase the barrier to enter the industry.
Rivalry among existing firms refers to the degree in which firm react to moves from other firms within an industry (Pearce and Robinson, 2007). Due to the evolving technology like internet, it allows customers to switch to other company with no more than a click (i.e. moving to other airlines website), this clearly would make player in the industry to be intense. Moreover, due to needs of high investments (i.e. purchasing aircrafts and investment on the technology), it creates high barrier to exit the industry, as the aircrafts and technology that are expensive will be rendered as no-use for other business. While, for company that hire aircrafts for their airline service also need to spend a lot of capital and usually involved with long-contract agreement and need long time to achieve break-even point or gain profit. Additionally, by the arrival of budget airlines which offer value for money airline service it affects the competition in airline industry to become more intense. Overall, the intensity of rivalry among existing firms is high. Therefore, airline firms may want to keep innovate their service and cope-up with the advancing technology so they will be able to provide advance and better service for better position at market.
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