Airline Industry Essay 16

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Since domestic deregulation occurred in 1978, competition in the airline industry has intensified and become more concentrated. This situation can be analyzed through Michael porter's framework of the five forces of competition. This framework views the profitability of an industry as determined by five sources of competitive pressure. These five forces of competition include three sources of "horizontal" competition: competition from substitutes, competition from entrants, and competition from established rivals and two sources of "vertical" competition: the bargaining power of suppliers and buyers.

Ø Competition from substitutes: the price buyers are propense to pay for one product depends, in part, on the availability, and on price-performance of substitute products. The airline industry faces competition from other transportation modes, such as railroads, buses. For long distances, buyers may be more inclined to choose air travel to reach their destination. On the other hand, for short distances car is the airline industry's main competitor: in fact, airline travel is neither practical nor economical for short trips. In the last five-year period, less obvious substitutes to airline travel in the business segment include teleconferencing, enabling virtual meeting rooms where participants can sit in different geographic locations.

Ø Threat of entry: threat of new entrants presents new firms' possibility to enter the industry and make its returns falling down through prices competition. In the airline industry, even if the capital cost of entry are fairly low, offering airline services requires airline and aircraft certification, gates, takeoff and landing slots, baggage handling services, and the marketing and distribution of tickets. Since the hub and spoke system has taken place, the barrier to entry are higher because new carriers find it difficult to obtain gates and landing slots at the major hubs, and so the new entrants have been forced to use...
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