Throughout it’s more than 100 years of existence; the Airline Industry has struggled with firms’ ability to cover their costs of capital. The industry experienced many years of difficult with relatively short durations of sustained profitability (Grant, 2010). The airline industry history can be broken down into two distinct eras, the regulation era, prior to 1978, and the deregulation era, post 1978. During the regulation era, with fare prices fixed, customer service and extra amenities were the main areas of achieving a competitive advantage. During this era, there were little new entries into the industry, indeed, “not a single new carrier was approved between 138 and 1978” (Grant, 2010, p. 520). After regulation, fare pricing became the focus of gaining a competitive advantage, with new entries becoming commonplace. Defining the Problem
Although the airline industry, like many other industries, is faced with many issues, the overall problem is the difficulty of maintaining consistent profitability over time. This issue is industry wide, affecting most if not all firms in the industry (Grant, 2010). Causes
Causes will be examined and outlined using Porter’s Five Forces analysis, first reviewing the three horizontal sources of competition, then reviewing the vertical sources.
As mentioned above, after deregulation of the industry, pricing became an area used to try to gain competitive advantage. Low cost carriers reduced service allowing them to charge lower prices for fares. Given the large availability of substitution, and the belief from consumers that there was virtually no difference in the product, demand was elastic to price. This, in turn, caused “legacy” airlines to reduce their prices on specific flights that had a high degree of substitution (Grant, 2010).
Threat of Entry
The airline industry presents unattractive financial performance as well as...