SCHOOL OF BUSINESS
Spring, 2013 MGT 489 STRATEGIC MANAGEMENT (Section-1)
Case on “Plane Wreck: The Airline Industry in 2001-2004”
Dr. Abdur Rab Professor School of Business
Shah M. Jakaria 081-317-530
Md. Sayed Hasan 081-223-030
Safayet Gaznabi 081-407-030
Jannati warda manal 081-597-030
Submission Date: March 31, 2013 Executive summary:
The airline industry has several factors that affect it which include the inflation interest rates, income, price elasticity, wage inequality and fuel price. All of these factors have a role in how the airline industry operates. Supply and demand also can affect the airline industry. After the September attacks the airline industry has suffered because people no longer trusted the airline to be safe. People stopped traveling by plane causing the airline industry to lose business even go bankrupt. Inflation, fuel prices, increasing interest rates, and oil demand have also affected the industry since they rely on fuel and a more steady economy to run their business. Airlines compete more for business because the economy is in a downfall, so they decrease fares to attract customers and add services at lower costs to lure people into using their airlines.
Q1. Use the competitive forces model to analyze the structure of the airline industry during 2001-2004. How well does this analysis explain low profitability of the industry? Answer:
The competitive forces model focuses on five forces that shape competition within an industry. These five forces are: the risk of entry by potential competitors, the intensity of rivalry among established companies within an industry, the bargaining power of buyers, the bargaining power of suppliers, and the closeness of substitutes to an industry’s products.
The first factor, risk of entry by potential competitors, was a major factor for airlines during 2001-2004. The airline industry took a big hit when oil prices went up and the want to fly due to 9/11 had gone down severely. Airlines needed to stay ahead of their competition to survive and several companies found themselves filing for chapter 11 bankruptcy protection, etc. to keep themselves established. If new competitors were to come in at this time the main airline companies could go out of business since the demand to fly was down and prices were skyrocketing for oil. This explains the low profitability of the industry by showing how potential competitors would bring down the profits of the other companies in the industry since the demand for flying was low at the time. But in this situation the risk of new entrants is low because in this economic condition one wants to start such as expensive company even which in not profitable or even suffering loses.
The second factor, the intensity of rivalry among established companies within an industry, Companies were challenging each other by price instead of quality. Consumers were now more concerned with lower price tickets then the quality of their seat due to the fact that oil prices went up therefore ticket prices went up. This affected the companies whose main focus was quality because they had to change into the market of price and started to become competitive with the airlines that were already focused on price. This explains the low profitability of the industry because it shows how each company was fighting over price so they were all lowering their prices and trying to stay equal with each other and not a lot of the companies were gaining a profit.
The third factor, the bargaining...