Analysis of the Force
Overall, the five forces model suggests that the overall intensity of competition in the airline industry is likely to be severe. Back in the early 1980's competition was very intense. During the late 1980's the monopolization of major routes by a few major carriers, the limited availability of free landing spots at major hubs and the emergence of limited brand loyalty and tacit price agreements have all helped reduce the intensity of competition. However, as already mentioned, slumping demand in the early 1990's plunged the industry once more into a severe price war. Airline travel is a commodity-type product, with limited potential for differentiation. Rivalry among Firms: High
Rivalry among firms within the airline industry is high because low cost airlines have entered the market forcing existing competitors to control costs. Intensely competitive industries generally earn low returns because the cost of competition is high or buyers are receiving the benefits of lower prices. Factors that affect competitive rivalry include industry growth, fixed cost, brand identity, and barriers to exit. The airline industry is fiercely competitive. Industry growth is moderate, and carriers are struggling to take away share from each other. Barriers to exit are substantial in the airline industry. Grounded planes do not earn any returns and disposing of these assets is difficult. Often, because of bankruptcy laws, companies in financial distress such as Delta or TWA can remain competitors for a very long time. The additional capacity of low cost airlines in the airline industry has held consumer costs down resulting in less revenue and lower returns for competing airlines.
Bargaining Power of Supplier: Moderate
Factors relating to the bargaining power of suppliers include the threat of forward integration and the concentration of suppliers in the industry. Suppliers are concentrated within the airline industry. Boeing and Airbus supply most commercial fixed-wing air carriers. Supplier concentration makes it difficult for competitors to exercise leverage over the supplier and obtain lower prices or play one supplier against another. The threat of forward integration is low. It is unlikely that Boeing, for instance, would staff flight attendants, commercial pilots, and a maintenance crew, and operate flights all across the country. While the airlines suffer from a brutal form of pure competition, many of their key suppliers enjoy oligopoly, monopoly, or regulatory power. Fuel, labor, airports, and security services are all suppliers with great power to increase prices. Supplier power further diminishes the ability of competitors to earn high profits. Bargaining Power of Customers: High
The over capacitated airline market competes to lower prices for customers, giving customers a high bargaining power in relation to cost. Consumers incur no significant costs in switching from one airline to another except for frequent flyer loyalty programs. Air travel represents the only viable option for international flights. While this would seem to cause bargaining power to be low, customer choices for these flights are not only cost-associated, but also the availability and quality of services. As globalization of economics and international businesses continues to increase, the need for worldwide meetings among corporations is increasing. Corporations have options such as video-conferencing that forces airlines to provide upgraded services to accommodate the market of travelers (i.e., executive suites at airports, airplane comfort, etc). Threat of New Entry: Moderate
The threat of new entrants presents the possibility that new firms will enter the industry and diminish industry returns by passing along value to buyers in the form of lower prices and raising the cost of competition. Factors that determine the threat of entry include capital requirements, economies of scale, switching costs, and...
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