Uk Airline Industry

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BUSINESS ENVIRONMENT

THE UK AIRLINE PASSENGER INDUSTRY

Monday, November 1 2010
I. INTRODUCTION

There are many factors that affect the everyday operation of a firm in an industry. These factors are both internal and external and hence a firm will need to adjust its strategies to accommodation both. However, in this paper I will be focusing mainly on the external factors that will affect the existence of a firm in an industry. (Cyert.R.M et al, 2003)

II. DEFINITION OF THE UK PASSENGER AIRLINE INDUSTRY

The United Kingdom (UK) passenger airline industry is made up of firms such as British Airways (BA), Easyjet, Ryanair, Virgin Atlantic, Jet2, BMI, Monarch and Flybe. However, there are foreign passenger airlines such as Air Frances, Swissair, KLM, Delta Airlines, Emirates, Kenyan Airways and Iberia (UKwebstart.com, 2010) operating as firms in the UK passenger airline industry. These airlines transport passenger to and from destination in and out of the UK. Though foreign owned some of these carriers have a significant market share carrying passengers to destination in Asia, the Americas and Africa were some are major players in their domestic airline industries

III. INDUSTRY BOUNDARIES

Some UK passenger airlines such as Thomas Cook, provide currency exchange for both passengers and non- passengers alike. They also provide package holidays and have substantial influence in hotels across the global.

IV. MICHAEL PORTER’S FIVE FORCES ANALYSIS

In order to analyse the external environment of an industry I will be using Michael Porter’s five forces as a theoretical framework. This is because this theory analyses the external environment that affects the location of an industry. Theory discusses five different factors affecting the industry but I will be concentrating on three of those factors. Figure 1 below illustrates Michael Porter’s five forces.

1. Power of Buyers

The bargaining power of buyers in UK passenger airline industry varies depending on the route or destination. It is very high to most European destinations where there are many carriers operating on those routes and low for most Central African destinations where there are fewer carriers operating on those routes from the UK. There are high costs involved with switching airplanes, but also take a look at the ability to compete on service. If a group of customers have a large enough impact to affect a company's margins and volumes, then these customers hold substantial power (www.investopedia.com, 2010) Michael Porter concluded degree to which buyers in an industry can influence the prices of goods or services in that industry is based on the total number of buyers in that industry (Mintzberg et al, 2003)

2. Threat of New Entrants

With adequate finances, it is not difficult to start up a firm in the UK passenger industry as may be perceived. However due to the recession, there are substantial costs to access bank loans and credit more so since major airlines such as Zoom, Silverjet and XL became insolvent. The more new airlines that enter the market, the more saturated it becomes for everyone. Incentives such as frequent fliers points and brand name recognition play a significant role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher. Porter’s concluded an industry with low barrier to entry will lead to the industry having many firms which drives down prices in a market that approaches pure completion. Hence, the easier for a new firm to enter an industry the most competitive that industry becomes as a result (Mintzberg et al, 2003)

3. Competitive Rivalry

Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy. (www.investopedia.com, 2010) Porter stated that industry where, firms...
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