Airline industry analysis by Porter's Five Forces

Topics: Airline, Avianca, Southwest Airlines Pages: 5 (1541 words) Published: August 23, 2014
The Airline industry provides a very unique service to its customers. It transports people with a high level of convenience and efficiency that cannot not be provided by any other industry or substitute. Airline companies pride themselves on the way they treat their customer during the flight. They have things such as food, drinks, entertainment, and a welcoming staff. The service of transportation is provided in other industries but the airline surpasses all of them when it comes to timeliness. The geographic scope of the airline industry is at a global level. Some firms are able to fly their planes all over the world while others focus on smaller geographic areas.

The five forces model is one way to answer the first basic question in strategic management; “Why are some industries more attractive than others?” This model shows the five forces that shape industry competition; threat of new entrants, bargaining power of buyers, threat of substitutes, bargaining power of suppliers, and competitors. In order to analyze the airline industry we have look at each of these forces.

Bargaining power of Buyers

The airline industry is made up of two groups of buyers. First, there are individual flyers. They buy plane tickets for a number of reasons that can be personal or business related. This group is extremely diverse; most people in developed countries have purchased a plane ticket. They can do this through the specific airline or through the second group of buyers; travel agencies and online portals. This buyer group works as a middle man between the airlines and the flyers. They work with multiple airline firms in order to give customers the best flight possible. Between these two groups there is definitely a large amount of buyers compared to the number of firms.

There are low switching costs between firms because many people choose the flight based on where they are going and the cost at the time. This is some loyalty to firms but not enough for high switching costs. Each customer needs a lot of important information. They need to know the details of what is provided during the flight. Buyers need to understand the timing of the flight and the safety aspects of flying in general. The service provided is unique. Each airline has a niche. Some airlines focus on cost, while others focus on having the best amenities, etc. Overall the bargaining power of buyers has an extremely low threat in this industry.

Bargaining Power of Suppliers

Next we look at the bargaining power of the suppliers. In this case the major suppliers are the airplane manufacturers. The top two manufacturers in the world currently are Boeing and Airbus(Odell,Mark). In this industry the inputs are extremely standardized. Airline companies only seem to differentiate with amenities. The planes are very similar. Currently some manufacturers are trying to make their plans more ecofriendly.

Airline companies cannot easily switch suppliers. Most firms have long term contracts with their suppliers. Planes are such high capital products that firms probably make long term loan agreements and have more favorable credit terms when they don’t switch companies. It is difficult to enter into the plane manufacturing industry because of the capital needed to enter. The amount of money and expertise needed to make even one plane is around 200 million dollars. For this reason there are very few suppliers in the airline industry. Airline firms are the only source of income for these manufacturers so their business is extremely important. Based on these things the bargaining power of suppliers has a low threat as well.

Threat of New Entrants

Threat of new entrants is another major aspect of the five forces. This aspect has a low threat for the airline industry. There are two aspects that do however raise the threat level. First, there are extremely low switching costs. Second, there are no proprietary products or...
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