1.Use Porter's five forces of competition' framework to show how the structure of the airline industry has caused low profitability during the past twenty years.
Below are Porter's five forces of competition. In them you will understand what has caused low profitability.
The bargaining power of suppliers: Labor is the airline industry's largest single expense. Most airline workers belong to one of a dozen unions, which give the airline workers strong power in negotiations with the airlines.
Airline operations are also energy-intensive, and some carriers attempt to hedge their fuel costs by buying and selling futures. Jet fuel prices are currently high because oil refiners kept jet fuel production down in 1996 as they waited for crude oil prices to dive following the return of Iraq to the market.
The bargaining power of buyers: The customers can be broken down into two main segments: business and leisure. Because business travelers often book flights at the last minute and frequently have their organization pick up the tab, they tend to be relatively price-insensitive. Consequently, business travelers generate a larger portion of the industry's revenues relative to their numbers.
The frequent flier programs were originally targeted toward the business segment. We have recently seen a trend toward expanding the frequent flier programs to let members earn miles by conducting business with a variety of other organizations. This makes the frequent flier programs a powerful tool in the leisure market as well. An attractive frequent flier program will increase the power of the airlines in the customer relationship.
Threat of entry: threat of new entrants presents new firms' possibility to enter the industry and make its returns falling down through prices competition. Since the hub and spoke system has taken place, the barrier to entry are higher because new carriers find it difficult to obtain gates and landing slots at the major hubs.
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