Industry Analysis: Bargaining Power of Buyers

Topics: Airline, Low-cost carrier, Southwest Airlines Pages: 5 (1438 words) Published: August 21, 2011
Industry Analysis
Bargaining power of Buyers

Buyer power is moderate.

The Buyers: Buyers here comprise of individuals (business as well as leisure travelers) and B2B buyers which comprise mainly of travel agents, travel companies, and charter companies. The airline industry typically has a large number of buyers – the Indian Airline Industry had 73.8 million passengers in 2009.

Inadequate differentiation: Even with the entry of low cost carriers, the sector lacks adequate product differentiation – almost all airlines tend to converge on similar competencies for differentiation. From time to time, airlines seek new competitive advantages, such as greater leg room, in-flight entertainment, on-ground services etc in order to differentiate themselves and ease price competition.

Low Switching Costs: Switching costs between various airlines remain low. Airlines have tried to mitigate this the threat of customer attrition by instituting various programmes such as Frequent-Flier-Miles, which allow frequent customers to redeem their travel miles for free flights. Should a buyer choose to travel with another airline, the air miles lost can be viewed as a switching cost. However this has not deterred customers from switching by a large extent – customers face negligible costs in choosing another airline which gives them higher value.

Price Sensitivity: The emergence of online travel companies have resulted in tremendous price sensitivity with each company claiming to offer the lowest rates. Earlier, business travelers by large were not price sensitive - corporates making travel bookings for business travelers has pushed price sensitivity up even for this class of passengers. Additionally, the luxury carriers face stiff price competition from the low priced, budget airlines. As a result of this they need to constantly deliver premium service in order to successfully compete against the low-cost airlines.

All these factors give buyers considerable power. Vertical Integration between travel agents and airlines could probably help in reducing buyer power to some extent.

Bargaining power of Suppliers
Supplier power is strong.

Aircraft Suppliers: The aircraft supplier market is a duopoly – dominated by Boeing and Airbus. Of the total 440 aircrafts in use today, Airbus accounts for 223(51% market share) and Boeing, 220 (Mansuri, 2010). The lack of alternatives in this market gives these suppliers a dominant position. In addition, airline carriers enter into contracts with the suppliers when leasing or buying aircrafts – the costs of breaking these contracts are prohibitive. While Boeing and Airbus command the market for large, commercial aircrafts(such as the 747 and A380), Embraer, Bombardier and ATR have effectively entered the market for regional, smaller jet planes – much in demand by the low-cost airlines. Nevertheless, limited alternatives result in high supplier power.

In this industry, the quality, reliability of the aircrafts is crucial – hence also, supplier power increases as they are directly responsible for guaranteeing high quality aircrafts and regular maintenance.

Fuel: Aviation Turbine Fuel is one of the most important constituents of any airline’s costs. In 2003, fuel accounted for less than 15% of the total airline costs. Unto 2008, fuel prices continued to rise, accounting for nearly 33%. Although in 2010 fuel constituted 25% of costs, it still continues to exert pressure on margins of airline companies (Data Monitor, 2010) which are unable to increase ticket prices correspondingly due customer price sensitivity. Here too, small number of suppliers increases supplier power, though companies try to protect themselves from rising fuel prices by implementing hedging strategies.

Staffing: The third major cost centre for airline companies is staffing costs – airlines have a large number of in-flight attendants, ground personnel, reservation agents, pilots, technicians etc. The numerous...
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