The airline industry is a sector where strategy plays an important role in the globalization of other industries and, leads to economic growth. However, all airlines within the industry operate in a highly dynamic environment. This industry faces severe financial distress due to oil crisis, recessions and terrorist attacks, In order to survive, and do well, the business needs to evaluate its competitive environment and identify key factors that may influence its actions.
We can use the five-forces model to analyze this highly competitive industry to identify the intensity of the competition and the profitability of this industry.
The analysis is made by the identification of 5 fundamental competitive forces. These include:
Threat of new entrants is high
One of the forces identified is the threat of new entrants which refers to the possibility of new competitors entering the industry and undermining the profits of the established businesses. Currently, the airline industry is so saturated that there is very little space for a newcomer to enter the market. The biggest hurdle faced is cost of entry. It is one of the most expensive industries, due to the cost of buying and leasing aircrafts, safety and security measures, customer service and manpower. Other barriers to entry which will recess new comers into the airline industry include Government restrictions/regulations and high capital costs to develop new airlines. However, the entry barriers for new airlines are lower today since domestic airline market was deregulated. This has produced far greater competition than before deregulation in most markets. The deregulation allowed new carriers like People express; Air Florida and midway enter the market and start the pricing war. Another major barrier to entry is the brand name of existing airlines and it is really difficult to attract customers out of their existing brands.
Bargaining power of Buyers is high
The bargaining power of buyers is another force that can affect the competitive position of a company .This refers to the amount of pressure customers can place on a business, thus, affecting its prices, volume and profit potential. The various airlines are competing for the same customer, which also results in strengthening the buyer power. Price cuts by airlines were selective and had complex fare structure. Price cuts were also selective by route .Airlines offered low prices on routes where they faced high competition. Hence, the bargaining power of customers in the airline industry is very high since they are price sensitive and search for the best deals available.
Bargaining Power of Suppliers is high
Suppliers can also exercise considerable pressure on a company by increasing prices or lowering the quality of products offered which are mainly dominated by Boeing and Airbus. The bargaining power of suppliers depends on supplier concentration, substitute supplies, switching costs, threat of forward integration and buyer information. The government also imposes quite lot restrictions on suppliers. Therefore, there are not many companies have the rights to provide products for airline industry. Airline companies have few choices about suppliers, so the suppliers’ bargaining power is very strong.
Threat of Substitutes is low for long distance and higher for short distance
The availability and threat of substitutes is another factor that can affect competition within the airline industry. It refers to the likelihood that customers may switch to another product or service that performs similar functions .Substitutes for air travel include travelling by train, bus or car to the desired destination. The degree of this threat depends on various factors such as money, convenience, time and personal preference of travelers. The competition from substitutes is affected by the ease of with which buyers can change over to a…