The Airline Industry:

Success and Failures

THE INDUSTRY

The Airline Industry is a highly competitive industry with companies operating in domestic and/or international markets. Many airlines are stilled owned by their respective countries and have treaties between countries to allow airlines to land there. The industry has been taking a relatively shaky course as costs are rising and profits have been decreasing. This was further intensified with the recent terrorist attacks on US soil, which lead to higher costs as the need for more security arose. Recent financial statements of major airlines showing major losses reflect the problems that the industry is having. Yet amidst the storm, some regional airlines such as Jet Blue Airlines have managed to focus on specific markets and maintained or increased their profits. It is no doubt that Porter’s 5 forces of competition are at play in this industry. These forces are the Threat of Substitutes, Threat of New Entrants, Competitive Rivalry, Bargaining Power of Buyers and Bargaining Power of Suppliers.

Threat of Substitutes

The airline industry has been plagued by rising costs resulting in poor profits. The recession adversely affected the industry during the first half of 2001. This was intensified by the September 11th attacks, when two airlines were crashed into the Twin Towers in New York City by terrorists killing everyone on board and demolishing the buildings. This lead to an immediate reduction in air travel as customers did not feel safe about flying and an increase in the use of other forms of transportation. Amtrak, a railway company, reported an increase in passenger volume in the days following the attacks. Though this has leveled off as things returned to normal, rail travel is a substitute for air travel that will be utilized by customers if they are looking for cheaper travel and if they are looking for a leisure trip that would not be too time consuming. Automobiles are also a form of travel that is a substitute for air travel. This is especially the case when a family is traveling as the costs are minimized and schedules coordinated on the travelers’ timetable.

Threat of New Entrants

Historically, entry into the market has been relatively easy for airline companies. When the economy was booming, people traveled more for leisure and companies used this opportunity to enter the market and purchase more planes. With the downturn of the economy however, the result was less travel and a saturated market. Many airline companies found themselves with heavy losses that lead to layoffs and in some cases bankruptcy. The industry has turned to Congress to bail them out of hole that they are in. Some of these airlines have been granted loans, but others were not because it was deemed they would be unable to repay. The industry is unattractive at this time so new entrants are not a major threat. There has been an increase however in the use of regional carriers and larger companies have entered this focused market themselves. Examples are American Airlines which owns American Eagle and Delta Airlines which owns Delta Express.

Rivalry

This is a fiercely competitive industry. There are several major carriers that all seem to have a large market share. Airlines are always looking for ways to gain market share and this is often done through price wars, improved quality and customer service. Some airlines that started alliances with other airlines such as Sky team, an alliance between six airlines. The goal is to gain market share by giving the customer more benefits such as more flights, more lounges, fare options and quality service. These wars are extremely critical in times of depression because it forces airlines to go into bankruptcy or to close down. Airlines also use incentives such as frequent flyer miles to promote customer loyalty and passenger volume.

Purchasing Power of Buyers

Because of the fierce competition in the industry, buyers have relatively strong purchasing power. They can choose an airline that offers them the best benefits. A major factor in this increased purchasing power is the Internet. The Internet has allowed customers to bid for a price that is more cost effective for them. Generally the earlier a customer books in advance the better the chance of getting cheaper flights but price bidding allows the customer to get cheaper flights at the last minute than if they went directly to the airline. It is estimated that there will be a continued increase in online bookings by customers.

Purchasing Power of Suppliers

Many of the suppliers in this industry have been hard hit because there is a downward trend in the economy as a whole and as a result of having little power. One of the major suppliers of parts, Boeing, saw a reduction in orders after September 11th. This company also has plans to lay off employees. Oil suppliers have more power as airlines still need fuel for their planes. The airline industry has seen rising costs of fuel and this lowers profits.

US Airways

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