In this assignment I am going to be writing about the porters five forces on the airline industry.

University Degree Business and Administrative studies

Manisha Vara

Tutor 2

HND Business & Finance

Porters Five Forces

In this assignment I am going to be writing about the porters five forces on the airline industry.

The domestic airline industry has been characterized by intensive rivalry and low profit margins. Within in the industry, however, there have been differences in terms of profitability. The degree of rivalry that exists within an industry will affect its overall profitability. Rivalry tends to be greater on those routes served by many carriers. Other factors affecting rivalry include high fixed costs, excess capacity, low differentiation, slow growth and high exit costs. Although aero planes were described as “marginal cost the wings”. On any flight there are the costs of fuel, pilots, flight attendants, ground staff, and the airline depreciation/leasing. In order to recover these fixed costs, airlines will want to maximize term their load factor by increasing revenue passenger miles. Given that there is currently excess capacity on many routes, intense price competition to attract passenger often results. Low differentiation between airlines and low switching costs for passengers increases this rivalry.

Many airlines have tried to generate consumer loyalty by introducing frequent flyer programs, however the number of membership plans held by passengers has diminished their effectiveness. The airline industry is also charcterised by slow growth and high exit costs.

Although some airlines lease their planes to minimize costs, a number of planes are owned outright and would have to be sold at a loss.

Below is a diagram of the Porters Five Forces

Competition

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Although some airlines lease their planes to minimize costs, a number of planes are owned outright and would have to be sold at a loss.

Below is a diagram of the Porters Five Forces

Competition

The first of the five forces is competition in a organisation especially as big as the airlines as there are a lot of different companies. The most dominant company in the airline industry is British Airways company’s although other company’s have a high profiles and similar marketing strategies. For many customers there is little or no real difference between airline company’s with Emirates, Easy Jet, Go. Airlines compete ruthlessly and they do so by offering different services. They do so by offering to upgrade to first class paying half the normal price and having free food and drink on the aero plane.

Threat Of Entry

A second factor affecting industry profitability is threat of entry. In the airline industry it is reasonably straightforward for a new startup airline to lease a plane and purchase a contract support service, the introduction of a new national airline is less of a threat, however due to limited gate space, high capital costs, reservation system costs, and the

need for a recognized trustworthy brand name. The potential threat of retaliatory action by existing airlines also serves as a barrier to entry. Also a high capital investment negates threat to some extent. The lack of take off and landing slots makes it difficult for new carriers to find suitable airports. The overcrowd market and very strong competition deters potential new entrants. The loss leaser is required in order to join the low cost market for example British Airways came a bit late with GO and it cost them “20m, and they have yet to make a profit

Below is a diagram that shows you the relationship marketing which is concerned with customer retention as much as finding new customers. This process can be summed up by the following diagram:

(Cornerstones of relationship marketing, Hooley et al. 1993,98)

For example a business such as easyJet provides a‘sound reasons’ for a customer relationship: a cost effective and good quality service. As such, easyJet is able to obtain customer feedback about the service they provide, and go on improving it. The marketing communication techniques that.

Substitues

There are several substitutes to air travel, including trains, buses, cars and not traveling at all. Switching costs between air travel and it substitutes are not great. The importance of the various substitutes, however, will vary according to route and customer type. Ground

transportation, for example, will lose its appeal as a substitute the greater the journey length. Consumers who travel leisurely are more likely to be wary of price differences rather than business travel.

Supplier Power

Employee expenditure forms a significant part of an airlines total costs. Employee power will vary according to the type of employee and whether or not they are a part of a union. Pilots, in the short term, can cause chaos for an airline through industrial action, however in the longer term thee are more easily replaceable. The power of airplanes should be quite high, given the huge switching costs involved for airlines. Such supplier power will be less, however, for those airlines purchasing the second-hand aircraft.

The price of aviation fuel is directly related to the cost of oil.

“The impact of the supplier depends on the availability of alternative suppliers and product substitutes” (Dibb and Simpkin, 2001).

The more a company expands the more power it will possess over its suppliers

Buyer Power

The large number of airline customers, their lack of organization and their inability to integrate upstream weakens the power of individual buyers. The extent to which airlines can charge a ticket price close to buyer value as opposed to ticket cost will vary depending on the route and type of customer. Routes where there are substitutes are more likely to have a lower price. This is especially true for coach fares whose leisure customer value, and therefore help to increase airline profitability. Porters generic competitive

strategies and still be successful for example British Airways pursues all of Porters generic c by offering a range of different airline tickets, i.e fist class, business class, economy class, and low cost via go, its budget subsidiary

Bargaining Power of Customers

Although the customer does not effect ticket prices much, they are still fickle and vote with their feet in order to find value for money.
In times of economic depression (slump) then customers have a tendency to opt for cheaper ticket flights
Customers have the Civil Aviation Authority (CAA) on their side. From the CAA:

provides protection against the consequence of travel organiser failure for people who buy package holidays, charter flights and discounted scheduled air tickets; and

licenses airlines and ensures compliance with requirements of European and UK legislation relating to financial resources, liability and insurance of airlines.

Porters five forces model helps to show that increase rivalry within the airline industry, significant supplier power, substitutes, especially flying and to some extent buyer power and the threat of entry all contribute to the industry’s lack of profitability.

Looking back at this essay I have found that there is not just only one force that effects the airline industry, and all five forces are important to the industry itself. I have come to the conclusion that there are more positive effects that the Porters theory has on the airlines than a negative one.