U. S. Airline Industry Analysis Prepared by: Lesya Koshel #899 Rostislav Travin #906
Outline • Five Forces Analysis of the U. S. Airline industry • Why is it so hard to make money in the airline industry? • Conclusions
Five Forces Analysis • Threat of Rivalry Main tools of competition among the industry are fares (consumers are varied a lot, but many select a carrier primarily on basis of ticket price). There are two types of airlines on the market: legacy carriers and low-cost carriers. Airlines encouraged loyalty among frequent travelers through branded frequent-flyer programs and attempted to differentiate themselves through a variety of service offerings, frequent departures, and distinctive cultures. Threat of rivalry is very high.
Five Forces Analysis • Threat of New Entrants This business is connected with highly expensive activities and costs: fuel costs, aircraft and facility rental, services, food, labor costs, maintenance material, landing fees and others. Huge amounts of funds are needed to enter this market. You'll need to look at whethere are substantial costs to access bank loans and credit. If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. Brand name recognition and frequent fliers point also play a role in the airline industry. An airline with a strong brand name and incentives can often attract a customer even if its prices are higher. Threat of new entrants is low.
Five Forces Analysis • Threat of Substitutes For an airline companies only two main substitutes exist: ground transport and other airlines. - Competition from ground transport (buses, cars, railroads) survives merely on the medium distances – up to 600 miles. - All distances above the 600 miles refer to internal competition within airline industry. Threat of substitutes is moderate-high.
Five Forces Analysis • The Bargaining power of customer - Price sensitive customers. Customers affect fares by their choice which airline to fly and, consequently, other airlines change their fares in order to stay competitive. - Switching to another airline is relatively simple and is not related to high costs (Internet-all airlines are online) - Customers know about the cost of supplying the service - Passengers create load factor, which affects airline productivity. The bargaining power of customer is high.
Five Forces Analysis • The Bargaining power of supplier The primary inputs to airline industry are: - Airplane. The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isn't a lot of competition among suppliers. Switching costs from one supplier to the other is high because all mechanics and pilots would have to be retrained. - Labor unions are suppliers who have significant power. Labor such as pilots, cabin crew, ground personnel, gate agents etc have a bargaining power which is due to the labour agreements at the time of industry regulation that left them with little flexibility. This force remains a significant factor in successful performance in the industry. - Aviation fuel. Fuel is a commodity and its prices are decided by market forces and existing geopolitical factors. Increasing cost of fuel is a threat to airline’s profits. The bargaining power of supplier is high.
Why is it so hard to make money in this business? - Load factor. Inappropriate seat configurations decreases revenue-generating power. Airlines should consider the right balance of customers mix. The same goes with the overbooking when number of reservation seats is unused which undermines the productivity of an airline’s operations. - Pricing. Difficult to manage the right set of fares in terms of offering the right mix of full-fare tickets and various discounted tickets. It’s an ongoing process, requiring continual adjustments as market conditions change. Unexpected discounting by a competitor can leave an airline with too many unsold seats if they do not match the discounts.
Why is it so hard to make money in this business? (cont’d) - High fixed and labor costs. Labor accounts for 35% of the airlines’ operating expenses and fuel is the second largest cost. Increase in fuel prices and the problem of the pollution makes airline industry to consume it more economically as a result aircrafts are forced to fly with the lower speed that decreases operating productivity. - Fleet planning. Having the right-sized aircraft for the market is vitally important. But can the airline afford to take on more debt? What is the company’s credit ratings? Too large aircraft can mean that a large number of unsold seats will be moved back and forth within a market each day. Too small an aircraft can mean lost revenue opportunities.
Conclusions Airline industry has a highly competitive environment, it depends sustainably on its suppliers, its profitability is influenced by customers and their bargaining power very significantly and there are quite big amount of substitutes. So, in conclusion we can say that this industry is not attractive.
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