9/15/2019 Porter's Five Forces - Airline Industry Analysis

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DEPEST Analysis Porter's Five Forces
Porter's Five Forces
Dominant Economic Features
Now that you know a little bit about the airline industry from viewing our DEPEST analysis, we will
Performance Analysis
know give you further information on the industry using our Porter's Five Forces Analysis.
VRIO Analysis
Business Strategy
Corporate & International Strategy
The Airline industry provides a very unique service to its customers. It transports people with a high
Conclusion
level of convenience and efficiency that cannot not be provided by any other industry or substitute.
References
Airline companies pride themselves on the way they treat their customer during the flight. They have
things such as food, drinks, entertainment, and a welcoming staff. The service of transportation is
provided in other industries but the airline surpasses all of them when it comes to timeliness. The
geographic scope of the airline industry is at a global level. Some firms are able to fly their planes all
over the world while others focus on smaller geographic areas.

The five forces model is one way to answer the first basic question in strategic management; “Why
are some industries more attractive than others?” This model shows the five forces that shape industry
competition; threat of new entrants, bargaining power of buyers, threat of substitutes, bargaining
power of suppliers, and competitors. In order to analyze the airline industry we have look at each of
these forces.

Bargaining power of Buyers

The airline industry is made up of two groups of buyers. First, there are individual flyers. They buy
plane tickets for a number of reasons that can be personal or business related. This group is
extremely diverse; most people in developed countries have purchased a plane ticket. They can do
this through the specific airline or through the second group of buyers; travel agencies and online
portals. This buyer group works as a middle man between the airlines and the flyers. They work with
multiple airline firms in order to give customers the best flight possible. Between these two groups
there is definitely a large amount of buyers compared to the number of firms.

There are low switching costs between firms because many people choose the flight based on
where they are going and the cost at the time. This is some loyalty to firms but not enough for high
switching costs. Each customer needs a lot of important information. They need to know the details of
what is provided during the flight. Buyers need to understand the timing of the flight and the safety
aspects of flying in general. The service provided is unique. Each airline has a niche. Some airlines
focus on cost, while others focus on having the best amenities, etc. Overall the bargaining power of
buyers has an extremely low threat in this industry.

Bargaining Power of Suppliers

Next we look at the bargaining power of the suppliers. In this case the major suppliers are the
airplane manufacturers. The top two manufacturers in the world currently are Boeing and
Airbus(Odell,Mark). In this industry the inputs are extremely standardized. Airline companies only
seem to differentiate with amenities. The planes are very similar. Currently some manufacturers are
trying to make their plans more ecofriendly.

Airline companies cannot easily switch suppliers. Most firms have long term contracts with their
suppliers. Planes are such high capital products that firms probably make long term loan agreements
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and have more favorable credit terms when they don’t switch companies. It is difficult to enter into the
plane manufacturing industry because of the capital needed to enter. The amount of money and
expertise needed to make even one plane is around 200 million dollars. For this reason there are very
few suppliers in the airline industry. Airline firms are the only source of income for these manufacturers
so their business is extremely important. Based on these things the bargaining power of suppliers has
a low threat as well.

Threat of New Entrants

Threat of new entrants is another major aspect of the five forces. This aspect has a low threat for
the airline industry. There are two aspects that do however raise the threat level. First, there are
extremely low switching costs. Second, there are no proprietary products or services involved.

Even with these two aspects the industry still has a very low threat overall. Existing firms have a
large cost advantage. This industry requires a large amount of capital and without a strong customer
base there will be little to no profit in the first few years. Existing firms can and will use their high
capital to retaliate against newer firms with whatever means necessary such as lowering prices and
taking a loss.

Although there are low switching costs between brands, consumers tend to only chose well-known
names. Airline tickets are expensive so people don’t want to give that money to firms they don’t trust.
There is also a huge safety aspect involved and most consumers feel safer with firms that have been
around for a long period of time. This industry requires plane and flying experience which also lowers
the threat of entry. When firms decide to enter the market they first have to become licensed which
can take about a year. After that they are constantly being regulated by several organizations such as
the Federal Aviation Administration and the Department of Transportation. The time and money spend
to solely open an airline company is enough to prevent most people from entering the industry.

Threat of Substitutes
After looking at the threat of entry it is important to also consider the threat of substitutes. This
industry has a medium substitute risk level. There are substitutes in the airline industry. Consumers
can choose other form of transportation such as a car, bus, train, or boat to get to their destination.
There is however a cost to switch. Some means of transportation can be more costly than a plane
ticket. The main cost is time. Planes are by far the fastest form of transportation available. Airlines
surpass all other forms of transportation when it comes to cost, convenience, and sometimes service.
Consumers do sometimes choose other methods for various reasons such as cost if they are not
traveling very far which raises the risk.

Rivalry among Existing Players

The last area of the five forces is the rivalry among existing players. The rivalry in the airline
industry is very intense for many reasons. The industry is currently very stagnant. It seems to be in the
mature stage of the business cycle. The number of competitors stays the same in the long run and it
doesn’t seem to be under or over capacitated. The fixed costs are extremely high in this industry. This
makes it hard to leave the industry because they are probably in long term loan agreements in order to
stay in business. The products involved or the planes are highly complex which also heightens the
competition.

The competition is lessened by the brand identities of different firms. For example, Jetblue is known
for its amenities and Southwest is known for its low prices. The market share seemed to be equally
distributed because each company has its own part of the market and because switching costs are
low none of the firms can really hold a large percentage of the market.

The strongest forces in this industry are the competition of existing firms and the power of suppliers.
The rivalry of existing players is high and will push out any firm that doesn't have enough capital.
Suppliers are strong forces because planes are so costly to make. If the suppliers changed the credit
terms by even a small amount it could mean a significant loss for the firm. On the other hand the other
forces involved seem to have a weak threat. It is costly and time consuming to enter the market which
lowers the risk of entry. Buyers have a weak force because of the low switching costs and substitutes
are weak because they are usually too costly.

The profit in this industry is high because for most people flying in necessary. It is not a trend which
makes this industry profitable for the long term. Airlines that are more profitable are in a better position
because they usually have more planes and a larger variety of flights which provides further
convenience for the consumer.

Recently there have been some changes in some of the forces. Some airplane manufacturers have
been making ecofriendly planes, which is a change in the bargaining power of suppliers. This would
differentiate the products, raising the threat of suppliers. Another recent change is the use of web
portals such as Expedia to book flights. This positive change creates a whole new group of buyers and
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makes purchasing flights faster and easier. The increase in gas prices has also been a positive
change for the industry because it lessens the power of substitutes. People are more willing to fly to
their destination if driving would be more expensive.

After looking at the Five Forces Model firms should make dealing with the competition their main
priority. The other areas in the model seem to have an overall low threat so existing firms don’t have to
focus on those areas as much in their business strategy.

Now that we have brought you through our Porter's Five Force analysis, the last thing that is important
to consider when exploring an industry, are the dominant economic features. The next section of our
report will give you an overview of what features affect the airline industry most.
APPENDIX:
Bargaining power of Buyers – Low Threat
Yes No Cannot
Question (Low (High Assess
Threat) Threat)
Are there a large number of buyers relative to the number of X
firms in this business?
Do you have a large number of customers, each with relatively X
small purchases?
Does the customer face any significant costs in switching X
suppliers?
Does the buyer need a lot of important information with regard X
to using the product?
Is the buyer aware of the need for additional information? X
Is there anything that prevents the customers from X
manufacturing the product/service in-house?

Are customers highly sensitive to price? X

Are products unique to some degree? Do they have accepted X

branding?
Do firms provide incentives to decision-makers on the buyer X
side?

Bargaining Power of Suppliers- Low Threat

Question Yes (Low No (High Cannot
Threat) Threat) Assess
Inputs (material, labor, services) in this industry are X
standard rather than differentiated.

Firms can switch between suppliers quickly and easily. X

Suppliers would find it difficult to enter this business. X

There are many current and potential suppliers in this X

industry.
This business is important to the suppliers. X

Threat of New Entrants- Low Threat

Question Yes(Low No Cannot
Threat) (High Assess
Threat)
Do existing firms have cost and/or performance advantage in X
this industry?

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Are there proprietary products/services on offer in this X
industry?
Are there established brand identities in this industry? X

Do customers incur significant costs in switching suppliers? X

Is a lot of capital needed to enter this industry? X

Does a new comer to the industry face difficulty in assessing X

distribution channels?
Does experience in this industry help firms to continually lower X
costs and/or improve performance? In other words, is there a
“learning effect” in this industry?
Are there any licenses, insurance and other qualifications X
required in this industry that are difficult to obtain?
Can a new comer entering this industry expect strong X
retaliation from the existing players?

Threat of Substitutes- Medium Threat

Question Yes No Cannot
(Low (High assess
threat) threat)
Available substitutes have performance limitations X
and/or high prices that do not justify their use as
mainline products.
Customers will incur costs in switching to substitutes. X

There truly are no real substitutes for the products X

available in this industry.
Customers are not likely to go for substitutes. X

Rivalry among Existing Players- High Threat

Question Yes No Cannot

(Lowers (Intensifies assess
rivalry) rivalry)
The industry is growing rapidly. X

The industry does not have overcapacity at the moment. X

The fixed costs of the business are a relatively low proportion X

of the total costs.
There are significant product differences and brand identities X
among the competitors.
It would not be hard to get out of this business because there X
are no long-term commitments that bind players to the industry.
Customers would incur high costs if the switched from one X
player to another.

Products on offer are highly complex and require significant X

customer-producer interaction.

Market shares in the industry are more-or-less equally X

distributed among competitors.

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