Porter’s Five Forces analysis

Michael Porter (1985) identified five factors, which he argued impacted the performance of
companies within market boundaries: the threat of new entrants to the market; the threat of
substitute products or services; the bargaining power of suppliers; the bargaining power of buyers
and the intensity of the rivalry in the market. Below, these factors are applied to the airline industry.

The threat of new entrants

This aspect of the Five Forces refers to the extent to which new competition can be accommodated
within the industry. In relation to the passenger airline business, the threat of new entrants is weak
considering the high amount of initial investment required. There are huge capital outlays and long
lead times to recoup investment in the airline industry, which explains the high failure rates of many
nascent airlines. Despite the weak threat of new entrants to the full, airline passenger sector, the
short-haul sector has witnessed the entry of several new entrants in recent years. Good examples in
the Southeast Asian markets in which Singapore Airlines operate are Air Asia and Jet Star (Stockport,
2012).

The intensity of rivalry

There is some intense rivalry within the airline industry, but it occurs on a route-by-route basis.
Where routes are well serviced by several different airlines, rivalry can be very intense. In order to
capture market share on such routes, airlines must adopt price-cutting strategies or ensure that the
quality of their service is very high. Eg- Delhi Raipur route used by Vistara, since there are just a few
carriers operating this route, competition tends not to be as fierce. The exceptional performance of

The threat of substitute services

This aspect of the Five Forces refers to the extent to which the product or service offered by an
industry incumbent can be replaced by another similar service. Porter (1985) argued that businesses
providing substitutable products and services were at risk of market losses.

India which has a vast network of railways which offers affordable transportation option to the
travellers and carries 23 million passengers every day. With the arrival of bullet trains this market
can become more competitive. Also, the growing network of roadways is a concern for airlines when
launching short route flights.

Due to increased concern with the environmental impact of air travel, improved real-time
telecommunications technologies and the growing number of virtual enterprises, individuals that
would previously have made considerable use of long-term business travel are finding that they can
do their work from home.

The bargaining power of customers

According to Porter (1985), where buyers have strong bargaining power, the relative position of
suppliers of goods and services is relatively weak. In such industries, product and service providers
must be particularly cognizant of the needs and demands of their customer base if they are to
develop – and maintain – their market share.

The bargaining power of customers in the airline industry is moderate. Switching costs between
airlines are very low (Cook, Tanner and Lawes, 2012) in India due to high fixed costs. Switching costs
refer to the burden perceived by customers in selecting one supplier over another, and are
comprised of time, emotions, opportunity and financial costs. The switching costs for passenger
flights have considerably lessened in recent years, driven by the decline in high street airline offices
and travel agents and the proliferation of the Internet (Lim and Lee, 2012). Although virtually all
airlines have their own websites through which passengers can search, book and pay for flights, it is
more common for passengers to search for flights using one or more of a multitude of ‘comparison
sites’ such as makemytrip and goibibo. These websites enable passengers to compare the airfares of
like-for-like routes and services, which in turn facilitates easy switching (Lim and Lee, 2012). Airlines,
have however, been attempting to increase switching costs through the provision to passengers of
loyalty schemes, either alone, or in conjunction with partners in strategic alliances. Passengers are
encouraged to remain loyal with one airline or one alliance as frequency of purchase enables them
to accrue ‘points’ or ‘air miles’ that can be exchanged for free or discounted flights, or other
rewards. The extent to which these initiatives drive purchasing decisions, is, however, under debate
(Wang, 2014).

The bargaining power of suppliers

This aspect of the Five Forces refers to the extent to which suppliers can negotiate with businesses
over materials and equipment. Porter (1985) argued that where suppliers have strong bargaining
power, the relative position of businesses is relatively weak.

Unusually for a transportation industry, suppliers to the airline industry are in a relatively strong
bargaining position. Fleets to the industry are supplied by what is effectively a duopoly– Boeing and
Airbus –, while an oligopoly exists in the supply of engines (General Electric, Pratt and Whitney, and
Rolls Royce). With so few suppliers in operation, manufacturers can unilaterally establish prices and
set delivery times (Olienyk, and Carbaugh, 2011).

Conclusion

Singapore airlines a company with an excellent reputation in fine financial health. While there is
little danger of the company succumbing to the competition any time soon, there are, however, a
number of environmental threats, of which it must remain cognizant, if it is to remain the leader of
what can be an intensely competitive industry. Importantly, the company will need to develop new
markets, particularly in India and North America, and develop its low-cost arm in order to meet
changing consumer demands.

As per CAPA’s prediction the industry is supposed to grow to 270 million by 2020 and presents a
huge market to capture. Singapore Airlines in order to develop new markets, always wanted to enter
India but was unable to due to government regulations. This opportunity had been in their plan all
along. At a point where major players were on the verge of bankruptcy a new entrant can benefit
from the losses of competition.

Reducing Cost of Market Entry and Marketing into International Market

As part of 'Vistara Freedom Fares', Economy Class fares are called 'Lite', 'Standard' and
'Flexi', while those for Premium Economy and Business Class are named 'Value', 'Standard'
and 'Flexi'.

Premium Economy
Vistara is thus operating with a rather unique configuration of Business (8 seats), Premium Economy
(24 seats) and Economy (132 seats).
The airline brand has even launched a full-fledged brand campaign talking about its Business and
Premium Economy classes. The ‘fly higher’ campaign, created by FCB India, is targeting a certain
segment of customers who would be happy to fly business but haven’t considered it because they
are too used to flying LCC.