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Five Forces Analysis of the US Airline Industry

Discuss about the five forces analysis of the US airline industry.

Strategic positioning defined as the positioning of an organization in the future which includes the fluctuating environment along with the organized realization of the positioning. The strategy identifies the contents and characters of the activities of the organizations (Hollensen, 2010). The report is based on the case study of the United States Airline Industry. It focuses on the strategic position of the Airline Industry of US. The report includes the five forces analysis of the US airline industry and their components from the perspective of the US Airline. Along with this, it includes the economic performance of the company. In the end, the paper will reflect the strategies that contribute to the improvement of profitability of the US airline.

The air transportation network of US was is very extensive. In the year 2013, there were approximately 86 airports in the U.S who per annum handled more than 1,000,000 passengers (CAPA, 2018). The passenger of air transportation market is a thriving industry which is taking individuals across the world. US airports were included in the list of the world busiest airports considering the passenger volume in the year 2014 (Belobaba, Odoni, and Barnhart, 2015). Considering the geography of the United States which reflects that places or major cities were available at large distance due to which most of the visitors started using air transportation for the trips. After the Great Recession in the year 2013, the air traffic in the US was a decline as reported by the government of US.

At the same time, the airline of US has faced the rapid association of all the nation's largest carriers experiencing mergers (Morrison and Winston, 2010). After all this, the average fare of domestic airline started increasing as the demand of the airline was increasing. The analysis of the US domestic Airline industry reflect the top costs and drivers of the airline which include Labour cost (31.3%), Fuel cost (17.3%) and the Aircraft Leasing cost (2.9%)(Lim, Sharma, Wang and Zhang, 2018). The rise in the cost of the domestic airline was one of the reason due to which there was a rise in the prices of the fare.

Porter’s five forces framework is a tool that is used by the companies for analyzing the competitors of the business (Kotler, 2015). This tool is helpful for the company to adjust the strategy that can suit the competitive environment and this will also contribute to improving the potential profit. Below given is the diagrammatic presentation of the five forces of the framework.

Economic Performance of the US Airline Industry

The porter five forces tool is also used by the airline industry of US for evaluating the level of attraction of an industry by considering the external environment in which the business works (Wilson and Gilligan, 2012).

In the airline industry, there are primarily two major airplane suppliers Boeing and Airbus. There are very few companies who deal in the Boeing and Airbus. Therefore, US airline industry has less number of suppliers which means these suppliers control the prices of the product with the immense power (Lee and Carter, 2011). In addition, the fuel is also supplied by only a hardly any of sources in the industry. There is very less number of Airports who are serving in the particular area as most of the airline companies serve their services in almost every area which is same line US. US airline offers its services in domestic as well as in international areas. Another high-cost input in the airline industry is labor which is powered by the labor union.

In the present market, the customer finds low switching cost in the airline industry. Most of the customer decides the airline on the basis of availability and fare of the airline. Every customer has a niche that attracts the customers who prefer airline. The emergence of the online portals offers the customer diverse facility related to the airline tickets, competing on price and flight timings. There are different portals such as Expedia.com, SkyScanner.com and many others who offer the different facility to the customers related to the availability and prices of the flight (Grant, 2016).

The threat of substitutes takes place when similar products are offered in the industry (Chernev, 2018). Potential travelers have the capability to select the over diverse modes of the transportation like buses, cars, trains, and boats. In substitution of the product, there is involvement of the switching cost which is associated with the shifting of modes of transportation. There are many customers who prefer US airlines for traveling places which are at distance. The customer might choose other methods of transportation for the shorter distances. In addition, technology is also contributing in substituting of customers from airline travel. Technological communication such as WebEx, Skype, and other video-conferencing tools are offering the facilities to the business travelers in conducting meetings due to which the volume of a passenger at US airlines is declining (Management Study Guide, 2018). Though, there are still numerous business meetings due to which the business operators travel. Moreover, frequent flier program reduces the threat of substitutes since establishing new benefits for any airline that affect the consumer to lose miles due to which they might have accumulated with another airline.

Benefits and Drawbacks of Porter's Five Forces Analysis

The airline industry is tremendously competitive in its nature of business because of time-to-time entry of the new entrants with the low-cost carrier and tight regulations with the concern of the safety which has increased operational expenses. The competition for the US Airline has become tough due to the entrance of low-cost carrier (Jet Blue, AirTran Airways, and Southwest Airlines) who have contributed in bringing the prices down by a large extent. This ultimately contributed in driving down the margins of the airline (Hill, Jones, and Schilling, 2014). The number of competitors of US airline remains stagnant in the market because of high fixed cost. There is a slight change between the existing choices and the loyalty programs of airlines which include flyer miles and the benefits that are hardly a preference over aspects such as prices, available flight times and routes.

The airline industry needs a huge initial investment along with a long learning curve. Apart from the investment, the airline that is willing to perform their operations needs to acquire high-cost assets which include skilled staff, planes and the required permission for the parking and docking space at numerous airports (Dobbs, 2014). These companies also require analyzing the market service extensively which helps them in understanding the trends of the customers. Most of the companies don’t get involved in the airline industry because of the fluctuation in the profit and the strict government regulations. Though, this is the fact that availability of the credit system has provided an opportunity to the companies to establish a venture in the airline industry. Due to which the US airline found new entrants including Southwest Airline, AirTran Airways, Virgin America and Jet Blue. These new entrants make use of the non-union labor often to fly just one type of the aircraft. Moreover, these airline companies are focused towards the lucrative routes which mean they fly point-to-point (Hill, Jones, and Schilling, 2014). These new entrants have contributed in creating a situation of the excess capacity in the industry. Generally, the threat of the new entrants in the airline industry is low but US airline industry has found many companies who entered the market of Airline.

Forces

Threat

Bargaining power of customers

High

Bargaining power of suppliers

High

Threat of Substitutes

Medium

The intensity of competitive rivalry

High

The threat of new entrants

Medium

There are numerous benefits and drawbacks of the use of Porter's five forces. Some of them are discussed below: -

Advantages

  • Highly recognized model: - This model of the Michael Porter Five Forces is a well-known model which is used by many companies for the strategic management. It is essential for the companies to understand the competitive forces due to which these companies make use of this model (Moutinho and Southern, 2010).
  • Simplicity: - Simplicity of the model is the strong point of the model as it is very stress-free to use and offers a comprehensible way of the market forces analysis. Therefore, the managers of the business can make use of this analysis in numerous numbers of markets where the business is operating its working.
  • The scope of business strategy: - This model is effective in the organization as well as in the education field. It residues to affect the scope of the business strategy in both the fields (Freeman, 2010).
  • Track the movements of suppliers: - The model talks about the activities from the suppliers of the resources through the company to the consumer. The role of the business is worried as it is the unit where the value is created. Moreover, the analysis of the suppliers and customers is explained because these are the most important element of the supply chain of the business (De Wit and Meyer, 2010).

Disadvantages

  • Development of model: - The model of Porter five forces was developed in the eighties and it was designed to extract the details at that point in time. The change in the time has brought many changes because of rapid development. Rapid development leads to the cyclical developments, steady market structures and solid competition which are changing with time. The emergence of the technology has also contributed to the changes in the structure (Pringle and Huisman, 2011). This reflects that this model can’t be used to explicate today dynamic changes. Therefore, there is a need for the changes or development of the model.
  • Limited to five forces: - The change in the industry working has brought many new factors that create the impact on the working of the company. The five forces model is used by the industry for the analysis of competitive forces. This model includes only five forces analysis which is very limited for the airline. There is need of more forces for the proper competitive analysis.
  • Only for external analysis: - This model is used only for the external forces, not for the internal forces which affect the working of the company. Therefore, the company makes use of the different framework through which they can easily analysis the internal factors.

Economic performance of the US airline reflected in the case study shows that at the beginning of 2001, the rise in the oil prices was one of the complicated matters. In the year 2011, the total fuel cost was equal to 32% of the total revenue of that particular year. This rise in the oil prices impacted the business of the airline. Along with this, the cost of labor was another one of the biggest variable expense items which affected the airline. These costs create an impact on many airlines due to which they went bankrupt in the 2000s which include Delta, Northwest, United and US Airways (Hill, Jones, and Schilling, 2014). The rise in the prices of the expenses leads to the rise in the prices of the fare of airline tickets. This might reduce the number of customers of the US airline because of the high fare.

Conclusion

Customers who prefer traveling by air generally have good disposable income. The change in the economy of the company leads to the change in the income of the people which can ultimately create an impact on the profitability of the US airline. This is a matter of concern for the airline working as it is essential to generate profit survives in the industry. Apart from it, competitors of US Airline who entered the market as a low-cost carrier has impacted the profit of other airlines. Considering the case study analysis, there is no option left for the US airline as there are low-cost carriers who are offering fare tickets at low prices but other airlines can’t do so because the cost of the expenses is high due to which they have to increase the prices of tickets.

The case study also reflects the mergers in the industry which turned as an effective way to resolve issues for some airlines. The late 2000s and early 2010s were characterized by a wave of the mergers in the industry as in the year 2008, Northwest and Delta got merged. Along with this, in the year 2010, the United and continental got merged. In addition, the southwest airlines announced that they are planning to acquire the AirTran. In the year 2012, the American Airline has put itself under the chapter 11 of the bankruptcy protection (Hill, Jones, and Schilling, 2014). In the end, in early 2013, the US Airways was pushed for a merger agreement with the American Airlines. These mergers help the airline to achieve the profitability in the industry.

The airline can increase their revenue if they provide the proper availability of the space to the customers when they demand (Birdsong, 2015). Moreover, the airline should provide the ancillary services to the customers which are an effective way through which the airline can attract the customers to make use of air transportation for traveling from one place to another. 

The overall analysis of the case study reflects that the US airline industry is facing many issues such as threat for the entrants of new competitors in the market and profitability of the airline industry. The competitive forces analysis has reflected that the US airline is impacted by these forces due to which they are not able to grow and even facing the problems related to the profitability of the airline. The profitability of the airline is reduced mainly because of the entrance of the low-cost carriers in the market along with the rise in the prices of the expenses. The airline should make use of the different strategies through which they can try to increase the profit. It is advisable for airlines to offer additional services to their customers which are an effective way to make the space in the market and to attract the maximum number of customers.

Conclusion

In the end, it can be concluded that the impact of the competitive forces on the business is high which means that there is a huge impact on the working of the industry. The Porter's five forces analysis is used in the report which reflects how the forces are creating the impact on the US airline industry. The report also includes the advantage and disadvantages of the model that is used by the airline for the analysis. In the case study, the profitability of the airline emerged as one of the leading issues which took place due to some or other issues. Though, with the use of strategies the industry can overcome these issues

References

Belobaba, P., Odoni, A. and Barnhart, C. eds. (2015). The global airline industry. UK: John Wiley & Sons.

Birdsong, D. (2015) The future of airline profitability [Online]. Available from: https://www.sabre.com/insights/the-future-of-airline-profitability/ [Accessed on 13th April 2018]

CAPA (2018) Airport Finance and Privatisation: CAPA's Review of the Year 2013 and 2014 outlook - Part 2 [Online]. Available from: https://centreforaviation.com/insights/analysis/airport-finance-and-privatisation-capas-review-of-the-year-2013-and-2014-outlook---part-2-143541 [Accessed on 13th April 2018]

Chernev, A. (2018) Strategic marketing management. Cerebellum Press.

De Wit, B., and Meyer, R. (2010) Strategy: process, content, context. EMEA: Cengage Learning.

Dobbs, M. (2014) Guidelines for applying Porter's five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), pp.32-45.

Freeman, R.E. (2010) Strategic management: A stakeholder approach. New Jersey: Cambridge university press.

Grant, R.M. (2016) Contemporary strategy analysis: Text and cases edition. Great Britain: John Wiley & Sons.

Hill, C.W., Jones, G.R. and Schilling, M.A. (2014) Strategic management: theory: an integrated approach. Germany: Cengage Learning.

Hollensen, S. (2010) Marketing management: A relationship approach. India: Pearson Education.

Kotler, P. (2015) Framework for marketing management. India: Pearson Education.

Lee, K. and Carter, S. (2011) Global marketing management. Strategic Direction, 27(1).

Lim, Y., Sharma, V., Wang, D., and Zhang, T. (2018) U.S. Airline Industry [Online]. Available from: https://courses.cit.cornell.edu/jl2545/4160/submitted%20presentations/2016/airlines.pdf [Accessed on 13th April 2018]

Management Study Guide (2018) Porter’s Five Forces Analysis of the Airlines Industry in the United States [Online]. Available from: https://www.managementstudyguide.com/porters-five-forces-analysis-of-airlines-industry-in-united-states.htm [Accessed on 13th April 2018]

Morrison, S. and Winston, C. (2010) The evolution of the airline industry. Washington: Brookings Institution Press.

Moutinho, L. and Southern, G. (2010) Strategic marketing management: a business process approach. EMEA: Cengage Learning.

Pringle, J. and Huisman, J. (2011) Understanding universities in Ontario, Canada: An industry analysis using porter's five forces framework. The Canadian Journal of Higher Education, 41(3), p.36.

Wilson, R.M., and Gilligan, C. (2012) Strategic marketing management. Routledge.

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