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Overview of the Industry

Discuss about the Attractiveness Of The Us Airline Industry.

In the rapidly changing business world, management struggles to implement policies that are focused on achieving organisational objectives. The  management uses different strategic tools to develop and implement policies in order to improve a firm’s profitability. Porter’s five forces model is a popular strategy development tool which was developed by Michael Porter. This report will analyse the attractiveness of the US airline industry by evaluating its strengths and weaknesses and examine different factors that affect the business of corporations operating in the industry. The primary goal of this report focuses on using Porter’s five forces model in order to develop strategies for airlines companies that operate in the industry. This report will also include advantages and disadvantages of Porter’s five forces framework. Economic growth of the US airline industry will also be discussed in the report while developing the strategies for improving the profitability of the airline companies.Overview of the Industry

In the US airline industry, a large number of corporations operate that provide their services to customers. The industry includes both high priced airlines along with low priced airlines. The corporations operate in high priced zone include United, Delta and American Airline (Belobaba, Odoni and Barnhart, 2015). However, in previous few years, the number of low-cost airlines has increased in the US airline industry. The companies operating in low priced zone include AirTran, Southwest Airline, Virgin Airline and Jet Blue. The low priced airlines have increased issues for the leading organisations because they offer substantially lower prices to their customers which increase their customers. The low priced airlines reduce their flight charges by selecting air routes which are most convenient and affordable (Hannigan, Hamilton and Mudambi, 2015). These companies use specific type of aircraft that did not increase their operating costs, and they use non-union workers maintain low operation rate. Due to increase in low priced airlines, the business of other high priced airlines is suffering which also negatively affect the US airline industry.

The increase in a number of online ticket booking services has also affected the economic growth of the US airline industry. Due to the popularity of smartphones and online-based services, many small companies have emerged in the market that enables customers to purchase flight tickets directly through their smartphones (Daraban, 2012). Companies such as Travelocity, Orbitz, and Expedia are the main leaders in online flight ticket booking service. Other than ticket booking services, these companies also allow its users to compare flight ticket prices between airlines. These create issues for high priced airlines because customers can easily compare between air ticket prices and choose the most affordable option (Lee, Seo and Sharma, 2013). Other than the reduction in sale of tickets, the increase in jet fuel prices also results in increasing issues for the corporations operating in the US airline industry. The fuel makes up about 32 percent of the airlines’ costs and increases in fuel prices increase their operating costs. The labour costs take another big part of overall airline costs.

Porter’s Five Forces Analysis

The labour costs contribute around 26 percent of the overall operating costs of an airline. Together labour and fuel costs contributes to more than 58 percent of overall airline costs and increase in these expenses result in effect the growth of an airline (Brueckner, Lee and Singer, 2014). On the other hand, between the 2000s and 2010s, many big mergers took place in the US airline industry which affected its economic growth. For example, Delta Airlines merged with Northwest Airline in 2008. In 2010, United Airlines merged with Continental Airline. Same year, SouthWest Airline announced it plans to acquire AirTran Airline. In early 2013, the US Airways pushed a merger agreement with American Airlines. All these mergers and acquisitions are occurred due to the introduction of low-cost airlines and third-party online ticket booking services which result in reducing the sales of airlines in the US airline industry (Borenstein and Rose, 2014). Although the companies are facing many risks in the US airline industry but the industry is substantially large, and it provides opportunities to airlines to face these challenges and improve their customer services in order to attract more customers (Ciliberto and Schenone, 2012). The companies are becoming more customer-centric, and they are improving their services such as baggage handling, customer services, flight check-in, delays in flights and others.

The five forces framework is a management tool which assists top-level management in analysing the attractiveness and competitiveness of an industry (Dobbs, 2014). Primarily, the corporation uses this model in order to analyse different strengths and weaknesses of the sector in which they operate to create future business plans that are focused towards achieving corporate objectives. The framework was given by Michael Porter in 1979. Before launching a new product, entering a new sector and developing future business strategies, the senior level executives use Porter’s five forces model for analysing the strengths and weaknesses of the industry (Yunna and Yisheng, 2014).

Threat of New Entrants

In the US airline industry, the threat of new entrants is low because the barriers to entry of new companies are relatively large. For new entrants, the initial investment costs are massive without guarantee of appropriate returns. The companies also require complying with a large number of government regulations because the security of aircraft is a major issue for the government (Bilotkach and Lakew, 2014). These factors increase barriers for airlines in the US airline industry due to which the threat of new entrants in the industry is relatively low.

Buyers’ Power

In the US airline industry, the bargaining power of buyers in high. The number of airlines is large in the US airline industry, and customers can easily choose between any of them. There are no additional costs of switching between airlines which increase the bargaining power customers. Furthermore, many third-party companies provide the ticket booking services directly on the smartphones of customers which makes it easier for them to choose between different airlines and select the most affordable option among them (Dana and Orlov, 2014). These factors result in increasing the bargaining power of customers in the US airline industry.

Suppliers’ Power

In the US airline industry, suppliers include aircraft manufacturers, labour unions, and fuel companies. Although there are five major aircraft manufacturers which include Bombardier, Airbus, Embraer, Tupolev and Boeing, but Airbus and Boeing are the primary aircraft suppliers in the US airline industry. These manufacturers hold monopoly which increases their bargaining power. The labour laws are strict in the United States as well, and companies are under significant pressure from the labour unions (Pitt and Norsworthy, 2012). Similarly, fuel companies have a monopoly in the market, and they can easily raise prices of jet fuel. Due to all these factors, the bargaining power of suppliers is high in the US airline industry.

Threat of Substitution

In the US airline industry, the threat of substitute options is relatively low. The substitutes of airlines include train, bur, cars and ships. However, for both overseas and local destinations, flights are the fastest medium of travel than compared to all other substitutes. On the other hand, the flight experience is also substantially comfortable than compared to its substitutes (Dai, Liu and Serfes, 2014). Therefore, the threat of substitutive is low in the US airline industry because customers have no other substitute that offers similar level of comfort and speed when it comes to travelling.

Competitive Rivalry within the Industry

In the US airline industry, the industry rivalry is intense due to a number of factors. There are a large number of airlines operating in the industry that offer high priced to low priced ticket options to customers. Online ticket booking services enable customers to choose most affordable flight option which increases pressure on airlines to offer competitive pricing (Treanor et al., 2014). Many international airlines offer their services in the industry as well which result in increasing competition in the industry. Therefore, competitive rivalry is intense in the US airline industry.

Following are different advantages and disadvantages of Porter’s five forces model.

Advantages

  1. Porter’s five forces framework use five key forces in the industry to analyse attractiveness or unattractiveness of the industry based on the level of its competitiveness. The model assists  management in evaluating a number of external forces that have a direct impact on the profitability and performance of an enterprise (Lee, Kim and Park, 2012).
  2. While launching new products or services or entering a new market, the senior level management can use the five forces model to analyse the competitiveness of the industry which assists them in creating policies for ensuring the effectiveness of the products or services (Sutherland, 2014).
  3. The model assists the management in evaluating the profitability of the corporation through which they collect relevant data to develop strategic policies that assist them in improving their performance and increasing overall profitability.

Disadvantages

  1. The primary critique of Porter five forces model is that it was developed in 1979 and it is not suitable for modern enterprises because many factors have changed. Many factors that influence industry are not included in the model because they were not present in the 1970s. Due to the advancement of technology, organisations are facing new challenges and opportunities due to use of technology which is not analysed by the model, therefore, it is not suitable for modern corporations (Hoque and Chia, 2012).
  2. The model is suitable for creating short-term business policies rather than long-term strategies because it only analyses current factors in an industry that influence a firm’s profitability. However, many future technologies are developing in different industries which are more likely to affect their profitability. For example, the introduction of ‘Hyperloop’ by Tesla will provide a new substitute for customers against airlines because it will travel them with a speed of 750 mph (1200 km/h) and it will be comfortable as well (Trimm, 2017).
  3. Porter gave equal importance to each of the five forces in the framework. However, in reality, one force has a more major impact on a company than compared to other. The management should prioritise the forces which has a significant impact on the company.
  4. The relevancy of the five forces model is entirely based on the accuracy of the information. Therefore, based on wrong information, the management can develop future strategies that are not suitable for their business which can negatively affect their profitability as well.

There are a large number of factors that influence the economic performance of the US airline industry. For example, customers buying power reduces in recession, and they are more likely to choose cheaper flights and alternative travelling options rather than investing their money in high price airlines (Johnston and Ozment, 2013). According to the report of IATA, the total spending on air travel in 2017 will be around $776 billion. The industry is expected to grow by 5.3 percent in 2017 (Idea Works Company, 2017). However, as compared to its performance from previous years, companies are suffering to maintain their profitability in the industry. The profitability of the industry is affected by different factors such as increase in jet fuel prices, reduction in sales, reduction in economic condition in the nation, labour strikes and others. The US airline industry is also suffering due to increase in number of low costs airlines which reduce the profits of market leaders. The introduction of third party corporations that provide online ticket booking facility to customers has also increased the completion in the industry which affects its economic performance (Williams, 2017). Most of the market leaders are able to sustain the negative impact of slow economic growth in the US airline industry; however, small airlines have no choice but to merge with others.

Following are different strategies that can be adopted by airlines operating in the US airline industry for sustaining their profitability.

Customer-centric approach

The airlines should focus on demand of customers rather than increasing their profitability. They should introduce new facilities for addressing customers’ issues rather than increase their profits. The corporations should not compare with low priced airlines by reducing their ticket prices; instead, they should focus on customers’ demands and issues faced by them while travelling through airlines (Steven, Dong and Dresner, 2012). They should address such issues and introduce facilities for improving customer experience such as improved flight experience, reduction in check-in time and better services for economy class customers.

Implementation of Technologies

The airlines should implement the latest technologies into their operations in order to improve their efficiency and overall customer experience. For example, they can allow its customers to check-in by using their smartphone as their identification. They can also use big data technology for analysing customer purchasing pattern and providing them offers that are customised to their demands.

Improved Customer Services

The airlines should focus on improving customer services experience rather than reducing their ticket prices which will make customers’ travelling experience more comfortable. Customers will prefer to pay extra money if the company is offering high-quality services (David Mc, 2013). For example, ticket prices of Emirates Airline’s business class are over $21,000; however, customers buy such tickets because the airline offers most comfortable travelling experience. Similarly, airlines can offers services such as baggage tracking from smartphone, reduction in check-out time, no flight delays and others.

There are a large number of domestic and international airlines operate in the US airline industry. The profitability of these airlines is affected by various factors such as increase in fuel prices, labour strikes, low-cost airlines, online ticket booking services and others. The leading market players are facing fierce competition in the industry, and they have to implement appropriate strategies for maintaining their competitive advantage. Based on five forces model, the bargaining power of buyers is relatively high, and the competitive intensity is fierce as well. In order to address these issues, airlines should improve their customer services experience which will provide them a competitive advantage over low priced airlines and sustain their future growth. The airlines can implement the latest technologies for improving their performance and customer services. These strategies can increase the profitability of airlines and provide them a competitive advantage which sustains their future growth.

Conclusion

Conclusively, the US airline industry is suffering due to increase in low costs airlines, online ticket booking services and slow economic growth. Both large and small airlines are affected by these factors. This report used five forces model to analyse the attractiveness and competitiveness of the US airline industry. The economic growth of the sector is analysed in the report as well. Further, different strategies are given in the report based on five forces framework. The airlines should focus on improving their customer service experience by implementing modern technologies which will provide them a competitive advantage and result in sustaining their future growth.

References

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

Bilotkach, V. and Lakew, P.A. (2014) On sources of market power in the airline industry: Panel data evidence from the US airports. Transportation Research Part A: Policy and Practice, 59, pp.288-305.

Borenstein, S. and Rose, N.L. (2014) How airline markets work… or do they? Regulatory reform in the airline industry. In Economic Regulation and Its Reform: What Have We Learned? (pp. 63-135). University of Chicago Press.

Brueckner, J.K., Lee, D. and Singer, E. (2014) City-pairs versus airport-pairs: a market-definition methodology for the airline industry. Review of Industrial Organization, 44(1), pp.1-25.

Ciliberto, F. and Schenone, C. (2012) Bankruptcy and product-market competition: Evidence from the airline industry. International Journal of Industrial Organization, 30(6), pp.564-577.

Dai, M., Liu, Q. and Serfes, K. (2014) Is the effect of competition on price dispersion nonmonotonic? evidence from the us airline industry. Review of Economics and Statistics, 96(1), pp.161-170.

Dana Jr, J.D. and Orlov, E. (2014) Internet penetration and capacity utilization in the US airline industry. American Economic Journal: Microeconomics, 6(4), pp.106-37.

Daraban, B. (2012) The low cost carrier revolution continues: evidence from the US airline industry. Journal of Business & Economics Research (Online), 10(1), p.37.

David Mc A, B. (2013) Service quality and customer satisfaction in the airline industry: A comparison between legacy airlines and low-cost airlines. American Journal of Tourism Research, 2(1), pp.67-77.

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

Hannigan, T.J., Hamilton, R.D. and Mudambi, R. (2015) Competition and competitiveness in the US airline industry. Competitiveness Review, 25(2), pp.134-155.

Hoque, Z. and Chia, M. (2012) Competitive forces and the levers of control framework in a manufacturing setting: A tale of a multinational subsidiary. Qualitative research in accounting & management, 9(2), pp.123-145.

IATA. (2017) Jet fuel price meter. [Online] IATA. Available at: https://www.iata.org/publications/economics/fuel-monitor/Pages/index.aspx [Accessed 16th April 2018].

Idea Works Company. (2017) Airline ancillary revenue projected to be $82.2 billion worldwide in 2017. [PDF] Idea Works Company. Available at: https://www.ideaworkscompany.com/wp-content/uploads/2017/11/Press-Release-123-Global-Estimate.pdf [Accessed 16th April 2018].

Johnston, A. and Ozment, J. (2013) Economies of scale in the US airline industry. Transportation Research Part E: Logistics and Transportation Review, 51, pp.95-108.

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Lee, H., Kim, M.S. and Park, Y. (2012) An analytic network process approach to operationalization of five forces model. Applied Mathematical Modelling, 36(4), pp.1783-1795.

Lee, S., Seo, K. and Sharma, A. (2013) Corporate social responsibility and firm performance in the airline industry: The moderating role of oil prices. Tourism management, 38, pp.20-30.

Pitt, I.L. and Norsworthy, J.R. (2012) Economics of the US commercial airline industry: Productivity, technology and deregulation. Springer Science & Business Media.

Schmidt, A. (2016) How the Airline Industry depends on the US Economy. [Online] Market Realist. Available at: https://marketrealist.com/2016/09/how-the-airline-industry-depends-on-the-us-economy [Accessed 16th April 2018].

Steven, A.B., Dong, Y. and Dresner, M. (2012) Linkages between customer service, customer satisfaction and performance in the airline industry: Investigation of non-linearities and moderating effects. Transportation Research Part E: Logistics and Transportation Review, 48(4), pp.743-754.

Sutherland, E. (2014) Lobbying and litigation in telecommunications markets–reapplying Porter’s five forces. info, 16(5), pp.1-18.

Treanor, S.D., Rogers, D.A., Carter, D.A. and Simkins, B.J. (2014) Exposure, hedging, and value: New evidence from the US airline industry. International Review of Financial Analysis, 34, pp.200-211.

Trimm, M. (2017) Opinion: How Elon Musk’s “Hyperloop” can (and will) affect short-haul air travel. [Online] Aeronautics Online. Available at: https://aeronauticsonline.com/how-elon-musks-hyperloop-can-and-will-affect-short-haul-air-travel/ [Accessed 16th April 2018].

Williams, G. (2017) The airline industry and the impact of deregulation. Abingdon-on-Thames: Routledge.

Yunna, W. and Yisheng, Y. (2014) The competition situation analysis of shale gas industry in China: Applying Porter’s five forces and scenario model. Renewable and Sustainable Energy Reviews, 40, pp.798-805.

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