Analyzing The US Airline Industry: Competitive Forces And Profitability Essay.

With the aid of a clearly drawn diagram conduct a competitive forces analysis of the U.S. airline industry. What does this analysis tell you about the causes of low profitability in this industry? What are the principal advantages and disadvantages of using the five forces framework?
The economic performance of the airline industry seems to be very cyclical. Why do you think this is the case?
Given your analysis, what strategies do you think an airline should adopt in order to improve its chances of being persistently profitable?

Overview of the US Airline Industry

The report helps in proper market analysis of the US Airlines industry with proper analysis of the five forces framework of the US Airline industry. Proper analysis is required in order to analysis the different components of the Porter’s Five Forces Model along with proper analysis of the economic performance of the US Airlines Industry.

The main aim of the report is to analyze the economic performance of the US Airlines Industry along with analysis of the different strategies that is required to generate profitability in the organization. The main purpose of the report is to understand the different strategies that will help in improving the chances to make the situation more profitable in nature.

The structure of the essay includes proper analysis of the Porter’s Five Forces Model that helps in understanding the different strategies that will help in understanding in improving the changes more sustainable in nature. The economic performance has to be properly analyzed as this will help in understanding the different values that will be delivered by them.

The United States Airline industry is one of most reputed airlines in the entire world. An airline is such a company that helps in providing different kind of air transport services for different passengers who are travelling as well as they utilize proper aircraft to properly supply such services with other airlines for codeshare agreements (Sutherland, 2014).

The US Airline industry has struggled for long in order to make proper profit as there has been a different research that has been conducted and it helped in analyzing that airline industry is the most difficult place to conduct business. Furthermore, over few years, there has been a large carrier such as Delta, American as well as United that have been hurt with the help of low cost budget airlines that has been entering into the airlines industry such as Virgin Airlines as well as AirTran Airways. In the beginning of the year 2001, the higher prices of oil has complicated the matter and made the situation even worse than before. There has been a hike of about 32% of the total revenues in the year 2011 and there were different airlines in the US airlines industry that were bankrupt and this included different airlines such as Northwest, Delta as well as the US Airways (Mathooko and Ogutu 2015).

However, on the other hand the larger airlines continued to fly and there were no such issues in those airlines as well (Yunna and Yisheng, 2014). These airlines were properly reorganized under the chapter 11 of the different laws related to bankruptcy and there has been excess capacity that persisted in the airline industry. In the late 2000s as well as in the early 2010s were properly characterized by wave of different mergers in the Airline industry. Furthermore, in the year 2008, Northwest as well as Delta merged and in the year 2010, Continental as well as United merged with one another as well. In the late 2012, the American Airlines has properly put themselves under protection from bankruptcy under the chapter 11. The US Airways helps in subsequently pushed them for the merger with the American Airlines under the negotiation in the year 2013 (E. Dobbs 2014).

Five Forces Analysis of US airline industry

Porter’s Five Forces analysis of the US airline industry helped them in analyzing the external environment wherein there is operation in the entire industry. The major aspect of the Porter’s Five Forces Model in US airline industry is that this respective industry has been properly buffeted with strong headwinds from different external factors that included declining passenger traffic that has properly led to airline industry affected in nature. Therefore, it can be concluded that airline industry is a death spiral and in the United States as well as there are different prominent carriers that were forced into bankruptcy or had been merged with different other airlines as well.

There are different components of Porter’s Five Forces Model in Airline industry that are as follows:

• Power of the suppliers in airline industryis immense as there are three inputs such as fuel, labor as well as aircraft that are affected by the entire external environment. For example: the price of the fuel in aviation is based on different fluctuations in the entire global market due to geopolitical as well as other factors. Furthermore, the labor is properly subjected to unions who bargain as well as their costly concessions from different airlines.  
• Power of the buyers is another component wherein the entry of the carriers that are less costly as well as resultant price are the ones that are properly benefitted by the different fliers. These are the different other factors that makes the entire airline industry cede proper power to the different consumers (Dalken 2014).
• Intensity of the rivalry is other component wherein it can be commented that the US Airline industry is highly competitive in nature (Rothaermel, 2015). There are different reasons such as entry of the barriers that are less costly as well as tight regulations of the entire industry as well. The airline industry is regulated on supply side more than the demand side. This is the main reason wherein low cost carriers have grounded full service airlines when it is combined with intense competition that is always the case in United States.
• Threat of substitutes wherein the airline industry in US is not threat from different substitutes as well as complementarities (Zhao et al. 2016). Furthermore, for complementarities, the different provisions such as Wi-Fi, a la carte meals as well as other amenities that has been offered previously by the airlines has been induced with help of low airline fares in the budget airlines that has been introduced (Aithal, Shailashree and Kumar 2016).
• An entry as well as exit barrier isother component wherein the entire airline industry requires huge amount of capital investment as to properly enter as well as for exit from the specific sector. The airlines industry requires properly absorbing the different losses as well as writing down about the different issues faced by the US airline industry as well. The different barriers relating to exit has different rules as well as regulations in US and the US Airline industry leverages different efficiencies as well as other synergies in order to pose properly and significantly in the entry as well as exit barriers.

Advantages

There are different strengths or advantages of each forces of the Porter’s Five Forces Model as this will help in understanding the means of generating profitability in the entire business of Airlines. The Porter’s Five Forces Model helps in analyzing the different strengths that is essential in nature to determine the long term profitability in the entire US Airline Industry. The advantages of the Porter’s Five Forces Model are as follows:

• It helps in increasing the potential profits of the respective industry as well as company
• There is proper flexibility in the different dynamics of the entire organization as well as industry as well (Aithal 2016)
• The main success of the industry is to analyze the different changing dynamics as well as continuous flux within as well as between the five forces in the Airlines industry in the United States.
• It helps in improving the competitiveness among the other competitors in the entire Airline industry (Indiatsy et al. 2014)
• The Porter’s Five Forces analysis can cause huge effect on the price as well as in the market share. Furthermore, there  are different necessary investments that is required for generating competitiveness

The major disadvantage or limitation of the Porter’s Five Forces model lies in the ways by which the model is composed. The model can be an useful tool for designing short term strategies rather than the longer term strategies. This strategy is not quite useful for the analysis of any industry and it is majorly used for analysing a particular company. The attractiveness of the industry related to the financial perspective cannot be detected with the help of the Porter’s strategy (E. Dobbs 2014). The model is not useful for defining the industry where the particular company is operating in a useful manner.

The consumers of the US airlines industry have seen an increase in the value derived from the money that they have paid for their travel. The travel expenses have also decreased and the new destinations for air travel have also increased. The economy of a country is hugely based on the expenses incurred for air travel. The US airlines industry is also booming in the recent years. The development of economy of the US has also received a boost from the air transport costs that are incurred from the airlines industry. The economic performance of the airlines industry has been improving in the recent years as well. The connection between the cities have increased and this has led to the increase in the flow of the goods, capital, people and technology as well (Jenatabadi2013). The connection between the cities has been increased by the increase in the number of flights as well.

The cost of transport by air has decreased a lot in the last few years as well. The prices have been reduced to more than half as compared to the fares twenty years ago. The travel by air plays a vital role in the trade of products as well and border trade of the US has become strong with the help of the different airlines services. The connectivity between the different countries has also increased with the help of the airlines connection between the cities and the countries as well (Wang 2014). The increasing influence of the airlines industry has also affected the job market as well. The supply chain of the job system has also been affected by the influence of airlines industry (Lee, Seo and Sharma 2013).

Advantages as well as disadvantages

The improvement in the economic performance of the airlines industry has also impacted the government of US. The tax revenues of the US government have also increased with the help of the increasing influence of the airlines industry. The industry has also helped to create jobs in the market which are of high value. The incomes that are generated by the aviation industry are not always well understood by the countries.

There are many ways by which profitability can be maintained in the airlines industry. The revenue that is earned by the airlines industry needs to be used in a sustainable manner. The industry has huge competition in the whole world as the main aim of the airlines industry is to make the airline services available to as many people in the world as possible. There are more than 250 airlines that are already operating in the industry, and these are ranging from small to large size airlines as well. The competitiveness in the market is increased with the presence of so many airlines companies in all the countries (Mellat-Parast et al. 2015). The implications of the competitiveness in the airlines sector have been the profits of some of the companies and the losses of some other companies as well. This situation has resulted in the buyout of many companies. The airlines are also trying to improve their services as well and they are trying to satisfy the needs and desires of the consumers by introducing many loyalty programs for the different customers to attract them towards the brand. The major strategy that has been driving the airlines industry is decreasing the costs related to the operations of the company. The low cost airlines have been able to make much more profits as compared to the high cost companies (Hannigan, Hamilton III and Mudambi2015).

The net worth of the high cost companies may be high in the market as compared to the low cost companies; however, the profits are much more in case of the low cost airlines as compared to that of high cost. The airlines which have low operating costs are more prone to make surplus profits so that it can be used for the next year as compared to those companies which have high operating costs. The strategies related to the airlines industry need to address many issues that occur during the operations of those companies. These issues are mainly, controlling the costs related to the companies, accessing the capital markets, insurance related issues, exposure of the company to foreign currency (Borenstein and Rose 2014). The other major issues that need to be addressed with the help of strategies for the industry are replacement of fleet of the airlines, the losses that are incurred by the industry. The issues related to the productivity of the labour and economy of the world affect the profitability of the airlines industry as well.

The airlines industry has proved to be a difficult area where business operations can be performed. The reason behind this situation is the increase of competition in the market and the ways by which business operations are performed. The larger companies have been highly affected by the smaller companies and their low cost operations as well. According to the Porter’s Five Forces Analysis that has been discussed above the suppliers have immense power to affect the prices of the industry. The increase or decrease in the prices of fuel is the major factors that has affected the airlines industry (Kimes and Wirtz2015). The customers have also become more powerful in the airlines industry as they have many options available in the market from where they can choose and this has helped them in controlling the prices of the companies.

Economic Performance of the US Airlines Industry

The entry and exit of the companies from the industries is not easy as this is a high investment related business and losses need to be absorbed by the companies as they cannot exit from the market easily. The increase in the rivalry in the market has also immensely affected the airlines industry, the increase in the number of companies and also increased the power of the consumers. This has led to the losses of the airline companies (Madsen 2013). The increase in the losses of the companies in the US Airlines industry has led to many mergers in the recent times as well. The companies have opted for mergers to stay in the market and operate with the other companies and to save the companies from being bankrupt (Daft and Albers 2015).

Conclusion

The report can be concluded by saying that the airlines industry is a fast growing sector as it provides major connections between the cities and the countries of the world. On the other hand, the growth of the industry has led to the increase of companies in the market. This has further led to intense competition in the market. The increase of the competition has led to huge losses for the large-sized companies of the industry. The losses of the airline companies of the US have led to huge mergers in the market as well. The types of labour and ways of operating in the market have also changed. The industry has become more dependent on the customers and the prices of fuel to increase their profitability.

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