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Athens University of Economics and Business
Department of Business Administration
Discussion questions for case three: The US Airline Industry in 2002
ARNESE ALESSANDRO
Athens, 10/11/2003
1. Use Porter’s ‘Five Forces of competition’ framework to show how the structure of the airline industry has caused low profitability during the past twenty years.
Since domestic deregulation occurred in 1978, competition in the airline industry has intensified and become more concentrated. ... This framework views the profitability of an industry as determined by five sources of competitive pressure. ... The airline industry faces competition from other transportation modes, such as railroads, buses. ... On the other hand, for short distances car is the airline industry’s main competitor: in fact, airline travel is neither practical nor economical for short trips. In the last five-year period, less obvious substitutes to airline travel in the business segment include teleconferencing, enabling virtual meeting rooms where participants can sit in different geographic locations.
Ø Threat of entry: threat of new entrants presents new firms’ possibility to enter the industry and make its returns falling down through prices competition. In the airline industry, even if the capital cost of entry are fairly low, offering airline services requires airline and aircraft certification, gates, takeoff and landing slots, baggage handling services, and the marketing and distribution of tickets. ... Even with this unprofitable situation, many entrepreneurs are still attracted by the apparent glamour of owning an airline. ... However there are economies associated with network density, so that the greater the number of routes within a region the easier it is for an airline to gain economies and utilization of aircraft, crews, passengers and maintenance facilities.
The product differentiation is also a source of barriers to entry: in an industry were products are differentiated, established firms have got the advantage of brand recognition and customer loyalty, which was not so easy to be built up. ...
In addition, governmental and legal barriers are the mostly effective barriers to entry: indeed, there is new policy adopted by federal aviation administration, that put caps on the number of aircraft a new airline can operate based upon carrier’s financial and managerial resources. ...
Ø Competition from established rival: the airline industry can be characterized as an imperfect oligopoly, in which a few carriers dominate in long distance flights, while several dozen small carriers compete for short-distance flights. The airline industry has become more concentrated over the last 10 years. ...
Ø The bargaining power of suppliers: Labor is the airline industry’s largest single expense. Most airline workers belong to one of a dozen unions, which give the airline workers strong power in negotiations with the airlines, such as the Association of Flight Attendants, the Air Line Pilot Association, etc. ...
Airline operations are also energy-intensive, and some carriers attempt to hedge their fuel costs by buying and selling futures. ... Consequently, business travelers generate a larger portion of the industry’s revenues relative to their numbers. ... Which of Porter’s five forces has had the biggest impact in depressing industry profitability?
Competition from established rival has had the biggest impact in depressing industry profitability: the airline industry has become more concentrated over the last ten years, because of mergers between airline companies and bankruptcies of many firms. ... airline industry was growing tremendously and average prices were falling consistently, suggesting a large benefit to consumers from U. ... Despite their competitive prices, most of the low-cost companies went bankrupt during the early years of the airline. ... Because of the huge amount of exit, some observers argue that the airline industry is inherently unstable and requires government intervention. It is true that profits in the airline industry can fluctuate easily, because of the biggest airlines costs, which are labor and fuel, fixed in the short run. The consequences for profitability have been disastrous: from 1990 to 1995, the total losses of the US Airlines industry exceeded total profits. ...
Deregulation also stimulated changes in the structure of airline companies. ... The hub-and-spoke system has allowed for efficient connections for passengers from small- and mid-sized cities, but it also has increased airline concentration at hubs. ... A good example in the airline industry is Southwest, one of the fastest growing airlines in recent years. ... In what way, and with what success, have the airline’s strategies attempted to counteract competitive forces depressing profitability in the industry?
During the government regulation, strategic developments could not be so easily implemented: the Civil Aeronautics Board told each airline both which products it could sell, and also established the ways in which they could be sold and the prices that could be charged. Once these constraints lifted, air travel marketing quickly became a dynamic and central part of the airline business: the airlines that innovated most quickly gained in market share and profitability. ... However, frequent flyer schemes also create strategic advantages for an airline with a large market share and reduce the threat of potential competition.
Approximate Word count = 3993
Approximate Pages = 16
(250 words per page double spaced)
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