Porter’s five forces analysis is a tool that is used to assess the external environment in which a business, in any industry operates. The main factor about using Porter’s five forces analysis for the United States airline industry is that it has been pummeled by strong forces from many external factors such as increasing operating costs, fluctuating fuel prices, decreasing passenger traffic, and higher costs of maintenance including severe competition from cheaper carriers that have resulted in price wars which have greatly affected the industry. The airline industry in the United States is in a tight position because it is difficult to recoup profits after spending on operational and maintenance expenses as well as capital investments to buy/lease planes and other appliances. Many high-flying carriers either had to merge to keep business afloat or to declare bankruptcy. The following is an analysis of the United States airline industry using Porter’s Five Forces model.
Suppliers in the US industry have vast power because aircraft, fuel, and labor, the three inputs of the airline industry are all affected by the external environment. For example, the cost of aviation fuel can and does fluctuate according to the state of the international market for oil which can spin wildly because of geopolitical and numerous other factors. In the same way, labor is subject to the power of workers’ unions who more often than not demand and get costly agreements from airlines. Airlines need aircraft whether it is on a sale basis or lease basis. The two main suppliers of aircraft globally are Boeing and Airbus. That there are no other plenty of options makes Airbus and Boeing powerful to negotiate high prices. The power of suppliers in terms of fuel, labor, and aircraft which are the key inputs in the airline industry is strong.
The two main factors that determine passengers’ choice of carrier to travel with is destination and price. Hence the industry has low switching costs between firms. While there is some buyer loyalty to airline firms, the loyalty is not strong enough to lead to high switching costs. Customers require a lot of detailed information such as what will be provided in the aircraft during flights, safety aspects of the trip, timings of the flight, layovers, and so forth. Every service provider in the U.S airline industry is unique. Some airlines provide affordable costs while others focus on providing the most luxurious amenities, for example, high-end entertainment, fine wine, and expensive food.
Advanced technology allows for online ticketing meaning that travelers do not have to depend on agents or the airlines for their tickets. The introduction of cheap carriers and resulting price wars has been an advantage for travelers. Tight regulations that protect flight consumers means that the power is in favor of the buyers. All in all, buyers’ bargaining power does not have a significant impact on the US airline industry.
Barriers to entry and exit
To penetrate the airline industry, one needs a huge capital investment. Even when a firm needs to exit the industry, they have to bear the burden of many losses. Hence, entry and exit barriers are extremely high. High costs of fuel and its fluctuating prices is one of the greatest barriers to entry. Fuel costs account for about 30 to 50 percent of costs. In addition to infusion of large amounts of cash, one needs complex knowledge and expertise concerning other players in the industry. Mergers have also formed a few major carriers that dominate the powerful hub airports in major cities making it rather tough for a new airline to join.
Exit barriers are conditional on regulations because US regulators do not allow airlines to simply exit the industry until they are convinced that the reason for exit is a valid business reason. Furthermore, the airline industry influences the alliances and efficiencies from the economies of scales making the entry barriers high. These factors show that the barriers to entry and exit in the US airline industry are significantly high.
Threat of Substitutes
Unlike the developing nations where travelers mainly take buses and trains for their journeys, most US travelers take a plane to travel long distances. As such, the industry does not face threats from substitutes. Flying in the United States is not as foreign or as an expensive phenomenon for travelers hence substitutes such as buses and trains as means of travelers do not have a notable impact on the airline industry. However, Americans also use their cars for long distance travels which can pose as a threat as a substitute because when it is expensive to travel by air, there is always the option to travel by road. Airlines discovered that the main factor that travelers look at when choosing to travel is price, Hence, provision of services such as meals a la carte, free Wi-Fi, entertainment, and passenger amenities does not mean that more people will opt to travel by air.
Despite low switching costs between brands, air travelers will almost always choose popular names in the industry because tickets are expensive and they do not wish to spend money on a brand that do not trust. There is also the issue of safety. Consumers feel safe traveling with a well-known brand with a clean safety record. The airline industry requires flying and business experience which decreases the threat of new entrants. If a business decides to start an airline, they need to be licensed. The licensing process can take up to a year.
The United States airline industry is highly competitive because of cut-throat price wars, low cost carriers, high safety requirements which increased operating costs, and that airlines use a business model that is rather obsolete particularly in light of high turnover in the industry. Besides any other factor, the airline industry is controlled more by the supply side (labor, fuel, and aircraft) than the demand side (buyers). This means that airlines are not as free to select the markets in which to operate and which market segments to penetrate but the fliers who enjoy the protection of the regulators. It is the reason cheap carriers ground full service firms and with tough competition, it makes the US airline industry the most competitive.
Another factor that contributes to intense competition in the US airline industry is stagnation. The airline industry appears to be in the maturity phase of the business cycle. The number of competitors has always been the same for a long while now and it does not seem to be over-capacitated. The fixed costs of operation are very high which makes it difficult to exit. The factors that make it difficult to exit the industry are possible losses that would have to be written down and the long-term loan agreements that would keep the business in operation. Abandoning such agreements would lead to even greater losses. The expertise, products, and aircraft are very expensive which also increases competition. Competition is only decreased by brand identities of various businesses. For example, Southwest is popular because of its low prices while Jetblue is well-renowned for its superior amenities. In such a case, the market share would be fairly distributed because each firm offers something unique to customers and since switching costs are low, no airline can claim a big percentage of the industry.