Evaluation of the United States Airline Industry Using Porter's Five Forces Theory - Essay Example

? Evaluation of the United s Airline Industry Using Porter’s Five Forces Theory of the Class Date of Submission Evaluation of the United States Airline Industry Using Porter’s Five Forces Theory Introduction Air travel is an increasingly expanding industry, for both business and leisure pruposes. “It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries” (Aruvian’s R’search, 2011). The United States Airline Industry can be analysed to determine its attractiveness using Michael Porter’s Five Forces Analysis based on Industrial Organisation (IO) economics “to derive five forces that determine the competitive intensity and therefore attractiveness of a market” (Aruvian’s R’search, 2011). The five forces that shape industry competition include rivalry among existing competitors, threat of new entrants, threat of substitute products or services, bargaining power of buyers, and bargaining power of suppliers (Porter, 2004). These forces form the microenvironment, in contrast with the more general concept of macro-environment. They constitute the forces impacting a company, thereby influencing its capability to serve its customers and to ensure profits. The company has to re-assess the marketplace if there is alteration in any of the forces (Aruvian’s R’search, 2011). The Airlines Deregulation Act of 1978 resulted in several years of low profitability in the industry, with lowered airline fares and the entry of several new firms into the market. “The financial impact on both established and new airlines was enormous” (Desai, Patel & Quach, 2004, p.2). The consequences of deregulation on the airline industry can be understood by studying Porter’s Five Forces and the influence of complements to the industry. Thesis Statement: The purpose of this paper is to examine the United States Airline Industry, and to determine whether it is an attractive industry, based on Porter’s Five Forces model. The United States Airline Industry “The airline industry is vital to the United States economy, accounting for over 11 million jobs and 9 percent of the U.S. gross domestic product” (Jones, 2006, p.102). The United States Airline Industry has grown significantly since the end of World War II. In 1945, the leading airlines flew 3.3 billion revenue passenger miles (RPMs). By the mid-1970s, with the development of deregulation, the chief carriers of the industry flew130 billion RPMs. By 1988, following a decade of deregulation, the number of domestic revenue passenger miles had inreased ten-fold (Aruvian’s R’search, 2011). This is reiterated by Desai et al (2004) who state that in the period 1965-1978 the federal government regulated the airline industry by means of enforcing artificial wage increases and artificial price levels. Further, “from 1980 to 1990 the number of passengers traveling by air increased by approximately 72%” (Desai et al, 2004, p.2). The rapid growth of the United States Airline Industry before 1990 has declined; however air travel continues to be the preferred mode of transportation for most Americans because of its cost effectiveness and time saving features. Contrasting with the significant growth of the previous decade, during the 1990-1998 period the United States airline industry experienced only 36% growth. Additionally, during the post-deregulation era, labour negotiations fuelled several labour strikes. The big airlines have tried to reduce costs, but have been hindered by strong oppostion from labour unions. For example, Unions have battled against interventions attempting to shift unprofitable routes to lesser cost regional jets with lower paid pilots. The large airlines have been caught in traditional fare wars that adversely impact their already poor profit margins, because of facing cut-throat competition especially from low-cost rival airlines. “The domestic airline industry in the United States is characterized by intense rivalry and low profit margins” (Desai et al, 2004, p.2). Analysis of the US Airline Industry Using Porter’s Five Forces Model A good industry analysis thoroughly examines the structural underpinnings of profitability. The appropriate time zone plays an important part. The purpose of industry analysis is not only to declare an industry as attractive or unattractive, but to understand the elements that underpin competition and the root causes of profitability. “The strength of the competitive forces affects prices, costs, and the investment required to compete, thus the forces are directly related to the income statements and balance sheets of industry participants” (Porter, 2004, p.29). Brown, Gogzheyan, Huwel et al (2009) focused their analysis on domestic travel within the continental United States , and on flights that carry passengers or passengers and cargo. The Geographic Scope of the analysis is that each airline is situated in several locations in major cities, at chief airports, all over the U.S. Some airlines have hubs at numerous airports all over the country, while several airports are hubs for multiple airlines (Brown et al, 2009). In the Supply Chain those agents upstream are those who provide aircrafts, those who provide goods and services that are vital for the efficient operation and maintenance of the aircrafts, making the flights more comfortable and safe for customers. Downstream are customers who use air travel for recreation or for business (Brown et al, 2009). Industry Size revealed growth in 2007 after several years of decline. After consistently falling from 2000 through 2006, in 2007 the average airline employment increased to 560,997 FTEs. In spite of the increase every year the workforce remained at 118,970 FTEs below the 2000 peak. “Though pilots, copilots and other personnel experienced a modest decline in headcount, all other work groups showed gains, led by flight attendants at 9.5 percent” (Brown et al, 2009, p.2). Market Value: The U.S. airline industry constitutes about 3,000 companies with a combined annual revenue of $120 billion. The important airlines include American, Delta, United, and Continental, and the air operations of cargo and courier companies such as FedEx and UPS. The government classifies airlines in categories: national, regional, and others. Around 40 national airlines have annual revenue between $100 million and $1 billion; 90 regional airlines have annual revenue under $100 million; the rest of the industry is composed of small air companies that generally have yearly revenue between $5 and $50 million (Brown et al, 2009). Competitors: Ten main competitors make up the majority of the marktet as 81.9%. They are: American Airways, Southwest, United, Delta, U.S. Airways, Continental, Northwest, Jet Blue, AirTran Corporation, and Alaska. Their market shares are established by the percentage of overall industry revenues (Brown et al, 2009). The Five Forces Analysis reveals that with regard to intensity of rivalry among competitors, there was low price based rivalry, and standardization in nonprice based rivalry. Further, there was low concentration and low capacity utilization. A study of the threat of substitutes shows availability and development of new and less expensive substitutes, besides the low cost of substitutes in poor economic times, and also the neutral effects of switching costs. In connection with the bargaining power of suppliers, there was found to be little control over fuel prices, high concentration of airplane manufacturers, and a low number of substitutes. Related to the bargaining power of customers, the evidence indicates a large number of buyers, several alternate buyers, and almost no threat of backward integration. On threat of entry, the competitors will probably oppose entry. A high number of governmental regulations are indicated, as well as low access to distribution channels (Brown et al, 2009). Although the five forces framework suggests that the United States Airline Industry is highly unattractive with an overall grade of 1- particular Airlines such as Jet Blue in the US is progressing successfully in the industry. The reason for this as stated by Peng (2008) is that firm performance is also impacted by firm-specific resources and capabilities. After the terrorist attacks in the United States on September 11, 2001, the country’s economy suffered extensive losses. The U.S. Airlines industry was the most adversely impacted. The industry which was already doing poorly lost $7.7 billion in 2001 due to decline in the number of passengers. Most airlines in the U.S. sustained losses post 9/11 terrorist attacks, however some airlines such as Southwest and Jet Blue continued to make profits every year subsequent to 2001. Jones (2006) conducted a study to examine the relationship of the business-level strategy, top management team characteristics, and firm performance of the major domestic airlines in the United States. The study sought to determine whether a manager-strategy fit led to higher performance in the United States airline industy. Evidence from the research indicates that a manager-strategy fit of top management teams does not result in higher performance in the U.S. airline industry. Conclusion This paper has highlighted the United States Airline Industry, using Porter’s Five Forces theory to justify whether it is an attractive industry. The model forms the basis for reviewing the competition within the industry, and also checks for threats from outside the industry in the form of new entrants, or threat from substitutes. Competitiveness within the airlines is also impacted by the bargaining power of buyers and that of suppliers. The analysis reveals that the U.S. airline industry is highly unattractive. Brown et al (2009) support this view and add that the industry will not be able to have sustainable profits in the long term. An overall grade of 1- indicates that investing in the United States airline industry cannot be recommended. References Aruvian’s R’search. (2011). US Airlines Industry – Porter’s Five Forces Strategy Analysis. Research and Markets. Retrieved on 17th December, 2011 from: http://www.researchandmarkets.com/reports/585727/us_airlines_industry_porters_five_forces Brown, A., Gogzheyan, R., Huwel, G., Meininger, M., Riedel, J. & Ryan, C. (2009). Airline Industry Analysis: Memorandum. Retrieved on 17th December, 2011 from: http://www.nku.edu/~fordmw/mgt490projectairlines.pdf Desai, K., Patel, V. & Quach, D. (2004). Southwest Airlines. Paper, University of Texas. Retrieved on 17th December, 2011 from: http://www.mcafee.cc/Classes/BEM106/Papers/UTexas/351/Southwest.pdf Jones, M. B. (2006). Top management team fit in the U.S. Airline Industry. Journal of Applied Management and Entrepreneurship, 11(3): pp.102-115. Peng, M. W. (2008). Global strategy. Edition 2. The United Kingdom: Cengage Learning. Porter, M. E. (January 2008). The five competitive forces that shape strategy. Harvard Business Review. Retrieved on 17th December, 2011 from: http://www.ascendcfo.com/pdfFiles/HBR-The%20Five%20Competitive%20Forces%20That%20Shape%20Strategy.pdf Read More