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)…
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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 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
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