Porters Five Forces Analysis of the Airlines Industry - Case Study Example

Global Airline Industry Table of Contents Global Airline Industry 1 Table of Contents 1 Abstract 2 Introduction 2 Literature Review 3 Data Collection 4 Finding and Analysis 4 Porter’s Five Forces Analysis of Airlines Industry 4 PEST Analysis 6 Final Outline 11 Reference 13 Bibliography 15 Abstract The importance of airlines has increased with the advent of globalization. At a time when the world is looked upon as a ‘local village’, significance of air transportation cannot be denied. The industry is a significant part of economic development and a breeding ground for technological developments (Button, “Introduction”). Deregulation and privatization has changed the industry intensively. This has also contributed to increased competition among its players who are required to further enhance their services to gain better prospects. Introduction In the wake of the recent recession, the global airline industry has been affected in an intensive way. However, according to a forecast, revealed in the year 2009, the airline industry is expected to grow to a value worth $ 711 billion. In the year 2007, the industry grew by 5.6 % to reach a volume of 2,076 million passengers. In the year 2012, the industry is expected to reach the volume of 2,362 million passengers, which is an increase of 13.7 % from the value of 2007. The domestic segment dominated the global airline industry with more than 50 % of industry’s overall volume. US airline industry is the largest airline industry contributing to 51.1 % of the global industry value (PRLog, “Press Release”). This report has analyzed the airline industry from a global perspective. The report has taken into account the recent trends, development and other factors to arrive at the conclusion. Several industry analysis tools have been used to fulfill this purpose. A conclusion has been inferred from the analysis. Literature Review During the first half of the 90s, the airline industry suffered from intensive financial downturn and was adversely affected by the Gulf War. In the year 1991, the number of air travelers dropped drastically which pushed the airline companies to a disturbing financial state. The member airlines of IATA suffered cumulative net loss of $ 20.4 billion in between the years 1990 to 1994 (Stanford, “Industry Overview”). Starting from the mid 1990s till the start of the millennium, the aviation industry faced one of the significant booms in the industry. The researchers have identified many factors which had been influential for this industry. Worldwide increase in GDP, enhanced economy, greater demand for travelling and globalization were some of the significant driving forces. All these has enabled the industry to gain around 4- 6 % of healthy growth even in the subsequent few years (Cento, “The Old Industry”). In the beginning of 2000, a slowdown in the economy had put an end to the consistent growth stage. After the terrorist attack of 2001, the slowdown further intensified. The uncertainty was expressed by KLM at an official release which said “many passengers are cancelling their reservations and we can expect diminishing load factors as a result” (Cento, “The Old Industry”). This literature review will further analyze the industry and the ongoing development within the same. Research Methodology This research intends to look into the airline industry from various perspectives. Effort has been put to investigate the trends, developments and the level of competition existing in this industry. Although, the research has talked about earlier developments in the industry, still focus has been made to discuss more about the recent trends. Data Collection This report has used secondary data collected mostly from the online sources. A number of journals, books, news papers and other web articles have been used to gather relevant information. As the report is based on the global airline industry, the area of research would be widespread; hence secondary research methodology seems more preferable. Finding and Analysis Porter’s Five Forces Analysis of Airlines Industry Threat of New Entrants Airline industry is a capital intensive industry. It demands huge set up and large investment. The possibility of new entrants used to be quite low till some time back. However, in recent years, the threat from the new entrants has increased with more and more organizations entering this business. This has been possible due to the decline in the cost amount to access loans and credit. If the borrowing is cheap, there is a high possibility that more airlines would be entering the industry. Today banks are offering long term loans at less interest to the business sectors which has increased the threat of new entrants in this industry (Investopedia, “Porter’s 5 Forces Analysis”). However, this would pose as a major challenge for the existing airlines as the market would get saturated with increased number of players. Bargaining Power of Suppliers The supply side of the airlines is mostly dominated by Airbus and Boeing. As a result, there is no cut-throat competition among the suppliers. So, the bargaining power of suppliers is quite high in the industry. The airline companies do not have much choice regarding suppliers. Bargaining Power of Buyers The bargaining power of the customers is quite low in this industry. High cost is incurred by travelers to switch from one airline to another. Almost all the airlines offer the same service. Hence, the buyers do not exercise much choice on the basis of differentiating factors. Threat of Substitutes Airline is the fastest way to travel from one region to another. So, there is no perfect substitute of this service. However, with the introduction of fast trains, a number of people prefer to travel by it. In many European countries, where the vacation spots are nearby, people prefer to use their private cars. Higher cost of airline make the travelers think of other viable options. However, intensity of threat of substitutes would depend on time consumption, personal preference, money and convenience of the customers. Competitive Rivalry Competitive rivalry is high in this industry. For the last few years, certain events like terrorist attack, war in the Middle East and recent recession have led to the declining growth rate of this industry. All these events have made it tougher for the airline companies to attract the travelers. To survive the situation, the airline companies are cutting down on their operational cost. The airlines are now competing on the basis of cost effectiveness and this has intensified in South West Airlines and several other low fare carriers (Gaskins, “Competition in the US Airline Industry”). In 1999, the industry experienced an average decline of 25 % in the inflation adjusted airfares. Undoubtedly, the intensity of competitive rivalry is quite high in this industry. PEST Analysis The analysis of airlines industry includes the investigation of macro environment factors of this industry. PEST analysis is a potent tool for carrying out the external environment analysis of this industry. Political Factors In the last few years, liberalization has been the most significant factor in influencing the political environment of the airlines industry. Apart from that, terrorist attacks and political instability in certain regions have also affected the performance of this industry. Since the creation of CEAA in the year 1997, the global air transport has not experienced much progress towards liberalization. The deregulation process was first introduced in the US airline industry. After some 10 years from then, UK experienced similar circumstances. The process has enabled the operators to move from the home countries to other regions. The ‘Open Sky’ policy has led to increased liberalization in the international markets and at the same time triggered off competition in the market. Open sky agreement among European Union and United States is one significant step to a liberalized global air transport system. This agreement would allow the European carriers to offer routes from each of the EU member states to US. The terrorist attack on September 2001 has been another influential factor in incorporating profound changes in this airline industry. The airlines, specifically the US carriers faced huge financial issues due to increasing fear of further acts of terrorism. As a consequence, people were very much skeptical about travelling through airlines, thus reducing the demand in the industry. Although the intensity of fear has reduced to a certain extent, still it remains a significant obstacle for the growth of airline industry. This has also led to reduced profitability as airlines companies have been incurring more cost on security expenditures and higher insurance cost. Moreover, political instability in many regions such as Middle East has also posed a threat to the airlines industry. The war in Iraq and Afghanistan has led to substantial decline in the demand of this industry. The war has also led to significant increase in oil and fuel prices, which has again added to the rising cost of the airline companies (Vedder, “Political Factors”). In recent years, the governments of different regions have been encouraging mergers of airlines. The consolidation of flag carrier Air France and KLM has resulted in increase in the operating profit of the merged one. Despite it, the industry has seen only few mergers and acquisitions in this industry. Apart from these, some other government decisions in the recent times have led to substantial changes in the airlines industry. Recently, European government has stopped providing aid to the ailed airlines. This has put a pressure on the loss making airlines to enhance their performance. Economic Factors The terrorist attack coupled with Iraq and Afghanistan war reduced the number of tourist arrivals. Moreover, the recession has been quite influential in introducing substantial changes in the airlines industry. These factors have eventually led to the significant financial problems for the airline business. With the emergence of low cost airlines, the competition has intensified, resulting in further decline in the yield amount. The fluctuating oil prices have put additional pressure on the airline companies, who have found it quite tough to sustain their cost effectiveness under rising oil prices. The rapid growth and expansion of China and other developing countries in Asia has been a significant determinant for global macro economic developments. The airlines industry has also been affected by this trend. According to IATA forecast done in the year 2007, with high growth rates in China and East Asia, the Asian market would be most significant for international air travel by the year 2011. Social Factors The significance of leisure time and enjoyment has not changed. However, due to the recession, the purchasing power of the customers has reduced to a great extent. “The pattern of demand with regard to price sensitivity has changed completely as a result of the economic downturn, previously listed crises and the emergence of low cost carriers at the beginning of 21st century” (Vedder, “Social Factors”). Moreover, business travelers, who have been previously indifferent to travel rates, are not willing to pay high business class fares. Rather they prefer to travel in comparatively low fares. In the wake of recent recession, even the organizations are finding ways to cut down the costs. In such a situation, they prefer to spend less on the travelling expenses. All these factors have put intensive pressure on the airlines to find ways to curtail down the costs. The following image displays the net profit margin of the airline industry, worldwide. Figure 1: Net Profit Margin of the Global Airline Industry (Source: Cento, “The Old Industry”) Technological Factors Driven by the airline’s requirements of enhanced efficiency and environmental concerns, many technological developments have taken place in the last few years. The airline industry, across the globe is exploring different ways to reduce the amount of carbon emission. The airline companies are trying several innovations in the technology such as airframe, improved engine cleaner, renewable energy sources to curtail down carbon emission in the air. A number of airlines have adopted ‘green ideology’ to conserve fuel and effectively recycle the waste of the airlines. European Union has also come up with a tool, developed primarily for the small airlines, to estimate their carbon emission level. This is expected to help the airlines comply with the EU Emissions Trading System. The airline industry has been sharing database known as ‘cloud’. This has enabled the industry to share significant information among them. Web ticketing and online reservation system has contributed significantly to the cost effectiveness of the airlines. The following snapshot displays some computer reservation systems used by leading names in the airline industry. Adding to these, there have been technological developments which offer enhanced and secured service to the travelers. Table 1: Computer Reservation Systems (Source: Morrison & Wintson, “Computer Reservation System” ) Final Outline The final outline of the report will change after taking into account the use of the report. The industry report can be used by the SMEs, the MNEs, the investors and the customers. Each of the categories of users may look for some specific information in the report. As a result, the content of the report may change to incorporate the specific requirements. The small and medium enterprises are supposed to be at the supply side of the airline industry. In such a case, they would like to know about both the demand and supply side of the industry. They would be more interested in the strategic analysis and technological requirements of the industry, so that they can contribute to fulfill the same. Even the MNEs are supposed to be more interested in the technological and other developments of the industry. The prospective investors of the company would look forward to have an insight of the financial performance of the industry, more specifically to the return on equity and dividend values. So, the final outline would change according to the requirements of the specific users. Reference Button, K. “Introduction”. November, 2008. The Impacts of Globalisation on International Air Transport Activity. December 07, 2010. < http://www.oecd.org/dataoecd/51/53/41373470.pdf>. Cento, A. The Airline Industry: Challenges in the 21st Century. Italy: Springer, 2009.A Gaskins, W. D. “Competition in the US Airline Industry”. October, 1999. Airline Competition. December 07, 2010. < http://www7.nationalacademies.org/ocga/testimony/Airline%20Competition.asp>. Investopedia. “Porter’s 5 Forces Analysis”. No Date. The Industry Handbook: The Airline Industry. December 07, 2010. < http://www.investopedia.com/features/industryhandbook/airline.asp>. Morrison, S. and Winston, C. The evolution of the airline industry, Brookings Institution Press, 1995. PRLog. “Press Release”. March 14, 2009. The Global Airline Industry will reach a value of $711 billion in 2012, forecasts New Report. December 07, 2010. < http://www.prlog.org/10198852-the-global-airline-industry-will-reach-value-of-711-billion-in-2012-forecasts-new-report.html>. Standford. “Industry Overview”. No Date. The Airline Industry. December 07, 2010. < http://adg.stanford.edu/aa241/intro/airlineindustry.html>. Vedder, H. Strategic Alliances in the Aviation Industry: An Analysis of Past and Current Developments. GRIN Verlag, 2008. Bibliography Ben-Yôsēf, E. The evolution of the US airline industry: theory, strategy and policy. The Netherlands: Springer, 2005. Bryman, A. & Bell, E. Business Research Methods. NewYork: Oxford University Press, 2007. Doganis, R.. The airline business in the twenty-first century. New York: Routledge, 2001. Doganis, R.. 2006. The airline business (2nd Edition). New York: Routledge, 2006. Penner, J. Aviation and the global atmosphere. United States of America: Cambridge University Press, 1999. Rothkopf, M. Innovation in Commoditized Service Industries: An Empirical Case Study. London. UK: Transaction Publishers, 2009. U.S. Centennial of Flight Commission. No Date. Deregulation and its Consequences. December 07, 2010. . United States Department of Transportation. No Date. Airline Business Model. December 07, 2010.. Wearden, G. 2008. Soaring oil price could drive 'weaker airlines' out of business. December 07, 2010. . Yang, S.. 2001. E-Commerce in Airline Business. December 07, 2010. . Yu, G. 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