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Porters Five Forces. External Environment Analysis of Southwest Airlines - Term Paper Example

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Airports set up in the high traffic cities account for high demand for air travel. In the US airlines market rivalry among airlines is seen to have increased considerably over the years. This is because passengers can now easily compare flight prices of airlines on the internet…
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Porters Five Forces. External Environment Analysis of Southwest Airlines
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"Porters Five Forces. External Environment Analysis of Southwest Airlines"

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Since the phase of deregulation, many new entrants have entered into the airlines industry in USA. 22 new airlines had been formed and another 43 of them has entered till 1982. Experts suggested that the industry had inefficient scale economies which supported the entry of numerous new entrants in the industry. However, since 1993 and during the recent years many of these start-ups have been consolidated, established and incorporated as large and major airlines. The high threat of new entry in the airlines industry in US also gets reflected through the fact that 8 major airlines existing in the market have become bankrupt merged with other companies or has simply vanished from the radar screen (Desai, Patel & Quach, 2002, p.4).
Trains, buses and cars account for major substitutes for air travel. However, the importance of trains and buses as substitute products has declined over the years. The Switching costs associated between air travel and its substitute services remain quite low; however, experts suggests that the importance of the substitutes are likely to change as per the customer type, route and reason for travel. For example, travelling through seas across US for long journeys would reduce ground transportation to a certain extent. Business travel could generate more flying demand while vocational travel could demand more driving. Due to the fact that leisure travellers are considered to be more price sensitive as compared to business travellers, they are more likely to use substitute services considering the opportunity costs incurred (Desai, Patel & Quach, 2002, p.4). Bargaining Power of Suppliers Employee bargaining powers are expected to vary according to unionization of employees or the characteristics of employees. Wage rates have accounted for major operating expense of airlines leading to many union strikes during the post liberalization era. The bargaining powers of pilots have remained low since there are numerous pilots available in the market. Moreover, airplane manufacturers such as Airbus and Boeing, enjoy high powers of bargaining since they huge switching costs are associated with changing the airplanes (Desai, Patel & Quach, 2002, p.4). Bargaining Power of Buyers The individual powers of buyers remain low because of the inability of the airline customers to coordinate and organize among themselves. The extent of price discrimination employed by airlines would also depend largely on routes and type of the customers. Routes which remain heavily flooded by different flights more likely to charge competitive prices because of the existence of substitute airlines. On the contrary the long distance flights which have less hubs and schedules are likely to be dominated by too many airlines and which consequently would charge exorbitant price from customers. Corporate discounting, i.e., ...Download file to see next pagesRead More
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