Low Cost Airline Industry in Europe - Term Paper Example

Competitors and Substitute Product Threat Introduction Rivalry denotes the extent to which a firm will respond to competitive moves of the other firm within a given market region in a specific industry .Several factors determine the intensity of competitive rivalry in an industry (Airlines Industry Profile: Italy' 2014, p. 3). For example, an industry consisting of numerous competitors always have an intense rivalry. High intensity of competitive rivalry in an industry results in competition and this reduces the profit potential for the existing farms. Conversely, low intensity of competitive rivalry in industries makes an industry less competitive and this increases the profit potential an existing firm can attain. Therefore, there should be checks and balances put in place to control the competitiveness among industries of low cost airline in Europe ('Airlines Industry Profile: Europe, 2014, p. 4). This paper examines the rivalry among the competitors and the effect this has on the profit potential. Moreover, it also unravels the threats of substitute of a product in low cost airline industry in Europe. Rivalry among existing competitors’ in low cost airline industry in Europe As asserted by Cameron and Quinn (2011, p. 2), airline industry has changed largely due to deregulation act of airline that occurred in America. These effects of deregulation act that occurred in America extended to the entire world. The results of liberalization of airline industry resulted in the emergence of low cost airline. The act helped in abandoning the status quo of restrictive pricing model that inhibited the growth of airline industry. Deregulation act helped in removing the state control over airline routes and it promoted the entrance of other airlines into the market ('Airlines Industry Profile: Europe, 2014, p. 9). Therefore, the act exposed the airline industry to competitive market forces that have resulted to rivalry among different firms. Nonetheless, the passenger’s fares decreased in a number of market because of the growth of competition in the industry. The competition came because of new entrance of airline of low cost into the market ('Airlines Industry Profile: United Kingdom' 2014, p.8). The strategy of low cost airline have been so appealing especially to traditional airlines and this led to Southwest airline being the pioneer to introduce low fares airline for short routes. In Europe, deregulation act helped in emergence of the first European low cost airline after which, rivalry competition have dominated the market due to high number of low cost airlines. Low cost airlines have lower cost compared to the cost of their competitors. The business model of low cost airline is a characteristic of products simplicity and low cost of operation that enable them to offer lower prices to their customers but with fewer services (Airlines Industry Profile: Italy' 2014, p. 9). The low price offered attract many customers to the low cost airline market hence this pose threats in the market of their competitors. The use of Porter’s five forces theory is an important consideration because it influences affect the competing companies within the airline industry. It also helps to identify attractiveness of an industry in terms of competitive forces. The nature of competition among farms that are in the same industry is always that they strive to achieve an advantage over their rivals ('Airlines Industry Profile: Europe, 2014, p. 19). Among the competitive forces in a given industry, rivalry is typically the strongest of them all. The rivalry competition always goes on as firms try to increase their market share. A view of rivalry competition is achievable when members of an airline shift in supplying one good for another. For example, due to perishability of other agricultural commodities, airlines firms may shift from supplying cotton to others goods from horticulture. This means that the rivalry usually focuses on price competition (Goettler & Gordon, 2014, p. 7). The airline industry has no specific strategy to use in providing it with a competitive edge over its rivals but the strategy depends on that of the rival firm ('Global Airlines Industry Profile' 2014, p. 18). The strategy also depends on the ability of all firms to put resources behind their efforts. However, factors such as fuel, labour and maintenance are the top three costs for airline and these factors influences the degree of rivalry because firms would always want a good net profit less these costs. Rivalry among the existing airline firm has become a contentious issue such that the airline regional market have identified three stages of development that can help in impacting the airline industry. The stages include regulation, liberalization and deregulation (Cameron & Quinn, 2011, p. 4). Other moves also reached at by the European region include privatization of airlines, liberalized environment, growth alliances and competition with other modes of transport. The threat of substitute product in low cost airline industry in Europe The threat of refers to availability of an alternative product in the market that the consumer can purchase instead of the industry’s product (Hoberg, Phillips & Prabhala, 2014, p.295). A substitute product comes from an industry that offers same utility to a consumer as the firms manufactured product within the industry. The threat of substitution from an industry has an influence in the competitive environment and in turn affects the firms’ achievement to attain a particular profit. The effect comes because of the consumer liberty to choose substitute products instead of the industry’s product (Polidoro & Puay, 2011, p. 371). Threat of a substitute is one of the Porters five forces that are de facto framework used in analysis in industry as asserted by Grant (2010, p. 209). Other forces include threat of new entrants, bargaining power of buyers, competitive rivalry among existing farms and bargaining power of suppliers. The threat of the substitute affects the competitive environment for organization where the firms operate (Grant, 2010, p. 2011). The threat issue is a significant issue since it constrains the ability of a firm to achieve profits due to customers’ switching over. As added by Grant (2010, p. 213), the situation in the market condition that strengthens the threat of a substitute than it may appear include the following: first, is the switching cost. If there is no change in cost for a consumer, then there is more chance that the consumer will move over to an attractive substitute. Another situation is the product price where pricing substitute more reasonably will risk consumers to switch products. Third is the product quality (Hoberg, Phillips & Prabhala, 2014, p.306). A higher quality of the substitute than the product will lead to consumer shift over. Finally is the substitute availability. If the substitute is readily available such as low cost airline in the market than the industry’s product like other traditional airline, there is likely to have customer switch over. In the event of the emergence of a threat, the affected company or the industry should seek; address it by considering the mitigation factors. However, mitigation factors are not fool proof, but it prevents customers form exploring alternative substitute. First, there is differentiation that, aim at creating a unique product in the market to counteract the substitute. Another mitigation measure is customer value where services offered should provide the best value for the money a customer spent (Hoberg, Phillips & Prabhala, 2014, p.316). Threat of substitute is in the form of land travel and indirect substitute like video conferencing. This may reduce the needs for air travel. Some other substitute like trains or cars may not be comparable to flying leaving the threat of a substitute very low (Koller, Goedhart & Wessels, 2010, p. 711). For example, in Europe passengers’ number dropped by three percent in 2004 suggesting that low cost airline plane was more attractive to consumers ('Airlines Industry Profile: Europe, 2014, p. 25). Therefore, the switching of customers from traditional airlines to low cost airlines that are the substitute, posed a potential threat in profit that traditional forms projected to make. Conclusion The split in airline industry have resulted in competition between quality and price. Although generally competing on two aspects, the reduction of rivalry and competition in the industry is achievable by factors of brand awareness (Goettler & Gordon, 2014, p. 21). Moreover, strong presence of customer loyalty results in the industry earning low rates of return. Maintaining good relationship with suppliers helps in giving the airlines the chances of obtaining lower prices than that received by the competitors. Therefore, it is important to identify all the potential threats to prevent an emergence of a substitute in the market. Besides, the company or the industry need to be more creative in its thought process and should look beyond their traditional competitors in the market. 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