Industry Analysis - the Airline Industry in the United Kingdom - Case Study Example

AN ANALYSIS OF THE UK AIRLINE INDUSTRY Name Professor (Tutor) University Course City and State Date AN ANALYSIS OF THE UK AIRLINE INDUSTRY Introduction The airline industry in the United Kingdom is one of the primary industries as evidenced by its contribution of over 18 Billion Pounds to the Gross Domestic Product (GDP). Besides, the industry also provides employment to over 230,000 people (Schimmel, 2014). The airline industry in the United Kingdom is aimed at facilitating transport of goods and passengers at the domestic and international stage. The industry’s contribution to the GDP is attributed more to passenger transport than cargo transport. The market sectors in the industry are divided into two broad sectors based on scheduling and nature of service. Scheduling is further subdivided into non-scheduled and scheduled while the nature of service comprises of domestic or global services. Scheduled services are those that have a set routine or operational timetable while non-scheduled are other air transport services that do not operate under a preset routine. Domestic services are the flights that operate within the United Kingdom while international or global services are the flights that operate between the United Kingdom and other nations outside the UK. The UK airline industry consists of more scheduled services compared to non-scheduled services. This paper aims at analyzing the airline industry in the UK using Porter’s five forces model. The Porter’s Five Forces Model is an important tool in analyzing the operating external environment for the industry (Porter, 1979). Porter’s Five Forces Model Michael Porter developed Porter's Five Forces Model in 1979 as a tool for studying competition in market environments and industries through picking individual forces that shape these environments (Ahlstrom & Bruton, 2010). A major factor that contributes to using this model in the analysis is the external factors that have recently affected the airline industry in the UK including a rise in operating costs, decrease in passenger traffic, increase in the price of fuel, increased competition, and increase in maintenance and landing costs. The airline industry not only in the UK but also globally has been categorized as a death spiral (Cento, 2009). The five forces include threats of new entrants, bargaining power of suppliers, bargaining power of buyers, rivalry among existing competitors, and the threats of substitutes. Bargaining power of Buyers The buyers bargaining power in the UK airline industry is considered medium with the introduction of online distribution process systems and online ticketing. There is no need for the passengers or cargo owners to have agents and even depend on the companies in the industry for all demands and needs regarding ticketing. However, a small number of the buyers still need buyer groups, which are the intermediaries between the passengers and the airlines. The buyer groups coordinate with the airlines to provide cargo owners and the passengers with the best deal possible. Passengers and cargo owners that use the airlines have also benefited from low-cost carriers entering the market; these low-cost carriers have resulted in price wars that have led to lowering of prices, which in turn benefits the buyers. Besides, there has been a tightening of the rules and regulations especially on the demand side, which includes the airlines. Tightening of regulations have led to the protection of all the passengers and cargo owners and this has recently led to an increase in the buyers' bargaining power. It is also important to note that there is a larger number of buyers compared to the airline companies, which leads to a lower switching cost between airlines. Due to recent developments in the industry, which include tightened regulations, online distribution and ticketing, and entry of low-cost carriers, the buyers bargaining power has shifted to moderate to high (Schimmel, 2014). Bargaining power of Suppliers Suppliers bargaining power in the United Kingdom airline industry is high mainly because of the three inputs into supply including aircraft, labor, and fuel. All these three supply aspects are greatly influenced by the external environment. The leading aircraft suppliers in both the global and UK airline industries are Airbus and Boeing (Fojt, 2006). Therefore, most of the aircraft possessed by the airline companies are similar. Amenities are the main issue that airlines need to put into consideration. Aircraft, therefore, do not contribute much to the suppliers bargaining power. However, the high prices of these aircraft come in to raise the bargaining power since on average the price of one aircraft is 200 million USD. The aircraft can be sold outright or acquired on a wet lease. Fuel prices are the main supplier input that leads to the high supplier bargaining power. Aviation fuel prices are always subject to fluctuations especially due to the unstable oil global market. Several factors, for example, geopolitical factors can lead to an increase in fuel prices, which leads to an increase in production costs for the airline companies in the United Kingdom. Alternatively, the price of global oil can drop leading to decrease in aviation fuel prices. The decrease in fuel prices leads to a drop in the cost of production for the airline companies. These fluctuations are a clear indication that the fuel suppliers bargaining power are high. Labor is another aspect in the suppliers’ part of the industry. Labor in the industry mainly includes the pilots and the whole crew, airport attendants, tower attendants, and many others. Workers unions control Labor in the UK airline industry; these unions often fight for the rights of the workers and bargain for their minimum wages. Sometimes, the unions' conditions are unreasonable and this creates a reason to classify the labor part of the supply has having a high bargaining power. Overall, suppliers have a high bargaining power. Threats of New Entrants Threats of new entrants in the UK airline industry is low. However, the level of threats of new entrants is raised low switching costs and lack of proprietary services and products. The airline companies that already exist in the industry have an established advantage cost wise. New entrants need large investments including marketing to acquire enough customers to make the required profits. The already established companies can retaliate threats from new entrants by putting in place several strategies for example price reduction, which ultimately leads to the threat being low. Low switching costs do not contribute much to the level of threat since customers tend to prefer popular brands such as British Airways even if their tickets are expensive. This gives an advantage to the already established brands and reduces the threats of new entrants. Since the industry also needs experience regarding flying and aircraft, the threat of entry is also lowered. Licensing is also an essential part of entering the UK airline industry and the average period to complete the licensing process is one year. Further regulations are provided by organizations such as the Civil Aviation Authority and the Transportation Department. The resources needed to enter the industry including time and money act as barriers for new entrants ultimately reducing the threat. Entry and Exit Barriers The exit and entry barriers in the UK airline industry is high. The requirement of huge resource investment that made the threats of new entrants low leads to the entry barriers being high. Exit barriers are also high considering the high losses a company needs to ride. Important aspects needed to enter the airline industry include experience, knowledge, expertise, time, and high capital fusion. These factors make entry to the industry hard classifying the entry barriers as high. Exit barriers are high mainly because of the regulation involved in the process of exiting the industry by any airline company. The UK government needs enough reason for exit and confirmation is needed before complete exit from the industry. Overall, the industry poses many exit and entry barriers, which highly influence the industry. Threat of Substitutes and Complementarities The UK airline industries have a low to moderate threat of substitutes and complementarities. Substitutes include road, rail, and water transport. The cost of switching to these substitutes especially for long distances is high and this contributes to the moderate threat. Also contributing to the low to moderate threat is the time resource, which is effectively managed when air transport is used compared to the other means of transportation. Besides, the United Kingdom is a developed country and therefore substituting air transport with the other modes of transport is not out of necessity but choice (Schimmel, 2014). In the UK, air transport is a natural phenomenon for the citizens and therefore train and road transport offer fewer impacts as substitutes. Aircraft are the quickest mode of transport in the transportation market and this renders the threats from substitutes low. Regarding issues of convenience and service provision, air transport outweighs other forms of transportation in the UK. However, the level of substitute threat is raised by the cost of transport, which is higher when compared to the other forms of transport especially short distances. Moreover, railway transport, which is also mostly used in the United Kingdom, has increased the threat level. Ferries also offer cheap and even free options when short distances are considered. Overall, issues that raise the levels of threats of substitutes to medium and complementarities are the cost and distance of travel. Rivalry among Existing Competitors As pointed out before, the UK airline industry is highly competitive because of several reasons. The reasons include the high saturation in the industry, rise in operating costs, decrease in passenger traffic, increase in the price of fuel, increased competition, and increase in maintenance and landing costs. All these factors have contributed to the sluggish nature that the industry is currently experiencing. The number of competitors has remained the same over the past few years and the fixed costs have also remained high over the same period. Major competitors in the domestic UK airline industry include British Airways, Flybe, EasyJet, Aurigny, Blue Islands, Eastern Airways, Ryanair, Loganair, Virgin Atlantic Airways, Citywing, Aer Lingus, and Isles of Scilly Skybus. International airlines companies that operate in and out of the UK include Virgin Atlantic, British Airways, American Airlines, United Airlines, Delta Air Lines, Norwegian, and Thomas Cook Airlines just to name some. The number of airline companies operating in the United Kingdom including all the global companies is high and this is an indication that the industry is highly saturated. With the high levels of competition, these organizations need to devise strategies that enable them to maintain a competitive advantage. A company like British Airways offers lower prices compared to its competitors on some selected routes and some of the passengers travel without their luggage being checked. Some of the routes that the company offers lower costs include flights that depart from Gatwick and destined for Turin, Tunis, Amsterdam, and Dubrovnik (Smith, 2013). With such strategies, airline companies such as British Airways and Virgin Atlantic Airways have been able to maintain their competitive advantage as they are among the top companies with the largest market share in the UK market industry. Other important strategies that these companies employ are the marketing strategies, which have to be effective to ensure that the companies gain enough customers to earn enough revenues. However, competition among the airline companies in the United Kingdom is decreased by the brand identity of the major market shareholders such as British Airways and easyJet, which are known to provide the customers with value for money through the provision of quality services at low costs (Mayer, 2003). The market share among top brands is equally distributed since each one of them has its own ways or strategies to ensure that it maintains its competitive advantage in the extremely competitive UK airline industry. Conclusion In conclusion, analysis of the UK airline industry using the Porters Five Forces Model indicate that three main forces are the strongest. The strongest forces in the industry are competition from existing rivals, bargaining power of suppliers, and the entry and exit barriers. Moreover, other forces have moderate to low threat levels to the industry. The threats of new entrants are low and this is mainly attributed to the high cost and time constraints. The bargaining power of the buyers and the threats from substitutes and complementarities are also considerably low. Substitutes have a low threat in the market since they are unreliable and the UK is also a developed nation. The buyers have a low bargaining power because of the innovative technologies that have been used including online distribution and ticketing. Besides low switching costs have also limited the buyers bargaining power. Overall, the airline industry in the UK is mainly controlled by the established brands such as British Airways, easyJet, and Virgin Atlantic Airways. The industry is one of the main industries in the United Kingdom as evidenced by its contribution to the GDP. The industry profits are high and the profitability is projected to remain since it is long term. Brands that have the largest market share and generate high revenues will continue being at a better position especially because of few new entrants into the market industry. New developments including manufacturers such as Boeing manufacturing eco-friendly aircraft will change the scope of manufacturers bargaining power. A development like this will raise the bargaining power of suppliers to higher levels. Other developments mainly in the technological innovations include online ticketing and development of portals, for example, lastminute.com where flights can be booked online. These technological developments would make the customers work easier and further reduce the buyers bargaining power. Finally, the industry may need to appreciate the rise in aviation fuel since it leads to a reduction in the threat levels for substitutes and complementarities. References Ahlstrom, D., & Bruton, G. D., 2010. International management: Strategy and culture in the emerging world. Australia: South-Western Cengage Learning. Cento, A., 2009. The airline industry: Challenges in the 21st century. (Airline industry.) Heidelberg: Physica-Verl. Fojt, M., 2006. The airline industry. Bradford, England: Emerald Group Pub. Mayer, F., 2003. A case study of EasyJet and the airline industry. München: GRIN Verlag. Porter, M., 1979. ‘How Competitive Forces Shape Strategy,’ Harvard Business Review. Schimmel, M., 2014. Communication in the U.K. Budget Airline Industry. Hamburg: Diplomica Verlag. Smith, O., 2013. ‘British Airways Is Using Cheaper Fares to Compete With Budget Airlines,’ The Telegraph. Read More