Strategies and Forces of Competition within the US Airline Industry - Case Study Example

Strategies and Forces of Competition within In the U.S. Airline Industry Introduction The U.S airline industry is considered as one of the best service provider airline industry in the world. In the year 1978, the airline industry had to undergo through a deregulation which led to the emergence of new budget carriers. As the airline industry achieved market success and faster growth the U.S Department of Transportation (DOT) in the year 1997 identified the revolution of low cost airlines. After the service revolution of low cost airlines got introduced it was observed that there was a significant increase in the market share of domestic passengers which escalated from 13% in the year 1997 to 28% in the year 2009. In addition, this revolution of low cost airlines resulted to the intense competition between the low cost carriers and the network carriers. It was observed that in the year 1997 the route intersection of low cost carriers (LCCs) which includes AirTran Airways; JetBlue Airways; Frontier Airlines; Virgin America and other LCCs airlines and network carriers (NWCs) such as American Airlines, US Airways, United Airlines, Continental Airlines and other NWCs airlines that had almost 1000 routes, increased form 13% in 1996 to 31% in 2009. The average cost (exclusive of fuel) incurred by the NWCs raised from 8.8 cents to 11 cents per seat mile. On the other hand LCCs managed to decrease their expenses on the average cost incurred which ranged from 7.7 cents in the year 1997 to 6.6 cents in the year in the year 2009. Moreover, it was observed that the U.S airline industry witnessed a huge growth of output derived from the passengers and the revenues obtained by them per mile. For instance, the number of people availing the airline service raised form 502 million in the year 1995 to 621 million in the year 2009 (Williams & Weiss, 2005; Hüschelrath & Müller, n.d.). Michael Porters Five Competitive Forces that Shape Strategy within the U.S. Airline Industry The airline industry is specialized in providing distinct services to its customers. The industry is committed to transport it customers with an extraordinary level of convenience and proficiency which cannot be facilitated by other substitute or industry. The U.S. airline industry is considered to be superior in treating their customers in the flight. The industry provides facility which includes entertainment, beverage, food and hospitable staff. The transportation services are provided by other industries as well but it is impossible to surpass the airline industry in relation to the time period incurred in transportation. The geographical scope of the airline industry is considered to be at global level. There are some airline industries which functions only in a small geographical area but most of the airlines function worldwide. The main objective of the Porters model is to enable the managers to provide an understanding of the industrial environment along with determining the strategy for the firm. It has been observed that if the five forces of competition for an industry are stronger than it would result in a relatively lower profitability potential of an industry but if these forces of competition are weaker than it would result in a higher profitability potential for an industry. The primary purpose of these forces of competition is to assist firms in the industry to frame strategies that would provide them with greater and sustainable competitive advantages. It is highly recommended that the managers in an airline industry should be able to position their company in such a manner that would provide relaxation to the restraints of stronger forces and help in leveraging the weaker forces. There are five competitive forces developed by Michael Porter which includes “threat of entry, power of suppliers, power of buyers, threat of substitutes and the rivalry among the existing competitors” (Rahman, 2010; Porter, 2008). Threat of entry: It is considered as a vital aspect in the Porter’s five competitive forces. It can be revealed that the US airline industry generally have a lower threat of entry. However, there are two factors that might upsurge the level of threat. The first factor involves the cost of low switching and the second factor entails that there is no branded services or products involved in the US airline industry. Although, these threats exists in the competitive market but these threats do not possess much of threat to the US airline industry. There is a huge cost advantage that has been availed by the existing airline industry of the US. Moreover, if the new industry decides to enter the market, the industry in its initial stage has to incur a huge amount of capital and investment without having a strong base of customers wherein the new industry might obtain very little or no profit in the initial startup. The existing firms in the US have incurred large investments to their advantage in order to restrict the entry of newer firms. Although, it has been observed that the cost of switching is relatively lower between the brands, customers have the options to choose from the brands that is well known in the market. Customers do not have the tendency of purchasing expensive tickets from the firms that have newly entered into the market which do not have a brand image. Moreover, customers focus on the aspect of safety wherein they feel safer, so it is understandable that most of the customers would prefer those firms that has been existing in the market for a relatively longer time. Furthermore, the have new firm entering the market of US must have the expertise of flying along with experience. The new firm in order to enter the market must have a license which could almost take a year and would be regulated by government bodies such as Department of Transportation and Federal Aviation Administration. Therefore, it is considered that the money and time incurred to open up an airline company is sufficient in prevention of the firm entering into the market (Tany, 2011; Porter, 2008). Power of suppliers: The key suppliers in the US airline industry are the airplane manufacturer. In the present context the top two manufacturers of airplane are Airbus and Boeing. Almost all the planes manufactured are similar but the planes can be distinguished with its facilities. The power of the suppliers in the airline industry is very high as the airline companies cannot switch their suppliers easily. Most of the firms have contracted with the suppliers for a long term as these products require huge investment which can be balanced with long term contracts for loan and appropriate credit terms. Moreover, the higher bargaining powers of suppliers have also imposed certain barriers for the potential entrants (Porter, 2008; Cizmec, 2005). Power of buyers: The airline industry comprises of two distinct buyers groups. It includes individual buyers who purchase plane tickets for various purposes that might be personal or related to business. The diversity of this group is quite extreme because most of the people have already bought a plane ticket in the developed countries. The second group consists of online portals and travel agencies wherein these group functions as an intermediary between the flyers and the airline firm. This group particularly works with several airline firms so as to provide the best flight to the customers as possible. Thus, it can be revealed that among these two groups there are numerous buyers as equated to the number of airline firms. The cost incurred for switching the firms is very low almost every customer selects their flight depending upon the destination and the cost at that particular time. There is some loyalty to the airline firms which is not considered to be enough for the cost of high switching. In the present day context each customers requires the desires to get information regarding the facilities that would be provided in the flight. Moreover, customers desire to obtain information regarding the flight timing and the factors of safety while flying. The services provided by the airline firm are unique in its nature wherein each firm has a niche. There are some airline firms that focus on the cost aspect while the other airline firms focus on providing the finest amenities. Thus, it would be worth mentioning that the power of buyers do not pose much threat to this industry (Borenstein, 2011; Porter, 2008). Threat of substitutes: The threat of substitutes is a vital aspect in the contemporary business of airline industry. The airline industry involves risk level of the substitutes to some extent. There are several substitutes available for the airline industry wherein the customers can select different modes of transportation which involves substitutes like train, ship, bus and car to reach their destination which is relatively lower in terms of cost. However, there is a cost of switch present in this force of competition because some modes of transportation can actually be more time consuming as compared to the time incurred in the plane. In the present day context people have the belief that time is money wherein the customers might opt for an airplane transportation mode in order to cover the time irrespective of the cost incurred. Moreover, other modes of transportation cannot be compared with the airplane transportation because travel through plane is regarded as the best in terms of convenience and facilitated service. However, high speed rails can be ascertained to be act as substitute for domestic airline industry (Peterson, 2010; Porter, 2008). Rivalry among the existing competitors: It is considered as the vital force of competition because the rivalry in the industry of airlines is very intense due to several reasons. In the contemporary business environment, the airline industry is very stagnant as the industry is in the matured phase of the business cycle. The competitors in this industry would remain the same and there is no possibility of under and over capacitation. The capital invested in this industry is very high due to which it is very tough for the industry to leave as they would have probably undergone a contract for long term loan so as to survive in the business. The structures of the planes are very complex due to which there is an elevation of competition by the existing firm in the US airline industry. However, there is not much of competition between the brand identities of distinct firms. For instance, Jetblue is considered for its amenities and Southwest is considered for its lower cost. The market share between the US airline industry is distributed equally as each firm has a function of its own and the switching cost are low due to which a particular does not hold a huge share of market. Competition between the existing firms and suppliers’ power are considered as the strongest force in this industry. Therefore, the rivalry of the existing firms are quite severe wherein there is a possibility that a firm might get pushed out if it does not have sufficient capital. In the days of pre-regulation airlines competed on things such as meals, in-flight movies and service but after the prices were revised by the Civil Aeronautics Board, the rivalry between the firm is related to the pricing competition and fare promotions. The services provided in the airlines are quite homogenous and there is no differentiation in product. The cost of operation which involves cost of aircraft, labor and fees of landing are fixed irrespective of how occupied seating capacity. Moreover, the marginal cost of a customer is negligible thus every extra seat that has been sold directly contributes to the bottom line. This provides motivation to the airlines to cut the fair price until the price reaches the marginal cost. It has been observed that due to the severe competition there has been a rise in the seating capacity of the airlines that is combined with the phase of diminishing demands due to macro-economic aspects and the fixed cost that is very high along with lower marginal cost increases the price competitiveness of the airline industry (Porter, 2008; Sundaresan, n.d.). Critical Evaluation for Shaping the Strategy From the aforesaid analysis of Porter’s model of competitive forces, it can be revealed that the airline companies within the industry that have been obtaining profit are well-positioned as they generally have more airplanes and variation in the flights that provides customer convenience. Moreover, it has been observed that bargaining power of the suppliers has changed as they are producing eco-friendly planes. This would bring in a distinction in the product that might increase the threat of suppliers. In the present day context, it has been viewed that the customers use online portals for booking flight tickets. This change develops a newer buyer group which makes purchasing of tickets much easier and faster. Due to the rise in the prices of fuel the power of the substitutes has been diminished. The forces of competition help in shaping the strategy against the competition faced by the US airline industry. Moreover, this force provides assistance for framing the course of action that includes positioning the company so that the ability of the US airlines helps in tackling the competitive force, influencing the balance of the competitive forces that would result in the improvement of the firms position and exploiting the change in industry by selecting the most suitable strategy to get a competitive balance before the competitors identify it (Borenstein, 1992; Porter, 1980). Positioning the company: This is the first strategy that the US airline industry has to approach that would help in assembling the airline firm and match the industry’s strengths and weakness. This strategy would provide resistance against the forces of competition and discovering the position of the industry wherein the forces are weaker. It is considered that if there is abundant knowledge about the firm and its abilities along with the reason of competitive forces, it would provide assistance in highlighting the areas wherein the firm should avoid competition and confront it. For instance, if the firm produces low cost products or services it might challenge the powerful buyers while it sells products to the customers that are not much vulnerable to the substitute’s competition (Borenstein, 1992; Porter, 1980). Influencing the balance: The five forces of competition facilitate the airline industry to frame strategies that enables the firms within the industry to device strategies for ensuring greater competitive position. These strategies should be defined in such a way that would merely not manage the causes of competitive force but also would help in altering the causes. Moreover, innovative strategy in the marketing process of the firm can help in uplifting the brand recognition or would result in product differentiation. If the airline industry invests in the large scale amenities of the plane it would help in providing barriers for a new entrant in the market. The balance of the competitive forces is possible only if the external aspects are properly mitigated and the airline industry defines the control strategy for tackling these competitive forces (Borenstein, 1992; Porter, 1980). Exploiting industry change: Strategically the evolution of the airline industry is very important which helps in bringing changes and exploiting the opportunities. Moreover, it has been observed that after the maturity of the industry there is a change in the rate of growth and the differentiation of the product would decline while at the same time the industry develops the tendency of vertical integration which has been a kind of trend being followed by the airline firms in the US. For instance, in a matured computer industry vertical integration both in improvement of software and manufacturing process has been occurring. Thus, this trend has resulted to the rise in economies of scale along with investment requirement to compete with the other competitive industries. However, this trend helps in providing barriers to the new entrant and might push out the smaller competitors in the business. From a strategic viewpoint the trend that has the highest priority is the one that affects the most significant forces of competition in the airline industry (Borenstein, 1992; Porter, 1980). Conclusion The airline industry of the US has been viewed as one of the best airlines industry in the world. The US airline industry ensures to provide commitment of suitability and expertise in its facilities. There are certain other substitutes to the airline industry but in context of time period incurred for transportation airline industry is one of the best as no other substitutes can surpass it. Porter’s model of competitive forces has provided contribution in shaping the strategies of the US airline industry. There are five forces of competition established by Porter which comprises threat of entry, power of suppliers, power of buyers, threat of substitutes and the rivalry among the existing competitors. In addition, it has been viewed that if the competitive forces of an industry are quite strong the industry then would have a lesser profitability prospect. However, if the competitive forces are weaker then there would be a higher prospect for profitability for the industry. Thus, it can be suggested that the management team in the airline industry must possess the capability of positioning their firm in such a way which would reduce the limitations of forces that are stronger and leverage the forces that are weaker. Therefore, the main objective of these competitive forces is to provide the required advantage in relation to the competition in the market. These forces of competition aim in providing support in order to frame the plan of action i.e. the strategy which is considered very important for the airline industry. This strategy entails positioning the airline firm in such a manner which utilizes the skills of the US airlines that acts as a shield against the forces of competition. In addition, the strategy involves that the balance between the forces of competition is induced which would lead to the enhancement airline industry position. The strategy also must include exploitation to the change of the airline industry by choosing the strategy that more suitable to obtain a balance in competitive aspect before any other rivals identifies the strategy. Thus, it can be concluded that if the strategies are effectively used in the airline industry then it would result in attaining higher profits along with competitive advantage in the prevailing market. References Borenstein, S. (2011). What happened to airline market power. Some Motivating Analysis, 1-27 Borenstein, S. (1992). The Evolution of US airline competition. Journal of Economic Perspective, 6 (2), 45-73. Cizmec, D. (2005).An examination of Boeing’s supply chain management practices within the context of the global aerospace industry. Wharton School, University of Pennsylvania, 1-81. Hüschelrath, K. & Müller, K. (n.d.). Low Cost Carriers and the evolution of the U.S. Airline Industry. Discussion paper, 1-35. Porter M. E. (1980). How competitive forces shape strategy. The Mckinsey Quarterly, 34-50. Porter M. E. (2008).The five competitive forces that shape strategy. Harvard business review, 1-18. Peterson, S. (2010). Airlines 2020: Substitution and commoditization. Retrieved from http://public.dhe.ibm.com/common/ssi/ecm/en/gbe03385usen/GBE03385USEN.PDF Rahman, J. (2010). Five forces shaping airline industry. Retrieved from http://www.slideshare.net/joharahman/five-forces-in-airline-industry Sundaresan, S. R. (n.d.).Analysis of the airline industry. Retrieved from http://bcs.solano.edu/workarea/mgarnier/MGMT%2050/Southwest%20Porters%20-%20Brief%202.pdf Tany, K. M. (2011).Incumbent response to entry by low-cost carriers in the US airline industry. The Ohio State University, 1-30. Williams, J. R. & Weiss, M. (2005).Competitive innovation in the U.S. Airline Industry. Tepper School of Business, 1-27. Read More