Airline Industry In 2007

Summary

Since deregulation in 1978, the airline industry has been one of the most volatile in the American economy. As an industry, profits were $2.4 million in 2000 and dropped to $-8.2 million the following year. This market volatility has caused countless airlines to file bankruptcy over the years, while providing other companies the opportunity to enter the market. In this paper, I will analyze Porter's Five Forces on the airline industry. This includes identifying external powers and threats surrounding the airline companies. This also includes mapping the airlines into strategic groups and identifying key factors contributing to their success. Additionally, my analysis and strategic recommendation explain how market consolidation, the identification of market niches, and differentiation within those niches can alter Porter's Five Forces within the airline industry to favor the airline companies.

Supplier Power - Summary

To accurately analyze supplier power over the airline industry, it is essential to distinguish the segregation of airline needs into separate industries. This segregation reveals the four essential airline needs of fuel, labor, landing slots and terminals, and aircrafts. This segregation is essential because supplier power may be high in one area of need of the airlines, but relatively low in another area. Such an analysis provides a more accurate depiction of the overall strength held by suppliers within the airline industry.

Supplier Power - Fuel

Fuel is a unique variable in the analysis of supplier power mainly because of price and volatility. The current market price of crude oil and jet fuel is an external factor that airlines companies have little control over. However, the suppliers themselves have little control over the price of fuel as the market is so competitive due to the number of suppliers and the need to sell fuel in large volumes. Additionally, all jet fuel is essentially the same making switching costs and product differentiation nearly nonexistent. All of these factors are in favor of the airline industry providing little power to the fuel suppliers.

Supplier Power - Labor

Due to the unionization of labor within many airline companies in the industry, I consider labor to be a factor to consider when determining supplier power. It is evident that labor plays an important role to airline companies as it is their second highest overall expense. Additionally, union forces were able to manage an average salary of $52,732 in 2005 for airline employees, 40% higher than the average salary in the private sector.

However, as airline companies' profits slid after 9/11, unions have conceded much of the stronghold they once had. This is apparent as the average union worker's compensation dropped from $79,356 in 2003 to $73,055 in 2005. This decrease represents less than a 10% drop in labor salaries, while net income slid nearly 100% for the airline industry over the same period. Despite the current downtrend, the labor unions still have at least moderate and arguably high power over the airline companies. As the airline industry recovers, labor unions will regain their strength once again demanding increased wages and benefits.

Supplier Power - Airports

Since deregulation in 1978, only one major airport has been built, in Denver. With the exception of larger cities, most cities in the United States operate only one airport. Each airport requires a separate contract with the airline companies to acquire landing slots and terminals. This represents dozens of contracts between the airline companies and essentially, independent, unique airports. In essence, this creates a monopoly for each of the airports or cities. The airlines have no alternative and must use the landing facilities provided by the city at the price the city demands or not fly to the city altogether. It is the "I have what you need" pricing strategy that has caused airline companies like American and United to pay $27 million for landing or takeoff slots. This obviously does not work in favor of the airline companies and represents a lot of power held by the airports.

Supplier Power - Aircraft Manufacturers

The aircraft industry is presently dominated by two competitors, Boeing and Airbus. While supplier concentration is relatively low, switching costs remain high due to the highly complex systems supporting the aircraft. For example, if Southwest switched to Airbus from Boeing, massive costs could be incurred through the training of flight, ground, and mechanical personnel as well as maintenance equipment. These factors contribute to a high power level currently being held by the aircraft suppliers, Boeing and Airbus.

Buyer Power

Many factors attribute to the overall buying power of customers within an industry. The airline industry however, is in a unique situation because of its high exposure through the Internet and media. Since the dot com boom of 1998, websites such as expedia.com and orbitz.com have sprouted, automating and facilitating end user airline purchasing. The end result is more educated end users making more informed decisions. As users make more informed decisions, competition increases along with buyer power.

Brand identity and price sensitivity seem to be inversely related in the airline industry. For example, airline companies experimented with price cuts throughout the 1990's and into the 2000's and noticed customers were most responsive to price than brand loyalty. In other words, brand identity was low while price sensitivity was fairly high. Both of these factors translate into an increase in buyer power. While buyer power may not exist on an individual basis, collectively buyer power is a factor because of price sensitivity and the lack of brand identity within the airline industry. Ultimately, this has created an industry competing on price and little else.

Despite all the apparent negatives going for the airline industry, the lack of substitutes available to consumers is one advantage held by the airline companies. When traveling any distance that would merit a plane, any other alternative is hard to justify when considering time and fuel. This provides a moderate advantage to the airline industry over consumers regarding alternatives available, but does not nullify the consumer advantage in price sensitivity and the lack of brand identity.

Barriers to Entry

Since deregulation in 1978, the airline industry has faced few barriers to entry. From