Airline Industry

Since domestic deregulation occurred in 1978, competition in the airline industry has intensified and become more concentrated. This situation can be analyzed through Michael porter's framework of the five forces of competition. This framework views the profitability of an industry as determined by five sources of competitive pressure. These five forces of competition include three sources of "horizontal" competition: competition from substitutes, competition from entrants, and competition from established rivals and two sources of "vertical" competition: the bargaining power of suppliers and buyers.

Ш Competition from substitutes: the price buyers are propense to pay for one product depends, in part, on the availability, and on price-performance of substitute products. The airline industry faces competition from other transportation modes, such as railroads, buses. For long distances, buyers may be more inclined to choose air travel to reach their destination. On the other hand, for short distances car is the airline industry's main competitor: in fact, airline travel is neither practical nor economical for short trips. In the last five-year period, less obvious substitutes to airline travel in the business segment include teleconferencing, enabling virtual meeting rooms where participants can sit in different geographic locations.

Ш Threat of entry: threat of new entrants presents new firms' possibility to enter the industry and make its returns falling down through prices competition. In the airline industry, even if the capital cost of entry are fairly low, offering airline services requires airline and aircraft certification, gates, takeoff and landing slots, baggage handling services, and the marketing and distribution of tickets. Since the hub and spoke system has taken place, the barrier to entry are higher because new carriers find it difficult to obtain gates and landing slots at the major hubs, and so the new entrants have been forced to use secondary airports. Even with this unprofitable situation, many entrepreneurs are still attracted by the apparent glamour of owning an airline. Furthermore, there are few major economies of scale in air transportation, so that both large and small airlines could coexist. However there are economies associated with network density, so that the greater the number of routes within a region the easier it is for an airline to gain economies and utilization of aircraft, crews, passengers and maintenance facilities.

The product differentiation is also a source of barriers to entry: in an industry were products are differentiated, established firms have got the advantage of brand recognition and customer loyalty, which was not so easy to be built up.

Another big problem was the retaliation: indeed retaliation against a new entrant may take the form of aggressive price cutting, sales promotion litigation or increased advertising. For example, the famous British Airways "dirty tricks" campaign against Virgin Atlantic, which included accessing Virgin's computer system and poaching its customers.

In addition, governmental and legal barriers are the mostly effective barriers to entry: indeed, there is new policy adopted by federal aviation administration, that put caps on the number of aircraft a new airline can operate based upon carrier's financial and managerial resources. This because according to a governmental accounting office study made many years ago, startup airlines' accident rate was higher than the major airlines' rate.

Ш Competition from established rival: the airline industry can be characterized as an imperfect