Five Forces Framework

Michael Porter's five forces model is a strategic framework by which an attempt is made to predict how an industry, behaves, grows and responds within a competitive environment. In his own words the creator of the concept offers an insight; "The five forces determine the industries profitability because they influence the prices, costs, and required investments of firms in an industry - the elements of return on investments ." It is the aim of this essay to apply Porter's model to Europe's rapidly growing budget airline industry. Finding it's liberalisation in 1997 Europe's domestic airline industry is relatively immature in comparison to its North American equivalent. A few years shy of maturity the industry currently resides in a business sphere of intense competition. As far as Europe is concerned the pioneering embrace of budget air travel is essentially an Anglo-Irish endeavor, however Europe now has around 50 low-budget carriers. Testament to the aggressively competitive state of the market is found in the truth this figure fluctuates on an almost weekly basis. Indeed it is precisely because the market is in a state of high growth and fierce competition that designates this industry most appropriate for the application of Porter's model.

When consideration is given to the "threat of entry" observed can be the changing predicament most responsible for the continuing dilution of an oligopoly. Traditionally the substantial capital requirements of entry have served to suppress competition. However the departure of the aviation industry from its state-sponsored beginnings the free market has begun to deliver allocative efficiency. The availability of public and private venture capital has been instrumental in spreading risk. Thus the capital requirement of entry has been substantially decreased. Due to the absolute expense of an aircraft; thought of in terms of percentile discounts economies of scale constitute a significant barrier to entry. Experience, or rather lack of it has not proved the deterrent to entry that one might have previously expected it to be. Many a virgin company has been born and subsequently flourished at the expense of shell-shocked national flag carriers. It would seem the inefficiencies of state influenced bodies have had yet another spotlight cast upon them. Still growing but having entered a phase of stakeout expected retaliation now constitutes a very visible barrier to entry. Once of considerable consequence but now of little significance; accesses to distribution channels provide less of a barrier than they have done at any point in history. To emphasise this one need only consider that European budget airlines on average conduct 99% of their business through the internet. In terms of service differentiation there exists only two underlying factors: price differentiation and catalogue of destinations. The former falls into the lap of capitalism. Fairness of the latter is a legislative matter, one which is the complicated responsibility of the European Union's