Planes are either manufactured by Booing or Airbus, picking between a seat on United 747 and Southwest’s 747 doesn’t make much difference to the buyer. Both aspects make entry Into the market appealing but as I will discuss below, entry may be easy at is more difficult than it looks and is proven by the 43 airline firms that have entered and exited the industry since 1994. Although switching costs are low, high ticket prices Influence buyers to be more brand loyal, opting to purchase from companies they recognize and trust.
Furthermore, the creation of the so called “hubs” has forced regional carriers to operate out of smaller domestic airports. Cutting off access to the large distribute networks (airport gates at large international airports) has forced regional carriers to either leave operate solely out of small regional airports or pay an extremely high cost for leasing a gate. Delta’s control over Atlanta and United over Denver are prime examples of how national carriers dominate regions and force smaller carriers out.
High capital requirements and economies of scale are also required to properly access the market, the cost of establishing one hub can costs hundreds of millions of dollars and most national carriers (Delta, united) have multiple around the country. The “Open Skies Agreement” also emphasizes the need for large economies of scale. Decreased barriers to entry into the US market will soon catch the eye of global airlines like Lufthansa and Emirates who will then look to capture a share of the US market.
Some means of transportation can be more costly than a plane ticket. The main cost is time. Planes are by far the fastest form of transportation available. It is also Important to take Into consideration that there are two types of travelers and each has a different view towards substitutes. For the convenience, time-oriented type of traveler, the threat of a substitute is very low, the time to travel by car or train s much more expensive then it is to pay for a plane ticket. For the price-sensitive leisure traveler, short-haul flights could become susceptible to substitutes.
Large families may opt to drive when the savings in price are viewed as more important than the savings in time. The rivalry among existing players in the airline industry is high and very cutthroat. As shown in the Southwest Airlines case study, the industry is consolidated, exit barriers and fixed costs are high, and there is little differentiation in the product (service differentiation does exist). Mega-mergers involving Delta/Northwest, Continental/United, and American/US Airways have consolidated the industry over the past few years and has intensified the rivalry among existing competitors.
The three firms battle intensity over the convenience, time oriented business traveler, while smaller carriers like Jet Blue, Southwest, and Allegiant battle over the price-sensitive leisure traveler. Large investments in equipment and long lease agreements with airports increase barriers to exit making firms more likely to battle for market share instead of backing out of the industry altogether. The airline industry extremely high fixed costs (80%) make it one of the worst net operating margin performers when measured against other industries.
With no alternative supplier, airlines become susceptible to suppliers maximizing profits and spreading increased costs downstream. Although airplane manufacturing is a highly consolidated industry, this does not give them complete control over the airlines. Airplane manufacturers only serve two markets, commercial airlines and government contracts. For this this reason, airplane manufacturers have a vested interest in the success of airlines. If the manufacturers/suppliers begin to eat too far into the airlines profits, the airlines will fold and leave the manufacturer with no buyer.
There is also little threat of forward integration from the suppliers. High capital requirements, operating with economies of scale, and access to distribution points (“Hubs”) makes it tough for suppliers to forward integrateBuyer power in the airline industry is moderate. Price wars between competitors, low strong influence over prices and services. Although buyers typically have a strong ice in product/service offerings, it is important to differentiate between two distinct sets of customers; customers traveling from rural areas to urban cities and travelers traveling from one urban city to another.
