U. S. Airline Industry Forces Supplier Power Supplier power in the U. S. Airline industry is high as passenger jets are the most significant cost for airlines and there are only a handful of suppliers. Additionally, planes must be ordered far in advance, leaving airlines with little choice but to place orders in anticipation of industry growth. Major U. S. Airlines have only two primary choices for supply of their jets and there can be significant differentiation between products from the perspective of the airlines.
The long-term nature of these purchases creates a long-term relationship whereby the airline is often motivated to arches the same kind of Jets to reduce maintenance and service costs, adding to the leverage held by major Jet suppliers. For the major U. S. Airlines, labor unions must be considered as a supplier with gallants power. This force Is held over from an era of regulation but remains a significant factor in successful performance in the labor agreements that left them little flexibility.
Threat of Entry While the airline industry is capital intensive and requires large upfront investment, there are also economies related to being new in the industry such as better fuel efficiency and lower maintenance costs for new planes. The Civil Aeronautics Board did not approve any new passenger airlines from 1938 to 1978, during the time of industry regulation making this industry force virtually nonexistent prior to 1978. With deregulation came a flood of new entrants and intense competition with more than 20 new airlines entering the industry by 1980.
The change in this industry force moved the once tightly controlled oligopoly much closer to perfect competition where price wars quickly became the norm. U. S. Airline industry return on capital should be deterrent to new entrants, but this impact has not been recognized as new firms have continually entered the industry. Threat of Substitutes The threat of substitutes in the airline industry is very low, primarily composed of passenger trains, buses, and personal automobiles. With no high-speed passenger train system in the U.
S. , the threat of this substitute has always been low since air travel became a viable option for U. S. Consumers. Travel by train is significantly longer than by air while the price difference to the consumer is not similarly disproportionate. The fixed routes of train lines also put this substitute for air travel at a disadvantage. Travel by bus offers consumers some of the same trade-offs as train service except that the travel time is often increased again, for a comparable trip.
Passenger cars as an alternative to airline travel is only viable to most consumers for very short distances, thus it is also an insignificant substitute. The lack of viable substitutes to the airline industry which effectively meet the travel needs of consumers is advantageous, though it has certainly impacted other industry factors eke the threat of new entrants. Buyer Power Buyer power has changed significantly in the airline industry over the last 20 years due largely to industry deregulation and technological innovation related to the impact of the Internet.
Prior to deregulation, the Civil Aeronautics Board’s control over pricing and airline routes gave the consumer very little power as it did not provide the choices of unregulated competition. If consumers did not like the prices available for air travel, they were forced to look for substitutes, none of which offered a similar value proposition as the airline industry. With the advent of the Internet as a convenient method for the average consumer to search for the lowest airfare and complete the transaction without an intermediary, buyer power has increased as a significant industry force.
This trend coupled with the lack of differentiation by the consumer between air carriers has commoditized the industry and made price the most important factor impacting buyer behavior. Industry Rivalry U. S. Airline industry rivalry is extremely fierce, driven by changes that have increased buyer power and the threat of new entrants. While the threat of substitutes is low ND the power of suppliers has remained largely unchanged, these forces have been offset to changes in buyer power and new entrants, resulting in overall poor industry performance.
High exit barriers have always existed in the industry but the flood of new entrants has exacerbated this issue and increased its impact on competition. Further, cost structures composed primarily of fixed costs has spurred price Industry Key Success Factors Factors which helped U. S. Airline industry to overcome their loss: * Make reliability a reality: The airline industry tried to improve in 4 key department of transportation agreements- on time arrivals, baggage handling, complaints and involuntary denied boarding.
In order to provide this employees needed to want to provide this, which was easily measured goals and reward came in the form of hard cash * Working together: They have managed to improve employee morale because of constant cost cutting measure. They were rewarded with hard cash every month for their good performance, happy employees took good care of customers. * Fund the Future: Continental Airlines lowered its debt levels and reduced interests payments on loan and aircraft lease. Their increased focus on their fleet plan, generation of cash flow and improved financial flexibility. Pricing structure got also changed.
These are the Factors those are had been faced by the US Airlines while they went through bankruptcy * Major US Airlines consistently losing money * The weak performance of pre-deregulation airlines has significantly diminished their financial condition, as a result some of these airlines went through bankruptcy * The overall volume of business air travel demand got decreased * Emergence of low cost airlines has been a significant challenge * Congestion and growing flight lays * Issue of aviation safety and security * Increased security checks and uncertainty of passenger processing times * The new security procedures had increased operating costs and induced more security related flight disruptions and delays * External shocks (9/1 1, the Iraq war, CARS etc. ) had depressed demand for air travel * Extreme price cutting to fill up seats * Several carriers failed and ceased operations including Pan American Airways and Eastern Airlines * High oil price drove up operating cost * Airlines industry highly responsive to economic cycles * Labor costs are very Strategies * Labor: Management should negotiate contracts with labor union in order to reduce labor costs. Currently, labor costs account for a bulk of the cost of operating an airline.
Currently, 40 percent of an airline’s expenses are used to pay pilots, flight attendants, baggage handlers, dispatchers, customer service, and others. * Fuel: Fuel savings initiatives such as single-engine taxing, more efficient fuel- reserve practices, and installation of winglets can result in significant cost savings. * IT Reservations/Customer Service: Technology-driven enhancements to airline besides and self-service kiosks can reduce the cost of bookings and passenger handling. Systems (GAS), reduce travel agent commissions, encourage travelers to book directly with carrier websites. * Fleet/Maintenance: Continue the fleet rationalization program.