Airline Industry Analysis

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1. Use the competitive forces model to analyse the structure of the airline industry during 2001-2004. How well does this analysis explain the low profitability of the industry?
Competitive forces model is the set of factors directly influencing the airline industry and its competitive actions and competitive responses within the airline industry environment. The five forces are listed as below:
i. Threat of new entrants
For the period of 2001-2004, the threat of new entrants in airline industry is low due to the economies of scale, capital requirement and government policies. The US airline business has been immensely affected by the September 11 tragedies where terrorists used appropriated American and United aircrafts to crash into the World
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The main supplier for airline industry is airplane manufacturers. The top two manufacturers in the world currently are Boeing and Airbus. It is hardly for airline industry to switch their supplier since suitable substitute products are not available and the switching costs is high. Most of the airline companies have long term contracts with their suppliers since aircraft are high capital products and airline companies probably have more favourable credit terms if they are not switching their supplier. Therefore, airline industry does not have bargaining power on their manufacturers as US airline companies must depend on these two companies for buying and leasing planes. Apart from that, petroleum plays a main role in airline operation activities. Hence, another categories of supplier – oil companies also has strong bargaining power on airline industry as aviation fuel is kinds of natural resources. Not only that, labour unions are suppliers who have significant power towards aviation industry. This is because labour such as pilots, cabin crews, ground personnel and gate agents is due to the labour agreements at the time of industry regulation that left them with little flexibility. This force remains an essential influence in effective performance in the airline industry. The low profitability of US airline industry in 2001-2004 is mainly caused by high initial cost and…show more content…
Most of the airline industry is composed of two categories of buyers, which are (i) single flyer, (ii) travel agencies and online portals. For the travel agencies and online portals, buyer power increases because they purchase a large portion of the airline industry’s total output. Both of the two categories of buyers have low switching costs because most of them choose the flight based on ticket price. For the period of 2001-2004, the US airlines began cutting prices to try to maintain their passengers’ loads in the face of declining demand. However, when one airline serving a particular route cut its prices, its competitors, desperate to cover their fixed costs, quickly followed. This “price competition war” among the aviation industry enable consumers can switching to any airline companies whose offer the cheapest price. This is because consumers at that period is more concern about cost driven rather than the quality and services after the September 11 attacks. This shows low profitability as US airlines is compete more for business due to downfall of economy, by cutting down fare to attract customers and add services at lower costs to lure people into using their
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