Michael Porter's famous five forces of competitive position model provide a simple perspective for assessing and analyzing the competitive strength and position of a corporation or industrial organization. Let us consider these concepts of industry analysis in the context of the US airlines industry in the past 20 years. To do so, we will analyze each of Porter's forces and its impact on profitability of the airline industry. Before 1978 the whole airlines industry was regulated by the US government, with the Civil Aeronautics Act, in order to guarantee certain stability and to administer the structure of the industry by The Civil Aeronautics Board (CAB). The deregulation in 1978 has had a huge impact on the airlines with consequences like the appearance of new entrants or an outbreak of the price competition. This new situation has deeply modified the mechanism of Porter's forces on the airline industry. The intensity of rivalry among firms varies across industries. In the case of the airline industry we can say that the competition is intense. Industry concentration: In the beginning the industry was hardly concentrated, with a concentration ratio in 1935 of 88%. There were few airlines companies (only 23) because the CAB limited their number. After 1978 and the deregulation, the concentration ratio fell to 54.2%. In 1982, the competition became more aggressive; new entrants appeared and some carriers went bankrupt. We can say that the structure of the sector was fragmented. After this period of instability the US airline industry has been consolidated: the strongest or the more profitable carriers acquired others that were in difficulties and the most successful low cost airlines succeeded in getting market shares.
[...] Even if there is some threat of substitute products to the airlines industry they don't have any impact on the finance of the airlines for the moment of Porter's five forces has had the biggest impact in depressing industry profitability? I think that the Porter's force which has had the biggest impact in depressing industry profitability is the rivalry among existing firms. The main event that has driven to the competition between airlines was the signature of the Airline Deregulation Act in 1978. [...]
[...] To counteract the competitive forces depressing profitability in the industry, airlines looked for many solutions. First they attempted to reduce costs in a drastic way in order to offer more competitive prices to their customers: - Horizontal integration strategy: after the deregulation, many airlines entered the market. But the oil shock happened and a lot of companies were in trouble. During this period a lot of mergers and acquisitions were made by major airlines in order to reinforce them. Indeed, those operations permitted to realize scale economies which is very important in this industry to spread the important fixed costs. [...]
[...] And for the carriers who use the high-coverage hub-and-spoke system, cost reductions won't retrieve profitability. The only outlook of profitability in the airlines industry seems to be the financial model provided by low-cost airlines. Despite the increase of concentration in the industry, airlines would have difficulties to stay profitable unless the focus does not shift from cost cutting to profit building. about the events of September Can you imagine any European airline increasing its profitability after the September 11 terrorist attack? [...]
[...] But now the threat of new entrants is quite low in the US airlines industry. The market is already well occupied by the major and low cost carriers. Bargaining power of buyers At the beginning, buyers had low bargaining power because prices were uniform. Since the deregulation and the opening to competition things have changed. There are more offers and airlines are fighting to propose more competitive prices. Now leisure customers and also Business travelers want to pay the lowest price. [...]
[...] In the case of the airlines industry, despite the deregulation of the industry in 1978, there are some barriers at the entrance still. Indeed, it would be very difficult for a new firm to enter the market because: - It requires a strong capital intensity: managing an airline costs a lot if we add the price of an airplane ($150 million apiece), the fuel, the labor of the cost for a carrier), the facilities, the marketing and distribution of tickets, the takeoff and landing slots and the baggage handling services. [...]
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