Case study: Airline industry

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Case study: Airline industry

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Abstract

After deregulation, many carriers came into the airline industry to compete against the main airline companies. Why and in what way could these entries be successful? Government Regulation was the main barrier to entry in the airline industry. To regulate prices and stability of this industry, the government voted the Civil Aeronautics Act. The Civil Aeronautics Board had to administer the structure of the industry (attribution of interstates routes to the 23 airlines, safety guidelines priorities, rules for fares etc.). However, with the oil shock, the growing public dissatisfaction and the shift in political opinion, the decision to deregulate was taken. The major barrier to entry was broken, leading to a price war with the entry of many carriers. Every carrier could enter and prices were not regulated. The cost of customer switching was very low. Thus companies developed "frequent flyer schemes" to retain customers by issuing free tickets and upgrades on basis of number of miles flown, thus raising the "cost" to switch airlines.

Use Porter's five forces of competition's framework to show how the structure of the airline industry has caused low profitability during the past 20 years
1. Risk of entry by potential competitors
2. Intensity of rivalry
3. Bargaining power of suppliers
4. Bargaining power of buyers
5. Threat of substitutes
Which of Porter's five forces has had the biggest impact in depressing industry profitability?
In what ways, and with which success, have the airline's strategies attempted to counteract competitive forces depressing profitability in the industry?
What is the outlook for industry profitability during the remainder of the decade?
Think about the events of Sept. 11, 2001. Can you imagine any European airline increasing its profitability after the Sept. 11 terrorist attack? Justify your position

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[...] The only efficient way of distinction was competitive price. -Customer switching costs: With a very high level of competition, companies had to retain customers by raising switching costs. For this, they developed some programs of fidelity to influence customers to choose to travel exclusively with one company. This system was based on the number of miles flown, to collect points and offer free tickets. It became a major part of the income of airlines. Partnering and flyer programs have become a heavy source of profits and a way to encourage customer loyalty, but not enough to raise their load factor (less than 65% for all the market). [...]

[...] However, the problem is that with a very competitive position of train companies, when a shock happens in the European airline industry, customers can switch to trains that take longer, but appear more secure at the instant of the shock. With the record speed of the TGV (high speed train), the customer is oriented to choose the TGV (the stereotype of aircraft crushing is sometime strong), and can prefer it to air travel. Moreover, airport repartition is not effective because only big cities can have some airports, and the customer is more inclined to take a transversal train than a multi-stop plane. [...]

[...] Profits are not increasing even though airline companies have negotiated some volume discount on fares, with prices reduction on certain routes. Substitute products have also developed quickly after the 11th September, with a growth rate of 40 percent. Communication technologies like video conferences are one of the main substitute products that can compete with airlines companies, in addition to acquisition of small aircraft, which are faster and easier to maintain, with higher level of technology and lower consumption of fuel. [...]

[...] airline industry. To regulate prices and stability of this industry, the government voted the Civil Aeronautics Act. The Civil Aeronautics Board had to administer the structure of the industry (attribution of interstates routes to the 23 airlines, safety guidelines priorities, rules for fares etc.). However with the oil shock, the growing public dissatisfaction and the shift in political opinion, the decision to deregulate was taken. The major barrier to entry was broken, leading to a price war with the entry of many carriers. [...]

[...] III. The Bargaining power of suppliers There are many constraints act on an airlines company. Trade unions are very powerful as is revealed by the difficulties faced in trying to negotiate an effective flexibility of the salaries (rise of salaries when losses are made). However, this is not the only factor. Fuel producers are united, and jointly influence the prices. Thus, negotiating prices of fuel is also difficult. Moreover, airports are in a deciding position to determine which company can use them and how much it will cost, owing to the profusion of airlines companies. [...]

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