Wednesday, March 30, 2016

Porter’s five forces for strategizing in airline industry

In the article, ‘The five competitive forces that shape Strategy’, Michael Porter talks about how the five forces can be used to decide the strategy for operation in a competitive industry. We can study this in relation to the airline industry and their strategies of success. The business strategy developed in this years is generally the one with mergers and acquisitions. The industry which had ten competitors at the start of 2000 has narrowed down to four by 2013. The mergers were justified due to mismanagement of airlines/routes and even due to the Chapter 11 bankruptcy filing but the overall effect on the market has been about price hikes and collusion.

The four major airlines operating in US are the American Airlines, Delta Airlines, Southwest airlines and United Airlines. To operate simultaneously without much competition and rivalry, these airlines tacitly colluded on price setting and capacity discipline. They use cross-market initiatives (CMIs) to avoid airlines undercutting on each other’s prices in various markets and different routes.
The airlines are aware that the threat of new entrant in this industry are low due to high initial investment. But it has been competitive due to the mergers and acquisitions. For example, the 2013 merger of US Airways & American Airlines earned American airlines the status of the biggest airlines in the United States. Due to its economic drawbacks, US government has been trying to restrict further mergers. But for a new entrant, the entry to a market might be expensive in terms of gaining initial funds to acquire resources.

The airlines strategized to keep the price of tickets high with tacit collusion thereby giving minimal or no power for the customers. As for the suppliers, the current duopoly in the airline industry is Airbus and Boeing. COMAC, Irkut and Bombardier have been trying to break this duopoly but have suffered due to lack of experience in terms of supply chains as well as reliability/safety of the airplanes. So currently, suppliers have a high bargaining power.

Substitutes in the airline industry can be of two forms: 1. Substitute route by other airline. 2. Substitutes in terms of mode of transport. In the airline industry, the threat from both of these substitutes is low since airfares for substitutes are controlled by means of CMIs whereas other modes of transport do not provide the service quality in terms of convenience and time of travel.

From the analysis of industry vis-à-vis the porter’s five forces for current situation of the industry, we can conclude that the airlines industry is extremely attractive in terms of profits. The airlines have recently made huge profits in 2015 when oil prices sunk. Moreover, other than the bargaining power of suppliers, there is not much threat to the industry for any other forces that determine competition. 

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