The economy plays a very large part in the airline industry. Recessions are known to cause less demand for air travel for both business and leisure travelers. The financial crisis in 2008 had an extremely negative impact on the industry. The companies saw sharp declines in both passenger traffic and profit margins. While the industries are still in a sensitive spot, the US airlines managed to make a small profit in 2009. Thanks to the efforts of combating the dwindling demand by shrinking capacity, US companies were able to enjoy a small victory.
II. Technology Recent advances in technology have made the airline industry more competitive than ever before. Websites like Expedia and Orbitz have caused companies to be extremely cost-conscious since customers can effortlessly compare prices. The rise of telecommunications has allowed business professionals to hold meetings in the comfort of their own homes. This has had a negative impact on the airlines, since business travel was a very profitable market for them. III. Socio-Cultural
Ever since the tragic incident that occurred on September 11, 2001, the airline industry has never been the same. The fear of planes being hijacked has customers thinking twice about taking that flight to visit family, or go on vacation. Customer safety has been a double-edged sword for the airlines, as increased security has been incredibly scrutinized. A customer wants to feel safe while on a plane, but at the same time they do not want to be subjected to a thorough pat down by airport security. IV. Political/Legal
Government deregulation on the airlines can be largely contributed to the current state of the industry. The option for companies to file for Chapter 11 bankruptcy allows the firms to seek protection from their creditors and existing contracts. This practice became quite the issue as successful companies couldn’t compete with bankrupt airlines and the artificial costs that were low. Industry Analysis I. Rivalry Among Existing Firms The competition between airline companies comes down to one thing, price.
Low cost carriers have a price advantage and use this to underprice the major carriers. The major carriers have responded to this by trying to offer more services. Services like, in-flight meals and cinematic entertainment are used to lure the customers back to them. However, the low-cost carriers have developed a reputation for their customer service offer what they feel to be superior service. The rivalry among existing firms is considered a high threat. II. Threat of New Entrants
The threat of new entrants in the industry is very low due to the multiple barriers of entry. These include, high capital requirements for aircraft, air service requirements such as gates, certifications, takeoff/landing slots, baggage handling services and more. These barriers are a very difficult to overcome and keep most entrepreneurs at bay. If new entrants were to enter the industry it would more than likely increase problems of congestion at some major airports which in turn would lead to higher prices of takeoff and landing slots.
III. Bargaining Power of Suppliers The airline industry requires several different suppliers. For one, airports are very complex and expensive and little in number. There are also a number of compliances operating within an airport as well. Next, there are only two manufacturers of aircraft, Airbus and Boeing. The limited number of aircraft manufacturers gives Boeing and Airbus huge bargaining power from the airlines. Also, the supply of fuel is extremely unpredictable and is the highest operating expense for airlines.
The high reliability on fuel while being unstable is a huge risk factor for the airlines and gives the oil companies tremendous bargaining power. Another supplier is the labor. In this industry it is involving predominant unionized labor. This unionized labor comes at a high cost of employee remuneration and is considered the second highest operating expense for airlines. It doesn’t help that the union contracts make it difficult to reduce hours and execute