Question one Basing myself on the Michael’s Porter five forces analysis, I studied de threat of new entrants for the US airlines industry in two directions. In the first place I looked at the barriers of entry to see whether it is tough to enter the market or not. Although the conventional wisdom says that huge companies could achieve in an easier way economies of scale, there is little evidence of this happening in the airlines industry.
Nevertheless the text says that the cost differences between airlines can be the ultimate factor to become an industry leader, so, on the past years the new entrants where mainly “low cost” competitors which could achieve lower costs by maximizing the utilization capacity. The problem I found is that when we are talking about leisure travelling, the consumers are very sensible to price. When reducing costs, the big airlines have a limited ability due to their inelastic structure (Trade unions, airport fares, higher fuel costs…), but they do selective price cuts in those routes where they compete with low cost airlines.
We should also take into account the possibility also of international airlines entering the US domestic market due to a potential agreement between US and UE or Japan or any other country. In second place I analyzed the Low cost “industry” as a substitutive product. Some years ago it was quite easy to change from traditional airline company to flight with low cost. Trying to retain costumers, the big airlines tried to offer a differentiation on services instead of differentiation in price offered by the low cost airlines. The result was that the budget/leisure costumers preferred to save some money instead of having on board meal.
Nowadays conventional airlines offer incentives to stay in their airline creating switching costs by offering a “frequent flier program” where they offer free upgrades or tickets In conclusion, there is a high potential of new competitors in the US airline industry Question two The bargaining power of costumers in this industry is quite low. This can be explained due to the high switching costs created by the airlines in the past years with the frequent flier program, explained above. We are talking of an industry where buyer’s concentration is very low and this helps to reduce their bargaining power.
Nowadays, the airline industry suffers from oversupply due to the many low fare carriers who offers bare-bones service flights in return for discounted fares. Factors such as the new technologies that affects the capability of information and the standardization of the products increases their bargaining power. In other words, we can say that buyer demand is re-shaping the airline industry as a result of these options Question three In the point of view of the profitability we should be aware of new entrants, specially the low cost airline companies.
As I have explained before, this kind of enterprises set up a lower price in which conventional airlines cannot possibly compete in price. In order to defend themselves, major carriers cuts prices selectively, ending final prices as little as 10% of the first class for the same journey. Many major carriers reduce their prices to the borderline of variable costs (in other words, reducing their huge fixed costs), allowing them to compete temporally in price. In conclusion, the threat of new competitors have by far more impact in the industry than the buyer’s bargaining power, although this last competitive forces is gaining in importance.