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Competitive Environment of the Airline Industry

Essay by   •  March 19, 2013  •  Case Study  •  1,175 Words (5 Pages)  •  1,892 Views

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Competitive Environment of the Airline Industry

A. Dominant Economic Traits

1. Market size - Total revenue was $81.6 billion for the airline industry for 2003.

2. Scope of Competitive Rivalry - Seller rivalry is primarily national, but competition does occur regionally and internationally as well.

3. Rivals - There exists about 12 major airlines in the United States. There also exists a number of smaller national and regional airlines that compete on a smaller scale.

4. Customers - Customers include mostly individual travelers and organizations.

5. Vertical Integration - No real significant backward or forward integration

6. Ease of Entry - Fairly strong barriers to entry exist in the form of capital requirements for investing in equipment and regulations. Also, there exists some market saturation in certain markets that discourage entry.

7. Technology and Innovation - Service technology is somewhat slow to technological change; use of new technology has changed distribution (e-tickets).

8. Product Differentiation - The actual service of transporting passengers from one location to another is fairly standardized. Differentiation exists in customer service and the locations in which an airline flies.

9. Scale of Economies - Moderate to High; On account of this, airlines are trying to lessen their planes' ground times to get more RPM (Revenue Passenger Miles). The less time a plane in idle on the ground and the more time its active in the air, generally results in more flights and more revenue from passengers.

10. Capacity Utilization - Load factor was 74.2% (2003), showing that as an industry, about 3/4 of capacity is being used.

11. Industry Profitability - Somewhat low; there is limited market capacity within each city's airports. Also, rising security costs and depressed fares (in an effort to attract customers after 9/11/01) are preventing profitability. Added to this is the unpredictable nature of fluctuating oil prices.

B. Competitive Forces

1. Rivalry among Sellers - Moderate to Strong. Airlines primarily compete on price and service; however, to a lesser extent they do compete on frequency of flights, frequent-flyer programs, reliability of flights, and other amenities. In recent years, pressures have somewhat eased as established carriers have stayed within their existing geographical areas of dominance, concentrating more on returning to profitability than expansion. However, there have been pressures from low-cost carriers (Southwest, JetBlue...) whom have been in a state of expansion.

2. Potential New Entrants - Weak to Moderate. Low traffic levels (since 9/11/01) and a lack of desirable gate access in airports has contributed to the industries barriers of entry. Also, the capital-intensive, labor-intensive, and energy-intensive nature of the industry can cause difficulties for new entrants.

3. Substitute Products - Moderate. Passenger rail lines, bus services, and personal transportation (cars) are all substitutes that exist in relation to air travel. They are generally lower cost and considered more convenient for shorter distance travel; however, air travel in the U.S. seems to be preferred for longer distances.

4. Supplier Bargaining Power - Moderate to Strong. For an airline company, aircrafts are costly and vital

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