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Porter's 5 Forces for Airlines Industry in India

Essay by   •  February 20, 2013  •  Case Study  •  1,351 Words (6 Pages)  •  6,781 Views

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PORTER'S FIVE FORCES

The Power of Suppliers (HIGH)

SUPPLIERS-FUEL SUPPLIERS, AIRCRAFT MANUFACTURERS, AND SKILLED EMPLOYEES

* Supplier Industry Concentration: Boeing and Airbus effectively form a duopoly of suppliers of new jetliners. This coupled with the fragmentation of the low-cost airlines segment, leads to high bargaining power for the aircraft manufacturers.

Relatively few companies supply aviation fuel, strengthening the fuel suppliers' power, although airlines generally defend against price rises using hedging strategies.

There is also an acute shortage of pilots which makes the industry dependent on them.

* Substitute for Inputs: It is currently virtually impossible to find substitutes for the inputs required for airlines to operate - an airline must have aircraft, a supply of aviation fuel and a sufficient workforce before it can offer flights. Unlike other modes of transport, airlines have no alternative source of energy.

* Switching cost: The bargaining power of the aircraft manufacturers owing to switching cost is high. This is because the airlines must enter into contracts when buying or leasing aircraft from suppliers. Breaking these contracts can often imply a heavy financial cost.

* Importance of Quality: In an industry where reliability and safety are critical, the quality of the planes and their maintenance are highly important; this factor leads to high supplier power.

* Forward Integration: Supplier power is restricted by the improbability of these suppliers integrating forwards into the airline business.

* Dependence on industry for revenue: Although the aircraft manufacturing companies like Boeing have alternative sources of revenue, notably defence aerospace, civil aviation remains a very significant part of their business, thereby restricting their bargaining power to some extent.

The Power of Buyers (MODERATE TO HIGH)

BUYERS - PRIMARILY INDIVIDUAL CONSUMERS PURCHASING FLIGHTS DIRECTLY FROM THE AIRLINE. SOME B2B SALES TO CHARTER COMPANIES, DISCOUNTERS, AND SIMILAR BUYERS.

* Price sensitivity: Price sensitivity is high; a result of factors, such as, the growth of online price comparison sites, corporate travel expense policies etc. This tends to strengthen buyer power in the airlines market.

* Switching Costs: The inherent switching costs for buyers in the airline market are negligible, which strengthens buyer power. In response, airlines could use loyalty schemes, such as flyer miles.The air miles lost should a buyer choose to travel with another airline can be viewed as a switching cost. However, this does not work well in the low-cost carrier segment and hence very few companies in this segment offer such programs.

* Differentiation in Product: The airlines in this segment can't much differentiate in their product offering by differentiating in their services, owing to the cost constraints

* Buyer Size: The power of buyers, owing to size and volumes, is low because they are large in number and highly fragmented.

* Backward Integration: Where the buyers are individual travellers, there is no opportunity for them to integrate backwards or for the airlines to integrate forwards; however, vertical integration is more feasible between airlines and companies such as travel agents.

Rivalry among Existing Competitors (STRONG)

The competition in the industry in high but the intensity of the competition has been reduced as it is an expanding market.

* Number of Players and size of players: The competitive landscape in India has several large companies alongside smaller competitors. The number of airlines is increasing which increases the level of competition among airlines.

* Exit Barriers: Exit costs are moderate. Planes are important assets with a high purchase price, which depreciate in value with time and require frequent maintenance expenses. The difference between the outlay on them and the amount they can be sold for represents a sunk cost for an airline exiting the market. However, they are mobile. If conditions become tough in the Indian airlines market, a carrier that wishes to exit is not obliged to try to sell these assets where other companies are trying to do the same thing. It could sell them in a location where there is high demand for second-hand planes. However, the airline industry is quite labour-intensive; thus large numbers of employees may need to be offered severance pay should a company lay them off on exiting this market.

* Switching Cost: Switching

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