Question

Discuss Porter’s five forces model with reference to the U.S airline industry. What does the model tell you about the level of competition in this industry?

Answer 1

Porter's Five Force model can be described as follows-

Competitor Rivalry

• Due to various cost constraints, the flexibility of competition between two stakeholders are very limited. They have to compete on the basis of Brand Perception and fringe benefits.
• Strict regulatory guidelines forces the competitors to improve upon their operations and thus, creating a favorable process benefiting its market position.
• With a clearly segmented customer base, the competitors have a right to choose their set of target segment and hence, structuring their offerings accordingly.

Supplier Power

• The aircraft manufacturers have established a closely knit cartel, thus providing them with ultimate provision to fix price according to themselves and hence providing them with high bargaining power.
• Human Resource suppliers also enjoys greater say as the skill set required by this industry (like Pilot, etc) is very rarely available.
• The Fuel and other facilities are also priced at frequently changing market rates and the industry doesn't have any say in that.

Buyer Power

• The switching cost of buyers are every low and thus, extra efforts are required to maintain a continuous loyalty towards the brand.
• All the service offering provided in this industry have very low differentiation factor due to the heavy cost constraints.
• The Volume of purchase is too low, hence the bargaining power of the customers are also very limited.

Threat of New Entrant

• Due to the high capital investment and amount of paperwork required, the entry and exit barriers are too high. Thus providing assurance to the present competitors about having any losses due to new entrant.
• This industry requires a lot of optimization and enhancement to be undertaken so as to increase the profitability quotient. Therefore an established player enjoys greater leverage over the the new market player

Threat of Substitution

• Flight has been a substitute for the slower means of communication like roadways and railways. Thus, they face very low probability of counter-substitution from these industries.
• Travel are mostly done due to necessity and hence, substitution by leisure places and amusement parks provide a limited scope against the air travel offering.

The Model says that the industry dynamics is greatly determined from the strategies implemented by the competitors and the suppliers. This can be well substantiated by understanding the bargaining power of these two players. On the other hand, low bargaining power of the consumers provides inference that they play lowest role in deciding the industry dynamics. Last but not the least, due to the high entry-exit barriers and low substitute risk, the competition in this industry is very stable and very predictable, which is a desirable feature.

Please Like & Provide your reviews in comments. :-)