Question

Discuss competitive rivalry in the Airline Industry? Why do many of the companies in the industry suffer from low performance?

Answer 1

Competitive Rivalry In The Airline Industry

Competitive rivalry is quite high and intense in the airline industry. Companies make heavy investments to enter the industry and the fixed as well as variable costs are substantial. The switching cost of customers moving from one company to another is low and comparable benefits are offered by all the airlines, which increases competition. The industry is currently in a mature business cycle stage where the number of competitors will stay the same for a long and reasonable amount of time and will not be over or under capacitated. Further, because of high fixed costs and even loans involved, it is not easy for any company to leave the industry. In most cases, there would be long term loans and financial agreements to comply with. The products and services involved in the industry are also quite complex. A firm may not like to lose any chance after putting in so much of efforts and investments, and after gaining the expertise and complexity.

However, the competitive rivalry in the airline industry also lessens due to certain factors. One of these is the brand identities of the many airline operators, which are quite unique. For instance, Southwest Airlines is known for offering the lowest prices for the tickets, while JetBlue is known more for its amenities. Because of the huge investment required and due to the complexity of operations, the threat posed by new entrants is also lesser. The industry is also essential for many different professionals, personal, and business reasons and hence can be termed as stable. While stability improves the prospects of business and profits, it also ensures that any capable business would like to enter this business segment. Also, the new technologies, the internet, and online travel agencies have made the industry even more profitable for businesses while also increasing competition.

We can also view the competitive rivalry in the airline industry based on the “Porter’s Five Forces” model.

The competitive rivalry among the sellers- airlines compete with each other on the basis of many different factors including prices, technology, flight entertainment, and customer services among others. The competition is intense and has the organizations focus less on expansion and more on increasing profitability.

New entrants- new entrants do not pose any significant threat to the existing players, because of the high cost required and the high complexity of operations.

Availability of substitutes- globalization has ensured that all the major carriers are now operating in many different countries. However, trains, buses, and other conveyance and transpiration modes pose a significant threat. Still, when it comes to international and long-range travel, there is no substitute for airlines.

Supplier power- power possessed by suppliers is immense in the airline industry. Aircraft are very pricey and there may be only two significant suppliers of airplanes today including Boeing and Airbus. Even if a small variation is made in the prices may cause significant losses for the airlines.

Bargaining power of buyers- individuals as well as organizations are the buyers who may not possess any significant power generally. Still, the switching costs are low and which increases competitive rivalry.

Reasons for Low Performance of Companies in Airlines Industry

Low performance is a critical and important issue affecting airlines. Many of the major airlines of the world including Delta, American Airlines, and United Airlines have faced bankruptcy and only mergers were able to save them. Many others were not so fortunate. Below are the reasons why most of the companies in the airline industry have low performance.

Critical Nature of operation and availability of support- in the era of liberalization and globalization, international air travel may not be important only commercially but also crucial for political and other reasons. Governments around the world provide the necessary credit and financial support and lifeline to the airlines to ensure that the service is available at all times. In these circumstances, the performance is not always a critical and important factor. For the commercial airlines, the companies are employing thousands of people, and vast amounts of shareholder and public monies are put into airlines. With so much at stake, the shareholders want to continue with them even in the face of losses, hoping for a better future. Hence, the perception that low-performing businesses would be forced out of the market may not apply fully to the airline industry.

Loans and High Costs- a commercial Jet may have a lifespan of around 25 to 30 years. The cost of these jets, as well as that of running the operations in the airline industry, is quite high. Most of the airlines are into heavy debts and procure a large amount of financial capital from banks and other financial institutions to acquire the place and to run the operations. There are usually long repayment schedules associated with these loans as well. Fuel prices have turned to be increasingly volatile in recent years and the payroll expenses are among the largest for airlines. The high-cost structure of the airline industry is also one of the reasons for low performance.

Demand affected by exogenous/sudden events- Any kind of exogenous and sudden event affects airlines, and these may include political instability, terrorism, or a pandemic such as a coronavirus. Demands turn to be very low and the performance reduces for an extended period of time.

Also, while all airlines like to cut costs, poor service, in convenient schedules, cramped seating, and long wait times for fulfilling security procedures make the industry and service less attractive to consumers. Many of these deficits cannot be improved upon due to circumstances and security and economic reasons. But for the consumer, the performance is not adequate.