Five Forces in the Airlines

Five Forces in the Airlines Industry

Airlines Industry Five Forces Analysis

Southwest Airlines is the discount carrier I've chosen for this analysis and U.S. Airways/America West as the legacy carrier. The intent of this analysis is to provide insights into how each of these types of carriers has been able to anticipate and respond to the industries' significant challenges.

Rivalry among Firms - Defines the ability of firms to compete effectively both against each other, substitutes, and broader economic trends like the price of jet fuel for example.

Discount Carrier Response:

Cost structure based on standardizing on a single airline type has significant savings in maintenance, repair, and overhaul tasks.

Southwest is well positioned to complete share buy-backs to further strengthen their stock price and drive up Return on Equity, giving them freedom for future capitalization.

Use route optimization planning to find those routes they have not yet penetrated and move to those markets quickly. Markets include Philadelphia and Washington Dulles for example.

Legacy Carrier Response:

Either partner with low-cost carriers and do code sharing flights as part of an alliance or trim back flights to only the ones where there is high differentiation.

Spend heavily on price and selling optimization technologies that are unproven in the market.

Continue looking to alliances including Star Alliance specifically to get cross-selling potential customers.

Bargaining Power of Suppliers - This factor measures the relative strength of the suppliers that the carriers partner with to continue operations. Suppliers for aircraft, maintenance, repair, and overhaul, and consumables including fuel are included in this influential group of stakeholders in the companies.

Discount Carrier Response:

Prudent strategy of buying fuel futures in 2005 anticipating higher oil costs has preserved profitability for Southwest Airlines.

High asset efficiency gives Southwest bargaining power with Boeing, their only jet supplier, for parts and maintenance.

Dwindling oil future options in the next four years are making Southwest push their Return on Assets strategies more aggressively than before.

Legacy Carrier Response:

Asking for concessions from suppliers to avoid bankruptcy.

Curtailing employee raises and bonuses with resulting quick drop in morale.

Bargaining Power of Customers - The price elasticity of demand, relative levels of usage and capacity growth, and the development of new routes are all indicators of the bargaining power of customers.

Discount Carrier Response:

No-nonsense loyalty programs that are easy to understand an accumulate flights using.

Low-price leader with room to move up-market when it chooses to most likely on exclusive flight routes they alone offer.

Legacy Carrier Response:

Customer loyalty from years of traveling continues 10% of total traffic; not enough to propel the company into profitability.

Regional route strategies focused more on price protection vs. price competition relative to competitors.

Threat of New Entry - This is the factor in the five forces analysis that illustrates the threat of new competitors entering the markets served by both discount and legacy carriers. Examples of this would be the low-cost jet taxi services based on Eclipse Aviation's smaller and more fuel-efficient jet.

Discount Carrier Response:

Competitiveness in routes on price and availability of flights challenges the entrance of low-price competitors.

Low-cost, highly verticalized air carriers tend to focus and excel on one specific geography, as Southwest does in the U.S. And Ryan Air, Berlin Air, and others do in Europe, and JetStar in Australia.

Legacy Carrier Response:

Battling new entrants by using aggressive pricing strategies only in attacked markets.

Relies on pricing exclusivity for those markets where it is the clear leader; this is the case for example between Santa Ana/John Wayne, California and Pittsburgh, PA where last minutes fares are over $3,000.

Threat of Substitutes - Defines the threat of companies either with comparable services or entirely new entrants coming into the market and disrupting pricing, service levels, or routes to their advantage.