Analysis of the US Airline Industry, Research Paper Example

Introduction

Overview of product/industry/market

The focus will be on the airline industry. Airlines provide transportation services for people and goods (commonly referred to as freight) from one place to another using predetermined and regular routes. Airplanes and helicopters are used for transport purposes. Airplanes are favored because they can carry many people, travel faster, and are more economical. This industry is a testament to man’s desire to fly. Each country in the world has its airline to allow connectedness with the outside world. It is the easiest way for goods and people to move into and out of a country.

Motivation for analyzing this product/industry/market

The airline industry has always fascinated me because of the complexities involved in running the freight and passenger divisions. It has long been my view that airlines always have a steady stream of customers. Yet, so many of them struggle to do well and perform against their competitors. An analysis of the factors that are required for success in this industry is required to come up with valid answers. Another issue that is of concern to me is the monopoly that the big four airline companies have on this market. Southwest Airlines, Delta Airlines, American Airlines, and others have a tight grasp on the industry as they have more than 80% of the customer share in the United States.

Overview of chronological development of product/industry/market

Balloons began being used by the military in the war at the end of the 18^th century. The next major breakthrough happened in 1903, where the Wright Brothers flew the first plane. It ushered in a new era of flying, which dominated world wars. This means that advancements in engine technology and the efficiency of aerodynamics led to a rise in the industry. The first airplane with a tail was made in 1909,  and this would be the blueprint used to this day. After World War II, jet engines were reduced, and they increased the stealth of the military operations. The focus shifted to the efficient delivery of weapons systems. Air combat became emphasized, and large-scale attacks were the target. As well, the use of more flexible aircraft that could allow infiltration into enemy lines was done. Then came the digital age from the early 1980s. Emphasis shifted from the military tactics, speed, and destructive ability of the aircraft to the commercial uses. In this case, the design of the airplanes and the use of more efficient manufacturing processes were important. Commercial airline companies were established to allow the movement of people across countries and continents. The number of airlines has increased across America and all over the world. The emphasis during the 21^st century has to do with the fuel economy and innovations that lead to savings.

Overview of Porter’s Five Forces

Nature of rivalry

Airline companies have to know whom they are competing against. They can do this by conducting an extensive analysis of their rivals to determine what they are up against, enabling them to adjust to the competition and be well-positioned to take advantage of any mistakes made by their rival companies. In essence, if the competition is fierce, then a price war occurs. These companies will battle it out to determine who will be the leaders and thus, make the profits and who will be the losers. This is how monopolies operate.

Entry costs/barriers

The airline industry has steep barriers to new entrants. This has to do with the large number of resources needed to set up the company. Buying aircraft proves to be a significant task, ranging from $12 million to as much as $320 million. Fuel prices are an important part of the business. This is because aviation fuel is known to fluctuate drastically in price. New airlines also need to look for new pilots who need to be experienced to provide the required quality flights that customers expect. Hence, the entry barrier in this industry is very steep, permitting only a small subset of people and companies who have access to such resources to dominate.

Substitutes

Airlines produce goods for which there is no replica or substitute in the space in which they operate; hence, they have a competitive advantage (Bruijl 7). There are other forms of transport such as cars, trains, and ships, but they do not allow fast movement from place to place. It would be impractical to travel from Europe to America using a vehicle. On the other hand, ships can serve this purpose, but they are not as fast and are limited to the sea. The airlines can, therefore, charge a premium for this increased convenience.

Power of suppliers

Every airline company relies on three major inputs for it to operate. These are labor, aircraft, and aviation fuel. The companies are at a disadvantage since all of these factors are determined by the external environment, making airlines powerless in the face of their suppliers. Their bargaining power is significantly reduced. To illustrate this, people who work at airports are all organized into trade unions and organizations. They can strike/boycott, halting operations at the airline company. This leads to huge losses, and the demands of the unions are usually met. As well, aircraft are made by two companies, Boeing and Airbus, which determine the prices in the marketplace.

Bargaining power of buyers

Customers for the airline companies are the people who get on board the passenger airplanes and the goods that are carried by the cargo planes. These people have the ability to make their choices about the choice of an airline that they want. Customers can switch from one airline to another at a bare minimum. The power of the buyer, in this case, is also high.

Government regulations

The airline industry is tightly regulated by the government. This is done through the Department of Transport, which does oversight of the industry. The airplane carriers, for instance, are not allowed to exit the industry until they can substantially prove their bankruptcy situation. The government also requires airlines to conduct regular investigations into the safety of their aircraft.

Narrow analysis

The analysis will be done on the major airline companies as they meet more than 80% of the air transport needs of the people in America. The focus will be done on what makes these companies become dominant in their specific niches.

Organization of the paper

The paper is made up of an introduction that provides a brief overview of the topic to get the reader acquainted with the airline industry. Next, it is the market background section that focuses on aspects of the product provided by airline companies, the innovations,  government regulations, and demand. The last section involves an in-depth analysis of porter’s five forces and how this relates to the major airline companies

Product/Industry/Market Background

Product nature

Basic characterization of the product

The aviation industry provides air transport to people and goods in need of transportation services to reach their destinations. It is not limited to people only, but also goods are transported. This is a valuable service that customers get as air transport is safer, faster, and more reliable than other transport forms. It also has the main selling proposition of making long-distance traveling easy. These customers pay for this service, resulting in the operational profitability of the company.

What is the product used for? One or multiple uses?

Airline companies provide transport, which allows the movement of people and goods to their destinations. Apart from this, there is the company website that allows customers to conveniently book their flights at the times they want, which is also a product of airline companies. Additionally, the maintenance systems for airplanes are also great products by the company. They ensure that passengers are safe on their journey. The system that monitors the progress of each flight and schedules the next flights to coincide with the customer’s ticket is also a product that airline companies provide. They all have the same common denominator of providing value to the customers.

Homogeneous or heterogeneous?

The product is heterogeneous as the transportation feature differs from company to company. The price points of these products vary markedly from one airline company to another. As well, these companies have differences based on the quality of their customer service and the reliability of their flights in terms of strict arrival times and the damage goods are exposed to.

Firms that make the product

Number, market size

In 2018, there were 58 airlines in the United States. Of this number, 27 were classified as major airlines. This is because they had revenues of over $1 billion. The combined total revenues from the sector in 2018 were $239.8 billion. The biggest one is the American Airlines Group that had a revenue of $44.54 billion in 2018. This is followed closely behind by Delta Airways Group that had a revenue of $44.438 billion in 2018. The third-ranking company is United Continental Holdings that had a revenue of $38.2 billion, which is then followed by Southwest Airlines with a revenue of $21.2 billion.

HHI

Airline companies have an HHI index of 1712. This shows the market is not intensely competitive. Doing business is favorable, as companies that want to charge high prices for providing superior services can do so.

Entry and Exit

The exit of an airline from the market can be caused by many factors. Terrorism, for instance, makes people afraid and less willing to travel by air as the assailants usually target aircraft. In addition, increased competition leads to the bankruptcy of some airline companies. The competition usually comes from better-organized companies that address the needs of customers and grab a sizable market share. This leads to the exit of other companies if they do not adjust their operations and increase their competitiveness. Another factor is the occurrence of bad economic conditions.

On the other hand, starting a new airline company or acquiring an existing one is very costly, which reduces the number of entrants. There is a high initial cost required to purchase an airplane. A company needs lots of money to break into the airline space. There also are well-established companies, which act as a deterrent against any new entrant. The entry into this space also requires proper staffing, especially of important positions such as the pilots. Getting talented personnel in these positions is a challenge. Fuel accounts for over 50% of an airline company’s costs. Without proper guidance and oversight of fluctuations in the global market, new entrants are prone to make mistakes that cost them much money. In extreme cases, it may cost them their business. Additionally, government regulations are strict in the way they choose the number of companies that are allowed to operate within the airline sector.

Merger history

Mergers have been a mainstay of how US airline companies adjust to the changing times. This is usually done so that companies can gain sizeable shares and experience the benefits of sharing resources (Asahi 10). A noticeable merger is the one between US Airways and American Airlines to become the American Airline Group. This happened back in 2013, and it solidified the company as the largest airline in the world. Also, prominence involved the coming together of Delta Airlines and Northeast Airlines to form Delta Airlines in 1986. Other mergers include United Airlines/Continental Airlines to form United Airlines in 2010 and FedEx/TNT Express to form FedEx in 2016. Merger deals in the United States airline industry have been used to consolidate the position of the companies involved or fend off competitors.

History of Collusion

Collusions

Industry giants have been colluding on several occasions. Reports were that the big four companies, American, Delta, Southwest, and United Airlines, have been in a coordinated effort to increase the prices of their products. This was also meant to bring down the lesser competitors. The claims being made were that the airlines signaled to each other how rapidly they would make additions to the number of seats on their airplanes, make new flights and routes. The Department of Transport sent letters to the airlines demanding to get access to all of their communication with one another. The implications for the companies were combined, and they owned more than 80% of the flights in the US. They also made efforts to slow down economic growth, enabling them to command higher prices. They also squashed most of the threatening companies through acquisitions. Customers are paying sky-rocket prices for their tickets as they have no alternative. The burden to consumers is increasing while the profits of these big airlines still increase. These big players are concerned with preserving and solidifying their market positions. They collaborate with one another as a result. It will be difficult to prevent such instances from happening, as collusion is already entrenched in this industry.

For these producers in this product elsewhere

Some airline companies have also been involved in the collusion to control the price set by other smaller airline companies. This allows them to determine the prices in the market without any evidence being traced back to them. This can also be done through the subsidiaries that these companies own.

Porter’s Five Forces

Nature of rivalry

The US airline industry is characterized by high competition due to the existence of many well-organized companies. There are many airlines out there, such as Delta Airlines, Continental Airlines, and United Airlines. There has also been the entry of low-cost carriers who can operate on lower budgets than normal airlines. It is because they are very well run in terms of managing costs and being as economical as possible. Competition of this level only serves to drive down prices of the tickets. The companies thus have a lower operating margin. Further, the airline industry is marked by tight regulation by the government. This regulation insists that they place the safety of their passengers at the forefront of the list of priorities. It makes it hard to make profits as most of the money is reinvested in making airlines safer. In essence, there is intense competition and rivalry in the US airline market.

Entry costs/barriers

The airline industry is associated with a high initial capital investment before a business can commence. Airports need complex infrastructure, for example, buildings and aircraft, before one can go into that business. Also costly are the systems that facilitate the smooth operation of airports. This makes the entry cost significantly high. Similarly, for the airline operators to go out of business, they need to write off massive losses for both the shareholders and the company management. Many assets are likely to get lost. As such, the US government does not allow airlines to liquidate themselves unless there is reason to warrant irreparable damage to the business. Hence, the exit costs are also high. This high ratio of both the entry and exit barriers makes the business attractive

Bargaining power of suppliers (factor inputs)

Airline companies rely on three major inputs for them to run. These include labor, aircraft, and aviation fuel. This places companies at a disadvantage since all of these factors are determined by the external environment. It makes airlines powerless in the face of their suppliers. Their bargaining power is significantly reduced. To illustrate this, people that work at airports are all organized into trade unions and organizations. They can strike, halting operations at the airline company. This leads to huge losses, and the demands of the unions are usually met. In addition, aircraft are made by two companies, Boeing and Airbus, which determine the prices in the marketplace. Lastly, the price of fuel is dependent on global oil prices. This value fluctuates drastically; these companies can only hope for the best. The power of the suppliers is high in the airline industry, making this position unfavorable.

Substitute products

The US airline industry is not burdened by the threat of alternative transport methods. Other transport methods such as roads and rail only occur on land limiting the places they can reach, not to mention being slower. Airplanes offer convenience in terms of comfort and uninterrupted flights. They also have the advantage and reliability of following a particular schedule. This makes arriving early very important, especially to the business people who operate on a tight time schedule.

Power of buyers

There are a variety of airline companies in the market. This is advantageous to the customers as they can choose the company that best addresses their needs. This list of options to choose from has undoubtedly made the buyer powerful. Customers can switch from one airline to another at a bare minimum. The power of the buyer, in this case, is also high.

Government regulations

The US government is invested in the aviation industry. US Department of Transport oversees this function. It monitors all of the aspects of the airline industry, including carriers, pilots, and their equipment. For example, it does not allow airlines to declare they are exiting from the business. The government also places its priority on ensuring the safety of people who are boarding the planes.

Narrow Analysis

Airlines need to be aware of their competitive situations. This will allow them to adjust their positions to suit the business needs better.

Conclusion

Companies need to be competitive. It ensures they gain a market share that supports the running of activities. Potter’s five strategies for gaining competitive advantage are key to the performance of a company. The assessment into each of the five forces described by Porter helps companies to be successful in the long run. Airline companies operate in a moderately competitive environment. They are required to be adaptable to compete favorably.

Paper review

The paper does an in-depth analysis of the US airline industry. This is an important sector of the economy, with revenues exceeding $1 trillion annually. Airline companies perform in different ways, which can be traced back to their operational efficiencies and metrics. Also important are Potter’s five forces of competitive analysis. Airlines provide a good study opportunity because of the many companies that are involved. They also compete on a global scale with other international airlines, making their operations complex.

Findings

The airline industry is characterized by a high entry cost, as well as exit cost. This makes the industry attractive. It also has demand throughout the year with no significant downtimes. There are many established players in this sector. New entrants must be wise to learn from the industry veterans.

Potential further research at a later date

A case study can be done for one of the airline companies. Southwest Airlines, in particular, interests me because of its low-cost strategy. It beats the industrial metrics by succeeding in using this strategy. In addition, international airlines can also be compared to domestic US airlines.

Works Cited

Asahi, Ryota. “Multimarket Contact and Mergers and Acquisitions: The Cases of Southwest Airlines and AirTran Airways in the US Airline Industry.” Global Journal of Management and Business Research (2017).

Batouei, Amir, et al. “Flight anxiety: investigating the role of airline service quality and flight crew’s competence.” Asia Pacific Journal of Tourism Research 24.7 (2019): 710-724.

Bruijl, Gerard H. Th. “The relevance of Porter’s five forces in today’s innovative and changing business environment.” Available at SSRN 3192207 (2018).

Llerena, Patrick, and Valentine Millot. “Are two better than one? Modelling the complementarity between patents and trademarks across industries.” Industry and Innovation 27.1-2 (2020): 52-79.

Yong, Xu, Xu Jianbin, and Bai Yu. “A study on the factors about customers’ acceptability to airline ancillary products.” Procedia Computer Science 107 (2017): 39-46.