There is a fierce competition between companies to gain a loyal consumer base. In addition, prices differ between competitors and new entrants who are trying to grow by using lower prices, such as Southwest Airlines and JetBlue Airlines. Money is being invested into marketing and loyalty programs to secure positions and remain competitive. The U. S. airlines industry is in a growth stage and this will continue after the effects of the terrorist attacks in 2001 begin to fade. Porter’s Five Forces Analysis:
Bargaining Power of Suppliers (high): Since there are only two main suppliers, it is relatively easy for them to compete directly with each other. This is because they are both in a fierce rivalry to gain and maintain more business from airlines. If an airline chooses only one of the two then the supplier may have some leverage due to switching costs. Threat of New Entrants (low): There are supply-side economics of scale in the airline industry, with high fixed costs needed for purchase or lease of passenger aircrafts.
These fixed costs can be spread over larger volumes of customers, meaning a higher load factor with more flights by existing airlines allows them an advantage over new entrants, who would need to first provide a significant upfront investment. Bargaining Power of Buyers: (high) There is bargaining power for buyers in air transport as they push to receive the best service at the lowest cost. With consumers being able to readily compare prices through the internet, they are able to make more informed purchasing decisions.
A major reason for JetBlue’s success was due to the lower prices with increased technology and comfort. Buyers face no costs in switching airlines and the end result is still air transport. Southwest Airlines capitalized on the low cost air travel idea and profited. Rivalry Among Existing Competitors: (high) There is rivalry in the U. S. airlines industry with the major companies that are almost equal in size competing for business through the use of service improvements and advertisements, as well as discounting.
Fixed costs are high and thus volume of customers lower the per-unit price of travel. Exit barriers are also high, with heavy investment upfront companies may choose to stay earning low or negative returns. There are low costs to switch, companies like Southwest airlines and JetBlue take business away from major airlines. Threat of Substitutes: (low) There are substitutes to the airline industry such as automobiles, buses, and railroads but these substitutes become almost irrelevant when looking at routes over 600 miles long for customers.
Summary Currently, the U. S. airline industry contains high rivalry among existing firms, where buyers having high bargaining power. These forces are all working against profitability with price competition between firms competing for customers. The positives of the industry include a low threat of entrants and low threat of substitutes. In conclusion, it is difficult to compete and above average returns is scarce. Profitability is hindered among existing competitors.