Overview of the US Airline Industry

Began in the 1920’s, the US Airline Industry started by offering mail services. In 1939, the mail services were extended to small western Ohio and Pennsylvania communities where the services of the flying post office were implemented. The transition from airmail to passenger service began in 1949 through the introduction of the DC-3. Currently, the United States airways operate domestic routes and widespread internationally with almost 200 destinations of Europe, the Middle East, South America and North America (Aguirregabiria & Ho, 2012 p.167)

According to Prince and Simon (2009 p.338) the 9/11 attack aftermath left an impact that was great on the US Airline Industry. The recession that was prolonged, oil prices fluctuations, a global slowdown which is consistent and other devastating influences are affecting the US Airline Industry growth. The US Airline Industry has to cope with soaring maintenance and operating costs, unionization, labor demands, stiff competition from low-cost airliners, high prices of fuel and declining passengers. In addition, terrorism events which are occurring throughout the US Airline Industry have had adverse effects on the industry.

The competition in the US Airline Industry is high among the key players in the industry. The US Airline Industry is consolidated, with barriers to exit and fixed costs being high. In addition, there is minimum differentiation of the product offered in the US Airline Industry (Goll, Brown & Rasheed, 2008 p.203). Over the past few years, mega-mergers between American/US Airways, Continental/United and Delta/Northwest have led to the consolidation of the US Airline Industry have intensified the rivalry among existing competitors. The three major firms battle intensity over the time-oriented business traveler looking for convenience. On the other hand, the smaller carriers like Allegiant, Southwest and Jet Blue battle over the leisure traveler who is price sensitive. Long lease agreements with airports and large investment in equipment have increased the barriers to exit which has made the firms more likely to battle for the market share instead of cooperating and backing up the industry together.

Research by Rhoades and Waguespack (2008 p.27) shows that the US Airline Industry has 80% of fixed costs which are high which have made it one of the worst performer of the net operating margin against other industries. The high fixed costs structure has increased rivalry in the US Airline Industry, therefore, making the airlines to invest more in the development of tools for the maximization of capacity utilization. Airbus and Boeing which are the only two global aircraft manufacturers which have led to the differentiation between the products that are offered by competitors being low. Therefore, the factors have left firms to differentiate via services including in-flight services, baggage check, boarding and booking.

The US Airline Industry has a low threat to new entrants in the industry. The high entry barriers have made it challenging for new firms to enter into the US Airline Industry. However, there are two factors which have raised the threat. First, customers have a low switching cost which has made the market entry increasingly lucrative to external firms. Secondly, the lack of technology and product differentiation has adversely affected the US Airline Industry. Planes are manufactured by either Airbus or Boeing thus customers do not experience any difference while traveling by Southwest’s 747 or the United’s 747 (Tsoukalas, Belobaba & Swelbar, 2008 p.186).

Analysis

Although there are low switching costs, the high prices of tickets influence customers to be more loyal to a particular brand, thus opting to purchase from companies they trust and recognize. In addition, hub creation has forced regional carriers to invest in operating out of domestic airports that are smaller. The cutting off of access to the large distribution networks has caused regional carriers to either pay an extremely high cost for gate leasing or either operate out of small regional airports. The control of Delta over Atlanta and the control of the United over Denver are good examples of how national carriers have forced small carriers out by dominating regions. Further research by Borenstein (2017 p.8) shows that high requirements of capital and scale economies are also required to adequately access the market, with the cost of establishing one hub being very high while most national carriers have multiple hubs across the country. The Open Skies Agreement has also emphasized the need for large-scale economies.

The threat of substitute products/services in the US Airline Industry is low when referring to long haul and medium flights. Multiple substitutes exist in the US Airline Industry including Southwest Airlines, Jet Blue, AirTran Airways, and Virgin America and customers have the discretion of choosing other transport methods including train, bus or car. However, the transportation means are likely to be more costly than buying a plane ticket especially in terms of time which have made plans to be the most time efficient mode of transport. Time, rather than cost, is important for business people who are traveling hence the threat of this type of substitute is low. However, short-haul flights are susceptible to substitutes.

Supplier power in the US Airline Industry is moderate, with the main factor being that there are only Airbus and Boeing as the only global suppliers. Since there is no alternative supplier, the US Airline Industry becomes more susceptible to increased costs and maximization of profits by Airbus and Boeing (Dai, Liu & Serfes 2014 p.166). However, airplane manufacturers only serve government contracts and commercial airlines. Therefore, they have a vested interest in the success of airlines, hence there is little threat in the supplier forward integration.

There is moderate buyer power in the US Airline Industry. Price wars between competitors, low switching cost and low levels of product differentiation give buyers strong influence over services and products. Although buyers have strength in the offering of services/products, different sets of customers exist; travelers from city to city and travelers from rural areas to cities. The city to city travelers have diverse choices in the airline they wish to use which has a stronger influence on the US Airline Industry while the rural to city travelers have fewer choices thus having low influence in the industry (Puller & Taylor, 2012 p.807).

The following diagram summarizes the five forces analysis of the US Airline Industry:

The threat of new entrants · the low threat to new entrants in the industry · customers have a low switching cost · lack of technology and product differentiation	The threat of substitute product/service · Low threat of substitute products · most time-efficient mode of transport	Power of suppliers · Supplier power in the US Airline Industry is moderate · Airbus and Boeing are the only global suppliers · US Airline Industry becomes more susceptible to increased costs
Power of customers · moderate buyer power in the US Airline Industry · Price wars between competitors, low switching cost and low levels of product differentiation give buyers strong influence over services and products	Industry rivalry · mega-mergers between American/US Airways, Continental/United and Delta/Northwest · low-cost budget carriers entering the industry, including Southwest Airlines, Jet Blue, AirTran Airways, and Virgin America · major firms battle intensity over the time-oriented business traveler looking for convenience · smaller carriers like Allegiant, Southwest and Jet Blue battle over the leisure traveler who is price sensitive

Five forces analytical tool helps the US airlines to understand competitive forces and their original causes that reveal the foundation of the industry profitability. Furthermore, the five forces analytical tool is simple and provides understandable way of market forces research. Further research by Malerba and Adams (2014 p.183) indicated that porter’s five forces also provide a picture of the important activities. Therefore, the model helps US airline to describe all the activities taking place from supplier to consumer through the company.

Economic Performance of the US Airline Industry

The five force analytical tool provides useful information for planning that take place in the industry. In addition, the model helps in determination of industry attractiveness, decision of entering and leaving the market and provides a comparison between the impact of the competitive forces and rivals impacts. Importantly, the model assists the company to come up with strategies for improving competitive forces.

The believe that the industrial structures are determined by external forces leaves the organization on dilemma of whether the decisions made by the US Airlines are accurate. The model is static and not all changes that occur in the industry can be recorded furthermore, the model is believed to ignore human aspect of strategy. According to Buhalis and Law (2008 p.609) the five forces analytical tool is of limited values as it cannot represent more than a constantly changing situation. Therefore, US airline managers cannot repeat regularly industry analysis and pay maximum attention to all changes in competition forces. Furthermore, through this analytical tool, the difference between the US Airline and individual is ignored as the industry is given too much focused.

The five forces analytical tool also focuses so much on external environment rather than internal resources. In addition, the model is considered outdated and was founded under situations of 1980’s. The steady market structures, cyclical developments and strong competition are for this time. Currently, the e-business application, internet and technologies are used in all business and therefore the method of not appropriate for explicating modern industry structure.

Discussiona. Interpretation of ResultsFrom the analysis, it is clear that Airline industry operates under oligopoly market structure. According to Naik, Prasad and Sethi (2008 P.109) oligopoly markets occurs in a situation whereby the markets are controlled by a small group of firms. With the oligopoly market structure, the competition is very high with key aircraft manufacturers setting conditions for quality and prices. The industry enjoys low bargaining power of customers due to lack of direct contact with airline sellers as customer’s book their tickets in travel agencies or the Internet. Therefore, the low entrant of new products in the market means the industry has a high competition advantages over the rivalries. The low threats of substitute mean the industry controls the quality and prices. Low switches costs clearly indicates that the degree of customer loyalty is very high. The merging, acquisition and low budgets in the industry operations means the rivalry between the firms is relatively low and therefore key players dominate the industry and small firms are struggling to survive. With industry having Being and Airbus as suppliers, the industry incurs high costs when ordering for products.b. Strategies for Airline ProfitabilityUS Airline adopts porter’s Generic strategies to determine its profitability. The porter’s Generic strategies are commonly used by the business to maintain and achieve competitive advantage. The three types of strategies in porter’s generic include focus strategy, cost leaderships and product differentiation. The commonly used strategies by US airline include differentiation and merging and acquisition strategies. According to Animesh, Viswanathan and Agarwal (2011 p.153) differentiation strategy is a strategy that differentiates an organization from others in the same industry. US Airline industry develops this strategy by introducing new services and products which are unique and valued by customers. Furthermore, the strategy has been able to meet a specific customer demands. Despite US airline being expensive, their uniqueness in products and services have maintain customer loyalty.

Conclusion

The US airline industry functions under oligopoly structure. The industry is very competitive with a high number of new entrants venturing into the market every day. The number of new entrants in the industry is increasing significantly. In order for new entrants to succeed in the competitive environment, they have merged with key players in the industry. Although the strategy is successful, the profits are slightly low as per organizational expectation. The five-force analysis of US Airlines has shown that the industry has low switching costs, the levels of product differentiations are quit low and the supplying power of suppliers is moderate with Boeing and Airbus being the only suppliers. Entrant of new product and availability of substitutes are greatest five forces that influence US airlines. The rivalry between the companies is moderate as the nature of market accommodates small firms. The global recession has been linked with reduction of revenues in the airline industry. Many carriers have taken and adopted several measures in order to survive in tough crisis times. The companies need to offer differentiated products and services like Jet blue that is unique and niche

The US airlines needs to do more than just merging with other companies in order to survive the rapid competition which is experienced in the airline industry. The industry should consider supporting and improving creativity and innovation.  The products should be differentiated in a way that could facilitate airline carrier to avoid head-to-head price competition and further increases it equilibrium prices. Furthermore, the airline industry should also implement antitrust laws that are essential in promoting the companies and the industry at large. In addition, with adherence to antitrust law, alliances and mergers by large couriers will be blocked for prevention of artificial barriers to artificial competition and further take actions against predatory practices to ensure competition functions effectively. The US airline should also focus on the economies of scale and cost efficiencies by exploring new routes in order to make sure that average costs does not exceed marginal costs. Generally, for the industry should have a significant competitive edge for long-term survival. US airlines should continue consolidating through merging and acquisition that will enable the airline to enjoy great synergies like keeping airfares stable, critical mass or greater customer base, economic of scales, and economic efficiency.

References

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Animesh, A., Viswanathan, S. and Agarwal, R., 2011. Competing “creatively” in sponsored search markets: The effect of rank, differentiation strategy, and competition on performance. Information Systems Research, 22(1), pp.153-169.

Borenstein, S., 2017. The evolution of US airline competition. In Low Cost Carriers (pp. 1-31). Routledge.

Buhalis, D. and Law, R., 2008. Progress in information technology and tourism management: 20 years on and 10 years after the Internet—The state of eTourism research. Tourism management, 29(4), pp.609-623.

Dai, M., Liu, Q. and Serfes, K., 2014. Is the effect of competition on price dispersion nonmonotonic? Evidence from the US airline industry. Review of Economics and Statistics, 96(1), pp.161-170.

Goll, I., Brown Johnson, N. and Rasheed, A.A., 2008. Top management team demographic characteristics, business strategy, and firm performance in the US airline industry: The role of managerial discretion. Management Decision, 46(2), pp.201-222.

Malerba, F. and Adams, P., 2014. Sectoral systems of innovation. The Oxford Handbook of Innovation, vol, pp.183-203.

Naik, P.A., Prasad, A. and Sethi, S.P., 2008. Building brand awareness in dynamic oligopoly markets. Management Science, 54(1), pp.129-138.

Prince, J.T. and Simon, D.H., 2009. Multimarket contact and service quality: Evidence from on-time performance in the US airline industry. Academy of Management Journal, 52(2), pp.336-354.

Puller, S.L. and Taylor, L.M., 2012. Price discrimination by day-of-week of purchase: Evidence from the US airline industry. Journal of Economic Behavior & Organization, 84(3), pp.801-812.

Rhoades, D.L. and Waguespack Jr, B., 2008. Twenty years of service quality performance in the US airline industry. Managing Service Quality: An International Journal, 18(1), pp.20-33.

Tsoukalas, G., Belobaba, P. and Swelbar, W., 2008. Cost convergence in the US airline industry: An analysis of unit costs 1995–2006. Journal of Air Transport Management, 14(4), pp.179-187.