Porter's Five Forces - the Airline Industry
Abstract
In this paper I will be analyzing the airline industry using Porter’s Five Forces. Porter’s Five Forces is a business management tool that allows firms to possess a clearer perception of the forces that shape the competitive environment of an industry, and to better understand what these forces indicate about profitability with regard to the microenvironment. The forces include Competitors, Threat of Entry, Substitutes, Suppliers, and Customers. When firms are able to widen their conception of competition beyond their direct competitors, and consider the broader economic fundamentals of their industry, they are able to form better strategy to better optimize their profitability. The airline industry is one characterized by low profitability, yet individual airlines are able to gain profits above the industry average through the consideration of Porter’s Five Forces. Competitors The most obvious force that impacts firms within the airline industry is the threat posed by rival airlines. The airline industry is characterized by a relatively high amount of rival firms, which creates an intense degree of rivalry between airlines. This rivalry is exacerbated by the microenvironment the airline industry finds itself in where competition is based almost entirely on price. This is due to the fact that all airlines offer essentially the same service to their customers and also by the fact that customers purchase flight tickets online. Customers that purchase tickets online are able to directly compare the prices of similar flights and will almost always purchase the cheapest available tickets. This causes airlines to have a limited capacity to differentiate themselves from rivals. All of these factors drives down the price of airline tickets and hinder profitability of airlines. An industry has a higher potential for profitability when firms vary in size. The manifestation of this desirable industry condition would dictate that there are
In this paper I will be analyzing the airline industry using Porter’s Five Forces. Porter’s Five Forces is a business management tool that allows firms to possess a clearer perception of the forces that shape the competitive environment of an industry, and to better understand what these forces indicate about profitability with regard to the microenvironment. The forces include Competitors, Threat of Entry, Substitutes, Suppliers, and Customers. When firms are able to widen their conception of competition beyond their direct competitors, and consider the broader economic fundamentals of their industry, they are able to form better strategy to better optimize their profitability. The airline industry is one characterized by low profitability, yet individual airlines are able to gain profits above the industry average through the consideration of Porter’s Five Forces. Competitors The most obvious force that impacts firms within the airline industry is the threat posed by rival airlines. The airline industry is characterized by a relatively high amount of rival firms, which creates an intense degree of rivalry between airlines. This rivalry is exacerbated by the microenvironment the airline industry finds itself in where competition is based almost entirely on price. This is due to the fact that all airlines offer essentially the same service to their customers and also by the fact that customers purchase flight tickets online. Customers that purchase tickets online are able to directly compare the prices of similar flights and will almost always purchase the cheapest available tickets. This causes airlines to have a limited capacity to differentiate themselves from rivals. All of these factors drives down the price of airline tickets and hinder profitability of airlines. An industry has a higher potential for profitability when firms vary in size. The manifestation of this desirable industry condition would dictate that there are