CaseStudy: The US Airline Industry in 2012
A look at theAmerican airlines industry reveals some of the challenges that thesector has been experiencing in the recent past. Such issues not onlyaffect the operations of the aviation sector but also reduce theattractiveness and profitability of American airlines. Wertheim’smodel highlights a lack of profitability in the sector arising fromincreasing operational costs, problems in utilizing their capacity,and deterioration in the US economy as some of the major problems inthe case. However, clients’ continued demands for better services,at a reduced cost, plague the management of the company to adifficult situation. Most of these firms are thus unable to realizeany profit. The root causes of the matters are varying and mayinclude a weak economy, the impact of legislations, and increase inoperational costs.
BargainingPower of Buyers
The companies inthe industry are few and serve a multitude of people, who either buyair tickets for themselves or through travel agencies. Manyindividuals will choose an airline depending on their destination andthe cost of travel. Since each business provides a unique service andothers concentrate on a particular niche, there may be an aspect ofloyalty to a company, but it constantly varies. The buyer in thiscase does not have a high bargaining power that may threaten theindustry.
Threatof New Entrants
Despite therequirements for providing air services being low, the costs arequite high for any organization that seeks to enter the market.Though one may start their operations with a single airplane, theability to maintain air schedules for a large group of peopleincreases the cost (Hannigan, Hamilton III & Mudambi, 2015). Theexisting firms have a cost advantage over new competitors. Thisthreat is raised by the low switching cost, where consumers caneasily switch to another airline depending on factors, such as cost(Rothaermel, 2016). Nonetheless, since airplane tickets are almostalways expensive, clients will often go for known companies that theycan trust.
BargainingPower of Suppliers
The mainproviders of aircraft companies are plane manufacturers. Due to thehigh cost of production in the aircraft manufacturing business, thereare only two leading suppliers in the world that include Airbus andBoeing (Kemp, 2013). Airlines establish loyalty to these companiesand often make long-term contracts to receive benefits, such asexcellent credit facilities (Hannigan, Hamilton III & Mudambi,2015). This power of the suppliers may be reduced by the fact thatthe airline firms are their sole income source. The threat ofsupplier power is thus relatively high in the airplane industry.
Air transport continues to be the most preferred mode oftransportation across the country for extended distances. There areother substitutes such as rail and road that may offer competition,but the cost of switching is time. The airlines surpass othersubstitutes due to service, convenience, and the cost. Shorterdistances, however, increase the risk of alternatives to a mediumlevel.
Rivalryamong Existing Companies
The competition,in this industry, is quite fierce, and any firms that are unable tokeep up with this contest are likely to be pushed out. This rivalryis increased by the constant number of airlines in the industry and astable supply of clients. Most airline firms can compete effectivelyby exploring a certain niche. For example, Southwest is known to be asource for cheap flights while JetBlue for its amenities (Rothaermel,2016). A few companies make high profits as most people fly out ofnecessity.
The supplierpower and contention in the industry are relatively high incomparison with the other forces making it unattractive for otherfirms. Wertheim’s model has been used to identify some of the majorproblems affecting the industry. Porter’s five forces also help toexplain the causes of some of the challenges that the sector faces.
Hannigan, T. J., Hamilton III, R. D., & Mudambi, R. (2015).Competition and competitiveness in the US airline industry.Competitiveness Review, 25(2), 134-155.
Kemp, K. (2013). Flight of the Titans: Boeing, Airbus and thebattle for the future of air travel. Random House.
Rothaermel, F. T. (2016). Competitive Advantage in TechnologyIntensive Industries. Technological Innovation: Generating EconomicResults (2nd Edition). (Advances in the Study ofEntrepreneurship, Innovation &amp, 26, 233-256.