Department of Business Administration

Discussion questions for case three: The US Airline Industry in 2002

1. Use Porter’s ‘Five Forces of competition’ framework to show how the structure of the airline industry has caused low profitability during the past twenty years.

Since domestic deregulation occurred in 1978, competition in the airline industry has intensified and become more concentrated. This situation can be analyzed through Michael porter’s framework of the five forces of competition. This framework views the profitability of an industry as determined by five sources of competitive pressure. These five forces of competition include three sources of “horizontal” competition: competition from substitutes, competition from entrants, and competition from established rivals and two sources of “vertical” competition: the bargaining power of suppliers and buyers.

Ø Competition from substitutes: the price buyers are propense to pay for one product depends, in part, on the availability, and on price-performance of substitute products. The airline industry

Ø The bargaining power of suppliers: Labor is the airline industry’s largest single expense. Most airline workers belong to one of a dozen unions, which give the airline workers strong power in negotiations with the airlines, such as the Association of Flight Attendants, the Air Line Pilot Association, etc. despite of the falling of the real ticket price and the always increasing competition, the labor costs have never stopped to increase and in the future will continue their raising.

The frequent flier programs were originally targeted toward the business segment. We have recently seen a trend toward expanding the frequent flier programs to let members earn miles by conducting business with a variety of other organizations. This makes the frequent flier programs a powerful tool in the leisure market as well. An attractive frequent flier program will increase the power of the airlines in the customer relationship.

Competition from established rival has had the biggest impact in depressing industry profitability: the airline industry has become more concentrated over the last ten years, because of mergers between airline companies and bankruptcies of many firms. The last one is a critical problem for the healthy airlines because their prices had the benefit of artificially lowered costs. Once established there are significant barriers to exit of companies: thus, as time went by, the U.S. airline industry was growing tremendously and average prices were falling consistently, suggesting a large benefit to consumers from U.S. practices. The new, low-cost entrants played a critical role in stimulating price wars.

Both Airline and government must work together to ensure the sustainability of the industry. The airlines must continue to address aggressively the business issues that they alone control. And, the government must assume the full cost and responsibility for assuring the protection of aviation against terrorist attacks, and do as much as possible to encourage air transportation.

Some topics in this essay:
Aeronautics Board, Pilot Association, Reservation Systems, Rossi MHTP, North American, Texas Air, Virgin Atlantic, Ryanair Easyjet's, Ryanair Easyjet, North America, airline industry, frequent flyer, low-cost airlines, air travel, mainline carriers, frequent flyer schemes, low-cost carriers, market share, major airlines, industry profitability, computer reservation, frequent flyer scheme, computer reservation systems, frequent flier programs, restructuring airline industry,