Airline industry has always been an area of interest to many professionals, academics and business moguls due to the economic impact of the industry. Transport industry as a whole is very crucial not only to the economy but also to individuals, ranging from pensioners; students; and working class people. The increased interest of people around the world to holiday, study, conduct businesses and network outside their home countries; the new world order of globalization; and also associated security issues have called for a good analysis of the airline industry. In this write up the performance of the airline industry will be examined, the level of competition within the industry , the effect of the environmental factors on the industry and how attractive it was 5years prior to 9/11 terrorist attack.
Nature of product and demand in the industry
It is worthwhile to look at the type of product of the airline industry which is mainly service. There is high degree of homogeneity in the type of service all the firms in the industry delivered and the demand for the services are considered not to be an end in itself but a means to an end, which is business or leisure. Due to the nature of their services and government regulations there were few firms in the industry with high level of profitability. Flying was on the increase and the industry was attractive. Shortly after the deregulation of the American airline industry in 1978 and that of the European Union in 1997 another era began in the industry. There is an increased competition on price, service level etc due to new entrants. Despite the increase in the number of customers from around 250 million to around 660 million between 1978 and 2000 as stated by G J Stockport in his article ,there was an aggressive competition within the industry which forced some operators into extinction, some into changing their business models. This brings us to the appreciation of the importance of Porters five forces which will be discussed later in this essay.
Classification of firms in the airline industry .
Due to new entrants into the industry and the accelerated competition the dichotomy between the firms became clearer. Two major carriers became dominant in the industry. Long haul and Short haul carriers which are other wise known as Long Service Carriers and Low Cost Carriers.
Low Cost Carriers: – These are carriers that premised their business model on cost effective operations by providing customers with good alternatives. E.g Ryanair, Easy jet, southwest airline, west jet, They do short haul services with limited or no connectivity. A good cost management which reduces their operating cost was spread to customers through low fares. This gave them a very subtle entry into the market and posed a very tough challenged to the FSC.
Full Service Carriers: – This type of carriers is also known as Network Legacy Carriers. They do long haul services and based their business models on delivery of quality service. They serve numerous cities regularly. They require high operation cost which in turn reduced their profit under an intense competition.
This classification can also be done using hub and spoke model. Hub and spoke is a model that is dated back to 1980 which helped the FSCs to enjoy cost advantage and increase efficiency during the competition posed by new entrants in the 90s. Hub and spoke is the model used to move passenger to a central place from within the vicinity for connectivity. Both the LCCs and FSCs benefitted from Hub and spoke. The FSCs have a comprehensive hub and spoke which comprises of regional domestic, mainline domestic and international while the LCCs have a simple hub and spoke and point to point models.
Porters’ five forces
This is a strategic framework that can be used to measure the attractiveness of an industry. Porters advanced five forces that determine the profitability of an industry. These forces includes: Competition among the existing firms in the industry, the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products.
The extent to which new firms enters an industry is dependent on the ease of entry. The attractiveness of an industry can be measured by how easy it is for new firm to enter and sustain the power of the existing firms. In the case of the airline industry pre 9/11 the entry barriers was soften through government deregulation policy. Not only that the entrants especially the LCCs were able to differentiate their product by entering the market though pricing strategy that can be likened to low penetration pricing strategy. The LCCs was able to deal with the retaliatory threat of forcing them out by the FSCs through a good cost management. The power of suppliers was able to be over come through the use of cheaper airports and reduction in the payment for landing space.
The competition among the existing industry was intense due to the fact that they are all competing for the same customers and this can reduce the attractiveness of the industry. The existing competition in the industry couple with the associated competition of the new entrants increased the bargaining power of the customers by offering them alternatives.
The PESTEL framework
PESTEL this is an acronym for the environmental factors that have a great impact on the operations and strategic decisions of an industry. These include: Political, Economic, Social, Technological, Environmental and Legal factors.
The attractiveness of the airline industry has been greatly affected by the PESTEL framework. As discussed previously the deregulation of the airline industry in USA in 1978 and in Europe in 1997 brought about a monumental changes in the industry. it gave a green signal to new entrants. Political situations within and among countries can also affect the industry greatly. Eg visa policy, war such as Gulf war of early 1990s which led to a huge lost in the US air industry prior to 9/11. Social factors such income level, class etc also led to the boom of the air industry prior to 9/11. acoording to Gary j Stockport in his article “Chaos in the skies” between 1990 and 2000 due to high no of pensioners leisure travel that was an increase in tourist passenger from approximately 450 million to 700 million.
The interplay between 5 forces of Porters model and the PESTEL frame work which led to a high competition in the industry brought about Changes in the strategic decisions of the Full Service Carrier. eg Alliances etc.
The challenge posed by the new entrants forced some of the dominant FSCs into strategic alliances which includes code sharing, block spacing, franchising. This strategic decision was taken by the traditional firms so as to enjoy economic of scale and cope with the emerging competition. Code sharing helped the firms to increase their market share of international market.
Conclusively, despite the level of competition in the industry, the economic turbulence and the increase overhead cost the profitability of the airline industry rose especially with some LCCs between 1995 and 2000. and this year was regarded as ‘golden 90s’.
THE ATTRACTIVENESS OF THE AIRLINE INDUSTRY POST 9/11
September, 11 terrorist attack which involved two major US firms (American and United Airlines) has been a major shock to the entire airline industry. This aspect of this essay will look into the impact of this major event on the industry, the attractiveness of the industry post 9/11 up till 2006 and the effect of the event on the external and internal environments of the industry which in turn affects the operations of the industry. The analysis will be situated within the realm of the PESTEL Framework.
9/11 event has been majorly implicated for the record loss in the US and global airline industries despite the staggering performance prior to the event. There is no doubt about the fact that the event has reshaped the operating environment of the industry. According to Ellen Naylor in her article “has American airline industry become too competitive” Between 2000 and 2005 American airline industry lost cumulative amount of $35billion. In order to give an insight into the attractiveness of the industry the PESTEL variables are discussed below:
Political factor: The political environment surrounding the operations of the airline industry immediately changed following the event of 9/11. On the same day of this tragic event US airspace was completely shut to commercial aircraft. This marks the beginning of a stiffer political environment in the airline industry.