Airline Industry

MD Safiur Reza Saddam

0161857

Background of Airlines Industry

The international airline industry provides service to virtually every corner of the globe, and has
been an integral part of the creation of a global economy. The airline industry itself is a major
economic force, both in terms of its own operations and its impacts on related industries such as
aircraft manufacturing and tourism, to name but two. Few other industries generate the amount
and intensity of attention given to airlines, not only among its participants but from government
policy makers, the media, and almost anyone who has an anecdote about a particular air travel
experience.
Today, the global airline industry consists of over 2000 airlines operating more than 23,000
aircraft, providing service to over 3700 airports. The worlds airlines flew almost 28 million
scheduled flight departures and carried over 2 billion passengers. The growth of world air travel
has averaged approximately 5% per year over the past 30 years, with substantial yearly
variations due both to changing economic conditions and differences in economic growth in
different regions of the world. Historically, the annual growth in air travel has been about twice
the annual growth in GDP. Even with relatively conservative expectations of economic growth
over the next 10-15 years, a continued 4-5% annual growth in global air travel will lead to a
doubling of total air travel during this period.

Porter's Five Forces

Bargaining power of Buyers:
The airline industry is made up of two groups of buyers. First, there are individual flyers. They
buy plane tickets for a number of reasons that can be personal or business related. This group is
extremely diverse; most people in developed countries have purchased a plane ticket. They can
do this through the specific airline or through the second group of buyers; travel agencies and
online portals. This buyer group works as a middle man between the airlines and the flyers. They
work with multiple airline firms in order to give customers the best flight possible. Between
these two groups there is definitely a large amount of buyers compared to the number of firms.
There are low switching costs between firms because many people choose the flight based on
where they are going and the cost at the time. This is some loyalty to firms but not enough for
high switching costs. Each customer needs a lot of important information. They need to know the
details of what is provided during the flight. Buyers need to understand the timing of the flight
and the safety aspects of flying in general. The service provided is unique. Each airline has a
niche. Some airlines focus on cost, while others focus on having the best amenities, etc. the
power of buyers is moderate to high as per Porters Five Forces methodology. Apart from this,
the buyers can engage in price discovery meaning that price fluctuations do not deter them as
they have multiple channels through which they can book their tickets.
Bargaining Power of Suppliers:
Next we look at the bargaining power of the suppliers. The power of suppliers in the airline
industry is immense because of the fact that the three inputs that airlines have in terms of fuel,
aircraft, and labor are all affected by the external environment. In this case the major suppliers

are the airplane manufacturers. The top two manufacturers in the world currently are Boeing and
Airbus. In this industry the inputs are extremely standardized. Airline companies only seem to
differentiate with amenities. The planes are very similar. Currently some manufacturers are
trying to make their plans more ecofriendly.
Airline companies cannot easily switch suppliers. Most firms have long term contracts with their
suppliers. Planes are such high capital products that firms probably make long term loan
agreements and have more favorable credit terms when they dont switch companies. It is
difficult to enter into the plane manufacturing industry because of the capital needed to enter.
The amount of money and expertise needed to make even one plane is around 200 million
dollars. For this reason there are very few suppliers in the airline industry. Airline firms are the
only source of income for these manufacturers so their business is extremely important. Based on
these things they have high bargaining power.
Threat of New Entrants:
Threat of new entrants is another major aspect of the five forces. This aspect has a low threat for
the airline industry. There are two aspects that do however raise the threat level. First, there are
extremely low switching costs. Second, there are no proprietary products or services involved.
Even with these two aspects the industry still has a very low threat overall. Existing firms have a
large cost advantage. This industry requires a large amount of capital and without a strong
customer base there will be little to no profit in the first few years. Existing firms can and will
use their high capital to retaliate against newer firms with whatever means necessary such as
lowering prices and taking a loss.

Although there are low switching costs between brands, consumers tend to only chose wellknown names. Airline tickets are expensive so people dont want to give that money to firms
they dont trust. There is also a huge safety aspect involved and most consumers feel safer with
firms that have been around for a long period of time. This industry requires plane and flying
experience which also lowers the threat of entry.
Threat of Substitutes:
After looking at the threat of entry it is important to also consider the threat of substitutes. This
industry has a medium substitute risk level. There are substitutes in the airline industry.
Consumers can choose other form of transportation such as a car, bus, train, or boat to get to their
destination. There is however a cost to switch. Some means of transportation can be more costly
than a plane ticket. The main cost is time. Planes are by far the fastest form of transportation
available. Airlines surpass all other forms of transportation when it comes to cost, convenience,
and sometimes service. Consumers do sometimes choose other methods for various reasons such
as cost if they are not traveling very far which raises the risk.
Rivalry among Existing Players:
The last area of the five forces is the rivalry among existing players. The rivalry in the airline
industry is very intense for many reasons. The industry is currently very stagnant. The number of
competitors stays the same in the long run and it doesnt seem to be under or over capacitated.
The fixed costs are extremely high in this industry. This makes it hard to leave the industry
because they are probably in long term loan agreements in order to stay in business.
The strongest forces in this industry are the competition of existing firms and the power of
suppliers. The rivalry of existing players is high and will push out any firm that doesn't have

enough capital. Suppliers are strong forces because planes are so costly to make. If the suppliers
changed the credit terms by even a small amount it could mean a significant loss for the firm.
Competition is intensive among rivalries. Customers want to go to another place, there are more
than one route offered by different companies. Nowadays, all companies are trying to improve
their quality of service, and lower the fare price to attract more customers.

Conclusion
The economic situation has proven to have impacted the airline industries in many ways. For
instance, changes in price of an airline industry may also change the demand and elasticity of the
services offered by the airline company. In this regard, the outlook of the airline industry can still
be considered to have strong growth in spite of changing economic conditions. For airlines, the
economic situation for prices, wage inequality and even monetary aspects will hold many
challenges and only those airlines which continue to tackle their costs and enhance their services
will remain in the market.
Recently there have been some changes in some of the forces. Some airplane manufacturers have
been making ecofriendly planes, which is a change in the bargaining power of suppliers. This
would differentiate the products, raising the threat of suppliers. Another recent change is the use
of web portals such as Expedia to book flights. This positive change creates a whole new group
of buyers and makes purchasing flights faster and easier. The increase in gas prices has also been
a positive change for the industry because it lessens the power of substitutes. People are more
willing to fly to their destination if driving would be more expensive.

References
1) Airline Industry Overview. Available at:
http://web.mit.edu/airlines/analysis/analysis_airline_industry.html
2) Teresa Cederholm (2014) External factors that influence the airline industry. Available at:
http://marketrealist.com/2014/09/must-know-external-factors-influencing-airline-industry/
3) Edward Clayton, Andreas Hilz (2015) 2015 Aviation Trends. Available at:
http://www.strategyand.pwc.com/perspectives/2015-aviation-trends
4) Cento, A (2009). The Airline Industry- Challenges in the 21st Century. Physica Verlag
Heidelberg.
5) Analysis Of The Economic Impact On The Airline Industry (2012) Available at:
http://thinkingbookworm.typepad.com/blog/2012/02/analysis-of-the-economic-impact-onthe-airline-industry.html