Plane Wreck # 1 by Jenn Omasta

1. Use the competitive forces model to analyze the structure of the airline industry during 2001-2004. How well does this analysis explain the low profitability of the industry?

The competitive forces model focuses on five forces that shape competition within an industry. These five forces are: the risk of entry by potential competitors, the intensity of rivalry among established companies within an industry, the bargaining power of buyers, the bargaining power of suppliers, and the closeness of substitutes to an industry’s products.

The first factor, risk of entry by potential competitors, was a major factor for airlines during 2001-2004. The airline industry took a big hit when oil prices went up and the want to fly due to 9/11 had gone down severely. Airlines needed to stay ahead of their competition to survive and several companies found themselves filing for chapter 11 bankruptcy protection, etc. to keep themselves established. If new competitors were to come in at this time the main airline companies could go out of business since the demand to fly was down and prices were skyrocketing for oil. This explains the low profitability of the industry by showing how h0w potential competitors would bring down the profits of the other companies in the industry since the demand for flying was low at the time.

The second factor, the intensity of rivalry among established companies within an industry, was also key during this time. Companies were challenging each other by price instead of quality. Consumers were now more concerned with lower price tickets then the quality of their seat due to the fact that oil prices went up therefore ticket prices went up. This affected the companies whose main focus was quality because they had to change into the market of price and started to become competitive with the airlines that were already focused on price. This explains the low profitability of the industry because it shows how each company was fighting over price so they were all lowering their prices and trying to stay equal with each other and not a lot of the companies were gaining a profit.

The third factor, the bargaining power of buyers, is shown through the budget airlines. They were a target for consumers because they were cost driven and focused on getting the consumers the flight they want at a good price. This is also shown by network carriers who were more for business travelers who paid for tickets at last minute and were more concerned for the quality of their flight not the price. This shows low profitability because they were trying to bargain with the buyer and give them the cheapest deal possible which was lowering the profits.

The fourth factor, the bargaining power of suppliers, is also shown through the budget airlines when they moved into the coast-to-coast markets, which were high fare prices. The budget airlines were able to control the consumers because they knew that they were going to get consumers so they directed them towards buying higher priced tickets to make money. This affected low profitability because when they went for coast-to-coast markets the tickets were higher but the cost of oil was higher so they were still not making much of a profit due to the fact of their cost v. demand to travel the long distances went down.

The fifth factor the closeness of substitutes to an industry’s product, this was shown by the budget airlines coming in and taking the consumers away from the network airlines by lowering the price of their tickets. Which shows low profitability because the tickets where cheaper and they were also taking consumers away from other companies which were putting them into debt.