The competitive forces model is based upon five factors. These factors are as follows: risk of entry by potential competitors, rivalry among established companies, bargaining power of buyers, bargaining power of suppliers, and substitute products. When comparing these five factors to the airline industry during 2001-2004, it is easy to understand the low profitability to the industry during this time period.
The first factor, risk of entry by potential competitors, was clearly shown as the network airlines were infiltrated by the budget airlines. The network airlines did not distinguish and absolute cost advantage and that cost them numerous potential clients. The second factor, rivalry among established companies, is also shown in the airline industry during this time period. Prior to the infiltration of the budget airlines, the industry was a consolidated industry, dominated by approximately six large companies. This was a problem, because when one company made a move it directly affected the market share of its rivals and thus their profitability, so when the budget airlines entered with their low prices, the network airlines were directly effected. The third factor, the bargaining power of the buyers, was perhaps the largest part of the downfall of the airline industry. When these new budget airlines hit the scene, it gave potential customers more choices, which inevitably allowed them to bargain with the big airlines easier. With the low prices of the budget airlines, the network airlines had no choice but to drop their costs as well, something that they could not afford to do. The fourth factor, the bargaining power of suppliers, relates highly to the cost of oil. All of the major airlines were affected when the price of oil shot up, and since this is a product that the airlines need to be able to operate, it was absolutely impossible for them to seek an alternate supplier. The fifth and final factor, substitute products is in essence what the budget airlines became for people looking for a cheap and reliable flight. With the new budget airlines, consumers were given more choices, which in the long run was cause for more of the network airlines to go under.
Since each of the five competitive forces came into play in the airline industry, it is obvious why there is such low profitability in the industry. With the competition between network and budget airlines, the lack of a substitute supplier for oil, and the overall economy surrounding air travel, the airline industry is going to have to rethink their strategic planning in order to be successful in the future.
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4 comments:
Plane Wreck Question #2- Steve Moore
The budget airlines use a much different strategy to attract customers and fill the seats on their planes. Traditional major network airlines such as American Airlines, United, Delta, etc. operate under a "hub and spoke" system. This means that these major airlines route their flights through major hubs (Chicago, Washington DC, New York, etc.). This system was put in place for good reasoning, it was working. This allowed these airlines to efficiently fill capacity when there was not enough demand to fill a plane flying point to point. These traditional airlines have not been able to gain as much revenue as the budget airlines have reeled in.
The budget airlines strategy allows them to now have a 30 to 50 percent cost advantage over the traditional airlines. Their plan of purchasing just one type of aircraft, then hiring nonunion laborers and workers to perform multiple jobs during one flight, has worked perfectly. Hiring less employees saves them money that they would normally use to pay the employees. The budget airlines fly their plane's "point to point" rather than into large major airports. If they do need to change planes, etc. they would use cheap secondary airports. These smallers plane companies focus on very large markets with money to gain and lots of traffic, mainly up and down the East Coast of the United States.
Plane Wreck Question #3-Jason Grier
The "hub and spoke" system would be the largest strength for budget airlines. The network airlines route their flights through major hubs. This system was developed due to the fact that the price of flying has increased so much and that the to fly isnt as high. Budget Airlines in flying out of secondary hubs rather than main hubs to make the cost of flying cheaper.
One weakness for the budget airlines would be the in-flight services. Another weakness would be the fact that there is only one plane that is being offered.
I think that the only way to return to profitability is to have cheaper flights, and more of them untill the demand for flights becomes higher. With the rise in gas combined with wages in commercial flights, one flight can be rether expensive. This turns the poorer people to buy from cheaper airlines
Question #5
The only way for network airlines to respond to the threat of competion is to either drop prices and offer more flights. Or they must have something to offer its passengers that budget airlines don't. They have cut operating costs and control officers and employees have even taken pay cuts in order to keep business, but so far these cuts have proven to have little affects on the market at this time. Fortunately because of the Chapter 11 bankriputcy laws they are at least given time to try to make a profit to keep the business alive temporarily.
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