Porter’s Five-Force analysis is an examination that helps a company or an individual in determining whether to invest in a certain industry. The analysis examines the level of competition that exists in an industry, the potential of new entrants, the possibility of introducing substitute products, and the bargaining power of buyers and sellers in the industry (Truxal 54). These factors when combined inform an investor about the profitability of investing in an industry. Therefore, it means that the porter’s framework acts like a SWOT analysis because it identifies the strengths and weaknesses that exist in a market. An analysis of the airline industry indicates that there are low, high, and medium factors that affect the market. The porter’s forces that are low in this industry include the bargaining power of sellers and buyers, and the threat of new entrants. The threat of substitute products is medium while that of competition among existing firms is high (Sheth 73). An additional force that has a high influence in the industry is the relative influence of stakeholders such as the government. This force creates barriers to new entrants, and it binds the existing companies in the market. An analysis of each of these factors is essential because it will enable the reader to understand the airline industry and conclude whether it is profitable to invest in this business.
The bargaining power of buyers in the airline industry is low. Buyers include companies and individuals who purchase tickets to enable them travel to various places in the world. Another group of buyers include travel agencies that carry out the function of bringing buyers and sellers together. Travel agencies act as mediators in the industry because they enable individuals to find cheap flights from low cost companies (Peoples 65). The agencies also enable companies in the industry to understand the needs of individual buyers and provide them accordingly. The existence of travel agencies and the internet enables buyers to find airlines that offer cheap prices. This means that they are flexible and they can choose among a variety of planes. However, buyers in the industry are limited because they have to choose flights that reach them to their desired destinations. This is because different airlines choose different destinations for their customers. Buyers, therefore, may incur huge costs of travelling when they find out that there are few airlines travelling to their desired destination (Delfmann 82). Customers in the industry also face limited choices because they choose flights depending on the time and safety history of an airline. This indicates that buyers do not have high powers in the market because they are limited by time, safety, and destination of flights. Customers, therefore, have a low influence in the airline industry.
The power of suppliers is also a lowly influential factor in the airline industry. The main suppliers in the market include manufacturers, fuel firms, and airports. There are mainly two manufacturers in the airplane industry, and they include Airbus and Boeing Company (Fotj 100). The manufacturers use standardized inputs, they produce similar flights, and they ensure that their products are environmental friendly. This indicates that airlines have limited choices in terms of manufacturers of planes. The fact that the manufacturers produce similar products also means that there is no need for companies to switch from Boeing to Airbus. The manufacturing of an airplane requires an organization to incur extremely high costs; this explains the reason for the existence of only two suppliers in the industry. Another factor that limits airlines from switching from one supplier to the other is the fact that they mostly purchase planes on loan agreements (Truxal 89). The loans allow companies to acquire planes and use them to earn profits that enable the firms in paying for their initial cost. This means that for an airline to switch from one manufacturer to the other, it must have completed paying for the cost of acquiring the plane, a case that may happen rarely.
The threat of new entrants is another low aspect of Porter’s five forces in the airline industry. This factor has a low influence in the market because of the high cost that is involved in entering the market. The existing organizations have cost advantages because they can raise the huge capital that is required in the industry. Customers in the industry are also loyal to companies of their choice because they prefer paying the high costs of travelling to organizations that they trust (Belobaba, Odoni and Barnhart 103). Buyers also prefer firms that are believed to offer safe flights. This means that even if a new firm may raise the high capital required to penetrate the market, it may lack customers and halt its operations. The difficulty of new firms to penetrate the market also means that customers do not have access to a variety of products.
The threat of substitutes is a medium aspect in the airline industry. This is because customers have access to other means of transportation that include vehicles, trains, and boats or ships. These forms of transportation are cheaper than air travel, although they consume more time than the latter. The electric train is the main threat to airlines because it moves with a high speed just like a plane (Sheth 120). Consumers who may not be in a hurry to travel may choose these other forms of transport because they are cheaper and more accessible. When consumers choose the other means of transport, airlines lose customers, sales, and profits. The existence of these transportation methods especially the electric train may force the airline industry to lower the cost of travel in the long run. However, if the industry develops new techniques of attracting and retaining customers, the threat of substitutes may be insignificant (Delfimann 134).
The highest factor that affects the airline industry is the rivalry among existing players. The high cost required to penetrate the market limits new entrants from the industry, and this means that the existing firms compete among themselves. The existing organizations compete with one another by differentiating the services and products that they offer to customers. The differentiation of products has spread to the extent that customers associate every firm with its strength. An example is JetBlue that provides customers with benefits when they use their airlines and southwest that offers cheap prices for all its products and services (Fotj 147). The competition among firms in the industry may eliminate organizations that fail to meet the industry standards. An example of a new standard that may eliminate firms that fail to adopt it is the use of environmentally friendly planes and products. Firms in the industry, therefore have to develop techniques of enabling them to survive the existing competition to avoid being driven out of the market (Belobaba, Odoni and Barnhatt 139).
The sixth force in the analysis is the relative power of stakeholders. This force is highly influential because stakeholders such as the government have the power to make rules for the industry. The companies in the industry have to adhere to the rules set by the government; for example, the rule of using and manufacturing eco-friendly products was because of the state laws of reducing pollution (Sheth 130). Other stakeholders who have an influence in the industry include shareholders and the community. These parties have the power to accept or reject services in the industry because they are the main customers. The high power of the government, shareholders, and the community indicate that firms in the industry must put up with the requirements of these stakeholders. The rules created by the government may discourage new firms from penetrating the market.
The Porter’s Five-Force analysis of the airline industry indicates that the factors that have low influence in the market include the entry of new firms and the bargaining power of manufacturers and customers. The existence of substitute products affects the industry at a medium level meaning that the firms that exist can end this challenge by developing techniques of retaining customers. Competition is a high factor in the airline industry because of differentiation among existing firms. New firms cannot enter the market because of the differentiation and high competition in the industry. The relative power of stakeholders such as the government and community may also discourage new firms from entering the market. Existing organization, on the other hand, have to adhere to the requirements of these parties. Therefore, penetrating the airline industry would lead to lack of customers, lack of sales, and losses.
Works Cited
Belobaba, Peter, Amedeo Odoni, and Cynthia Barnhart. The Global Airline Industry. Chichester: Wiley, 2009. Print.
Delfmann, Werner. Strategic Management in the Aviation Industry. Aldershot: Ashgate, 2008. Print.
Fojt, Martin. The airline industry. England: Emerald Group Publishers, 2006. Print.
Peoples, James. Pricing Behavior and Non-Price Characteristics in the Airline Industry. Bingley: Emerald, 2012. Print.
Sheth, Jagdish N. Deregulation and Competition: Lessons from the Airline Industry. New Delhi: Response Books, 2007. Print.
Truxal, Steven. Competition and Regulation in the Airline Industry: Puppets in Chaos. Milton Park: Routledge, 2012. Print.
