Case study: Airline industry

Résumé du document

After deregulation, many carriers came into the airline industry to compete against the main airline companies. Why and in what way could these entries be successful? Government Regulation was the main barrier to entry in the airline industry. To regulate prices and stability of this industry, the government voted the Civil Aeronautics Act. The Civil Aeronautics Board had to administer the structure of the industry (attribution of interstates routes to the 23 airlines, safety guidelines priorities, rules for fares etc.). However, with the oil shock, the growing public dissatisfaction and the shift in political opinion, the decision to deregulate was taken. The major barrier to entry was broken, leading to a price war with the entry of many carriers. Every carrier could enter and prices were not regulated. The cost of customer switching was very low. Thus companies developed "frequent flyer schemes" to retain customers by issuing free tickets and upgrades on basis of number of miles flown, thus raising the "cost" to switch airlines.

Extraits

[...] -The switching costs of customers were very low. Thus companies developed “frequent flyer schemes” to retain customers by free tickets and upgrades on the basis of number of miles flown, thus rising the of switching airlines. But this program was developed by a lot of companies, and its efficiency was relative and only influenced people who traveled a lot. -Absolute cost advantage: Costs linked to entry in the market were high, but the absence of real competition before the deregulation and the optimism of the investor tended to consider that it was not a real barrier to entry. [...]

[...] Their strategy was to acquire other smaller companies to keep their influence on the demand in an area. That is why the ratio rose after 1982. The consolidation by geography appeared during this period (re-consolidation), to fight the war of prices. But low cost companies were very attractive and it was not enough to counteract this pressure. -Costs conditions: Acquiring others other smaller companies was also a way to decrease rivalry in the market, but companies had to deal with the need to fight against low costs companies to retain market shares. [...]

[...] Additionally, we have the bargaining power of suppliers. Due to rigid fuel prices, salaries prices negotiated with trade unions, the fixed cost of equipment and airport taxes, companies have no choices to limit their costs, and in a hyper competition environment, it is very difficult to conserve a real margin in the market. In fact, the conditions of the market are mostly directed by the rivalry. This high competition results in a strong rivalry especially because acquiring market shares is sine qua non for the companies. [...]

[...] We cannot say that buyers are in the position to decide the prices, but we can say that the pressure is now on the price, and not only on the quality. The rivalry is the main cause of prices decrease, not the bargaining power of the buyer. But it could be interesting to underline the fact that the tentative differentiation was not very effective. The price war to attract buyers, contributes to a decrease in margin. V. Threat of substitutes This not the main influence on airlines markets. In fact it is the least influential force on the airlines market forces. [...]

[...] However, the fusion of the two demands was not effective as it provided a demand that was sensible of the prices, not of the quality. The only efficient way of distinction was competitive price. -Customer switching costs: With a very high level of competition, companies had to retain customers by raising switching costs. For this, they developed some programs of fidelity to influence customers to choose to travel exclusively with one company. This system was based on the number of miles flown, to collect points and offer free tickets. It became a major part of the income of airlines. [...]