The US airlines industry in 2002

Maxime L.

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The US airlines industry in 2002

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Résumé du document

Michael Porter's famous five forces of competitive position model provide a simple perspective for assessing and analyzing the competitive strength and position of a corporation or industrial organization. Let us consider these concepts of industry analysis in the context of the US airlines industry in the past 20 years. To do so, we will analyze each of Porter's forces and its impact on profitability of the airline industry. Before 1978 the whole airlines industry was regulated by the US government, with the Civil Aeronautics Act, in order to guarantee certain stability and to administer the structure of the industry by The Civil Aeronautics Board (CAB). The deregulation in 1978 has had a huge impact on the airlines with consequences like the appearance of new entrants or an outbreak of the price competition. This new situation has deeply modified the mechanism of Porter's forces on the airline industry. The intensity of rivalry among firms varies across industries. In the case of the airline industry we can say that the competition is intense. Industry concentration: In the beginning the industry was hardly concentrated, with a concentration ratio in 1935 of 88%. There were few airlines companies (only 23) because the CAB limited their number. After 1978 and the deregulation, the concentration ratio fell to 54.2%. In 1982, the competition became more aggressive; new entrants appeared and some carriers went bankrupt. We can say that the structure of the sector was fragmented. After this period of instability the US airline industry has been consolidated: the strongest or the more profitable carriers acquired others that were in difficulties and the most successful low cost airlines succeeded in getting market shares.

Sommaire

Use Porter's Five Forces of Competition's framework to show how the structure of the airline industry has caused low profitability during the past 20 years
1. Rivalry among existing firms
2. Threat of new entrants
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Threat of substitute products
Which of Porter's five forces has had the biggest impact in depressing industry profitability?
In what ways, and with what success, have the airline's strategies attempted to counteract competitive forces depressing profitability in the industry?
What is the outlook for industry profitability during the remainder of the decade?
Think about the events of September 11, 2001. Can you imagine any European airline increasing its profitability after the September 11 terrorist attack? Justify your question

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Extraits

[...] Under regulation, the airlines industry was administered by the government in order to give stability to this sector. The CAB awarded routes, established safety guidelines priorities and set fares. During this period the airlines worked as public administrations. There was no competition and no new entrants. Airlines were in charge of carrying mail and passengers after they received their outcome from the CAB. This was their management model for many years. After deregulation in 1978 and the elimination of restrictions over domestic routes and fares, the situation has changed. [...]

[...] Porter's forces seem to have an important influence on the airlines industry's profitability. The brutal growth of competition after deregulation has obliged the carriers to move on fast to propose competitive offers and prices to their customers. Before the deregulation it was easy for airlines to adapt their costs to the market. With competition, some companies have difficulties to cover their expenses with their incomes, that is why some go bankrupt or some make huge losses (like Delta in 2002: 354 million). [...]

[...] To face this situation and to manage excess capacity, airlines try to reduce variable costs like fuel or maintenance by putting aircrafts into storage. One other consequence of September 11 is the increase of security measures in the airports. For airlines, security and insurance provisions represent the additional costs they have to manage. Moreover, the inconveniences caused by the time spent on security measures at checkpoints in the airports have made business travels less interesting. These inconveniences could be a threat for carriers. [...]

[...] For instance, Air France is owned by 44% by the French State which is a competitive advantage during crisis period. - And the last reason is that the European airlines industry suffered less thanks to the fact that Europe is a very attractive place for tourists, so people started travelling by planes to Europe again. In conclusion, we can say that the European airlines couldn't have increased its profitability after the September 11 terrorist attack, at least directly. But we can consider that the return to normal came faster in the European industry than in the US airlines industry. [...]

[...] Rivalry among existing firms The intensity of rivalry among firms varies across industries. In the case of the airlines industry we can say that the competition is intense. - Industry concentration: at the beginning the industry was hardly concentrated with a concentration ratio in 1935 of 88%. Indeed, there were few airlines companies (only 23) because the CAB limited their number. After 1978 and the deregulation, the concentration ratio fell to in 1982, the competition became suddenly more aggressive, new entrants appeared and some carriers went bankrupt. [...]

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