Porter's Five Forces Model When relating the airline industry, or more specifically Northwest Airlines, to Porter's Five Forces Model there are five forces to be examined, hence the name. First off it is good to look at the risk of entry by potential competitors. With respect to this force there is a high barrier to entry due to the high cost of capital. To be a competitor in the airline industry you must first have and airplane. Airplanes are large investments that require high mechanical maintenance, and a high degree of employee competence. If you aren't operating efficiently you won't be profiting enough to adequately maintain your aircraft and keep competent employees.
The second force of the five is rivalry among established companies already in the industry. In the airline industry this is always something that is relevant. Seeing that all airlines generally provide the same service of bringing people from one place to another it is important to differentiate. To be a competitive airline you need to offer something that the others don't, for instance you may focus on service and neglect low fares or focus on low fares and minimize service. Depending upon the target market for either one of these niches it is important to offer customers something that is appealing, and something they won't be able to get from another airline. The third force of five is the bargaining power of buyers.
The events of 9/11 promoted negative financial trends that were already evident in the airline industry before this disaster. Buyer bargaining power as of right now is somewhat high. People aren't traveling as much as they used to due to widespread fear over terrorism. In general people aren't traveling by plane unless they have to. This leads to the dilemma of making it a bargain to fly using an airline and not some other substitute. Perhaps focusing on business travelers is the smart thing to do right now because they are the people who fly out of necessity due to their career.
The fourth force in the model is the bargaining power of suppliers. Since the airline industry is hard to substitute for with other modes of transportation, the bargaining power it has is overall quite strong. Airlines can provide poor service such as delays and overbooking and still have people pay fares that aren't very low. This is because when you need to get to a place not accessible by any other way than aircraft, whether it be due to time constraint or physical location, people will put up with the poor service. Obviously bad service is a poor business strategy, but in the airline industry it is far more accepted than in most other industries. The final and fifth force is substitutes for the industry.
Luckily there are not many modes of transportation that can compare to the airplane. Although many modes of transportation are less expensive, none can cover great distances in such a short amount of time. There are substitutes such as personal vehicles, buses, and boats, but all of these can be inconvienent and slow. Another form of substitution could be the wide range of communication technology there is today.
With high speed internet access and cell phones at an all time high you can stay in touch with anyone and everyone whenever you please. Although these are very comforting nothing can be substituted for a face to face meeting or visit with a loved one or business associate. To substitute any other form of transportation or communication mode for flying will result in less than desirable results a majority of the time. Industry Significance Since 9/11 the airline industry's significance has undoubtedly dropped off to regions of questionable importance to a lot of people.
These people are not just the customers, but the airlines themselves. The airline industry's profitability has been cyclical over time and negative since 9/11. "Between 1990 and 1992, major U.S. carriers lost about ten billion dollars. All but one major airline reported losses.
Three major carriers: Bra niff, Eastern, and Pan Am, went out of business. Three others including TWA, Northwest, and Continental entered bankruptcy proceedings". (Walker 2001) In 1992 Congress had established the National Commission to Promote a Strong and Competitive Airline Industry. This formed a commission that helped with making suggestions for the FAA's structure, the airline industry's financial health, and foreign ownership limits.
Between 1993 and 1999 almost all of the major U.S. airlines reported positive annual operating profits, and this also held true for 2000. The terrorist attacks on 9/11 unfortunately sped up the already negative financial trend that the airline industry was beginning to experience. Before 9/11 the airline industry was already beginning to incur major net operating losses. In order for the industry to maintain it's financial health it must be profitable, because without profits cash will not be generated internally. The net income is very important, but for the airline industry to stay viable, or for a specific airline to stay afloat, there needs to be good cash flow.
Market Share Lately losses have been a part of the game for the airline industry. As quoted from UBS Warburg airline analyst Samuel Buttrick says, "the industry will lose $5 billion this year, followed by a $1 billion loss in 2003, and profits unlikely in 2004". (Buttrick 2002) In Buttrick's report he cites that there will be a less robust revenue environment amid industry cost cutting. Finance chiefs with major airlines are looking more closely at competitors wanting to move in on their turf. Just a few years ago Southwest Airlines, that was just a little upstart has had considerable growing market share.
Low-cost airlines operate under different cost structures than regular airlines. Some of these airlines have sacrificed service with things such as no seat reservations, no transfer of luggage from one carrier to another, and even the absence of onboard meals. With al this reduced overhead lower fares are able to be set in comparison with most of the other major airlines. Low-cost carriers account for about 20 percent of the U.S. domestic marketplace. Back when they accounted for five or ten percent, they would be in two or three different markets.
Because there was such a competitive industry these airlines would set the pricing, and as they grow there is just no way that these markets cannot be addressed.
Walker, David M., State of US Commercial Airline Industry. web (2001) The Airline Industry, web (2000).