Porter’s Five Forces Analysis of the Airlines Industry in the United States

Michael Porter’s name has been associated with corporate strategy since he developed the Five Forces analysis, a method to analyse a company’s competitiveness. Michael Porter describes strategy as “intentionally finding a different series of activities to generate a unique mix of value.” To put it another way, you need to understand your competition and the market you have selected to determine how your company should respond. 

In this article, we will learn more about Porter’s Five Forces model. The primary goals of this article are to:

• Understand the economic characteristics of the United States airline industry.
• Assess the degree of competition/rivalry among competing airline businesses in the United States airline industry.
• Review recommendations to airlines and air transportation consumers.

Porter’s Five Forces

Michael Porter of Harvard Business School established Porter’s Five Forces model in 1979. This model includes the five marketing aspects that influence the performance of a specific organisation in a particular sector.  Since its establishment, it has proven to be an excellent tool to determine whether or not a firm can function financially in a competitive environment among competing rival enterprises in a certain industry.

The major part of Porter’s Five Forces analysis of the airline industry in the United States is that the industry has been driven by outside factors such as low passenger traffic, higher operating expenses, increased fuel prices, as well as increased landing and maintenance costs. In addition, the intense competition from low-cost carriers has resulted in a fierce price war that has severely harmed the industry.

The five forces are :

• Rivalry among competitive firms
• Customers’ bargaining power
• Suppliers’ bargaining power 
• The threat of substitutes 
• The threat of new entrants (barriers to entry) 

The combined strength of these factors defines an industry’s profit potential, and consequently, its competitiveness. When the five factors are intense, nearly no company generates excellent returns on investment. However, if the forces are light, there is space for larger returns. 

Rivalry Among Competitive Firms 

A competitive analysis of the airline industry in the United States includes factors such as the entry of low-cost carriers, the industry’s tight regulation, which leads to high operating costs, and the fact that airlines operate under an outdated business strategy, particularly in times of rapid turnover in the industry.

According to Porter’s five forces model of market competition, if the airline sector has many rivals, rivalry among these airlines will be more severe. At the same time, if the competing airlines are of equal size or have a similar market share, the intensity of the rivalry will increase.

The airline sector is governed more on the supply side than the demand side, which indicates that instead of airlines being free to choose which markets to operate in and which segments to target, the regulators pamper the travellers. This is the reason low-cost carriers have halted full-service airlines, and when combined with stiff competition, the sector has become one of the most competitive in the United States.

Bargaining Power of Customers 

Long before the advent of the internet, the travel business was structured with these three key components: 

• Suppliers
• Intermediaries (travel agencies and tour operators)
• Travellers

With the rise of online ticketing and marketing methods, travellers are no longer at the whim of agencies and intermediaries, as well as the airlines themselves, for their ticketing requirements. The airline business has always been very competitive. However, with online ticketing and distribution systems, clients now have immediate access to timetables and tariffs, allowing them to make the most cost-effective decisions. Customers’ negotiating power has strengthened, as a result of the arrival of low-cost carriers into Porter’s five forces, in the airline business.

Bargaining Power of Suppliers 

The leverage of suppliers in the airline business is enormous since the three inputs that airlines have (fuel, aircraft, and labour) are all affected by the surrounding environment. For instance, the value of aviation fuel is affected by changes in the global oil market, which can fluctuate rapidly due to geopolitical factors and other variables. The airline business requires aircraft for purchase or wet lease, causing them to rely on Airbus and Boeing, for example, for their aircraft requirements.

Threat of Substitutes 

There are numerous alternatives to air travel that are available to passengers. They have the option of travelling by car, train, or boat. The airline business in the United States is not threatened by replacements and complementary assets because, unlike in the developing world, consumers do not often travel by rail or bus. This means that air travel is familiar for customers, and hence, substitutes such as the train and bus are limited.

The threat of New Entrants (Barriers to Entry) 

The threat of new entrants in the US aviation business is relatively minimal, owing to the industry’s substantial entry and exit barriers. New competitors may use cheaper prices to pressure the airline sector by cutting unnecessary costs and delivering innovation. Locally, new entrants have the opportunity to compete with industry giants, such as the airline business. Using Porter’s five forces analysis of the aviation industry, we can see that the airline industry’s brand image, brand loyalty, and market share can effectively manage this risk.

Conclusion

For the airline business, Porter’s Five Forces model depicts the various factors at work on the airline industry’s players. These forces include:

• Industry competitiveness
• The threat of new entrants
• Suppliers’ negotiating power
• Consumers’ bargaining power
• The threat of replacements

The airline sector is highly competitive, and suppliers and customers have significant bargaining power. However, the threat of new entrants and replacement products is low to medium. The main reason for applying Porter’s Five Forces to the airline industry in the United States is that the industry has been driven by outside factors such as decreasing passenger traffic, higher operating expenses, increased fuel prices, as well as increasing costs in maintenance and landing, in addition to intense competition from low-cost carriers that have resulted in a price war that has severely harmed the industry.