Undifferentiated marketing is more suited for _____________ products

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The Commercial Airline Industry

October 17th, 2014

Ben Cohen

Z23106977

Global Strategy and Policy

Man 4720

Professor Harry Schwartz

Finance Major

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In this paper, a Porter’s analysis will be conducted on the commercial airline

industry. The Porter analysis is a means of measuring the intensity of the competitive

forces associated with an industry. The competitive forces consist of threat of new

entrants, rivalry among existing firms, threat of substitute products or services,

bargaining power of buyers, bargaining power of suppliers, and relative power of other

stakeholders. Each of these 6 competitive forces will be analyzed and rated high, medium

or low in strength based on their intensity.

Threat of New Entrants: Low Companies that are considering or attempting to enter the airline industry will

have extreme difficulty, as a result of the many entry barriers they will encounter. These

entry barriers are why the threat of new entrants in the commercial airline industry is

considered low. Airline companies operating in today’s industry have a large inventory of

aircrafts and offer many flight availabilities. They are able to use economies of scale to

effectively provide flexibility to travelers. The existing airline companies will capitalize

on their economies of scale as a competitive advantage and entice travelers with their

low-cost fares for the same service. This is why in the airline industry many companies

seek to gain strategic alliances with other companies. Forming strategic alliances allows

companies to add new routes and increase sales revenue, without substantially increasing

their capital investment. An example of this is the joint venture agreement between Delta

Air lines and Virgin Atlantic Airways Ltd. This agreement allowed them to form a “fully

integrated joint venture that will operate on a “metal neutral” basis with both airlines

sharing the costs and revenues, from all joint venture flights” (Delta Air Lines, 2012).

This agreement will allow these two airlines to provide a seamless network between

North America and the U.K. for their customers. These alliances have changed the

dynamic of the industry.

Another barrier to entry into this industry is the extremely high capital

requirements. It takes a large amount of initial capital to buy inventory of large

commercial aircrafts. However, it is not just the initial capital that is crucial; it is also the

steady capital needed to maintain these aircrafts. “Domestic carriers spent $11.6 billion

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last year on capital improvements. Over the past five years U.S. airlines have retired

nearly 1,300 planes” (Mayerowitz, 2014). This is substantial evidence of the financial

intensity associated with entry into this industry.

Another barrier to entry is government policy. Government policy in the past

played a much larger role, however today, it is no longer a strong barrier to entry into the

airline industry. This is the case because on October 24, 1978, the Airline Deregulation

Act was passed. “Federal controls over the entry and exit of airlines, flight schedules,

airfares and quality control of service were abolished” (Morris, 2013). Although

government policy is no longer a strong entry barrier, the difficulty new companies face

with economies of scale and capital requirements still make the threat of new entrants

low.

Rivalry among Existing Firms: High A major challenge facing the companies in the airline industry is the rivalry

among existing firms. Even though the number of competitors is low, airline companies

face intense competition. This intense competition is a direct result of the Airline

Deregulation Act in 1978. Prior to this act, “flying was absurdly expensive. There was

one simple reason why flying was absurdly expensive. That was the law” (Morris, 2013).

The deregulation of the airline industry allowed companies to adjust prices and thus make

the market more competitive and price sensitive.

Another challenge is the high amount of fixed costs airline companies face.

Companies must fly their planes on schedule, whether at full capacity or not. This