Environmental Analysis of the Airline Industry

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In conclusion, I have identified the driving factors as being both economical as well as technological. The increase in fuel costs affects whether or not the airfares are high or low at that time and drive demand to travel up and down for consumers. Fuel costs also have an environmental effect on what type of planes they will fly to reduce carbon emissions as well as technology. As technology advances, designs of new air fleet will arise which will cost significantly more but in the long run will reduce fuel costs.

Five-Forces

One could argue that rivalry and competition among the airline industry is intense due to existing firms and low cost carriers creating competitive prices. Entry barriers are high because of the high capital needed to fund an airline. Exit barriers are also high due to extremely high fixed costs and government regulations. Existing firms knock competition out that don’t have enough capital, so it remains pretty stagnant. Airlines tend to be reactors and behave based on the situation. Due to the reactive nature of the airline, if one airline lowers its price for the day then others will also follow the trend for fear of missing an opportunity.

When it comes to supplier power, one could argue that suppliers have a relatively high and strong power in the airline industry since there are only two major airplane suppliers: Airbus and Boeing. With such few suppliers, they are able to hold immense power and control over prices. Planes for the most part are very similar, with only the amenities differ making it hard for airline companies to switch suppliers. Most firms have long-term contracts because planes are such high capital products, and they don't want them switching companies. Cost of fuel, labor unions, and the aircraft make suppliers dominant among the industry.

Threat of new entrants is relatively low because of all the red tape associated with becoming an airline. It requires a long-term investment and specific knowledge and expertise because not everyone can enter this industry very easily. There are high costs associated with this industry including acquiring assets like planes, skilled workers, gates, parking and dock space, fuel costs, and marketing and advertising expenses. Marketing and advertising are crucial in the aspect of building a strong reputation and a distinguished brand so that consumers will want to travel with this new, unknown airline. The fluctuating nature of profitability and oil and gas prices is a huge factor as well. Some airlines are still in debt from hedging fuel costs.

The threat of substitutes can range from medium to high due to the fact that there are so many other modes of transportation including: boats, automobiles, trains, bikes, buses, and even walking. This industry is sensitive to time which causes one to make the decision on which mode to choose. One can choose to fly from Austin to Dallas or one can drive there. If you take an automobile, one has to account for traffic, construction, flat tires, or gas. Flying may be faster unless there is equipment malfunction, delay, layovers, lost baggage, or time of transportation from airport to final destination. Some could argue that threat of substitutes are low due to the factor of location. One wouldn’t take a boat to China, or take a train to Africa. It all depends on the convenience of time and location and context of the situation.

In the airline industry, bargaining power of customers is pretty high. Buyers choose airlines based on the cost and availability. The buyer has a wealth of information from websites and is able to compare prices and flight times. There are low switching cost between airlines, making it easier to switch from airline to airline based on cheaper prices and better amenities. Each airline has a niche which attracts customers, whether it be low cost, quality of airline, or amenities offered. Leisure travelers travel for vacation purposes or just to visit family and friends for holidays where as business travelers are there strictly for business purposes like analyzing annual reports or budgets. For corporate travelers, company travel policies usually indicate approved booking channels and preferred travel providers whereas the leisure traveler can visit multiple booking sites for cheaper prices and better offers. Corporate travelers have less bargaining power than leisure travelers. They are unable to choose the location of the conference, the hotel, whether it be a 5 star or 3 star, price in some aspects, and sometimes seat selection.

Conclusion

From what I have drawn from my PESTEL analysis and Porter’s five-forces, I have concluded that the airline industry is not an attractive market for a brand new airline to enter into. It has become highly competitive and too expensive for many businesses to start up. This has led to many airlines being pushed out of business and increasing number of mergers. Fluctuating profitability, fuel and oil prices make it even tougher to enter. Although, if existing airlines decided to expand into a new market, that could be a more attractive market. As for the 5 year outlook, I see this industry moving more towards environmentally friendly fleets to reduce carbon emissions, noise, and fuel consumption. This could change the way planes look, operate, and the overall pricing strategy. If fuel is able to be conserved more, this could be a benefit to consumers in the future with lower airfares and eliminate surcharges. Price will always be a huge factor for any airline or consumer. One thing I don't see changing is the continued consolidation of major airline carriers to try and maintain their pricing power in the market. Technology is ever changing, so who knows how it will affect personal travel in the future or what it may even look like. It depends if airlines start to focus on targeting millennials. If the websites are easily accessible through mobile devices then advertising efforts will have to be focused on social media. Value propositions are important in maintaining your business and as well as when you are a new start up in the industry. You want to create a highly differentiated value proposition that will create a customer just for you. They are always from a customer perspective and deliver a level of value that they just can't get from anyone else. Let’s take a look at Southwest as an example. Southwest Airline’s value proposition is simply along the lines of getting passengers to their destinations on time, at the lowest possible cost, and to have fun while doing it. Southwest appeals to consumers by being the lowest possible cost and fun, something that will never go away. Consumers are always looking for a better offer especially with millennials on