Structural analysis of an industry is a valuable tool that can be used as a primary determinant of a firm's long-term profitability. Understanding the dynamics of competitive forces can provide insight into the attractiveness of an industry and the potential for returns on capital. Michael Porter, a Harvard Business School professor, has developed a framework for understanding an industry's structure. Porter's analysis is widely taught in business schools and commonly used by analysts. Porter's book, Competitive Strategy, provides an excellent, readable resource for understanding the impact of competitive forces on an industry. According to Porter, the five competitive forces affecting an ...view middle of the document...
Barriers to entry are also heightened by the hub system in the airline industry. Carriers can offer travelers more choices while tying up less capital through their hubs. As a result, the hub system creates market power for large carriers.
Bargaining Power of Suppliers
Factors relating to the bargaining power of suppliers include the threat of forward integration and the concentration of suppliers in the industry. Suppliers are concentrated within the airline industry. Boeing and Airbus supply most commercial fixed-wing air carriers. Supplier concentration makes it difficult for competitors to exercise leverage over the supplier and obtain lower prices or play one supplier against another. The threat of forward integration is low. It is unlikely that Boeing, for instance, would staff flight attendants, commercial pilots, and a maintenance crew, and operate flights all across the country. Supplier power further diminishes the ability of competitors to earn high profits.
Bargaining Power of Buyers
The third competitive force is the bargaining power of buyers. If significant buyer power exists, industry returns can accrue to buyers in the form of lower prices. Buyer power is determined by switching costs, the relative volume of purchases, the standardization of the product, elasticity of demand, brand identity, and quality of service. Buyers are presented many choices when choosing an airline carrier. Because of the Internet, pricing information is less fragmented and easier to compare. Often, a traveler can find price discrepancies for the same exact flight. One seat is hardly any better than the next since everyone arrives at his or her destination at the same time. Vacation travelers will also search out the best deals. Airline travel is not cheap, and can be the most expensive part of a family vacation. Hence, for some buyers, demand is very elastic (as the price drops, demand increases). However, airlines may move their prices in tandem with other carriers and force buyers to pay the market price until a price war breaks out.