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Following the deregulation of the airline industry that happened in 1978, several changes needed to be adopted by all airlines in the United States. The following are some of the changes that happened after the deregulation. First, prices were constantly adjusted in the industry. Airlines spent most of their time monitoring the prices of their rivals, and a majority of them had to make even very small price cuts to ensure that their specific flights would appear first on the travel agent’s computer reservation system. To ensure that potential clients knew of any price changes done by their favorite airlines, the airlines had to advertise significantly (Camerer, Loewenstein & Rabin 2011). Airlines also introduced incentives such as discount fares as efforts of luring customers increased. Second, airlines had also their yield management departments decide on the allocation of seats to the two main categories, the supersaver category, and the full-fare coach category. Third, computer reservation systems were adopted to assist airlines setup complex fare structures for their flights.
The five forces model was initiated to assist companies to evaluate the nature of an industry’s competitiveness and create corporate strategies accordingly. The guidelines assist a business to recognize and analyze the significant forces that define the profitability of an industry. The internal rivalry and entry/exit components of the five forces model assists evaluate the level of competition in an industry and the potential factors that may force firms out of the industry or those that may attract more firms to join the industry (Miles, 2011).
The following items will directly impact the stated component of the five forces:
Entry of new airlines- threat of substitutes
Frequent flyer programs- bargaining power of buyers
Airport slots- bargaining power of suppliers and threat of new entrants
Corporate discounting- bargaining power of buyers
Airline pricing- competitive rivalry
Entry of new airlines will directly affect the threat of substitutes. More airlines getting in the industry implies that there will be more airlines serving the same purpose and thus the customers will have the option of choosing the airline of choice.
If more frequent flyers are introduced in the industry, then the bargaining powers of the buyers will increase. Buyers will enjoy the benefits of choosing the airline that rewards them heavily for after redeeming the points they will have accumulated after flying with them.
If the airport slots are increased, then two components will directly be affected, the bargaining power of suppliers and threat of new entrants. More airport slots will give aircraft manufacturers like Airbus and Boeing the supplying power since more aircraft are likely to be gotten from them. Moreover, more airport slots will imply that new airlines can get into the industry to fill the available slots. New airlines getting into the industry are likely to be a threat to the existing airlines.
If the corporate discounts increase, so will the bargaining powers of the buyers. Corporate discounts act as incentives to buyers, and thus they are likely to choose the airlines with the biggest corporate discounts. Buyers are prince sensitive, and any price cut that may occur through the discounts is likely to attract them.
Airline pricing is likely to increase competition rivalry in the industry. Price wars will result as airlines try to win more customers by attracting them through the prices that they will set. As said earlier, customers are price sensitive, and thus slight changes in pricing are going to affect their choices.
Increases in the bargaining power of suppliers and new entrants are likely to have a high threat to the industry profits. Suppliers have the power of increasing the costs of the aircraft which will reduce the profits of the airlines. Moreover, new entrants are likely to result in increased competition through pricing. Profits in the industry will reduce if new entrant charges low prices than the existing airlines more so because the existing airlines will be forced to reduce their prices too to remain competitive.
The number of slots an airline has been awarded in a specific airport can be essential in determining the profitability of an airline. The route selection, market share models, and the S-curve impediment illustrates how an airline can be in a position of maintaining a competitive advantage over its competitors. The number of airport slots allocated to an airline will determine its choice of the route that it decides to fly. Explaining this in details using the market share model, it is possible to know the share of the market that an airline will expect to command. An airline with more airport slots than its competitors can attract more passengers. Moreover, it is in a position of increasing its market share because the demand of its airline will rise (Pitt & Norsworthy, 2012). The S-curve of an airline with more airport slots is likely to be more flexible compared to that of an airline with a few slots. A more flexible S-curve implies that even the flight schedules are flexible and thus will attract more customers. More customers will mean more revenue and a big customer base which will lead to the airline having a competitive advantage over its competitors.
- Camerer, C. F., Loewenstein, G., & Rabin, M. (Eds.). (2011). Advances in behavioral economics. Princeton University Press.
- Miles, D. A. (2011). Risk factors and business models: Understanding the five forces of entrpreneurial risk and the causes of business failure. Boca Raton
- Pitt, I. L., & Norsworthy, J. R. (2012). Economics of the U.S. commercial airline industry: Productivity, technology and deregulation. New York: Springer Science+Business Media, LLC.