The Industry’s Dominant Economic Features

Market Size: The global airline industry consists of over 2000 airlines operating more than 23,000
aircraft, providing services to over 3700 airports. In the year 2009, the industry’s revenue was
estimated to be $483 billion. Major services of this industry include domestic passenger flights
which accounts for about 30 percent of industry revenue, international passenger flights contributing
25%, domestic cargo flights contributing 20%, international cargo flights which account for about
10% and domestic commuter passenger flights contributing 10% of the industry revenue. The U.S
constitutes the largest airlines industry in the world, accounting for about 49.8% of the global
revenue. US airlines reported over $160 billion in total revenues, with approximately 545,000
employees and operate over 11 million flight departures per year, and carry one third of the
world’s total air traffic.
Growth Rate: The global airlines industry grew by 6.3% in 2008 to reach a value of $467.4 billion. In
2013, the global airlines industry is forecast to have a value of $609.3 billion, an increase of 30.4%
since 2008. The growth of world air travel has averaged approximately 5% per year over the
past 30 years, with substantial yearly variations due to changing economic conditions and
differences in economic growth in different regions of the world. The domestic segment
dominated in the global airline industry and accounted for 1.4 billion passengers in 2007,
equivalent to 66.5% of the industry's overall volume.
Number of rivals: The airline industry is characterized by the high competition that exists among
the rival airlines due to its low cost nature. Since the carriers are involved in a constant
struggle to take away the market share from each other, the rivalry is increased, as it is easy
for buyers to switch between the airlines companies, depending on price. The airlines are
continually competing against each other in terms of prices, technology, in-flight
entertainment, customer services and many more areas. The industry is fragmented into many
small companies. The key competitors in the industry include: American airlines, Delta, southwest,
United airlines etc. As in many mature industries, consolidation is a trend. Airline groupings
may consist of limited bilateral partnerships, long-term alliances, mergers, or takeovers. Due
to the large number of airline companies the industry is not going through a period of
consolidation to a smaller number of companies.
Scope of competitive rivalry: Services of the industry can be segregated as domestic, regional,
within the continent or travel between continents. Large companies compete with other major
companies on a national or global scale. However, Small airlines can compete by serving local or
regional routes. Competitive rivalry is high and hence, the demand for air travel is inelastic because
there are many different airlines to choose from. Example: Southwest VS American airlines.
Number of buyers: The market demand is fragmented among many buyers. The important customer
segments in the industry include corporations, SME’S and leisure travelers. The various airlines
are competing for the same customer, which also results in strengthening the buyer power.
Individuals wishing to travel have various options to choose from when selecting an airline but
price is usually the most important factor. Hence, the bargaining power of customers in the
airline industry is very high since they are price sensitive and search for the best deals
available.
The degree of product differentiation: The products and services of the rivals in the industry are
less differentiated. The airline companies mostly fly similar aircrafts and hence, have identical
or near identical seating configurations. Frequencies and timings are very similar with only a
few airlines prepared to allow their competitors with frequency advantage. The onboard
products are also mostly comparable, and do not have much change. In order to attract more
customers there is severe price competition within the industry, with airlines ruthlessly
undercutting each other with fare promotions. Hence the look alike products of rivals cause
heightened price competition.
Product Innovation: Innovation plays a major role in airlines’ strategy, which focuses on Internet
Protocol technologies, end-to-end services to the desktop and airport integration. The airline
industry is characterized by having rapid product innovation and depending on the market
conditions and buyer demands certain products may have short life cycles in this industry. For
example some flights may have innovation in their in-flight products, and thus if it is
unpopular with passengers it has to be quickly withdrawn. Hence, there are opportunities to
overtake key rivals by being the first to market with next generation products.
Pace of technological change: The airline industry is growing leaps and bounds because of the
revolutionary advancement in the techno world. It has completely changed the structure, form,
and future of the industry in all ways. Internet has given a huge thrust to the industry by
heightening the comfort level provided by art transport in various ways. The benefits offered
include the availability of cheap airfares through online booking; Travelers can also compare
prices of different airlines and then choose the best offered price. Carriers have been able to add
more functionality, especially in customer service areas ranging from check-in desks upwards.
Furthermore, they have also been able to integrate internal systems. Internet Technology has become
recognized as a major enabler for aviation to work effectively and safely, while achieving substantial
cost savings. Hence, industry members cannot operate without technological capabilities and thus
they need technology to compete and survive within the industry.
Supply/ Demand conditions: Intense competition within the industry leads to surplus of capacity in
several markets. As a result of surplus of capacity many airline companies get into the price war in
order to attract more customer demand. Hence, surplus of capacity may push prices down however;
this usually doesn’t affect the profit margins. This is because the prices are lowered as a result of a
cut in the costs. The airline companies in the case of excess capacity, cut back on the cost in the form
of entertainment, meals etc. For example southwest lowers its price by cutting down on
entertainment, meals etc. hence they still make a profit. There are number of airlines making the
airline industry fairly crowded. As a result short supplies are not found in the industry as there would
be a lot of substitutes to choose from.
Vertical Integration: Vertical integration maybe found in some of the companies in the airline
industry. By performing the traditional role of travel agents airlines achieve forward
integration. Likewise by performing the role of suppliers such as aircraft maintenance and in
flight catering airlines have backward integration. In this industry, some competitors operate
in multiple stages. For example the UK’s biggest charter airlines Thomson fly, Thomson holidays
(Britain’s largest tour operator) Lunn – poly the travel agency with the biggest high street presence
are all subsidiaries of the same parent company the German Firm TUI. Hence, through such vertical
integration the airline has a guaranteed outlet for its production.
References

• http://www.pp.bme.hu/tr/2003_1/pdf/tr2003_1_03.pdf

• http://web.mit.edu/airlines/analysis/analysis_airline_industry.html (Sundaresan)

• (Shaw, 2007)http://www.aerlines.nl/issue_28/28_Dostaler_Flouris.pdf

• http://adg.stanford.edu/aa241/intro/airlineindustry.html

• http://docs.google.com/viewer?
a=v&q=cache:9qvqPjEjtqIJ:bcs.solano.edu/workarea/mgarnier/MGMT
%252050/Southwest%2520Porters%2520-%2520Brief
%25202.pdf+exit+barriers+in+airline+industry&hl=en&gl=lk&pid=bl&srcid=ADGEESg
NdX6kQxq6kKkqVoeL1LdoWJmNwaLs03uwh398XI5ZHiLnu3oG-
TQpnrvGqLB4BkHHqFZgbj_QK5Mlg9A7ZnSU0mFAofKTvr0cqeTUKPvx6kbwW3TT
oIWhHvFPWAGshqrzNmts&sig=AHIEtbTBQ9vQhobF-V87Eg70E6R_UybYiQ

(Kelemen, 2002)

(Anonymous)

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