Lecture 2 Case Study: The Airline Industry Pre and Post 9/11
Question 1: Analyse the attractiveness of the airline industry pre 9-11.
When analysing the attractiveness of the airline industry, Porter’s five forces framework is an important tool that can provide useful insight of the overall profitability potential (and thus attractiveness) of said industry. Generally, in industries where the five forces are high, the attractiveness is low because of too much competition – which in turn leads to limited profitability, if any.
Pre-9/11 there were a number of drivers that saw demand for flights increase from 450 million passengers in 1990 to approximately 700 million in the year 2000. The rise of world GDP, with 55% of passengers travelling for leisure, initially indicates a very strong industry – especially with increasing world trade and investment, liberalisation of markets and growth in the number of retirees with an enthusiasm for travel.
However, Porter’s five forces below help analyse the industry further and enable one to come to a better conclusion.
a) The threat of entry:
How easy it is to enter the industry directly influences the level of competition. An attractive industry has high barriers to entry. In 1978, the introduction of the US Open Markets policy effectively removed barriers to entry, enabling numerous competitors to enter the industry. Deregulation in the industry brought about the freedom for airlines to choose routes and set prices in accordance with demand. Just before 9-11, the US accounted for 40% of the world air travel market, and with low barriers to entry, this indicates the threat of entry to be high.
b) The threat of substitutes:
The threat of substitutes in the airline industry was high. Increased competition led to lower prices and diminishing profitability.
The emergence of Low Cost Carriers (LCC) changed the nature of airline competition. The more traditional Full Service Carriers (FSC) felt...