You are on page 1of 5

Industry you are analyzing: ________Domestic Passenger Airlines___________________________

External Industry Analysis


Conduct an industry analysis on an industry of your choice, using the analysis tools below. Then, use
the results of your analyses to draw conclusions regarding the Opportunities and Threats that face
firms in the industry. Use as much space as necessary. Remember, you are analyzing an industry,
not a particular company in that industry.
1. Industry Characteristics: (market size, growth rate, competitors, etc.)
Market Size - $168,755,000,000
Growth Rate - Flat at a year to year rate of -.5% (Market Segment is Mature)
Competitors When it comes to the Aviation Industry, there is no direct competitor against it. There
are alternate forms of travel but nothing that would affect the aviation industry.
Product Characteristics- Commercial aircraft ranging from the high millions to mid billions of dollars,
provided by two companies, Boeing and Airbus.
Customer Demographics The airline industry caters to all ages, but prefers to target business
customers because they are most likely to fly the most and get upgrades. This helps make the
airlines more profit.
Industry Profitability - $25,584,000,000 or 15.16 % Net Margin
2. Driving Forces of Change (list and explain the effect of each on firms in the industry):
-

Industry growth rate Not much of a factor. The industry has reached the mature stage and
must work to maintain or lower costs.
Societal Changes Not much of a factor. Many people have taken to flying on commercial
aircraft and many people feel now that flying is safer than driving a car. However, with terrorism
on the rise and security being increased, many passengers have second thoughts about flying.
This small percentage of people, however, have not hurt the industries bottom line.
Regulatory Changes Major Factor. Landing and taking off at the major airports in big cities
such as New York City, Washington DC, and Chicago are regulated by the federal government
in efforts to prevent congestion. Also airlines pay major fees for taking off and landing at these
airports. Also service to small isolated airports are regulated by the government. In addition to
operational regulations, airlines face a barrage of safety regulations. From number of seats, to
the size of the walkways inside each jet airlines are faced with many restrictions.
Product Innovations Non Factor. When the product or Aircraft in this case changes, Airlines
would simply replace its older aircraft with the new and improved design. This may affect the
smaller airline carriers if the new design is costlier, but overall it will not have an effect on the
industry as a whole.
Technological Change Technology is something that moves at a tremendous speed. The
airline industry has seen aircraft that are now cable of streaming satellite television to allowing
passengers to use Wi-Fi while in flight. We have also seen a shift to where buyers can buy
their own tickets online without the need of a travel agency. Airlines in the future will see
aircraft that can fly on alternate fuels or by using solar power. We have just recently seen an
aircraft fly around the world without passengers using solar panels as its source of energy.

With this advancement in technology, it will, in the long run, allow the Aviation industry to
reduce transportation costs.
Marketing Innovation Currently the US domestic airline industry markets through several
streams. From TV ads to airline miles through your favorite credit card. Marketing in the past
has been focused on obtaining new customers and not particularly focusing on existing
customers. However, this is beginning to change in the industry as many carriers have adopted
a reward program with airline miles. They are starting to market and obtain loyal customers.
Especially business customers who spend more on a per passenger revenue basis.
Industry consolidation Major Factor. In the Airline industry we have seen many mergers.
Some of the major ones have been, American airlines/US airways, Delta/Northwest,
United/Continental, and Southwest/AirTran. Whenever these mergers take place we see an
industry where the number of aircraft does not change but the shifting of power changes.
These main four airlines are the ones who hold the majority of the market share in the industry.
They are more routes to more airports with better ability to expand with the establishment of a
merger. Mergers threaten the smaller airlines and essentially effect prices that passengers
may have to pay.
Industry Globalization Low Factor. The Domestic Airline industry has a low possibility of
losing market share to global competition. Many airlines do not have the capability or
economies of scale to afford to compete extensively within the US. The only factor that
globalization has on the domestic airline industry, is the possibility to pull market share from
some of the major routes. Routes such as New York City to Los Angeles.

3. 5 Forces of Industry Competition: (for each force, state whether it is strong, moderate, weak,
and then list the supporting facts about the industry that led to your conclusion bullet points are
fine)
Industry Rivalry: Strength __Strong__________
-

There are 25 different airline couriers in the US market


Planes (Product) are all similar with very few modifications

Threat of New Entrants: Strength __Weak_________


-

Entering the Airline industry requires vast amounts of Capital.


Access to major, more frequented airports are regulated by the Federal government
Brand loyalty and airline mile incentives make it harder for new entrants
Requires extensive knowledge and expertise of the industry

Threat of Substitute Products: Strength ____Weak________


-

The major routes have now fear of substitute products.

The regional airlines have a slight fear of alternatives, such as trains and buses, but airlines
have convenience and amount of time it takes to travel from destination to destination on its
side. The fear here would be the price would be too high and customers would select one of
these alternatives.

Bargaining Power of Suppliers: Strength ___Strong_______


-

There are only two suppliers of aircraft, Airbus and Boeing.


The competition of these two companies help keep prices fair but can also cause prices to be
higher than if there were more suppliers.
Fuel prices are dictated by the global market and the airline industry has no say.

Bargaining Power of Buyers: Strength ____Strong_________


-

Buyers no longer have to buy tickets through a travel agency. They can now purchase tickets
online.
They can search for the cheapest price and do not have to settle for the first price they see.

Conclusions from 5 Forces Analysis (re: industry attractiveness and profit potential):
In conclusion, the domestic airline industry is very competitive. It has four major carriers that make
up a huge part of the market share, and multiple other carriers fighting for the rest. The airline
industry is also very hard to get into. One must have huge amounts of capital, knowledge, and
expertise. The airline industry is not threatened by substitute products. Trains and buses do not offer
the same type of experience and are therefore not used very often to replace flying on an airline. The
bargaining power of suppliers is strong because there are only two suppliers of aircraft and the
market price of fuel is dictated by outside controls. Finally, the bargaining power of buyers is high
because the buyer has many different options when selecting which airline. The seats in many aircraft
are the same from carrier to carrier. Although profit potential can be very high, the industry is not an
attractive one to enter. The airline industry is complicated and takes a lot of patience and risk.
4. Industry Key Success Factors (list and explain why each is a KSF)
- Keeping Airline ticket prices as low as possible
o Buyers of tickets for flights are often times looking for the lowest price when considering
the cost of the ticket and any fees.
- Building Brand loyalty
o Switching costs are low and therefore each carrier should work to do whatever it takes
to get repeat customers. Those loyal to a certain airline will often return to the airline
even if the price is a little more expensive.
- Keeping costs low

o With cheaper ticket prices comes the need for airlines to reduce costs. Whether that is
investing in research of alternative fuels or finding way to eliminate having empty seats
on flights.

Industry Opportunities and Threats


(be as specific as possible)

Opportunities

Threats

(for firms to increase growth / profitability)

(against increased firm growth / profitability)

Airlines can focus on existing customers.


They can offer those who fly with them
certain coupons or vouchers to save
money with them on future flights.
The industry can focus on improving airline
terminals. Many of their customers have to
sit in terminals often times for hours before
they board their aircraft. Some of things
that could be offered to customers for free
or a small fee, is short documentaries
explaining things to do while visiting their
place of travel. Or offering virtual realities
headsets to explore HD pictures of where
they are traveling. Airlines need to focus
on comfort of its passengers and reduce
the stress and wait times experienced by
many.
Ditch the costly TV ads and focus more on
word of mouth and creating brand loyalty.
Many times customers buy tickets off of a
price, not by an ad they saw on TV.
Allow customers to buy first class tickets
cheaper if they are not all filled on a
particular plane. Or raffle them off to those
who are waiting in the terminal. It is better
than leaving them empty and making any
profit off of them.
More mergers could spell more profitability
for the industry because it gives carriers
more routes and better expansion than
they previously had.

Sources

Rising fuel costs are a problem for airlines.


They increase costs and lead to smaller
profit margins.
Regulations at airports imposed by the
federal government. Also strict regulations
on training/flying time for pilots and safety
features. There are also regulations on
prices and scrutiny of mergers.
Suppliers can raise the prices and threaten
the rate at which smaller airlines can buy
new aircraft. With only two suppliers, the
airline industry is really forced to pay the
prices dictated by the them without having
many alternatives.
A small threat is the rising shortage of
qualified pilots. With more people flying
and less pilots being trained, the industry
could run into a problem getting the
number of pilots needed to fly all the
available routes.

5 Ways that Marketing Can Save The US Airline


Airline Financial Data
The Runway to the Final Four
Porter's Five Forces Analysis of Airlines Industry in United States
What GAO found
Bureau of Transportation Statistics