The Five Forces in the Airline Industry Although many of the mega-airtines such as American, Deka, and United have lost billions of dollars over the past few decades and continue to struggle to generate consistent Profitability, other players in this industry have been quite profitable because they were able to extract some of the eco- omic value crcated. The airlines, however, benefited from a windfall because the prices for jet fuel fell from a. high of $8.25 per gallon (in 201H to $1.50 (in 20%5), giving some reprieve to cash strapped airlines, Regardless, the mature of rivalry among airlines is incred- ibly intense, as consumers primarily make decisions based on price. In inilation-adjusted dollars, ticket prices have been falling since industry deregulation in 1978. Thanks to Internet travel sites such as Orbitz, Travelocity, and Kayah, Price comparisons are effortless. Consumers benefit from cut-throat price competition between cacriers and capture significant value Low switching costs and nearly perfect information combine to strengthen buyer power, Moreover, large corporate customers can contract with airlines to serve all af their employees’ travel needs: such powerful buyers Further reduce profit margins for air carriers, Entry barriers are celatively low, cesulting in a aumber of new airlines popping up. To enter the industry (on a small seale, serving a few select cities) a prospective new entrant needs only a coupie of airplanes, which can be cented; a few pilots and crew members; some routes connecting city pairs; and gate access in airports, Indeed, despite notoriously low ‘industry profitability, Virgin America entered the US. market in 2007. Virgin America is the brainchild of Sit Richard Branson, founder and chairman of the Virgin Group, a UK anglomerate of hundreds of companies using the Virgin brand, including the international airline Virgin Atlantic, is business strategy is to affer low-cost service between major metropolitan cities on the American East and West Coasts |i the airline industry the supplier poner is also strong The providers of airframes (eg., Boeing or Airbus), makers of aireratt engines (eg, GE or Rolls-Royce), aireraft main. tenance companies (eg, Goodrich), caterers (eg, Marriott labor unions, and airports controlling gate access al bargain away the profitability of airlines, To make matters worse, substitutes are also readily avail- able: I prices are seen as too high, customers can drive their cars or use the train or bus, As an example, the route between Atlanta and Orlando (roughly 400 miles) used to be ‘one of the busiest and most profitable ones for Delta. Given the increasing security delays at airports, more and moro People now preter to drive, Taken together, the competitive forces are quite unfavorable for generating a profit poten tial inthe airline industry: low entry barriers, high supplier Power, high buyer power combined with low customer switch ing costs, and the availability of low-cost substitutes, This ‘ype of hostile environment leads fo intense rivalry among ‘xisting airlines and low overall industry profit potential The surpcising conclusion is that while the mégaaiclines themselves (.., Anerican, Dela, and Unite) frequently strug- sle to make a profit the other players in the industrysuch a the suppliers of aircraft engines, aircraft maintenance companies, IT companies providing reservation and logistics services, caterers, airports, and so on—are quite profitable, all extracting significant value from the air transportation industry. Customers also are better off, as ticket prices have ‘decreased and travel choices increased.®