‘A Porter's five-force analysis of the airline industry ‘Table 16.12 Major airfne alliances, 2008 any ote adusres in 2006 airline industry Meat rom a variety of sources. Increasing al —— rie creat crunch and Simca cancatea.. | ee a ke Hyves ofthe issues which are naving & Ga Mifeot onthe industry Ho! wil these alee! innaty bei. 09 cris case study uses Porter's five-forces ‘Aer Lingus, American Aifines ‘irways, Cathay Paci, pan Aine, LAN, ‘Maley, Royal Jordanian, ‘star Aliance ‘ar Canad Air China, Air Now Zealand, ANA, Asian Airlines, ‘austrian Anines, BM}, LOT Polish ‘awines, Lufthansa, Scandinavian jome are ‘aitines, Shanghai Aifines w Aiines, South African competition mndreds of aifines in the world. Sc 1ys and American Always Singapore ue pisn Ai Bi oleracea Se yt The ia pc of 1 Nada HS iad roe pet rit uc. ne Yu Ths Aan ne i cnraoae okt Garam Ma San Go stnexstmpnaonente OT ras, arse AF FTE ee ‘isle cna Souther ai anes, C98 38> Fs nes as they typical operate ment More casuati 2 Contre es peted by the end of 2008, especialy among the Aine Te onnrest Anes Ser avlnes operat in EU sips a eee Morfe creit crunch 1 as “ Ther ecsrge asec) increased ie xpectane ‘than the demand for ‘seats. Even national flag meant that all ag@ trave! sen fin atv ing rae on ate na ave over te ast 20 ye8® Far ator tne orcs to save Ata iP i areurd 5 pe cont per]annum® Bon wave eae a eee ‘pr business ae eycical and wil te es er se omic goveh ad this demard iS en era Sere ecole to exeral ces THe Was 3 randed and a further 200000 | ‘without a holiday. One sharp drop in alr travel ater 11 September 2001, for Pe rey ote oe ar Fa eee Chapter and th acts of the rat 1 yuo corerie HAY rari be fet onthe volume of av 118 oN ea tegen. rte 82 cae poteved tate comand fr eur avel® Be aliances vere lccte: a rice go down travel neonses re rd vew vores) tis so general Pelee ig Open skis agreement has opened the Oe" © to possible strategic aliancos between anes so frat business travel Bie inelastic, that business topos or consideration a he td of 2008 - raoters are ess concered about whet they Pay 2S between American Airines, British Aways ‘and Iberia, someone else picks up the bill this is ‘questionable ‘Ths nas been heralded as the advent of (Ne global —gvennthe: extent to which the low-cost, no-ils mega-aliance. aps have expanded nine business marke) the numbers of ¥y and better health, have J more than before. The ‘The annual growth rate in Power of buyers passengers carted has fallen ftom 12 De ‘cent in rcreiaieend eee tog par contin 2007. Table 16.19.6hous the treakdown of lr travel by area and Procite) ‘growth 5s travel accounts: fajos up to 2011, and tean be seen that nese 272 ‘There has been faster growth in the ‘especially China a “There are two main reasons for ai business. Itis estimated that ousine eraround 15 per cent of air travel anc Ieisure Bt tant, Over the last 50 years the demand fOr of caval sia cer ncroased great. Demographic factors, Neladng developing counties: E‘Chapter 15 - Market structure Table 15.13 Air traffic by area Area Europe Asia/Pacific North America Migale East Latin America Africa Source: Adaoted rom ATA, 2008. Percentage of Growth rato global airtratic forecast in 2007 2007-2011 40 350 28 159 7 +42 7 468 4 +44 3 +56 ‘Another issue which might impact on the level of ‘demand for air travels the environmental impact of x flying, The International Civil Aviation Organisation has ‘a carbon emission calculator on its website, The UK government has announced that it wil introduce a new tax which will replace the current ai-passenger duty in 2009, The new tax wil be much higher than the current tax and itis argued that it represents a more realistic assessment of the environmental costs of ai travel Power of suppliers ‘There are two main organisations which dominate the supply of atcraft to airines - Boeing Company (US. based) and Airbus SAS (European based). Both ‘companies have full order books but are experiencing delays in production. Airbus has delayed deliveries of Its A380 because of wiring problems and Boeing is ‘experiencing ongoing industrial action by employees. ‘Another supplier of importance is the oil industry — oll, represents a third of the operating costs of the airlines. Beoause of rises in the ol price, the price of jet fuel rose by 80 per cent between 2007 and 2008, Threat of new entry ‘The threat of new entry is low because the airine ‘business carries very high fixed costs ~there are the ‘costs of purchasing and maintaining the aeroplanes and, the cost of landing at airports. All of these are fixed ‘costs which do not change if an acratishaif-empty. ‘Airspace was deregulated in the 1970s in the USA and in the 1990s in Europe, such that any quaified airtine can fly anywhere in the EU without government agreement. f web For further details see e.9. wwwiata org: www.icao.org; www.oneworid.com; www.staralliance.com; www.skyteam.com “This increased tne level of competion and alowedthe ‘smaller low-cost airines to establish themselves. The Open Sis agreement res aso reduced barra for compettion by existing ates not by new companies. n over toy anes have to pay apo charges and these are very high especialy nthe Biggar airports is is why the low-cost lines often operate and fom smal, less wel known ports) and hs may bo petitive The problems with Terminal 5 at Heathrow in 2008 led to delays in the transter of BA flights to the new terminal ac a backog of ates waiting to tke BAS emply lots Threat of substitutes For ntemational travel there is realy no substantia) ‘compatiion te air travel; sea travel accounted for only 10 per cent of international tps in 2007. Domestically the airiines are in competition with all other sorts of travel and there is evidence from the UK that between 2008 and 2007, the fastest growing ‘mode of transport for domestic destinations was railways (up from 6.2 per cent to 7.1 per cent). This ‘growth took place at the expense of road travel rather than air travel, which remained stati. Europe has been opened up as a destination for railway travel «with the opening of the Channel Tunnel. The low-cost airlines are cheaper than other ‘methods of travel and of course much faster. The fact, that in Europe countries are joined and the rail network is more developed may in part explain why the low-cost airinas do not yet have much of the ‘market (5 per cent) compared cent) and the USA (22 per cent). The Future “The airline industry is experiencing a period of rapid structural change for a number of reasons, which have been considered above. Its argued by many ‘commentators that this restructuring is necessary and that the industry that emerges will be much stronger. Case study questions 4 Why is there unlikely to be a price war between the low-cost providers in the airline industry? 2 What might be ihe effect on the industry of the pro- posed strategic alliance between British Airways, ‘American Airlines and Iberia mentioned in the text?