Porter Five Analysis of the European Airline Industry Essay

While the business model existed for some time (first such in 1973 US), the appearance of these in the European market needed the liberalization brought forth by the EU, implementing the „Freedoms of the air† in three stages. In 1997 the first LCC (Low Cost Carrier), the Ryanair began its operation, and in a few years a few more followed, which gave the national and network airlines a new problem to the existing economic problem, shrinking market and others such as 9/11. By today the changes in the past two decades have shifted and diversified the industry, which was once a mature and to some level declining in structure. The new regulations, companies, investors and consumers have brought new life, the industry once again mature with fragmented characteristics. The ideal tool for the assessment of the airlines industry is Michael Porter’s five force model. It aims to find and demonstrate the forces in the microenvironment which influence the industry, internal and external as well. Threat of new entrants (barriers to entry) †¢High capital investment ? †¢Capital intensive ? †¢Airport slot availability ? †¢Predatory pricing ? †¢Brand loyalty/frequent flyer ? †¢Economies of scale ? Limited number of routes ^ The threat of new entrants, due to the barriers mostly set by the nature of the industry and by the existing companies, are very low. Yet sometimes when the possibility arises, new companies start: in the past few years many national companies went bankrupt leaving a market to take by the existing companies or new upstarts. Bargaining power of suppliers †¢Ai rcraft manufacturers †¢Relatively low number of suppliers ^ †¢Suppliers are concentrated ^ †¢Airlines are valued customers ? †¢Airports †¢Slot availability ^ †¢Alternatives to the primary airports ? The bargaining power of suppliers is mostly two-legged, and both have a medium threat. For both parties it is best to find a mutually working solution on a long term, because it is a industry with relatively small number of players loosing even one can have an impact on both sides. Threat of substitutes †¢Alternative transport (bus, car, train) ^ †¢Videoconferencing ^ †¢Global environmental awareness ^ The threat of substitutes includes a broad variety for the different needs. All-in-all it still only gives a medium threat, since the quick transport to a distance has no alternative. Bargaining power of customers †¢Price ? †¢Internet/social media ^ †¢Customer orientation ? †¢Choice ^ With the first LCCs the customers had no bargaining power: if you choose to go with this low price, accept the services as it is. However, nowadays with more alternatives and the ever-reaching internet and social media a bad customer satisfaction can be a disaster. This can however be mitigated with customer orientation, but still customer had the choice, it is a medium high level. Rivalry within the industry †¢Between LCC and national/network airlines ^ †¢Between LCCs ^ The rivalry within the industry is high due to the high number of big and medium sized companies. The airlines industry is highly competitive, with very high barriers and medium to high threats within. While there is a relatively low threat from a new market entree, the existing international competition is fighting over all the resources: more and better airports possibly with mutually excluding contracts, picking up the customers fed up with their previous carrier or starting a price war on a selected destination, binding the newly aquired flyers with brand loyalty programmes. Unless there is an opportunity, it is not an attractive industry to enter due to the high number of barriers. However, once established a foot, it is a very interesting and very intensive industry with good possibilities. The major LCCs depending on how low cost they are making good profit and there is still room for growth. The key factors for success should include: †¢Efficiently utilizing the resources (financial, time, human resources) †¢Utilizing a network of business partners (complementary) †¢Timely expansion (trying new destinations, increasing frequency) †¢Customer orientation (with following trends eg. ocial media) These above should be observed by both LCCs and traditional airlines. The industry standards are given, those companies will become successful which can effectively utilize them.