Threat of Entry

The threat of new entrants presents the possibility that new firms will enter the industry
and diminish industry returns by passing along value to buyers in the form of lower
prices and raising the cost of competition. Factors that determine the threat of entry
include capital requirements, economies of scale, switching costs, and brand value. In the
airline industry, access to capital is plentiful. Banks extend credit to airline carriers, and
the debt and equity markets provide alternatives for raising funds. Because it's relatively
easy for weaker airlines to obtain credit, the industry has become saturated.

Brand identity is important in the airline industry, and benefits larger airlines. Major
carriers allocate considerable resources to marketing efforts. Frequent flier programs and
other incentives have been successful in enticing travelers to fly with certain carriers. The
frequent flyer incentive can often be strong enough to cause a customer to choose one
carrier over another -- even when the other carrier offers a lower fare.

Barriers to entry are also heightened by the hub system in the airline industry. Carriers
can offer travelers more choices while tying up less capital through their hubs. As a
result, the hub system creates market power for large carriers.

Bargaining Power of Suppliers

Factors relating to the bargaining power of suppliers include the threat of forward
integration and the concentration of suppliers in the industry. Suppliers are concentrated
within the airline industry. Boeing and Airbus supply most commercial fixed-wing air
carriers. Supplier concentration makes it difficult for competitors to exercise leverage
over the supplier and obtain lower prices or play one supplier against another. The threat
of forward integration is low. It is unlikely that Boeing, for instance, would staff flight
attendants, commercial pilots, and a maintenance crew, and operate flights all across the
country. Supplier power further diminishes the ability of competitors to earn high profits.

Bargaining Power of Buyers

The third competitive force is the bargaining power of buyers. If significant buyer power
exists, industry returns can accrue to buyers in the form of lower prices. Buyer power is
determined by switching costs, the relative volume of purchases, the standardization of
the product, elasticity of demand, brand identity, and quality of service. Buyers are
presented many choices when choosing an airline carrier. Because of the Internet, pricing
information is less fragmented and easier to compare. Often, a traveler can find price
discrepancies for the same exact flight. One seat is hardly any better than the next since
everyone arrives at his or her destination at the same time. Vacation travelers will also
search out the best deals. Airline travel is not cheap, and can be the most expensive part
of a family vacation. Hence, for some buyers, demand is very elastic (as the price drops,
demand increases). However, airlines may move their prices in tandem with other carriers
and force buyers to pay the market price until a price war breaks out.

Availability of Substitutes
The fourth factor affecting industry competition is the availability of substitutes. The
relative price of substitutes and the buyer propensity to substitute have effects on the
industry. Likely substitutes for airline travel include automobiles and trains. Driving from
Washington, D.C., to Philadelphia may provide a cheap mode of transportation, and
buyers may be more inclined to use automobile travel for such a trip. A less hurried
traveler may hop aboard a train and enjoy the relaxation and scenery that train travel
affords. However, airline travel can save time and money for longer distance adventures.
Flying from Washington, D.C., to San Francisco is often cheaper -- and far more time-
efficient -- than chugging along in a train or automobile. As a result, buyers may be more
inclined to choose air travel to reach their destination. The threat of substitutes has to do
with time, money, personal preference, and convenience in the air travel industry.

Competitive Rivalry
The final factor is competitive rivalry. Intensely competitive industries generally earn low
returns because the cost of competition is high or buyers are receiving the benefits of
lower prices. Factors that affect competitive rivalry include industry growth, fixed costs,
brand identity, and barriers to exit. The airline industry is fiercely competitive. Industry
growth is moderate, and carriers are struggling to take away share from each other.
Barriers to exit are substantial in the airline industry. Grounded planes do not earn any
returns and disposing of these assets is difficult. Often, because of bankruptcy laws,
companies in financial distress such as Pan AM or TWA can remain competitors for a
very long time.

Not all of these factors are equally important when assessing the overall attractiveness of
an industry. In the airline industry, it's easy to gain entry, but very difficult to get out.
This is often the worst possible scenario for a competitor. Not surprisingly, airlines have
been mediocre investments in recent years.

It is important to note that a full-fledged industry analysis would require talking with
customers, suppliers, competitors, industry experts, and a variety of other sources.
However, as a general overview, using Porter's five forces is an excellent way to get a
feel for whether or not you would like to invest in a particular industry

The airline industry is very competitive and Michael Porter’s five-forces model can be used to analyse the intensity of the

competition and the profitability of this industry. Porter’s five forces model is a business unit strategy tool which is used to make an

analysis of the value of an industry structure (Hubbard, 2004, pg 35). The analysis is made by the identification of 5 fundamental

competitive forces. These include:

• Entry of Competitors

• Threat of Substitutes

• Bargaining Power of Suppliers

• Bargaining Power of Buyers

• Rivalry among the existing players

(Hubbard, 2004, pg 35)

One of the forces identified by this model is the threat of new entrants which refers to the possibility of new competitors entering

the industry and undermining the profits of the established businesses. The degree of threat en route for Virgin Blue in the future

is determined by the existing barriers to entry. In the world today, the airline industry is so saturated that there is hardly space for

a newcomer to enter the market. The biggest for this is the cost of entry. The airline industry is one of the most expensive

industries, due to the cost of buying and leasing aircrafts, safety and security measures, customer service and manpower. Other

barriers to entry which will recess new comers into the airline industry include Government restrictions and high capital costs to

develop new airlines. However, the entry barriers for new airlines is lower today since the Australian domestic airline market was

deregulated in 1990, which since its founding, Virgin Blue has seen more airlines start up and existing airlines expanding their

market due to this deregulation. This has produced far greater competition than before deregulation in most markets. The

deregulation has allowed Jetstar and Tiger Airways enter the market and reduce the market share for Virgin Blue and with the

added competition, together with pricing freedom, means that there is a major constraint on profitability for the airline industry.

The bargaining power of buyers is another force that can affect the competitive position of a company. This refers to the amount

of pressure customers can place on a business, thus, affecting its prices, volume and profit potential. The various airlines flying

from the Gold Coast airport are competing for the same customer, which also results in strengthening the buyer power. Individuals

wishing to travel to and from the Coolangatta airport are presented with various choices when selecting an airline but price is

usually the most important factor, especially for students and families. Hence, the bargaining power of customers in the airline

industry is very high since they are price sensitive and search for the best deals available. Virgin Blue attracts travellers that are
price sensitive by offering them low fares and those that are convenience oriented by providing them with frequent flights. Qantas

on the other hand has created a frequent flyer program to create switching costs which may be a significant factor to a traveller

when choosing which airline to fly with.

In addition to buyers, suppliers can also exercise considerable pressure on a company by increasing prices or lowering the quality

of products offered. The bargaining power of suppliers depends on supplier concentration, substitute supplies, switching costs,

threat of forward integration and buyer information Suppliers within the airline industry are concentrated since Boeing and Airbus

are the main suppliers. As the supplier industry is dominated by Boeing and Airbus the concentration undermines the ability of

airlines such as Virgin Blue to exercise control over suppliers and earn higher profits. Since Virgin Blue has a fleet of 53 Boeing

737 aircraft its supplier has a high bargaining power over Virgin Blue. However, other suppliers who work with the airline such as

the providers of on board snacks do not have the same bargaining power as they are a larger industry which allows for Virgin Blue

to have a choice over who they are purchasing from. Virgin Blue will purchase their on board snacks from the supplier which is the

most economic so Virgin Blue can make a higher profit margin from the goods when they are sold.

The availability and threat of substitutes is another factor that can affect competition within the airline industry. It refers to the

likelihood that customers may switch to another product or service that performs similar functions. Substitutes for air travel include

travelling by train, bus or car to the desired destination. The degree of this threat depends on various factors such as money,

convenience, time and personal preference of travellers. The competition from substitutes is affected by the ease of with which

buyers can change over to a substitute. A key consideration is usually the buyers switching costs, however due to their low fare

non-stop flights, Virgin Blue, Jetstar and Tiger airways can lure both price sensitive and convenience oriented travellers away from

these substitutes. Virgin Blue has actually joined forces with its substitutes, such as car rentals and hotel and tour packages as

they believe that these complement the Airline Industry by helping its growth and popularity. No other travel industry has such

incentives and these really help the airline industry to a large extent.

The final force in Porter’s model is competitive rivalry that describes the intensity of competition between established firms in an

industry. Industries that are very competitive generally earn low profits and returns since the cost of competition is high. The

airline industry is usually characterized by the cut-throat competition that exists among the rival airlines due to its low cost nature.

Since the carriers are involved in a constant struggle to take away the market share from each other, industry growth is average

and as it is easy for buyers to switch between the airline companies, depending on price, the rivalry is increased. Rivalry is also

high in the airline industry due to high fixed costs, as much of the cost of a flight is fixed, there is a great opportunity for airlines to

sell unsold seats cheaply, which resolve in pricing wars between the airlines. The airlines are continually competing against each

other in terms of prices, technology, in-flight entertainment, customer services and many more areas. The net result of this

competition between companies is an overall slow market growth rate.

In conclusion we can understand that the airline industry is very competitive and Michael
Porters five-forces model can be used to explain why the potential for returns is so low in
this industry. Firstly, the threat of new companies entering the industry is high and the
entry barriers are low. Secondly, the bargaining power of customers is high since they are
price sensitive and search for the best deals. The third force, bargaining position of
suppliers, is strong since they are concentrated and this limits the control airlines have
over suppliers to reduce prices and earn higher profits. The availability and threat of
substitutes is another factor that can affect a company’s competitive position. However,
the degree of this threat depends on various factors such as time, money, convenience and
personal preferences of travellers. The final force in Porters model is competitive rivalry
between the companies within an industry. Cut-throat competition exists among the
airlines and since there is a constant struggle for market share, the over all profit potential
of this industry is low

Porter Competitive Model

Airline Industry Analysis – Indian market
Aircraft Manufacturers
Aircraft Leasing
Companies
Labor Unions Foreign Carriers
Food Service Companies Potential Regional Carrier Start ups
Fuel Companies New Entrants Cargo Carrier Business Strategy Change
Airports
Local Transportation
Service
FAA
Hotels

Intra-Industry Rivalry
Bargaining SBU: American Airlines
Rivals: United, Delta, US Air, Bargaining
Power
Northwest, Southwest Power of Buyers
Of Suppliers

Travel Agents
Business Travelers
Federal Government
Alternate Travel Services Substitute Pleasure Travelers
Fast Trains
Boats
Products Charter Service
Cargo and Mail
Private Transportation And Services
Videoconferencing
Groupware