Nature of competition in the airlines industry

>The nature of competition in the airline Industry is Intense. The competition is created and guided by many market factors. Airline Industry is one of the world's largest Industry. In 2001, total revenue of almost 300 billion US dollar was reached by this Industry (www.ba.com accessed on 11.01.2010). As the world grew and the globalization took place all around the globe, this Industry was among the top Industries, which expanded exponentially. The main reason for the massive expansion of this Industry still remains the deregulation and privatisation. This ended the monopolistic attitude of this Industry and exposed it to the market forces of competition. All the flagship and state owned airlines companies were exposed to this new market which was actually based on the competitive forces.

The nature of competition has been somewhat different from the inclusion of the low cost carriers in this Industry. They focus on the short haul and point to point strategies, which has turned the table upside down, as the most profitable airlines today are these airlines. Earlier, concentration was on having a strategy which focused more on the long haul flights. Privatisation and deregulation have to do a lot for this. Earlier, many airlines faced considerable performance problems, sometimes because of lack of adaptability and also because of the performance management. Some important event such September 11th, dangerous SARS virus and high oil prices has forced for the Industry for the reduction of the fares (Steffanie Hoffman, 2006). Now the airline Industry is a price elastic Industry which means the prices decreases immediately as early as the demand increases.

Air alliances also play a major role in shaping the competitive forces in the airline Industry. The largest carriers belong to one of the four global alliance groupings - Wings, star alliance, one world and Sky Team which represents fifty six percent of the world revenue passenger kilometres (Journal of air transport management, 2005). Alliances are considered as a defensive economic strategy for dictating the market. It reduces the prices generally and increases the passenger traffic. Sometimes, the alliances could create anti competitive forces in the market and thus require a regular check from the aviation authorities. For example, Ryanair had plans to aquire Air Lingus but this could have led to the rise of anti competitive forces in the market because of the creation of monopolistic behaviour in the market as both would have acquired 70% of the routes (Journal on Airlines competition in British Isles by Alberto Gaggero and Claudio A.Piga). The European Union stopped this to happen.

The nature of competition in the airlines Industry could be analysed with the help of Porters five forces (http://www.investopedia.com/features/industryhandbook/airline.asp accessed on 11.01.2010)

  1. Threat of new entrants- At a first glance it looks like it's quite tough to get into the airlines Industry but because of the presence of the low cost airlines, the scenario has changed a lot.
  2. Power of suppliers- Since there is presence of just two suppliers- Boeing and Airbus, there is no cutthroat competition among the suppliers.
  3. Power of buyers- The bargaining power of the buyers is not a concern.
  4. Availability of substitutes- There is almost nil availability for the International flights and has some options in the regional segment.-
  5. Rivalry among existing competitors- It's quite intense as the cost of competition is high and has low returns.

According to the principles of Bain's barrier to entry, the low cost airlines fall in the overall barrier category of moderate to low whereas the long haul airlines falls in the substantial overall barrier category( Class lecture from professor Romano Dyerson at Royal Holloway in November 2009).

Taking all the analysis and in depth principles of economics into consideration, it is observed that, the nature of competition in the Airlines Industry is quite intense.

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