Case Study Plane Wreck: Airline Indusrty

As the nature of the good is a seat on a plane, clearly capacity constraints are present in the form of the limited seating on aircraft, as well as the inability to in the short run increase output beyond full capacity. During the setting of price, clear communication will most likely result in a non-static equilibrium. As well as this, the symmetry in terms of the market and cost structures has played a part in creating a successful cartel. Each firm produces a relatively homogenous good in terms of economy, business or first class, with a limited amount of features it can differentiate itself from its competitors. As well as this, using Figure 1, which will be discussed later on, demonstrates that the main costs to an airline are those which cannot be easily reduced or offset, most notably the cost of fuel and aircraft maintenance. Therefore both firms have near perfect knowledge of the cost structure and revenue through observing prices, and will aid in choosing a certain pricing strategy.

Suppliers generally have a moderate to high bargaining power within the industry due to the limited number of suppliers which forces aviation companies to choose from the number available and accordingly to accept their prices. In fact, fuel is the second highest cost for aviation companies. There are highly depended on supplier’s prices and the availability which indicates on a relatively high bargaining power of suppliers. In addition, there are high switching costs which are strongly in favor of the suppliers and means that the company experiences an increase in operating costs when switching to another supplier as flying another type of aircraft leads to additional costs (maintenance, training etc.).Aircrafts are vulnerable to delays due to the location of gate locations which leads to a decrease in utilization and therefore to an increase in costs.

Private jet crash that killed four members of Osama Bin Laden's family crashed while attempting to land at Blackbushe Airport

Bargaining power of customers: In airline industry the bargaining power of the customers is low to medium, because the buyers are not concentrated; there is no threat of backward integration.

1. There are a few trends in the US airline industry. One is consolidation, wherein existing players merge in an attempt to lower their costs and generate operating synergies. The most recent major merger was the United Continental merger, which is still an ongoing affair, but has created the largest airline in the United States by market share (Martin, 2012). Another trend is towards low-cost carriers. In the US, Southwest has been a long-running success and JetBlue a strong new competitor, but in other countries this business model has proven exceptionally successful. The third major trend is the upward trend in jet fuel prices, and the increasing importance that this puts on hedging fuel prices and capacity management (Hinton, 2011).

Market structure can be defined as patterns of behaviour by enterprises in an effort to adjust to the markets in which they operate (buy or sell). Pricing strategies and collusive behaviour mergers are a few dimensions of market conduct. It is the industry norm for a legacy carrier to offer service to most popular destinations; Delta reducing routes to a similar schedule as the low-cost airlines is not an option in the multi-billion dollar industry. In order to gain market share from low-cost airlines, Delta must create a value proposition that differentiates itself from its competitors. Many customers will pay a premium if the level of service provided is higher than the low-cost, no-frills

Powerful customer-the flip side of powerful suppliers-can capture more value by forcing down prices, demanding better quality or more service, and generally playing industry participants off against one another at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reduction. The bargaining power of the buyers is very high as now a day’s tickets can be booked online and if they can go for the cheapest fares and there is not much cost involved in it.

When they didn’t, the airline retaliated by offering deep cuts in fares on several routes flown by its competitors. Northwest airline responded with a $198 round-trip fares with connections on routes for which American airline’s average fare was $1,600. American’s response was to offer $99 one way fairs in 10 markets flown by each of the other competitors except that of Continental Airlines which had followed and matched the leader’s (American Airline) original changes in all markets. With respect to the concept of strategic behavior exhibited by firms in an oligopolistic setting, some firms may try to achieve a dominant strategy that yields them better results and do not flip-flop, no matter what strategies other industry participant follow. This was illustrated in the case, when, in 2004, Continental Airlines raised its fares to mitigate rising cost of aviation fuel. Firms in an oligopoly may differ in terms of their cost structure and the airline industry is no exception and participants do exhibit strategies that enable them not to follow price increases driven by aviation fuel cost.

Launched just 8 years ago, today, the Jetstar Group consists of a network of value-based air carriers that deliver high quality air passenger services for budget-minded travelers across Australia, New Zealand and the Asia Pacific region. Beginning with just 400 employees, the company currently employs more than 7,000 people and carries about 20 million passengers a year. To gain some insights into how the Jetstar Group achieved this impressive growth in such a short amount of time, this paper provides a review of the relevant literature concerning the air passenger industry in general and the business strategy used by the Jetstar Group in particular. A summary of the research and recommendations for this company are provided in the paper's conclusion.

Airlines must operate within a low-margin, high-fixed-cost environment, making profitability particularly sensitive to decreases in volume, either from environmental factors (e.g., the September 11,2001 attacks) or from competition. Moreover, the airline business is labor-intensive. Labor costs as a percentage of revenues ranges from a low of about 25 percent for the low-fare airlines to almost 50

The main reason for the low-cost subsidiaries’ failure is the airlines’ corporate strategy. By launching a LCC as a unit inside the same corporate structure (e.g., single scheduling and pricing centre for United Airlines’ and Shuttle’s low–cost flights), traditional airlines limited the LCC’s flexibility and independence. By building a low-cost carrier on top of a traditional carrier cost-structure, the parent company was also tempted to think low-cost when setting ticket prices, but not trying (or being able) to reduce traditionally high costs: the airline had now two unsustainable business models instead of one!

3,4- The Airline industry and the market The airline industry is large, specially in the United States, mainly due to the “ Deregulation” of the industry. In 1938, the Civil Aeronautics Board was created to control the growth of the air transportation industry. This board had the authority to control entry, exit, prices and methods of competition. In the late 1970 this structure was found inefficient and in 1978 deregulation took place. Due to the deregulation of the industry competition intensified, prices dropped, and the number of people travelling increased. Many new companies emerged and regional airlines saw deregulation as an opportunity to expand. Due to the rise in competition, by 1986 mergers started to take place and in 1987 64.8% of the market was controlled by the four largest airlines. The demand for air travel is determined mainly by price, studies revealed that half of the leisure travellers and on quarter of business travellers did not have a preference for a particular airline, which means that prices determined the

Airlines use a formula of combining their yield and inventory costs to determine ticket prices. While it is imperative to focus on the idea of being profitable, the focus is to maximize the cost of the flight revenue. One huge factor that encourages an increase in the cost of tickets relates to a customer ordering a ticket close to the departing date, define this as a risk factor because they need to make up for all unsold seats. A high percentage of the revenue is dedicated to overhead costs such as fuel and labor. When a ticket price is higher with one airline than the other, the customer interprets this as being an excessive cost. The demand is greatly affected by the external market

According to my research the power of buyers is medium to increasing within the airline industry. Over the last few years, buyers have been presented more choices when choosing an airline carrier. The internet has created a structure of easier pricing information and allows the buyer to more easily compare pricing. Buyers can sometimes find pricing discrepancies on the exact flight due to less fragmented pricing information at the buyers fingertips. The internet and it’s ability to compare prices has also allowed the emergence of a few budget airlines to be profitable. Much of the bargaining power of the power can still depend on where the flier is traveling. The “hub” system, mentioned earlier still allows the larger airlines to dominate certain cities and creates an environment of higher prices in that market. For example, a flight from Nashville to Santo Domingo, DR presents the flier with very low bargaining power. Unless the flier wants to fly through NYC or Newark, NJ, he/she must fly American Airlines via Miami. The price for this flight is typically very high due to no other airlines

In this paper I will be analyzing the airline industry using Porter’s Five Forces. Porter’s Five Forces is a business management tool that allows firms to possess a clearer perception of the forces that shape the competitive environment of an industry, and to better understand what these forces indicate about profitability with regard to the microenvironment. The forces include Competitors, Threat of Entry, Substitutes, Suppliers, and Customers. When firms are able to widen their conception of competition beyond their direct competitors, and consider the broader economic fundamentals of their industry, they are able to form better strategy to better optimize their profitability. The airline industry is one characterized by low