Porter's Five Forces Analysis

Because of the deregulation of the government policy, there are a number of new airlines that entered the industry at first. However the most significant barrier to entry that new entrants face is significant post-entry competition from existing major airlines. The existing market is already saturate. In order to open market the new entrances have to lower the price of their limited routes. But they are facing the stronger competitor who can provide lower price on the same routes while create profit on the other non-competing routes.

Air transport is a global industry and as such every airline is a likely challenger for every other. It is contrary to expectation that any airline will be able to contest on a large scale without being associated to other carriers. Traffic feed is the industry's lifeblood and stand-alone carriers will be labored to carry low-revenue point-to-point traffic when front with airlines able to offer manifold route alliances. Southwest Airlines is a major carrier to the USA accounting for about 85% of its airfreight tonnage, but it also operates scheduled services to South Africa, Japan and Hong Kong. The subject of strategic alliances inside the air transport industry is not a well-researched area. This is due, in part, to the truth that

A key component of managing a business effectively is having an understanding of the competitive environment in which that company operates weather it’s a large or small business. A way to access the competitive environment is the use of Porter’s model also known as Five Forces Analysis. The Five Forces Analysis was developed by Michael Porter of Harvard business school back in the late 1970’s. Ideally this analysis should be done before starting up your business. It can show you the likelihood of success of the company before you start it up. Even if your company is established the Five Forces Analysis is still extremely valuable. Once you understand the forces that are acting on and affecting your business being a success you will be in a much better position to develop strategies to combat those forces that are working against you. Porter identifies

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).

There is no guarantee of customer loyalty with such high competition. Other competitive threats are the fixed rates that airlines have to endure. The fixed costs of purchasing airplanes and keeping up with their maintenance are very expensive. Due to investment in equipment and fixed assets is so high, the industry has high exit barriers. Southwest

International Competition. Internationally, the Company competes not only with U.S. airlines, but also with foreign carriers. International competition has increased and may increase in the future as a result of airline mergers and acquisitions, joint ventures, alliances, restructurings, liberalization of aviation bilateral agreements and new or increased service by competitors, including government subsidized competitors from certain Middle East countries. Competition on international routes is subject to varying degrees of governmental regulation. The Company’s ability to compete successfully with non-U.S. carriers on international routes depends in part on its ability to generate traffic to and from the entire United States via its integrated

The competitors of Southwest Airlines were many. From the first day its establishers met problems in making their vision a reality and to achieve the goals they had in mind. The

After the Deregulation Act of 1978 in the United States, the airline industry was forced to adapt to the rapidly changing environment (Goetz & Vowles, 2009). At the time, the nominally regulated air transporting environment permitted the airlines to begin services on any desired route, giving them a great deal of liberty in the market. Although things were going well for those involved in the aviation industry, several factors began to have a negative impact on the industry. For instance, as the competition started to escalate, airlines began to take a competitive stance against one another, fighting for their share of the market. Moreover, the World Trade Center tragedy in 2001 had an adverse impact on the entire airline industry (Coy, 2005). Adding to the predicament, the recent financial crisis of 2008 and the current inflation in fuel prices have caused the US airline industry to regroup the fleet formation, making it the most competitive airline industry in the world (Ryerson & Kim, 2014). The whole airline industry now found itself struggling to survive.

The recent economical and financial downturn severely impacted the airline industry in 2009 and brought only small increases in 2010. The recession negatively influenced the discretional income of travellers. More precisely, the leisure travellers’ and business travellers’ budget changes resulted with a sudden decrease in their demand. Therefore, corporate policies tightened and generally the demand for travelling decreased. On the other hand, demand for substitute products, such as video conferences and surface travel, has increased. As a result, many airlines, including Southwest Airlines, responded with capacity cuts and fare discounting. On the other hand, Southwest used the opportunity also to further expand and because of its low-fare services, it could enter new markets as well.

As we look at American Airline’s current financial conditions, it would be helpful to understand the framework that has affected American Airlines and the Industry at large. The airline industry has experienced immense turmoil in recent years plagued by poor financial performance that has led to bankruptcies, mergers, and union disputes. It has been said that deregulation has contributed to the volatility of the industry, both from a positive and negative perspective. Therefore, deregulation has boosted competition as airfares are more competitive, heighten improvement of customer service practices, increased consumer choices in airlines, and added additional routes. Conversely, has led to a survival of the fittest mentality as airlines

In a landmark article published in the March/April 1979 issue of the Harvard Business Review, Michael Porter identified five competitive forces that determine if you should enter a new market segment.

Because Southwest is so effectively able to differentiate itself from its competitors based on price, others may want to duplicate the airline’s efforts. With Southwest’s limited range, larger carriers could effectively emulate Southwest’s low-cost strategy and encroach upon Southwest’s share of the market, since they already serve a wider community. It might then be possible for them to outdo Southwest Airlines.

There have been few inventions to change how people live and experience the world considerably as the creation of the airplane. Today, traveling by air has become the norm and it would be difficult to imagine life without it. Air travel has improved the way people are able to conduct business by shortening travel time and changing their thought of distance. The companies within the airline industry exist in a very competitive market. One of those companies, Southwest Airlines, features low-fare, no-frills air service with frequent flights of mostly short routes. Costs are kept down by the exclusive use of Boeing 737 aircraft, which allows for low maintenance costs and quicker turnaround times for flights, and by an emphasis on ticketless travel (Encyclopedia Britannica). This paper will address two segments of the general environment and how they affect Southwest and the airline industry; evaluate how Southwest has addressed two forces of competition; predict what Southwest might do to improve its ability to addresses these forces; assess the external threats affecting Southwest; discuss Southwest’s greatest strengths and most significant weaknesses; determine Southwest’s resources, capabilities, and core competencies; and analyze their value chain.

The airline business is a highly competitive industry. According to Morningstar article Southwest Airlines Co Analyst Report, the airline industry has many barriers to entry, which creates an intense industry rivalry. This claim is backed up by the text Attention All Passengers by William J. McGee, which states “Air travel has become a commodity, and the airlines themselves an oligopoly.” (McGee) Therefore, a sustainable cost advantage is the only way to survive in this cutthroat industry. (Dihora) Furthermore, the same Morningstar article claims that the airline industry is not growing. This is because the top four airline carriers control approximately 80% of the domestic market in 2015. This can be compared with results from the year 2000, when around 9 carriers controlled as much. (Dihora) This statistic shows that the number of organizations in the market is in fact

The Air Transport sector has gone through four basic stages in the deregulation era: expansion, consolidation, concentration, and globalisation. In the expansion phase several “new entrant” airlines were added to the US system. Since most of the airlines were non-union carriers, they were able to operate at a lower per unit cost that forced the other carriers to reduce their comparative prices so as to match the prices of the non-union carriers. This helped in increasing competition and reduction in costs.