Market analysis of the Commercial Airline Industry
Introduction The airline industry is one of the most volatile and unpredictable industries in the world, with a long history of excessive losses, sudden bankruptcies and proceeding government bailouts. It is also one of truest examples of an industry governed by strict market competition and the laws of economics. Profits are closely tied to favourable economic conditions as they affect everything from the cost of oil to the demand for global travel; as such the commercial airline industry lends itself well to an analysis utilizing Michael Porter’s Five Forces Model. The Five Forces comprises of two vertical forces: buyer and supplier power; and two horizontal forces: treat of new entrants and the treat of substitute products. These four forces combine to give us the crux of Porter’s model – rivalry within the industry, as illustrated in figure 1.
The following essay draws upon each of these five forces, and their relevant economic concepts of industrial organizational, to assess the overall Potential Industry Earnings (PIE) of the commercial airline industry. The higher the PIE the more “attractive” an industry would be to potential investors. An “unattractive” industry would be one with a low PIE value. All that rational investors are concerned with is the amount of profit they could potential extract and the given likelihood of that occurring. For example pure competition markets are often viewed as unattractive to potential investors as the possibility of making a high return is rare as the activities of competing firms drive down profits to normal or (hypothetically) zero. Before we proceed with examining whether each of these five forces contributes or diminishes overall profit we need to first place them in the context of the airline industry’s market structure.
Market Structure The market structure of the commercial airline industry is undeniably oligarchical. It is a situation in which...