Porter’s Five Forces analysis is a useful methodology and a tool to analyze the external environment in which any industry operates. Show The key aspect about using Porter’s Five Forces for the airline industry in the United States is that the airline industry has been buffeted by strong headwinds from a host of external factors that include declining passenger traffic, increasing operating expenses, high fuel prices, and greater landing and maintenance costs, apart from intense competition from low cost carriers that has led to a cutthroat price war which has led the industry severely affected. Indeed, it can be said that the airline industry globally is in a “death spiral” and more so in the United States where several prominent carriers were either forced into bankruptcy or had to merge with other airlines just to stay afloat. Supplier PowerThe power of suppliers in the airline industry is immense because of the fact that the three inputs that airlines have in terms of fuel, aircraft, and labor are all affected by the external environment. Buyer PowerWith the proliferation of online ticketing and distribution systems, fliers no longer have to be at the mercy of the agents and the intermediaries as well the airlines themselves for their ticketing needs. Apart from, the entry of low cost carriers and the resultant price wars has greatly benefited the fliers. Moreover, the tight regulation on the demand side of the airline industry meaning that passengers and fliers have been protected by the regulators means that the balance of power is tipped in their favor. All these factors make the airline industry cede power to the consumers and hence, the power of buyers is moderate to high as per Porter’s Five Forces methodology. Apart from this, the buyers can engage in “price discovery” meaning that price fluctuations do not deter them as they have multiple channels through which they can book their tickets. Entry and Exit BarriersThe airline industry needs huge capital investment to enter and even when airlines have to exit the sector, they need to write down and absorb many losses. This means that the entry and exit barriers are high for the airline industry. As entry into the airline industry needs a high infusion of capital, not everybody can enter the industry, which in addition, needs sophisticated knowledge and expertise on part of the players, which is a deterrent. The exit barriers are also subject to regulation as regulators in the United States do not let airlines exit the industry unless they are satisfied that there is a genuine business reason for the same. Moreover, the airline industry leverages the efficiencies and the synergies from the economies of scale and hence, the entry barriers are high. Therefore, applying Porter’s Five Forces framework, we find that the airlines pose significant entry and exit barriers, which means that the impact of this dimension is quite high. Threat of Substitutes and ComplementaritiesThe airline industry in the United States is not at threat from substitutes and complementarities as unlike in the developing world, consumers do not necessarily take the train or the bus for journeys. What this means is that flying is a natural phenomenon for the consumers and hence, the substitutes in terms of the train and bus is minimal in its impact. Of course, many Americans motor down (use their cars for longer travel as well) which means that there is the threat of this substitute. As for complementarities, the provision of services like free Wi-Fi, a la carte meals, and passenger amenities offered by the full service airlines does not really translate into more passengers as in the recent past; fliers have been induced more by lower fares than these aspects. Intensity of Competitive RivalryAs mentioned in the introduction, the airline industry in the United States is extremely competitive because of a number of reasons which include entry of low cost carriers, the tight regulation of the industry wherein safety become paramount leading to high operating expenses, and the fact that the airlines operate according to a business model that is a bit outdated especially in times of rapid turnover and churn in the industry. Apart from anything else, the airline industry is regulated on the supply side more than the demand side, which means that instead of the airlines being free to choose which markets to operate and which segments to target, it is the fliers who get to be pampered by the regulators. This is the reason why low cost carriers have literally grounded the full service airlines and when combined with the intense competition that was always the case in the United States, the result is that the sector is one of the most competitive in the country. Related ArticlesView All Articles Two companies dominate the manufacturing of commercial aircraft today. This duopoly consists of American manufacturer Boeing and multinational European corporation Airbus. But how exactly do these companies compare to one another? What points of comparison are there?The commercial aviation industry is fiercely competitive. Deciding between Airbus and Boeing products is a choice made every week by airlines worldwide as they look to purchase the next assets for their growing fleets. With countries like China reportedly needing over seven thousand jets over the coming years, it is a choice that is more important than ever. As such, we will examine both manufacturers from the perspective of an airline eyeing such an expansion. We will examine factors such as financial aspects, company structure, fleets (products), and more.
Airbus is the smaller company in terms of employee numbers, falling short of Boeing by approximately 26,000. However, we can see that, for 2019, it was far more successful than Boeing in terms of profit and gross orders. This is more than likely a consequence of the two fatal crashes that led to the grounding of the Boeing 737 MAX in March 2019.
The crashes of Lion Air flight JT610 and Ethiopian Airlines flight ET302 occurred within five months of each other, resulting in 346 fatalities between them. After the accidents were found to bear several striking parallels, aviation safety agencies worldwide elected to ground the type indefinitely. This had a serious impact on Boeing's image, causing the company to lose customer confidence. The financial consequences are plain to see in the table above. Indeed, 2019 saw its first annual loss in two decades. Going forward, things are beginning to look better for Boeing, as the USA and Brazil have recently recertified the MAX series. However, with the ongoing coronavirus pandemic having hit the industry hard, both Airbus and Boeing will have struggled in 2020 nonetheless.
One can draw many parallels between the fleets of commercial aircraft that Airbus and Boeing produce. This is perhaps to be expected, after all, as they compete in the same sub-markets within the airline industry as a whole. In some instances, one can even find points of comparison between two aircraft from the same manufacturer. Simple Flying has covered such discourses extensively in previous articles, a selection of which can be found at the following links: At the end of the day, both manufacturers invest millions in technology and engineering. The end goal in both instances is to build the best and safest flying transportation possible. This is how the two companies have come to constitute such a powerful duopoly in commercial aircraft manufacturing. With that in mind, one might be hard-pressed to choose between the two.
That being said, more often than not, Boeing is lauded for its firsts. For example, it was the first manufacturer to build a plane out of composite materials. This aircraft is the 787 'Dreamliner,' at 50%, although Airbus has also since built a 53% composite aircraft: its A350 XWB. Boeing is perhaps best known for being the first manufacturer to produce a double-decker aircraft. This was, of course, the iconic 747, known by some as the "Queen of the skies." As far as pilots are concerned, it has been said that the yoke on Boeing aircraft gives a better sense of what the plane is experiencing. However, the controls on Airbus are said to be more high-tech. As a result, the increased level of automation in the cockpit helps to eliminate the human error factor in safety.
Some would even go as far as to say that Airbus merely waited and watched Boeing produce the 707 and 737 before developing its own competitors. One might also draw similar parallels when looking at the Airbus A380 and A350. After all, both of these aircraft are competitors to the Boeing 747 and 787 respectively. However, and crucially, they were both developed after their American counterparts. Nonetheless, the aircraft in question do still differ in many ways. As such, it would perhaps be cynical to state that Airbus outright copied Boeing in this respect. Both Airbus and Boeing officially manufacture their airliners in their home countries. Boeing's main factory is situated in Everett, Washington, at the northeast corner of Paine Field. Meanwhile, the majority of Airbus's production takes place in Toulouse, France and Hamburg, Germany.
However, in practice, it often proves to be the case that aircraft are sourced and built worldwide. For example, Boeing actually builds some of its aircraft internationally (where products may be cheaper or closer to customers), and then finishes them in America. An example of this is the 787 Dreamliner, a lot of which is built in Japan. Being a multinational European corporation, Airbus was initially restricted to only using European suppliers and manufacturers. However, the seamless movement of goods and people between EU countries means that this has not proved to be a particular hindrance. As a result, most of its products are produced exclusively within Europe. However, it does have some overseas production facilities for certain aircraft. These are situated in Mirabel (Canada), Mobile (USA), and Tianjin (China).
A common argument when comparing these two manufacturers is that one is supported by its government(s) whilst the other is a hardworking capitalist firm. In reality, both Airbus and Boeing could assume either position in this sentence. In truth, both of these statements apply to each of them. For example, Boeing gets exclusive contracts with the US military and government. Meanwhile, Airbus gets tax breaks and government subsidies in the form of government orders. All in all, it is a like-for-like argument that is difficult to break down and simplify.
But what do they do with this competitive advantage? It allows them to price their planes far cheaper than asking price:
So, as you can see, both companies press these advantages to beat the competition. At the end of the day, both companies produce safe and reliable aircraft that passengers should have no problems traveling on. It is certainly true that the recent grounding of the Boeing 737 MAX called its operational safety into question. However, its recertification suggests that appropriate safety measures have been taken to ensure tragedies such as those that led to its grounding do not happen again. Indeed, the MAX series is surely one of the most heavily-scrutinized airliners of all time. As far as aircraft interiors are concerned, these are made and designed by airlines rather than aircraft manufacturers. As such, passenger comfort levels, while still very important, depend on factors outside of Airbus and Boeing's control. Ultimately, it comes down to personal preference. Be it the government-supported Airbus or the military-contracted Boeing, the decision on a personal level lies in the hands of the passenger themself. |