Porter’s five forces analysis of the U.S. airline industry

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Porter’s five forces analysis of the U.S. airline industry

This is a detailed Porter’s five forces analysis of the U.S. airline industry. The market size of the domestic airlines industry is around $138.9 billion (IBISWorld, 2022). There is no doubt that the market size is massive and the demands for both business and leisure travelling are on the rise. Therefore, some airlines focus on the domestic market heavily. However, the market is not as friendly as it is big. Certainly, it has undergone significant changes over the years. These changes were driven by dynamic competition, leading to consolidation and the emergence of new players.

 

What is Porter’s five forces?

Porter’s five forces is a framework for analysing the competitiveness of a business sector. It was developed by one of the greatest minds in strategic management, Professor Michael Porter. It assumes that profitability and competitiveness are the result of interplay between five distinct factors. These forces determine the attractiveness of an industry to investors. The five forces are as follows:

 

Competition: The presence of competitors in the market, as well as their overall strength and the extent of competition among them.

 

Buyers: The presence of buyers in the market, as well as their overall strength and the extent of their purchasing power.

 

Suppliers: The presence of suppliers in the market, as well as their overall strength and the extent of their bargaining power.

 

New entrants: The likelihood of new competitors entering the market.

 

Substitutes: The availability of viable alternatives for the products or services offered by the industry.

 

Competition in the U.S. airline industry

The U.S has a competitive airline industry, with well-established players and a number of smaller ones. Top ranked four airlines in terms of domestic market share are American Airlines, Southwest Airlines, Delta Airlines, and United Airlines which compete with each other every day (Salas, 2022). In addition, as there are many low-cost carriers out there in the market, it is easy to see that there is no shortage of competition.

 

According to the five forces model if the airline industry comprises of numerous competitors, then the competition among them will be fierce. Similarly, if the competing airlines are of the equal size or are close to each other in terms of market share, then the intensity of competition will further increase.

 

Examination of the U.S aviation industry reveals that rivalry among the four top players (identified above) is intense. However, some analysts argue that the market is dominated by the above-mentioned four airlines which have created significant market entry barriers discouraging potential competitors, even though any price fixing issue has not been identified.

 

Bargaining power of buyers in the U.S. airline industry

A key part in this Porter’s five forces analysis of the U.S. airline industry is the discussion on the bargaining power of buyers. Millions of passengers fly within and outside the United States every month. Currently, their bargaining power is high with significant purchasing power and the ability to switch to other modes of travel if the industry does not respond to their needs.

 

Passengers can compare prices online and purchase from their preferred airlines. Similarly, the switching cost is low as well thereby providing them with a high bargaining power. It is widely observed that many passengers do not browse the websites of airlines to book flights. They rather use third-party booking and price comparison sites to get the best deals.

 

Bargaining power of suppliers in the U.S. airline industry

In the aviation industry, there are only two significant aircraft suppliers i.e. Airbus and Boeing. Therefore, their power is high. However, as suppliers have long-term contracts with the airlines, the latter can reduce the power of the suppliers by securing favourable terms and conditions at the beginning.

 

The bargaining power of suppliers providing food, drinks, etc. is low. Airlines can easily find an alternative provider if the relationship does not go well as planned.

 

Threat of new entrants into the U.S. airline industry

The threat of new entrants is low in the airline industry due to high entry barriers. These include significant capital requirements, high operating costs, and extensive government regulation. Although the threat of new entrants is low, three new players i.e. Avelo, Breeze Airways, and Aha entered the industry in 2021.They target cost-conscious passengers and fly mainly to overlooked or smaller destinations (Sachs, 2022).

 

Threat of substitutes in the U.S. airline industry

The threat of substitutes is high in the U.S. aviation industry due to the presence of other modes of travel that passengers can use instead of flying. The most significant forms of substitution are driving, car-sharing, or taking the train.

 

A number of surveys suggest that most Americans prefer road trips to flying due to a number of factors such as delays, airport security check, and cramped cabins. In fact, most Americans prefer road tripping as they can watch scenic beauty, stop anywhere, and pack anything they wish.

 

Summary of the Porter’s five forces analysis of the U.S. airline industry

To conclude, the U.S. aviation industry is attractive for existing large airlines. However, it is a difficult water for new competitors, though some dare to step in now and then.

 

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Other useful articles:

Porter’s five forces analysis

PESTEL analysis of the aviation (airline) industry

SWOT analysis of the USA (U.S Swot analysis)

 

Last update: 27 May 2022

References:

IBISWorld (2022) Domestic Airlines in the US – Market Size 2002–2027, available at: https://www.ibisworld.com/united-states/market-research-reports/domestic-airlines-industry/  (accessed 26 May 2022)

Sachs, A. (2022) The U.S. gained three new low-budget airlines last year. We flew them all, available at: https://www.washingtonpost.com/travel/2022/02/04/review-new-budget-airlines/  (accessed 27 May 2022)

Salas, E. (2022) Leading airlines in the U.S. by domestic market share 2021, available at: https://www.statista.com/statistics/250577/domestic-market-share-of-leading-us-airlines/  (accessed 26 May 2022)

Author: Joe David

Joe David has years of teaching experience both in the UK and abroad. He writes regularly online on a variety of topics. He has a keen interest in business, hospitality, and tourism management. He holds a Postgraduate Diploma in Management Studies and a Post Graduate Diploma in Marketing Management.