Competition and Market Power Analysis in the Airline Industry

This report provides an analysis of competition and market power within the airline industry. The analysis covers key aspects such as competition and rivalry, the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, and the threat of substitutes. The airline industry is characterized by high competition, leading to low market power for individual airlines. Factors like capacity, service differentiation, and pricing contribute to this competition. The threat of new entrants is high due to low barriers to entry, while customers hold significant bargaining power due to information access and price sensitivity. Suppliers, including airframe manufacturers, labor, and airports, also wield considerable power. Finally, the report considers the moderate threat posed by substitutes, such as alternative travel methods and the option of not traveling at all. The report references several sources to support its findings.

Competition/Rivalry
In the airline industry there is high competition and therefore an airline has low market power.
Competition is brought about through various characteristics held by the different players in the
market. One of the differentiating factors is capacity where increase in the number of fleet
reduces the marginal costs per customer. Another differentiating factor is the services that an
airline provides to customers on the plane. Also, airlines can choose to differentiate themselves
based on the ticket price. Due to high competition levels, the airlines may not be able to capture
customer value through certain systems such as fencing. Due to high level of rivalry, the profits
experienced are normal profits since they are spread across the industry (Belton, 2017).
The threat of new entrants
The airline industry experiences a high level of threat of new entrants which means that the
companies experience quite low market power. Market entry occurs regularly especially when
the existing airlines expand their services to the new markets also the barriers to entry in the
industry are low. For instance, with a strong brand, one is able to stimulate demand, on the
supply side, the economies of scale are limited if the airlines grow above 50 aircraft, there is ease
of access to distribution channels for new entrants and slots on congested airlines can be traded,
low customer switching costs, access to capital for financing purchase of aircraft and a less
government sanctioned industry. In this market therefore, the airlines have low market power
due to high threat of new entrants (The International Air Transport Association (IATA), 2011).
Bargaining power of customers
The airline industry has a high bargaining power of customers. Since the channels of customer
information have become concentrated for example, presence of internet websites and travel

agents, the consumers have more choices at their disposal. In addition, a significant portion of
the customers are price sensitive, there is low loyalty to specific airlines but they can be attracted
by customer loyalty programs. Further, customer power is contributed by aggregator websites,
travel agents, price sensitivity and low switching costs. This means that the airlines have to
speculate customer behavior for them to increase their revenues and profits (The International
Air Transport Association (IATA) Vision 2050).
Bargaining power of Suppliers
Airlines have a high supplier bargaining power across the value chain. The airframe and engine
manufacturers have a high supplier power since there are moderate switching costs between the
airframes and engines. In terms of labor, the market requires skilled labor which is quite scarce,
the pilots and the air hostesses therefore have a high bargaining power in terms of negotiating
their salaries. Also, the airports parking spaces in which the airlines park have a high supplier
power since they are quite few and limited competition from other airports which are secondary
airports. Similarly, the catering services also have a high supplier power given that they are few
in the market and that their selection is based on the level of credibility in the market (Samonte,
Garcia, Lucero & Santo, 2017)
Threat of substitutes
Airline industry faces a moderate level of threat from substitutes. This is because, one of the
substitutes is the choice not to travel from which the customers may decide to do something
different with their income instead of travelling. The other threat comes from alternative means
of travel for instance the use of ship por by road, however since not all areas can be accessed by
road, the airline industry maintains some level of value ad to the customer (Price, 2017).
References

Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. Macat
Library.
Price, M. J. (2017). Strategies for Mitigating Low-Cost Airlines' Passenger Complaints.
Samonte, M. J. C., Garcia, J. M. R., Lucero, V. J. L., & Santos, S. C. B. (2017, November).
Sentiment and opinion analysis on Twitter about local airlines. In Proceedings of the 3rd
International Conference on Communication and Information Processing (pp. 415-422).
ACM.
The International Air Transport Association (IATA) (2011. Vision 2050 Report