The five force model is a framework tool used to assist in the analysis of completion within a bounded industry. This model is in essence, a model of an Industries’ structure. The five forces comprising this model and identified by Michael Porter to have an effect on industry structure are: rivalry, otherwise known as the intensity of competition; the threat of new entry (of competitors into an industry); supplier power or degree by which suppliers in an industry can dictate favorable contract terms and extract profit; buyer power or degree by which the companies within the buyers’ industry can control purchase agreement terms to their favor; and finally, the threat of substitutes or degree by which other products can be substituted for others to fill a demand. Analysis has shown that within an industry, such as the Commercial Airline Industry, in general, when the above defined five forces are strong, profitability of the industry tends to be diminished. Since the establishment of the five force model, a sixth factor, known as “Impact of Complementors” has been recognized to affect industry profitability.
A Complementor is an industry competitor who provides complementary, rather than competitive, services or products to another competitor within the same industry. There are industry specific factors that will determine the importance of Complementors within that industry. By applying this five force model to an analysis of the U.S. Commercial Airline Industry, I will demonstrate how this tool is used in practice. Drawing upon the article “A Five-Force-Plus Complementors-Analysis of the U.S. Airline Industry” taken from the course text. As the article states, the Department of Transportation categorizes the airline industry into four major groups or types: Cargo, Regional, National and International. The article focused on analysis of the national airlines with sales of at least $1 billion annually. National airlines will also be the focus of the discussion here. The method chosen to conduct the analysis, in this case requires transforming the concepts into quantitative data or scaled values. The method chosen to accomplish this was a 0-5 points system. When a concept or force factor listed within one of the five primary forces is weak or will provide no threat to an industry, the force factor is assigned 0 points. If the particular concept or force factor is considered strong or the threat to firms in the industry is high, the force factor is assigned 5 points. Once this quantitative method has been chosen, the analysis can being.
Starting with the first of five forces, Rivalry, the key players within the U.S. commercial industry must be identified and named. Using hoovers.com, these are, Delta, United and American, listed in order of flying preference, followed by the rest, not necessarily in any order, Southwest Airlines, Continental Airlines, Jet Blue, Hawaiian Air, America West, Alaska Air and Air Tran. Some research regarding recent airline mergers, buyouts and bankruptcies and from personal experience working within the Airline industry for Midway Airlines for 7 years, I can tell you that this industry is highly competitive. Assuming that all the sub-factors of Rivalry for this industry have been identified, each of these factors can then be quantitatively evaluated using the method described in a previous paragraph. Once this has been done, an average value for Rivalry can be calculated and a general assumption can be made for this industry force. The above highlighted steps can then be repeated for the other four remaining forces. Each of the remaining four forces is evaluated for the various sub-factors applicable to the force. After the sub-factors have been quantitatively evaluated and scored, similar to the averaging above, the new average values can be established for the four Forces.
Once this is done, the analysis can be summarized for all of the five Forces and a final conclusion can be made regarding this particular industry. Additionally, if a complimentor is identified, an analysis of the sub-factors may be accomplished in the same manner as the other five forces were analyzed. The current aviation industry has faced significant challenges over the last decade. The post 9-11 industry climate added several pressures to the already highly competitive, low margin of profitability industry that has a high rated Rivalry Force. Several of the major U.S. carriers were either forced into temporary bankruptcy or were forced to the verge of bankruptcy after this event as a national fear of flying combined with the added inconvenience of tight security greatly reduced the numbers of traveling public in the United States. Airlines were forced to “Tighten their Belts” significantly during this time period and in years to follow, reducing their services such as free on-board snacks and additional charges on checked bags etc. Additional actions have included reductions in new aircraft orders by U.S. majors and reductions in actual fleet sizes which intern affected flight crew and employee pay and have driven a period of increase in Airline Fleet age and one has to assume increases in maintenance costs. During this period of time, a little greater than the first decade of the twenty first century, there has also been a general period of economic recession in the U.S. with high rates of un-employment that are continuing till today.
This economic hardship is a direct result of the U.S government’s pursuit of Osama Bin Laden and the Al Qaeda through several middle-eastern countries with U.S. military forces, combined with the significant increase of the price of jet fuel during this period and a significant slowing of the U.S. economy. Additionally, speaking from the author’s experience working for a large U.S Aerospace Engineering Company, this has tended to generally reduce the travel budgets of a great many U.S. corporations, both large and small, thereby continuing to reduce the passenger market for competing airlines. From a Five Force Model perspective, this period of time has seen a significant increase in the Rivalry forces within the Airline Industry. During the same period, there has also been a significant reduction in the likelihood of new entries into the U.S. Commercial Airline industry. There have been significant changes in the balance of Supplier Power in the U.S. Commercial Airline Industry as airline fuel supply companies have gained power but aircraft airframe and engine design and manufacturers have lost power and have had to refocus there product lines to optimize aircraft fuel efficiency.
We are just seeing the result of the refocusing of these Manufacturers with the entry of the new B787, B737-Max, B747-8 and updates to the 777 from BOEING and the A350 and A380 models from Airbus, in response to the rapid shift in the aircraft market toward the need for better fuel efficiency. Finally, the threat of substitutes to fast point to point personal travel via Commercial Airline has been low over the last decade and will remain low for the foreseeable future within the U.S. as fly carpets, flying cars and high speed trains have all failed to catch on here so far and human teleporters have not been invented yet. Future developments within the U.S. Commercial Airline Industry will surely continue to drive a demand for more fuel efficient aircraft & engines with potential for conversion to alternate fuel sources such as bio-jet fuels and development of slush hydrogen powered air-breathing engines looming on the horizon. We may also see more exotic aircraft airframes such as the mostly/all composite B787.
Additionally, we may eventually even see a return of some type of lighter than air commercial airship or hybrid aircraft/airship vehicles that utilize all electric or jet fuel/gas power and electric powered hybrid propulsion systems that minimize use of jet fuel and maximize use of lightweight quick charge battery systems or flexible solar panel materials built directly into the primary and secondary vehicle surfaces. It appears from my recent airline travels last week that airline travel is slowly gaining in volume again. On recent flights to the east coast and back to the west coast, the author makes note that these flights were all relatively well populated by a wide mix of travelers. This is a good sign for U.S Commercial Airlines as the U.S. economy appears to be making a slow recovery and as jet fuel prices stabilize over the coming months and years. These future changes in the business environment will of course result in changes in the U.S. Commercial Airline Industry Five Force Model. As is evident, this industry is quite dynamic.