Airline Industry

In analyzing the world airline industry, we must make distinctions between two main segments:

Domestic / regional segment

This segment of the industry is mainly characterized by operating within a limited region (country or continent), using smaller aircrafts and consequently shorter flights. In this segment particularly, there is a fierce competition involving the major, low cost and regional/niche airlines, especially in the North American and European markets.

International Long-Haul segment

International business, long flights and broad range of destination characterized this segment. The rivalry between the competitors are also intense, however it’s limited to the major airlines. In this segment, only Boeing and AirBus are the main suppliers.

For the purpose of the present analysis, all of others relevant industry’s attributes, such as growth, fixed costs, government regulations, etc, will be considered as common attributes for the industry structure in context.

Based on the characteristics previously mentioned, the major external environmental drivers influencing the future development of the airline industry can be evaluated using Porter’s five force model.

Initially, the barriers of entry in both segments are high. Capital requirements, incumbency advantage, legal barriers (routes rights), government policies, loyalty programs, among other things, can be mentioned as typical barriers in this industry. In the international long-haul segment, the hub-and-spoke system has been developed in order to increase profitability and to protect the existing major airlines against new competitors. Finally, since the deregulation in the USA and Europe, the market has become more mature, which makes the newcomers think twice before try to enter in the airline industry. Conversely, for the regional segment (small chat flights), the barriers have dropped considerably over the years.

The threat of substitution is also relevant - fast train, car, bus, etc - mainly in the domestic / regional segment. In addition, video conferences and shared corporate jets seem to have become more popular. Majors can be threatened by these potential substitutes, as well.

Bargaining power of suppliers is relatively strong. There are basically few aircraft manufactures worldwide and therefore they are much more concentrated than the buyers (airlines). In the Long-Haul segment, there are no substitutes for Boeing and Airbus. However, airlines can eventually mitigate supplier’s power of bargaining, such as when updating their fleets forcing the manufacturers to bring down the prices (in such a case, airlines are complimentary).

Rivalry of competition is intense in both segments, with numerous competitors, usually roughly equal in size. Industry growth is slow and exit barriers are high investments. Rivals