Airline Industry Analysis.docx
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Airline Industry Analysis.docx
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AirlineIndustryAnalysis
AirlineIndustry
FinalReport
YiLi
Fall2010
Contents
I.EXECUTIVESUMMARY
TheairlineindustryisoneofthevitalindustriesintheworldaswellasintheUnitedStates.Ithasbeendefinedbythemarketasthebusinessthatcomprisingpassengerairtransportation,includingbothscheduledandchartered,butexcludingairfreighttransportation.TohaveamuchbetterunderstandingaboutU.S.airlineindustry,certainmodelandapproachshouldbeutilized.
Thispaperhasbeendividedintotwosections:
qualitativeanalysissectionandquantitativeanalysissection.Inthequalitativeanalysissection,IusePorter’sFiveForcesModeltotakeadeeperlookattheU.S.airlineindustry.Porter’sFiveForcesModelisaframeworkfortheindustryanalysisandbusinessstrategydevelopmentthatidentifiesfivecompetitiveforces.Inthequantitativeanalysissection,Iconductastatisticalanalysis,t-test,basedontheROAdataretrievedfromMergentOnlinedatabasetoseewhetherthereisanysignificantdifferenceintermsofindustryperformancebetweenthetwoperiodsselected.
II.QUALITATIVEANALYSIS
THREATOFENTRY
Newcompetitorsmayneedtomakegreateffortsbeforetheycanbecompetitiveorprofitable.Infact,manyexistingaircompaniestakeadvantagesofeconomiesofscaletocombatthenewcompetitors.Newentrantscaneithercomeintotheindustryonalargescale,oraccepttheweaknessofcoststructure.Inaddition,anewcompetitorisbarelypossibletoenjoythebenefitsofnetworkeffectsunlessitcouldenterthemarketwithacompletelynewconceptand/orinnovativetechnology.
TheairlineindustryintheUnitedStatesishighlyconcentrated.The50largestcompanieshavealreadyaccountedformorethan80percentofrevenueoftheindustry.Therefore,thereisscarcelydetectablespaceforanewentranttocomeinto.Asaresult,newentrantshavetofacefiercecompetitionwithintheindustry. Atthesametime,pricecompetitioncausedbylowlevelofcustomerswitchingcostsandothercriticalfactorshasmadethecompetitionintheindustrymuchfiercer.
Airlineindustryisoneofthemostexpensiveindustriesintheworldthatrequiresahugeamountofcapitaltoaccess.Thismeansoneofthebiggestentrybarriersfornewcomersisthecostsofentry.Theseincludethecostofpurchasingairplanes,operationalfacilities,securityequipment,laborforces,andsoon.Inthesedays,financialservicesprovidedbybanksorotherfinancialinstitutionstosomeextentincreasethepossibilitiesanderodethedifficultiesofenteringtheairlineindustry.Inputssuchasmaintenance,foodservices,distributionservicesetc.couldbedonebythethirdparty.Otherinputssuchasaircraftscouldbeleasedfromthemarketaswell.
Nonetheless,therearealwaysmoreneedstomeettoofferairlineservices.Itrequiresairplanecertification,gatesofairports,takeoffandlandingslots,baggagehandlingservices,andthemarketinganddistributionoftickets.However,itisalwaysdifficultfornewentrantstoobtaingatesandslotsatmostairportsasmostofthemhavebeenalreadyoccupiedbyexistingairlines.Inthisscenario,thebarriertoentrywouldbeassessedashigh.
THEPOWEROFSUPPLIERS
Ingeneral,threeprimarysuppliersofairlineindustryareaircraftmanufacturers,skilledemployees,andfuelcompanies.Thenumberofmanufacturersofairlineindustryislimitedasfarasthereareonlytwodominantmanufacturersforlargecommercialaircraft–BoeingandAirbus.Thelimitednumberofsuppliersrepresentsthatthereisnointensivecompetitionamongthemandsupplier’sswitchingcostsaretiny.Thisleaveslessopportunityforbargainingfortheairlineindustry,andthepoweroversuppliersislowaccordingly.
Skilledemployeesofairlineindustryincludequalifiedpilots,cabincrew,gateagents,groundpersonnel,andsoon.Approximatelyover85%oftheemployeesofairlineindustryaretypicallygroupedtogetheraslaborunions.Althoughmanyairlines,especiallyinthepost-deregulationerahaveusedthethreatofbankruptcytorenegotiatedissatisfactorylaborcontacts,laborissuesarecausingnegativeimpactsonthecompetitivepositionofeveryairlinecompany.Moreover,airlineindustryhastodealwiththeimpactofsubstantiallaborcostincreasesworldwidely.
AviationfuelpricehasmaterialadverseimpactsonairlinerswithintheAmericaairlineindustry.Aircraftfuelnormallyaccountsforabout25percentofindustrycosts;eveningoodtimetheexpendituresforfuelconstituteroughly10%ofoperatingexpense.AccordingtoInternationalAirTransportAssociation(IATA),aviationfuelpricehasencounteredanincreaseof12.6%overaone-yearperiodfromAugust2009toAugust2010.Also,theIMFforecaststhattheoilpricewouldbeincreasedbyaround8%in2011andcontinuingincreasinginthefollowingyears.
Everypennyincreaseinthepriceofaircraftfuelcouldcosttheairlineindustryaconsiderableamountofmoneyayear. Bydefinition,aviationfuelisacommodity.Itspricesaredeterminedbymanyfactorsincludinginternationalmarketenvironmentandgeopoliticalissues.Inordertofightagainstnegativeeffectsresultedbyfuelpricefluctuation,airlinersusefinancialtools,forexample,hedging,tocopewiththeproblemofincreasingfuelprices.Butaircarriersasawholeonlyhavelimitedpowertonegotiatewithfuelcompaniesandarebasicallyimpossibletobeaviationfuelpricedominatorinthenearfuture.
THEPOWEROFBUYERS
Customershavesomepowerstobargainindomesticairlinesasthecompetitionisintenseinlocalmarket.SwitchingcostsarelowandkeepdecreasingbecausecustomerscanhaveInternetaccessforpricecheckingandcomparison.Forleisuretravelers,especiallyshortdistancepassengers,thedegreeofsensitivitytopriceismuchhigherthantootherfactors.TheyarewillingtospendafewhoursontheInternettolookforthelowestticketpricesinordertominimizetheirtravelingcosts.Someofthesecustomersevenprefertotakethebudgetairlinesratherthanfullserviceairlines.Infact,theprofitabilityoftraditionalairlineoperatorshavebeenaffectedalotinrecentyearsduetotheemergenceandtheriseofbudgetairlines.
Unlikeleisuretravelers,mostbusinesspassengersaretimesensitiveandmorelikelytoplacetheirattentionsonthequalityofservice.Businesspassengersalwaysrequestbettercabinservices,comfortableseats,morepersonalspaces,andeventheuseofcomputerandtheInternet.Thebasicphilosophybehindthisisthemoretheypay,themoretheywant.Althoughairlinecustomershavesomechancestobargainindomesticmarket,theyhavelesspoweroninternationalroutesasairtravelistheonlyandthefastestwayforpeopletotravelaroundtheworld.
Airlineshavebeenaffectedalotbythelackofdemand.However,inthelightofareportrecentlyreleasedbytheAirTransportAssociation(IATA),theslumpinairtravelisclosetotheend.Itestimatesthatpassengertrafficfor2010willriseby4.5percent.Thetotalnumberofpassengerwillbebackinlinewiththepeakin2007causedbyanestimated2.28billionpeopleexpectingtoflyintheyearof2010.FromPorter’sperspective,largevolumebuyersareparticularlypowerfulinindustrieswithhighfixedcosts.Insteadofpurchasingairticketstogether,airtravelersalwaysactasindividualsorasmallgroup.Thismayreducebuyer’sbargainingpoweralittlebit.Overall,buyerpowershouldbemoderatebecauseoftheintensepricecompetitionamongairlines.
THETHREATOFSUBSTITUTES
Ononehand,forinternationalairlines,thethreatofsubstitutesislowsinceairtravelistheonlyandthefastestwayforpeopletotravelfromonedestinationtoanother.Forinstance,itisvirtuallyimpossibletofindotherpracticaloptionsforsomeonewhowantstotravelfromAsiatoNorthAmericawithinafewdays.
Ontheotherhand,fornationalairlines,thereareanumberofsubstitutestoairtravel.Substitutesareothermodesoftransportationsuchasrailroadsandby-roadarrangements.Inotherwords,thethreatofsubstitutesindomesticmarketshouldbemuchhigherthaninternationalcarriers.
Thecostofairtravelhoweverisanessentialreasonthatdrivescustomerstoconsidertakingotheravailablealternatives.Airtravelisnotaneconomicaloptionforshortdistancetravel,butsometimescontinenceandtimeconsumptionarecurialfactorswhichdiscouragecustomerstoalterfromairlinetorailroadorby-roadarrangement.
Anothersubstitutethathasbeenalwaysignoredis“nottraveling”atall.Someonemayarguethatitisimpossibleandridiculous.Buttheuseoftechnologythatfacilitatesremotevirtualcollaborationisbecomingapossiblesubstituteforbothleisuretravelersandbusinesspassengers.
Forexample,netmeetingtechnologydevelopedbyMicrosoftprovidesasolutionforasmallgroupofpeopletocollaboratewitheachother,sharedocuments,andmakepresentations.Inaddition,videoconferencingallowspeoplesittingintwoormoredifferentlocationsaroundtheworldtocommunicateandsharenewknowledgethroughsimultaneousaudiotransmissions.
RIVALRYAMONGEXISTINGCOMPETITORS
Inthecaseofairlineindustry,consideringthestrikebythemacroeconomiccondition,theforceofrivalryamongexistingcompetitorswouldbethemostimportantoneoutofthefive.Thereareintensecompetitionsamongdifferentairlinessincemanyserviceprovidersareoperatingonthesameroutearoundtheworld.Inmostcases,thisrivalryexistsintheairlineindustryhastakenontheformofcompetitionuponprice.MajorUS-basedplayersofairlineindustryareAMR,AlaskaAirGroup,ContinentalAirline
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