All that rational investors are concerned with is the amount of profit they could potential extract and the given likelihood of that occurring. For example pure competition markets are often viewed as unattractive to potential investors as the possibility of making a high return is rare as the activities of competing firms drive down profits to normal or (hypothetically) zero. Before we proceed with examining whether each of these five forces contributes or diminishes overall profit we need to first place them in the context of the airline industry’s market structure. Market Structure The market
The five forces are competitive rivalry, threat of substitute products, and threat of new entrants, bargaining power of suppliers and bargaining power of buyers. 2.1 Threat of new entrants The threat of new entrants presents the possibility of new firm entering the industry, which increases the competition while reducing the airline revenue. There are a few factors influencing the threat of new entrants such as government regulations, product differentiation, capital requirements and lastly switching costs. There was a low barrier of entry in the airline industry when Airline Deregulation Act eliminated government control over fares and routes. This allows those new entrants who enter the airline industry to slash price to capture market share which increase in competition.
Such technological advancement placed a lot of financial burden on the operations of Jet Blue. The airline industry continues to feel the effect from the U.S economic slowdown and rise of crude oil/jet fuel prices, which have risen to record numbers with no predictable end in sight. The slow economic growth has compelled both business and individual travelers to cut back on travel expenditure thereby compelling airlines such as Jet Blue to initiate energy conservation measures, targeting specific markets and exploring the possibility of partnership with other airlines. Linked to the volatility of jet fuel prices is the increased in competition posed by new entrants to the airline industry. New entrants such as Virgin America are bracing the competition by offering lower fares to customers.
For the airline industry, this means that the average cost of operating are being met. The airlines are able to operate, but do not make any extra money above covering costs. An article in Wall Street Journal suggested that United Airlines “was not covering its costs from San Francisco to Washington D.C.” (Brickley, Smith & Zimmerman, 2009). It is being assumed that the revenue collected on the typical flight between these two hubs did not cover the costs. This does not necessarily mean that the airline should discontinue flights between these two hubs.
Does it have competition from any other manufacturer of wide body twin aisle aircraft? If there are substitutes for the 787 Dreamliner, how would it affect the cross elasticity for its demand? Literature Review The production of the Dreamliner was a departure from Boeings traditions (Peterson, 2011). Boeing chose to outsource a major percentage of the engineering and manufacturing of the Dreamliner. The intention was to reduce development cost from $10 billion to $6 billion and reduce development time from six to four years.
Recent military programs, notably the A400M military transport, have been a drain on company resources. The outlook for this side of EADS business is unpromising, although it might still win a share of the controversial $40 billion U.S. Air Force tanker contact. Boeing has used the WTO's ruling against Airbus to strengthen its lobbying campaign in Congress against EADS participation in the tanker deal. However, legislative action to block the EADS bid might have a damaging impact on U.S.-European defense relations. A preliminary WTO ruling on a U.S. complaint against Airbus declared part of $4.3 billion in repayable E.U.
U.S. Airline Industry Case Study Ronald Loebel Park University INTRODUCTION As technology rapidly develops in the 21st century, so are goods and services in the competitive market. The airline industry in the United States of America is one of those undergoing a tidal wave of changes, causing a drastic alteration in the business landscape. Some of these changes were not heard of before, such as more nonstop air travel with the USA, and even the kinds of entertainment systems provided onboard the plane. Moreover, the grueling battle between prolific companies to compete for customer attraction and in the end, loyalty, resulted to further segmentation of the airline industry.
In Europe and North America, where the air travel market is already highly developed, slower growth of 4% is expected. The most dynamic growth is on the Asia Pacific region, expected of 9% due to fast-growing trade and investment are coupled with rising domestic prosperity. Despite financial turmoil in the region, it’s expected not affected on the growth. Despite some may considered airline industry is a monopoly industry, due to most of the airliners is own and control by government, thus, people may perceive it is a profitable industry, on the contrary, airline industry has long been an unprofitable industry. The industry is characterized by intense competition, threat of substitution, threat of new entry and strong buyer/supplier power which lead to dangerously low profit margins.
The resulted pressure led to serious production delays, billions of dollars of lost revenues, and loss of about 11% of market share to its closest competitor, Boeing. The consortium of the companies that integrated into Airbus represented interests of four major European countries. These countries continue pursuing their national interests in Airbus by manipulating EADS, Airbus's parent company. As a result, management makes decisions taking into account political rather than economic expediency. To solve its political, management, and cultural problems, Airbus should: 1.