Analysis Of The Airline Industry

Introduction

Deregulation in the US 1978

UK and Netherlands followed with deregulation in 1984

The economic boom of 1989/90 – Followed by the recession of 1990/91

The airlines had a tough time in the early 1990’s – mainly due to aircraft orders in the pipeline

The effect of the current economic climate

International Passengers

International passengers carried

0

100

200

300

400

500

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

year

pas

sen

ger

s (m

illi

on

s)

Source: British Airways Annual Report 1998-1999

PEST Political

– Deregulation as the market increases in size, therefore economies of scale may arise.

– Liberalisation of skies• Ownership rules relaxed, EU and US forcing

this through increasing the size of the market.

PEST Economic

– Decrease in passenger numbers– Competition from low cost airlines– Consolidation leads to alliances rather than

mergers where possible– Increase in cost i.e. Insurance– Deregulation has exposed airlines, previously

operating at inefficient cost levels– Many airlines in serious financial trouble e.g. Aer

Lingus, Swiss Air– Supplies also experiencing sharp downturn, e.g.

Rolls Royce

PEST

Social

– From September 11th

• Reluctance to fly

• Need to rebuild confidence in air travel

• Sub losses with knock on social affect

PEST

Technological

– Economies of scale in production due to expanding market size

– E-commerce method of selling tickets, therefore less infrastructure required, overhead savings

Five Forces Framework Internal Rivalry

– Price competition especially from no frills carriers

– Competition for airport landing/departure slots

• Therefore barriers to entry at major hub airports

– Passenger demand declining/static in most countries

– Regulation barriers decreasing, therefore increasing competition in Europe (Ownership rules still protect to a degree)

Five Forces Framework

Entrants

– Since flights between countries, must have majority ownership or the operator in one of the two countries, threat of entry is not currently global

• This could change with three to five years if “open skies” agreements are brought in, therefore potential future threat.

Five Forces Framework

Substitutes

– Travel by sea or land is not always convenient

– Spend leisure money on alternatives or domestic holidays

Five Forces Framework

Customer Power– Loyalty from Frequent Flyer Program

Supplier Power– Fuel prices are a major cost with no

substitute, therefore powerful hold on airlines.