For the Wordist

Here is a paper as a guideline, feel free to use some of its concepts to write the paper.

Southwest Airlines will be used as our company to the analysis

Topic: Threat of New Entrants, Threat of Substitutes

LENGTH: 2 to 3 pages

Porter’s Forces: Airline Industry

Porter’s six forces are designed to facilitate the understanding of a company’s position within an industry. It can outline every particular market, becoming a powerful tool to analyze and defend companies against its competitors, and even influencing the market in its favor. The strategy instructed by Dr. Porter helps evaluating and rating each competitive force in different strengths – high, medium, or low. The global commercial airline rivalry is extreme and major airlines compete closely for market share and growth. This competition transformed the concept of distance and it improved techniques, design, and service, pleasing passengers.

Threat of New Entrants – Medium

Threat of new entrants is seen as medium because entrants have to analyze capital requirements for accessing the market, cost disadvantage, government policies, and product differentiation. Since there is a huge need for financial resources, when easier access for bank loans and credit is found, more companies have the chance to chase the airline market. Airline competition follows the natural business cycle. It grows as resources are easily available for investments. But, it also shrinks as financing gets expensive and interest rates rise. Major banks around the world are usually involved in aviation financing, providing special departments for the subject. In some cases, big airlines may have more than 15 bank offerings for mandates, sometimes financing aircrafts in 80-90 percent of total capital expenditure. (Morrell, 2007)

A key setback for airline entrance is the cost of operations, which keeps the industry really tough to succeed. In 2011, the cost of airport and air navigation infrastructure paid by airlines and passengers together, were estimated to be US$92.3 billion (IATA, 2013). On top of operational costs, new firms have to pay large amounts of money for governmental barriers, licensing, and training.

The large amount of capital required to balance operational costs gives current companies an advantage. New companies do not have a strong customer base to generate constant profits. Consequently, established companies can use their capital to retaliate new firms in many different ways, such as reducing ticket prices, and even taking a loss to harm new firm’s budget.

Government policies also prevent new companies to enter the market. Different permits and licenses are required for safety, environmental concerns, airports, comfort, and alimentation. All these different policies discourage new entrants to pursue the market.

Threat of Substitutes – Medium

Planes are the fastest transportation method around the globe and for long international travels the threat of substitutes is low. Cost, time, service and convenience are major factors that customers attribute for long haul travel when choosing air transportation. Main substitutes for long air travel are telecommunications, instead of buying expensive and time-consuming air tickets, companies are adopting online communications to deliver problems and results. Face-to-face traditional method is still highly preferable because of its closer human sense in performing business. But, as technology advances, the need of airplane usage will eventually decrease.

Substitution in regional carriers has higher threat because of easier exchange of time over travel. Taking the distance between Miami and Orlando for example, the time a person takes to drive to the airport in advance. Check-in luggage. Wait for boarding. Boarding. Taxing. Flight time. Waiting for luggage and exiting the airport, he will probably be in Orlando by that time, if traffic on the ground is reasonable.

Another concern for the industry is the advance of high-speed trains. Japan is the greatest example of train technology, where it is possible to cover distances exceptionally fast. The service between Tokyo and Osaka, which is about 320 miles, is completed in only two hours and thirty minutes. Tokyo and Aomori, 420 miles, is complete in three hours. Because of these advances in the Japanese transportation system, airlines reduced their operations in many regions, cutting several flights and reducing plane sizes. (Brasor and Masako, 2014)

According to Wheelen and Hunger, substitutes can satisfy customer needs even being different services. Porter states “substitutes limit the potential returns of an industry” (Wheelen and Hunger).

References

Brasor, Philip, and Masako Tsubuku. "How the Shinkansen Bullet Train Made Tokyo into the Monster It Is Today." The Guardian. The Guardian, 30 Sept. 2014. Web. 7 Oct. 2014. <http://www.theguardian.com/cities/2014/sep/30/-sp-shinkansen-bullet-train-tokyo-rail-japan-50-years>.

Canada. IATA. IATA Economic Briefing Infrastructure Costs. IATA, Mar. 2013. Web. 6 Oct. 2014. <http://www.iata.org/whatwedo/Documents/economics/Infrastructure-Cost-March-2013.pdf>.

Morrell, Peter S. "Sources of Finance." Airline Finance. 3rd ed. Aldershot, England: Ashgate, 2007. Print.

Sinha, P., Saini, R., Jain, R., & Raj, R. (2011). Bargaining Power of Suppliers and Airline Industry. 29-29. Retrieved October 7, 2014, from https://www.scribd.com/doc/58246013/Bargaining-Power-of-Suppliers-and-Airline-Industry

Wheelen, Thomas L., and J. David Hunger. Strategic Management and Business Policy: Toward Global Sustainability. 13th ed. Upper Saddle River, NJ: Pearson Prentice Hall, 2012. Print.