Please note that this article is aimed at providing a simplified, high-level example of how to apply the Porter"s Five Forces and PESTLE frameworks. These analyses can (and should) be undertaken in much greater detail.
Porters Five Forces
- Strong rivalry due to deregulation* and a highly saturated market**. Different airlines service different segments***, but there is little differentiation between products in each segment.
Threat of substitutes
- Moderate level. Cheap buses, trains and ferries pose a threat but are less efficient. There is no realistic substitute for long haul travel, without technological developments and infrastructures that facilitate faster rail travel over longer distances.
Bargaining power of buyers
- High due to a highly saturated market, price-sensitive consumers, low switching costs and largely undifferentiated products.
Bargaining power of suppliers
- High to due there being only two major aircraft suppliers, a lack of influence over oil supply and cost, strong labour unions**** and infrastructure providers are typically monopolies and owned by the government (such as airports).
Threat of new entrants
- Low due to high entry barriers. Entry barriers are a result of brand loyalty, complex regulations, congested airports and high start-up capital requirements.
A PESTLE analysis outlines the impact political (P), economic (E), socio-cultural (S) technological (T), legal (L) and environmental (E) factors have on an industry. It is a useful tool to help candidates understand how macro-level elements impact on an industry and deepen their appreciation of how being part of a specific industry affects a company.
- The airline industry is highly regulated with the aim of protecting customers and uphold passenger safety. Government policies designed to avoid monopolisation means competition between airlines have increased. Other policies that have an impact on the airline industry include high taxes and onerous visa requirements.
- Fluctuating oil prices are a debilitating factor for the aviation industry and airline tickets have a high income elasticity, both of which have a negative impact on the industry.
- Globalisation has contributed to increasing demand for airline travel. However, the profile of passengers has changed, as today they are typically more economically minded and thus there will be less passengers flying business or first class. Demands is also exposed to external shocks that influence consumer attitudes, such as terrorist attacks that reduce propensity to fly.
- Technological advances are essential and contribute towards improved safety, lower costs, greater efficiency, and improving the overall customer experience. Improvements in airport operations have facilitated the processing of ever increasing passenger numbers, and more efficient luggage handling an air-traffic-management. Latest technology must thus be adapted by airlines in order to survive in the competitive environment.
- The airline industry is highly regulated with controls on fares, routes, alliances, safety, security and environmental impacts.
- Global warming may cause extreme weather conditions and natural disasters, increasing delays, cancellations and airlines' costs, thus reducing airline profitability. As passengers are becoming more environmentally aware, airlines will be forced to adopt green policies and be more responsive to the concerns of environmentalists.
The process by which the government lessens the amount of regulations for a particular market or industry, often with the aim to increase competition.
Where there is little demand for more products in a particular market or industry.
A market segment refers to a group of consumers that share characteristics, such as age, location or gender.
****Strong labour unions
A strong labour union means that the workforce of a particular industry have high collective bargaining power. This means that the cost of human capital is likely to be higher as a strong union could demand higher wages or more extensive benefit packages for the employees.