Marketing Management

Threat of new entrants: The extent of threat due to new entrants is determined by how high or low are the barriers to entry into an industry. In the airline industry, deregulation and availability of alternate sources of funding reduced the barriers to entry.

Economies of scale did not work out well for the players in the airline industry. The hub-and-spoke model developed by the major players, led to more of diseconomies of scale than economies. However, the large investments already made by the major airlines, and their established networks do pose a significant threat to new entrants unless they counter it with highly efficient operations.

Product differentiation. Airlines try to create strong brand identification and customer loyalty by using the frequent flyer programs. When there is strong brand identification, it forces the new entrants to spend heavily on weaning away customers from the existing players, thus discouraging their entry. However, in the airline industry the brand identification has not proved to be so strong as to prevent people from switching to other airlines. Some low-cost players are trying to achieve some product differentiation (e.g., JetBlue providing more legroom, directTV at each seat, etc., Southwest emphasizing commitment to customer service). However, these are not very strong barriers to entry as the other entrants are imitating them rather pretty easily.

Switching costs. There are virtually no switching costs for customers. The frequent flier programs attempt to create switching costs. However, when the customers are presented with low-cost options, there is nothing strong enough that could prevent them from switching to other airlines.

Thus, the airline industry faces a high threat of new entrants particularly in the low-cost segment. The barriers can be heightened only when they have very closely tied and ultra-efficient operating routines that competitors find it difficult to copy or imitate.

Bargaining power of suppliers is high when there are few suppliers in the industry, there are no easy substitutes to supplier's products, when the buyer industry is not an important customer of the supplier group, the supplier's product is an important input to the buyer's business, the supplier products are differentiated or built up switching costs, the supplier group poses a credible threat of forward integration. There are the only two major suppliers i.e., Boeing and Airbus, to the industry and when the airline trains its pilots on either Boeing or Airbus, switching costs get built in terms of pilots' training in the event the airline decides to change the supplier. Thus the supplier does enjoy considerable bargaining power. However, there is no credible threat of forward integration by the suppliers such as Boeing or Airbus.

Bargaining power of buyers is low to moderate as the buyers