Porters Five Forces Of Competition Model Tourism Essay
This essay will examine the Porter’s fives forces model applied to the major airline industry. Secondly it will assess the market condition and nature of competition faced by Lufthansa and finally this essay will look at an effective competitive strategy and explain why it may be successful. From the analysis of the Porter five forces of competition model in the airline industry, we can conclude that there is moderate level of competitiveness within the airline industry with the exception of strong supplier power. In addition, we can also conclude that due to difficult market conditions and the nature of competition faced by Lufthansa, an effective competitive strategy would be cost leadership as it will enable Lufthansa to survive through the current economic crisis.
Competitive Rivalry is one of the central forces of the Porter five forces model that is used to assess the competition within an industry (Capon, C. 2009). In the case of the airline industry, it is one of the major industries in the world today and it exists in an intensely competitive market (Investopedia. 2009). Air France KLM, Lufthansa and British Airways are the leading companies in the European airline industry (Datamontior, 2008). The core activity of these airlines is passenger transportation and they are competing for the same customers for example, leisure and business travellers (Datamonitor, 2008). These airlines are continually competing against each other for price, in-flight entertainment, technology, customer service, catering services, ancillary services and other areas (Datamonitor, 2008). Air France KLM, Lufthansa and British Airways maintain their customer base by sustaining their differentiation within the services they provide to their customers. (Capon, C. 2009).
“The air industry in Europe has been deregulated to a certain extent, which makes it more attractive to new entrants” (Datamonitor, 2008: p.13). The second force of the Porters five forces is the threat of new entrants into an industry (Capon, C. 2009). The airline industry is so saturated that there is hardly space for newcomers (Investopedia, 2009). The important factor that new entrants will look at is the cost of entry. It is important to look at whether there are substantial costs involved in accessing bank loans and credit as this makes the likelihood of more airlines entering the industry higher if burrowing is cheap (Investopedia, 2009). It is evident that the capital required for a new company to enter the airline industry is considerably high, for example to acquire the fleet of planes, safety and security measures etc (Datamonitor, 2008). In addition, there are significant costs involved for even existing airlines to begin operating in Europe, such as overheads, wages etc (Datamonitor, 2008). Therefore, the bureaucracy and large financial outlay involved in setting up can serve as a deterrent to new companies entering the airline industry (Datamonitor, 2008).
In addition the infrastructure available is a barrier to entry. The infrastructure in “Europe is lagging behind the growth in traffic” (Datamonitor, 2008: p.14).Congestion is increasing and therefore slots at certain airports have become a commodity for certain airlines. This makes it difficult for new entrants to negotiate primetime slots at busy airports and can result in restriction to offering flights at only off peak times or having to fly to other less busy airports away from popular destinations (Datamonitor, 2008). The Global economic meltdown and the rise in oil prices have made it difficult for the airline industry in the year 2008. As a result although UK market revenues are high, the likelihood of new entrants is weak to moderate (Datamonitor, 2008). Another major barrier to entry is brand name of existing airline as they can lure customer into using their service, even if the costs are higher that other airlines (Investopedia, 2009).
Another force that Porter describes is the threat of substitute products or services. “The main substitutes for airline are other forms of transport, road, rail and marine.” (Datamonitor, 2008: p.15). The distance and time taken to reach a destination using a substitute service serves as a threat for the airline industry if the customer perceives the substitute service as equally good (Capon, C. 2009). The distance between European destinations are relatively small. The flight may be short in duration however, the time to check in can make the overall time of the journey similar to the rail travel service (Datamnitor, 2009). Another threat to the airline industry is the environmental impact of travelling. “Some consumers may see the greater environmental impact of air travel as a significant disadvantage compared to rail” (Datamonitor, 2008: p.15). However longer journeys are not a threat to the airline industry as “rail travel may be comparatively time consuming and rail fares often compare unfavourably, reducing the threat of this substitute” (Datamonitor, 2008: p.15). Overall, the threat of substitutes for travel to the airline industry is moderate (Datamonitor 2008).
The bargaining power of buyers is another force of the Porters five forces model. The main buyers in the airline industry are leisure and business travellers (Datamonitor, 2008). Buyers’ power in the airline industry is assessed as moderate overall. “The large number of individual consumers in this market diminishes buyer power, as the impact on an airline of losing one customer is marginal” (Datamonitor, 2008: p.13). Consumers are able to switch from one airline to another as it does not incur any additional costs therefore customers are free to shop around for the best deal for their particular journey (Datamonitor, 2008). Overall, the airline industry is highly price sensitive and many customers are eager to find tickets with the lowest price for their journey (Datamonitor, 2008). Buyers’ power has increased marginally due to “online booking sites that allow consumers to compare and contrast tickets according to price, flight times and number of stops en route and travel agents who assist customers in finding the best deal” (Datamonitor, 2008: p.13). In response to consumers being able to switch from one airline to another with ease, they are offering loyalty schemes such as BA’s executive Club to their consumers (Datamonitor, 2008).
In addition, another force that Porter describes is the bargaining power of suppliers (Capon, C. 2009). The airline industry is characterized by strong supplier power as a result of global duopoly of Boeing and Airbus that exists in the manufacture of aircrafts globally and that there is no viable substitute for jet fuel that has yet been discovered (Datamonitor, 2008). Airlines have little control over rising fuel prices as no alternative source of energy is available and as a result supplier power is strong (Datamonitor, 2008).
“On first of July 2009, Lufthansa finally took over BMI the second biggest carrier at Heathrow airport” (The Economist, 2009: p.60). This deal gave Lufthansa control of more flights from London Heathrow airport than any other airlines except British Airways (BBC, 2008). Lufthansa is facing extremely difficult market conditions due to the present economic crisis (Flottau, J. 2009). As a consequence of the Global economic downturn, the acquisition of BMI and two other smaller airlines makes Lufthansa strong enough to weather the storm better than others (The Economist, 2009). Lufthansa saw its premium traffic fall by 15% in the first four months of 2009 and its competitor British Airways premium tariff fall by 17% (The Economist, 2009). Due to plunging demands in the market, Lufthansa is trying to conserve cash and cut capacity. However, the last thing it wants to do is spend precious money and time trying to sort out the struggling, sub-scale airline BMI (The Economist 2009). Lufthansa faces competitive rivalry. Low cost carrier such as Easyjet, Ryanair, Air Berlin are Lufthansa’s most dangerous competitors (Flottau, J. 2009). Bargaining power of suppliers increases as the penalty for late cancellations of new aircraft orders are high (The Economist, 2009). This makes it difficult for airlines to cut down capacity to match the fall in demand (The Economist, 2009). In addition the rise in jet fuel prices by fifty percent since the beginning of the year, adds extra costs to the airlines (The Economist, 2009). This increases supplier power as there are no other alternatives to use (Datamonitor, 2008).
“The airline recently warned that without fierce cost cutting measures it would fail to make even an operating profit this year” (The Economist, 2009: p.60). An effective strategy for Lufthansa would be cost leadership (Capon, C. 2009). “Lufthansa’s declared aim is to increase the sustainable profitability of the segment by cutting costs” (Lufthansa Annual Report, 2008 p.1). This will be an effective competitive strategy for the current economic crisis. Lufthansa is making capacity adjustments to match plunging demands (Mayrhuber, W. 2009).”400 jobs (overhead) will be phased out by 2011. (That will save us costs of 55 million euros)” (Mayrhuber, W. 2009: p.4). In addition Lufthansa has planned to reduce personal unit costs by ten percent which will save cost of a hundred and ninety million euro’s and furthermore reduce material costs by seven percent by 2012 (Mayruber, W. 2009). In order to make profits, this strategy will enable Lufthansa to survive through the economic crisis.
To conclude, the porter five forces of competitive, rivalry, threat of new entrants, threat of substitute service and the bargaining power of buyers are assessed at a moderate level to the airline industry. However the bargaining power of suppliers is strong. I think that the airline industry should maintain this level of competitiveness in the industry as it will make them more efficient and improvement in the quality of their services will increase as a result. Lufthansa is facing very difficult market conditions (e.g. increase in jet fuel, decrease in demand etc) due to the economic meltdown and as a result I suggested the cost leadership strategy for Lufthansa in order for them to survive though this economic crisis.
