Analysis of the Force
Overall, the five forces model suggests that the overall intensity of competition in the airline industry is likely to be severe. Back in the early 1980's competition was very intense. During the late 1980's the monopolization of major routes by a few major carriers, the limited availability of free landing spots at major hubs and the emergence of limited brand loyalty and tacit price agreements have all helped reduce the intensity of competition. However, as already mentioned, slumping demand in the early 1990's plunged the industry once more into a severe price war. Airline travel is a commodity-type product, with limited potential for differentiation.
Rivalry among Firms: High
Rivalry among firms within the airline industry is high because low cost airlines have entered the market forcing existing competitors to control costs. Intensely competitive industries generally earn low returns because the cost of competition is high or buyers are receiving the benefits of lower prices. Factors that affect competitive rivalry include industry growth, fixed cost, brand identity, and barriers to exit. The airline industry is fiercely competitive. Industry growth is moderate, and carriers are struggling to take away share from each other. Barriers to exit are substantial in the airline industry. Grounded planes do not earn any returns and disposing of these assets is difficult. Often, because of bankruptcy laws, companies in financial distress such as Delta or TWA can remain competitors for a very long time. The additional capacity of low cost airlines in the airline industry has held consumer costs down resulting in less revenue and lower returns for competing airlines.
Bargaining Power ...