DELTA AIR LINES - The Low-Cost Carrier Threat

Porter analyse

a) Rivalry among existing competitors

The airline industry has a very strong level of competition and the only lever to compete on this market for all the actors is the price of a fly.

There is many competitors and they all try to be attractive with their different offers but in reality the only thing matter for the customer is the price because in each case, with any air lines they will finally get the same service which is the transportation of them from a point A to the point B. For sure air lines try to make them different from the others with special services on board (as special meals, personal entertainment video, communications) and also on internet (as on line reservation etc.) but they are style quite close.

Also all the services you can get on board didn’t fill their goal: win the loyalty of customers. They just increased the cost of air lines therefore the price of the tickets.

Concerning their flexibility, they could manage some excess capacity with the staff but definitely not with the planes. They have an air fleet and they can’t easily and quickly move it.

Economies of scales exist in this case because the price per miles for a flight is much more interesting for a long flight than for a short one. So there is a kind of economy of scale for customers.

b) Threat of new entrants

One of the most important is the capital you need to enter the market. This capital must be very important because of the price of planes for example. It is still interesting to see new competitors enter this market because we know the return on investment is pretty low and the risk because of the strong competition is high.

Economies of scales exist in the case of purchasing planes but it means purchasing to the same suppliers and it could be dangerous to put all the eggs on the same basket. Then if the company choose this way to have enjoy economies of scale they will also appreciate the decrease of the cost of maintenance which the same for all the fleet.

Regarding to the channel of distribution, it is easy to communicate and sell his tickets on the web for example. Each media as TV, radio etc. has an easy access now for companies trying to increase their visibility.

However it is much more complicated to get the approbation of the government which is really thoughtful about security since September 2001. But the good news for new comers is the Deregulation Act signed by President Carter in 1978: “The act phrased in freedom of pricing and route entry and exit.”

The arrival of a new competitor should have the effect of a bomb for the old one and they will probably do an important pressure on him. The market has already a strong competition; actors don’t want to see others coming in.

c) Threat of substitutes

We can consider many substitutes to the plane in the case of local flight. In fact, cars, buses, trains should be substitutes to flight. All of them have strong advantage which could be about price, easiness, etc.

The problem is air lines don’t fight just against planes substitutes they also have to compete against the other airline companies because the service is so close that customers could change their suppliers very easily.

d) Bargaining power of buyers

This is a fact; customers are highly interest about the price. This is the most important thing for them when they are buying a flight ticket. This comportment is possible because each company in this industry has nearly the same service and they can’t really differentiate their brand to the others in terms of service. Then if the service is the same the customers can move from another one with a better price.

The bargaining of buyers is also stronger than loyalty programs. They try to make buyer loyal but finally they aren’t. It shows us how this bargaining is high.

There is something really interesting at this point. We just saw the bargaining and the loyalty of customers but if they are just interest about price all of them don’t want to bet on the security. They want the lowest price with the same level of quality and security.

Internet has changed the level of information for buyers. It is really easy to anybody now to check on one of the many specialise website to compare the price of flights. Those tools have made the bargaining of buyers stronger than before.

e) Bargaining power of suppliers

At this point it is very important to remind the different lever of air lines industry. The cost of purchasing or renting planes represents 15% of total cost but the main threat in this case is about the number of suppliers. There are just two suppliers (Boeing & Airbus) in the all world which means they have a strong power of bargaining. This is an oligopoly and prices are pretty similar due to the number of suppliers and the competition between them.

The fuel is also a huge part of the cost with 15% on the total cost and this is a very particular part. The price depends of so many variables as complicate as politic context of oil producer countries etc. For this cost companies can’t prevent or manage

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