The domestic US airline industry has been intensely competitive since it was
deregulated in 1978. In a regulated environment, most of the cost increases were
passed along to consumers under a fixed rate-of-return based pricing scheme. This
allowed labor unions to acquire a lot of power and workers at the major incumbent
carriers were overpaid.
After deregulation, the incumbent carriers felt the most pain, and the floodgates had
opened for newer more nimble carriers with lower cost structures to compete head-on
with the established airlines. There were several bankruptcies followed by a wave of
consolidation with the fittest carriers surviving and the rest being acquired or going out of
Analysis of the airline industry
To determine the profitability of the airline industry, we will do an industry analysis using
Porter's five-forces framework. This industry analysis will help us in understanding the
size of the Potential Industry Earnings (PIE), and how much of this the different
participants can extract.
Rivalry among competitors
There is intense rivalry among different airlines. In the pre-deregulation days, airlines
competed mostly on things like service, meals and in-flight movies etc., since prices
were mandated by the Civil Aeronautics Board. In the post-de-regulation era, this rivalry
has taken on the form of severe price competition, with airlines ruthlessly undercutting
each other with fare promotions.
There are a number of airlines making the airline industry fairly crowded. Even though
the 3-firm concentration in 1992 was 50%, and the 8-firm concentration was 92%, the
fact that the airlines competed on price made the industry much more competitive than
the numbers might suggest.
The service the airlines sell (air transport) is pretty homogenous, and there is not much
product (in this case, service) differentiation. The major differences between the services
offered by different airlines include the total time spent...