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An Analysis Of The Airline Industry

1132 words - 5 pages

My industry analysis will be about the airline industry.
Nature of competition
The airline industry is in a state of oligopoly, bordering onto the state of imperfect competition. The various aspects that have a bearing on the nature of competition will be covered subsequently.
Imperfect information. There is imperfect information about the airline market. This can be gauged by the fact that airlines are never sure as to what is the exact demand for seats on any route over the period of the year. While airlines make fairly accurate guesses about the number of passengers depending upon season, holidays and weekdays, the goal of ensuring that each aircraft flies with passengers occupying all the seats in the aircraft is seldom met. While airlines try to make up for such lack of solid intelligence through the fuzzy logic of dynamic pricing, the results remain sub-optimal and may actually prove detrimental should the public get to believe that airlines are functioning in a predatory manner. Therefore, seat-pricing cannot go beyond a pre-defined range, and this acts as a constraint towards the use of dynamic pricing to fill seats in the aircraft.
Airlines are major consumers of fuel. The cost of fuel plays a major role in determining the profitability of an airline. Airlines are hamstrung by their inability to accurately predict the price of gasoline over the year. This is because the price of gasoline is determined through a complex mechanism of international trade practices and is subject to the shocks of international events (Wensween). For example, the Gulf War literally took Iraq off the gasoline grid and caused an increase in the prices of airline fuel.
Airlines are the weather wanes of the global economy. If the economy is good, there will be more fliers. If the economy is hurting, people would try to save money and try alternative means of communication, especially for business. There would be fewer vacationers to distant locales during a slump. With the global economy becoming more and more tightly integrated, political or economic tremors are felt across wider swaths of the world. Hence, it becomes difficult for airlines to be certain that their business models will break even over the year. For example, the recent standoff over Crimea between the West and Russia resulted in airlines not flying to Sevastopol, except Russian airlines. Such incidents are unknowns, resulting in imperfect information for the airline world.
Homogeneity of product. The airline industry gives a near homogenous product to the consumer – a seat on an aircraft to go from one place to another. The ticket-booking process, the website, the check-in procedure, the boarding process, the frequency of snacks served during flight, are all more or less the same across airlines. That said, airlines try to differentiate the experience through a variety of mechanisms. Low cost airlines try to differentiate themselves by pitching themselves at lower price points. They do...

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