Overview of the British Airline Industry

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Recommended: Introduction of porters five forces

i. Overview of the industry

With a contribution of £b 18.4 to the Gross National Product, £b7.8 in taxation to exchequer and employing 234,000 employees British Airline Industry can be Considered as one of the major industries of United Kingdom . As an overview of the airline industry we can say that “By their nature, airlines are highly capital-intensive, fiercely competitive, fossil-fuel dependent, labour intensive, government controlled, politically influenced, and weather vulnerable” .

Therefore, with an oligopoly market structure airlines are competing on price, cost efficiency and product differentiation. These all characteristics make this industry hard to enter, highly competitive and buyers oriented. Below we will conduct a test to identify the reasons, which makes this industry like this, using Porter’s Five Forces model.

i. Rivalry

According to Captain and Sickles (1997) the European airlines have historically been sheltered from competition through bilateral agreements between member states and have been heavily subsidized. Therefore, UK airline industry enjoyed benefits of competition less environment. But regulation program started in 1984 and followed by the 1992 EU liberalization program has changed the competition environment in the industry. But the 1992 liberalization program exposed these airlines to a more competitive environment with the entry of the world's other airlines to this once heavily protected market (Captain and Sickles, 1997). Therefore, currently airlines are fiercely competing on price/fares, cost of production and routes availability. Their services are differentiated in space and by time of travel as well as in other dimensions such as comfort and flexibility of ticketing (Charles and Se...

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v. Threats from Buyers

As compare to suppliers’ power in airline industry threats from buyers are not of great significance. Airlines have reduced buyers’ power through using competitive pricing and customer switching as a tool. According to Burkart (1962) the intention of these competitive pricing policies by the scheduled operators has been to deter new entrants to such routes.

In National Economic Research and Discussion paper (April 2003) says that … switching costs are created by loyalty programs designed … such as frequent flyer or corporate discount schemes. These programs create both intertemporal switching costs (as they create benefits for the consumer in using the same airline for the same route in different time periods) and also shopping costs (as they create benefits for using the same airline for different routes in the same time period).

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