Five Forces in the Airlines Term Paper

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Legacy Carrier Response:

Customer loyalty from years of traveling continues 10% of total traffic; not enough to propel the company into profitability.

Regional route strategies focused more on price protection vs. price competition relative to competitors.

Threat of New Entry - This is the factor in the five forces analysis that illustrates the threat of new competitors entering the markets served by both discount and legacy carriers. Examples of this would be the low-cost jet taxi services based on Eclipse Aviation's smaller and more fuel-efficient jet.

Discount Carrier Response:

Competitiveness in routes on price and availability of flights challenges the entrance of low-price competitors.

Low-cost, highly verticalized air carriers tend to focus and excel on one specific geography, as Southwest does in the U.S. And Ryan Air, Berlin Air, and others do in Europe, and JetStar in Australia.

Legacy Carrier Response:

Battling new entrants by using aggressive pricing strategies only in attacked markets.

Relies on pricing exclusivity for those markets where it is the clear leader; this is the case for example between Santa Ana/John Wayne, California and Pittsburgh, PA where last minutes fares are over $3,000.

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Threat of Substitutes - Defines the threat of companies either with comparable services or entirely new entrants coming into the market and disrupting pricing, service levels, or routes to their advantage.

Discount Carrier Response:

Copes with discount substitutes by reverting back to its core business proposition, which is being cheaper to fly than drive.

Moving down-market by increasing flight frequency in the most competitive markets, and then stabilizing prices. This is certainly the case between Las Vegas and Eastern cities.

Significant effort to increase routes over 550 miles, the break-even point the company sees itself as having to exceed to provide greater value over the substitute of driving.

Strong service ethic as a differentiator is working as there is no unionization to this point in the company.

Legacy Carrier Response:

Alliances and more work to partner with smaller and often unsafe, unreliable carriers.

Looking for a drop in operating costs by freezing wages and speculating on oil prices has lead to employee churn and higher than market pricing.

Increasing customer loyalty benefits to the top 5% of customers, many of whom are retiring from 25-30 years.....

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