Southwest Porters Five Forces
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 …show more content…
The power that airline customers have varies based on the options available to them and the origin-destination city pair. As the General Accounting Office report in 1989 found, fares were 27% higher in monopoly or duopoly hubs than at competitive airports. Sophisticated yield management techniques and competitive pricing have allowed airlines to extract significant consumer surplus in smaller remote markets where travelers don’t have much choice and for direct long-haul flights that are preferred by business travelers. Even though there are pockets where some airlines have pricing power, the overall airline industry in characterized by significant buyer power stemming from the intense price competition among airlines.
Exhibit 1 provides a summary of this industry analysis. As highlighted by