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The South west airlines are part of the airline industry in U.S.A and are a low cost airline located in Dallas U.S.A.
An external analysis of the environment in the airline industry was carried out through a PEST analysis and the 5 forces of the Porter’s model and the below conclusions were reached.
Political environment-the policies that governments have come up with. For instance the UK government and environmental activists that aviation degrades the environment greatly and should therefore be controlled. A government is a very powerful entity and therefore it could pose a threat to airlines if it decided to impose regulatory practices on airlines.Limitations regarding the terms and legal obligations of the airline may make it hard for the airline.
Scanning the political environment in this case, we find that south west airlines sought to make use of the opportunity created by the airline Deregulation Act passed by the U.S congress in 1978.this law permitted interstate flights. But Southwest’s attempt to becoming an inter-state airline soon faced political obstacles. Southwest wanted to operate all its interstate flights from Love Field Airport which was very close to downtown Dallas. On the other hand, all the other airlines operated from Dallas Fort Worth Airport, which was far away from the main city. Rival airlines fearing that South west would get a larger share of passengers, tried to use their political influence to ban operation of flights from Love Field, Congressman Jim wright tried to pass this law.
Social environment. These have positively affected the industry in that with the introduction of more and more airlines, even people from the middle-class can now travel by air. Beyond that, there has also been more job creation through the establishment of these airlines. An important aspect of the social environment concerns the values consumers hold. Values mainly revolve around a number of fundamental concerns regarding time, quality, total environment, financial conditions and diversity. The ultimate taste of a business is its social relevance. When it entered the airline industry, the social environment for air passengers was discouraging, the fares were too high, flight schedules were not convenient for passengers and the time required for travelling from the city , to park and take off from the airport was lengthy and tiring. The aptitude of managers of southwest airlines is seen whereby they refuse to move their flight operations from Love Field. This was a clear indication that they were observing the social environment and building their organization against this. With this recognition of the social environment, the southwest Airlines gained popularity among the citizens and thus attracted more customers.
Economic environment. These can take several dimensions, first how the industries that airlines depend on affect airlines and how the airlines are directly affected by a country’s economy. The changes in the economy have had a tremendous effect on the airline industry. Another thing that the economy is affecting the airline industry is the competing airlines. The bigger airlines can afford lower fares which make it hard for the smaller airlines to compete. Different airlines have plans to expand but will not be able to until the cost of fuel is under control.Fuel price hauls and fluctuations are a major reason for the Southwest for not incurring more profitable operations. (Southwest counters this by strict financial spending on fuel i-e fuel-hedging) For the low carriers who allow advanced booking, they will need to work on a plan to avoid bankruptcy. This will make the airline industry continue to boost prices due to the fact that oil prices are expected to continue rising due to the supply.
Traveling by air is both elastic and inelastic depending on whom it is that is traveling. If a family is planning a trip just to take a vacation and the price of an airline ticket is extremely high, more than likely they will decide to wait on the trip until the prices are lower. This shows that the airline industry in considered elastic. However, if a businessman needs to be at a seminar across the country by the next day, he will need an airline ticket regardless of the cost. In this example, the airline industry would be considered inelastic because it is a necessity.
The current market has a big part in the supply and demand in the airline industry. For instance, with the price of oil rapidly increasing, the cost of an airline ticket is also increasing and the demand for leisure travel is decreasing.
After the bombing of the World Trade Centre on September 9th 2001, people were afraid there would be another terrorist attack involving a plane and the demand decreased. Another factor in the cost of an airline ticket is the date it is purchased. If there is an emergency and someone purchases a ticket close to the departure date, even though there are unsold seats available the cost will increase.
Technological environment. This basically means that some technological advancement has proven, and may in future prove to affect the airline industry negatively thus a decrease in the air travel demand. A good instance would be video conferencing which reduces the need for people to constantly travel. If not planned for properly, an airline could suffer greatly from ignorance to technology. Social networking sites like Facebook and Skype allow for people around the world to share information they may not have been able to before. One can chat with a relative and avoiding travelling by air throughout the world.
The 5 forces of Porter’s model
Threats of new entrants. There has been a never ending expansion of the aviation industry with new airlines coming up every day. Airline managers should therefore ensure that they are prepared and have a strategy on how to deal with new entrants into the industry. This can be clearly portrayed by the way Braniff and Texas international Airlines reacted to the entry of a new airline, Southwest Airlines, they even decided to work together in a bid to destroy the airline even before it started their operations. This would go to show that the treat of new entrants in the airline industry is very high.
Availability of substitutes. They exist because there is more than one way of doing anything. For instance when travelling, one can use vehicles, trains bicycles, airplanes, ship and so forth. Apart from alternative methods of transport, technology has gifted us with the gift to do a lot of things without moving. The ease of substitution in the airline industry is surprisingly very high the greatest contribution being from technological advancement. This has led to a drop in the demand for air travel causing airlines to constantly register losses. The ease of substitution in the Airline industry is very high since other alternatives have come up mostly due to technological developments.
Degree of rivalry among competitors. How competitive is the industry? Is there a dominant airline and many other small airlines or are there many powerful airlines how many other airlines are there in the industry. These are some of the questions that are raised under competition. If there’s one dominant airline then the degree of competition is quite low in the industry. The airline industry in the USA is very competitive and has a lot of rivalry going on. In the case of southwest airlines, its major competitors, Texas International and Braniff Airlines even joined hands in a bid to destroy the southwest airlines even before they started operations. This goes to illustrate how competitive the airline industry in USA can get, the competitors were threatened by an airline that hadn’t even started operations.
Bargaining power of suppliers. The bargaining power of suppliers is basically quite low in the industry in that, much bargaining doesn’t take place. Suppliers are mostly big shot aviation companies and can only compromise prices with airlines so that during their low period, they are able to negotiate prices with their buyers. It may not be exactly bargaining but it counts for something. And therefore the bargaining power of suppliers will be considered to be low.
Bargaining power of customers. The airline industry rarely allows room for customer bargaining, you can either afford to travel by air or not and with more and more new airlines coming up, almost all social classes are catered for. South airlines however haven’t classified their passengers which reduces discrimination. Through observing the social environment, the Airline has been able to cater for the diverse needs of the customers, this though does not count as bargaining power of the customers towards the airline. The bargaining power of customers in the airline industry is quite low compared to other industries.
After carrying out the PEST analysis and analysing the environment using the Porter’s Model the following conclusions were reached. There are threats and opportunities that affect the Southwest airlines
The decreasing demand for air travel
Fuel price hauls and fluctuations.
Terrorist activities make it more of a threat to travel.
There are still many national and international markets that are still untapped.
There are many industrial opportunities for development in the airline industry.
It can haul longer flights to cover more expansion.
It can also tap the travel business option for the business class passengers, and offer private flights.
It can get the latest technology, which would give it a further cost effective lead, as well as providing new services and products.
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