Porters Five Forces. External Environment Analysis of Southwest Airlines - Term Paper Example

? External Environment Analysis Table of Contents External analysis of Southwest Airlines- Porter’s Five Forces 3 PEST Analysis 5 Conclusion 6 Reference 8 Bibliography 8 External analysis of Southwest Airlines- Porter’s Five Forces Rivalry The firm’s total profitability depends largely on the existence of rivalry in the industry. Market concentration further determines the extent to which rivalry exists in the market. Airports, routes and hub served by numerous carriers can account for intense rivalry in the industry. Airports set up in the high traffic cities account for high demand for air travel. In the US airlines market rivalry among airlines is seen to have increased considerably over the years. This is because passengers can now easily compare flight prices of airlines on the internet. For example, Delta Airlines distributes majority of its tickets through travel agents which subsequently increases the prices for customers. One of the strong points on which Southwest Airlines maintains profits is through its online reservation system. Producing e-tickets has reduced prices which passengers are required to pay for air travel (Desai, Patel & Quach, 2002, p.3). Threat of Entry Since the phase of deregulation, many new entrants have entered into the airlines industry in USA. 22 new airlines had been formed and another 43 of them has entered till 1982. Experts suggested that the industry had inefficient scale economies which supported the entry of numerous new entrants in the industry. However, since 1993 and during the recent years many of these start-ups have been consolidated, established and incorporated as large and major airlines. The high threat of new entry in the airlines industry in US also gets reflected through the fact that 8 major airlines existing in the market have become bankrupt merged with other companies or has simply vanished from the radar screen (Desai, Patel & Quach, 2002, p.4). Substitutes Trains, buses and cars account for major substitutes for air travel. However, the importance of trains and buses as substitute products has declined over the years. The Switching costs associated between air travel and its substitute services remain quite low; however, experts suggests that the importance of the substitutes are likely to change as per the customer type, route and reason for travel. For example, travelling through seas across US for long journeys would reduce ground transportation to a certain extent. Business travel could generate more flying demand while vocational travel could demand more driving. Due to the fact that leisure travellers are considered to be more price sensitive as compared to business travellers, they are more likely to use substitute services considering the opportunity costs incurred (Desai, Patel & Quach, 2002, p.4). Bargaining Power of Suppliers Employee bargaining powers are expected to vary according to unionization of employees or the characteristics of employees. Wage rates have accounted for major operating expense of airlines leading to many union strikes during the post liberalization era. The bargaining powers of pilots have remained low since there are numerous pilots available in the market. Moreover, airplane manufacturers such as Airbus and Boeing, enjoy high powers of bargaining since they huge switching costs are associated with changing the airplanes (Desai, Patel & Quach, 2002, p.4). Bargaining Power of Buyers The individual powers of buyers remain low because of the inability of the airline customers to coordinate and organize among themselves. The extent of price discrimination employed by airlines would also depend largely on routes and type of the customers. Routes which remain heavily flooded by different flights more likely to charge competitive prices because of the existence of substitute airlines. On the contrary the long distance flights which have less hubs and schedules are likely to be dominated by too many airlines and which consequently would charge exorbitant price from customers. Corporate discounting, i.e., negotiations between corporate institutions and airlines account for valuable strategies for reducing airfares and waiver fees. However, in spite of that corporate power of bargaining are likely to remain at a low rate because of the need for negotiating far ahead in advance in compliment to such factors as discounts, airline offers, demand forecasts and decisions (Desai, Patel & Quach, 2002, p.5). PEST Analysis Political US political conditions are particularly conducive for conducting business. This is with regards to safety, security, health conditions, and relations with foreign nations. With liberalization, the large carriers have benefited greatly by freely operating in the market and sustaining profitability in the aggressive industry (Desai, Patel & Quach, 2002, p.2). Economic One of the most technologically powerful economies of the world, USA has a high per capital GDP of $48,100. The favourable for any large business is that the economy is highly market oriented where businesses can make the most of it. These businesses can enjoy immense flexibility and suppleness in their home country as compared to other foreign firms operating in the region. Large airlines like the Southwest Airlines enjoy prime benefits as compared to other foreign airlines as they face severe barriers to entry in the market (Central Intelligence Agency, 2012). Socio-Cultural Living conditions in the region are high with conditions transforming from an economy based region to modern wage earning. Urban population accounts for 82% of the total population which is characterised by free and urban living, metropolitan lifestyle with regards to music and clothing etc. (Wetherly, 2007, p.124). Technological US firms appear at the forefront in terms of technological advancement in the world. This is particularly visible in the computer world and medical sciences, aerospace and military equipments. However, their advanced have slowly narrowed down over the years with such nations as China and Japan. The onrush of technology is the cause of generation of the two tier labour market in which people at the bottom lack the required education and skills; while persons on top having high technical expertise and education do not get adequate pay rises, benefits, insurance coverage or other benefits (Central Intelligence Agency, 2012). Conclusion The above analysis reveals a number of opportunities and threats for the Southwest Airlines. Firstly, with liberalization, it has the opportunity to expand into other regions and states. Also the fact that it is highly appreciated and accepted by customers and passengers gives it opportunities to improve on its value and customer satisfaction. Few of the threats include entry of strong competitors like Airtran and Jetblue. Also oil price hikes could pose a threat. Sudden occurrences of recessions and slowing down of the economy could reduce the demand for air travel could customers. Reference Central Intelligence Agency. (2012). The Worldfact Book. Retrieved on May 24, 2012 from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html. Desai, K., Patel, V. & Quach, D. (2002). Southwest Airlines. Retrieved on May 24, 2012 from http://www.mcafee.cc/Classes/BEM106/Papers/UTexas/351/Southwest.pdf. Wetherly, P. (2007). The social and cultural environment. Retrieved on May 24, 2012 from http://www.oup.com/uk/orc/bin/9780199203055/wetherly_ch05.pdf. Bibliography Department of State. (2012). U.S. Department of State. Retrieved on May 24, 2012 from http://www.state.gov/. Value Based Management. (2012). PEST Analysis. Retrieved on May 24, 2012 from http://www.valuebasedmanagement.net/methods_PEST_analysis.html. Read More