Bargaining power of the airline industry’s customers and suppliers
Supplier power
The air transport supply chain consists of aircraft manufacturers, lessors, air navigation service providers (or ANSPs), travel agents, and freight forwarders. The supply chain also includes providers of other services such as computer reservation systems (or CRS), catering, ground services, and maintenance, repair, and overhaul (or MRO).
As seen in the chart below, all the airline suppliers generate higher returns compared to airlines, and returns vary for each business partner. Computer reservation services providers, travel agents, and freight forwarders are the most profitable with returns more than double the cost of capital. The bargaining power of aircraft manufacturers is high, as there’s a limited number of suppliers. The major portion of the world’s demand for aircraft requirements is addressed by two top manufacturers: Boeing and Airbus. Even many airports and ground handling companies are local monopolies.
Customer power
Customers have a high bargaining power since the industry deals with a perishable product with limited options to differentiate their services from competitors’ products. However, airlines do have various classes of seats to customize services according to customers’ requirements. Low-cost carriers such as Southwest Airlines Co. (LUV) provide low-fare options for travel, while legacy carriers such as Delta Air Lines, Inc. (DAL), United Continental Holdings Inc. (UAL), and American Airlines (AAL) provide more customer service and amenities for a higher price. JetBlue Airways Corporation (JBLU), on the other hand, caters to the niche segment who look for better features and benefits that low-cost carriers don’t provide and at a reasonable price that network carriers can’t provide. The SPDR S&P Transportation ETF (XTN) holds stocks of the major US airlines.
Passengers, especially those traveling for leisure purposes, are highly price-sensitive. Customers also have other travel options to consider such as high-speed trains, private jets, cars ships, and buses. Some business customers may choose not to travel at all for events such as business meetings that can be accomplished via technologies such as video conferencing. Airlines, however, will remain the only option for extremely long-haul distances.
