EWMBA 299 – Competitive Strategy

Southwest Airlines

Introduction
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…

A mitigating factor for this supplier power is the lumpy nature of aircraft sales, where there are a few high-value orders placed by airlines with deliveries spanning several years. Labor such as pilots, cabin crew, ground personnel, gate agents etc. are typically unionized and have some bargaining power. However, many airlines especially in the post-deregulation era have used the threat of Chapter 11 bankruptcy to re-negotiate unfavorable labor contracts. Aviation fuel is a commodity and its prices are determined largely by market forces and geo-political factors.

Buyer Power
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.

Industry profitability
Exhibit 1 provides a summary of this industry analysis. As highlighted by