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The main power of the suppliers in the
airline industry can be summed up by the influence it has on all three inputs
that airlines are composed of in terms of fuel, aircrafts, and labor. For
instance, the price of aviation fuel can be described as constantly affected by
the flux in the oil prices as offered in the global market, which can gyrate
wildly. Similarly, labor is directly subject to the power of the unions who
often bargain and get unreasonable offers or compromises from certain parties,
in other cases they might pose a disadvantage to the labor market itself. A
study conducted in highly unionized industries found that the more the unions
have influence, the lower the profitability is in the industry. Third, the
airline industry needs aircrafts that are mainly manufactured by both Airbus,
and Boeing. The mixture of the three reasons mentioned results in a high
bargaining power of the suppliers in the airline industry.1

It is an almost impossible process
to change suppliers for airline companies; most firms have long-term contracts
with their suppliers. Planes normally require a high capital investment, which
explains the long-term deals companies enter into. The challenged posed in the
entrance into the airplane industry is represented in the form of the high
initial capital needed. It takes millions of dollars to manufacture one plane
for example, the Boeing 777 costs around $320 million, not to mention the test
trials and specialists being hired for this sole purpose. For the above reason,
it is clear that the number of suppliers in the industry will remain relatively
low in the near future. Based on these points we conclude that the bargaining
power of suppliers poses a low threat. Customers are price sensitive in the
sense that prices and offers are considered essential to them. We should include that in general,
airports are in limited supply and we need airports to land planes and board
passengers, Suppliers are under the threat of bankruptcy if they are more
profitable more that buyers are.2

have summarized the power of suppliers in three main factors beginning
with fuel. The price of fuel is one of the main
issues to take note of when addressing the airline industry, which is greatly
unstable because of geopolitical and other factors such as taxes and exchange
rates. Fuel
suppliers such as Shell, British Petroleum and Chevron Texaco are considered
market giants; Fuel providers have an excellent bargaining position as they can
increase fuel prices without regarding the airlines as an important customer
group. To prevent losses in the form of costs from
fluctuating market prices of fuel airline companies regularly hedge fuel.
Hedging can save a lot of money for the company by reducing the risk exposure
when market prices fluctuate. To demonstrate the fluctuations of market table
referred to shows an Example of fuel hedging and the total saving from that
approach.3 OPEC also
plays a role, the more OPEC cuts the supple of oil, which is needed for
airplane fuel, airline companies have to depend more and more on hedging.4

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One major shift will be the use of
certain natural resources such as; algae, flax, coconut husks or even using
cooking-oil to produce airplane fuel, often called “Bio Fuel”; this is a huge
advantage because the airplanes engines will not have to be replaced, changed
or even renewed because of the newly produced fuel.5
One example would be Airbus; they also say the technology, in which it and the
Bavarian government are investing more than 10 million euros ($11 million)
between them6.

Secondly, aircrafts are
considered one of the most important and highest expense in the
airline industry. The main suppliers within the airline industry are the
manufacturers of aircrafts like Airbus and Boeing, Two major
determinants in terms of aircrafts and their manufacturers are sale or lease
basis, which means that it mostly depends on the companies and whether they
want to have the aircrafts as assets on their balance sheet or would prefer a
higher ROA by applying the lease basis. Moreover, at the current stage, aircrafts for long distance
travel cannot be substituted by any other product, which strengthens the
bargaining power of the suppliers even more.7
Boeing and Airbus respectively have been the two major suppliers of aircrafts
to the airlines over the world.8
The strong position
fuel suppliers and aircraft manufacturers hold in the industry need to be taken
into account when operating an airline.9

Labour comes third in our inputs, it is subject
to the power of the unions who often bargain and get unreasonable and costly
concessions, which are granted rights or a privilege from the airlines, plus,
another point to keep in mind is that strikes affect the industry greatly.

One example on how the strikes have
a great effect, German airline Lufthansa declared (2015) that it lost at least
10 million euros ($10.8 million) a day from the longest strike in its 60-year
Another is the general union strike example of Eastern Airline Workers’ Strike
(1989, U.S.) and Alaska Airlines flight attendant strike CHAOS (1993).11

To summarize, all suppliers have
tremendous bargaining power with the airline industry. There are few fuel
providers and no reliable alternative to fuel. There are very few pilots in the
job market.12
Mechanics for airplanes are in short supply and planes cannot be flown without
being serviced. Flight attendants provide services that cannot replaced easily
and customer satisfaction without flight attendant would be detrimental.

We recommend companies in the industry to take into
consideration the limited product suppliers, keeping in mind that customers
behavior is highly affected by price, which can pose a tough competition.
Certain analyses have proved to be important in the long-term survival of the
companies such as; SWOT analysis, Pest, peer group analysis among others, this
includes the three mentioned points in terms of fuel hedging, it is advisable
to keep revised on the bio-fuel technologies. For aircraft supplier deals,
having a low-cost reliable maintenance deal is optimal. Labor can be improved
by the company’s interest in reserve pilot academies to supply any events such
as a strike or a general shortage. This would enable the company to safeguard
through certainties at all times.

Categories: Industry


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