The main power of the suppliers in the airline industry can be summed up by the influence it has on all three inputs thatairlines are composed of in terms of fuel, aircrafts, and labor. For instance, the price of aviation fuel can be described asconstantly affected by the flux in the oil prices as offered in the global market, which can gyrate wildly. Similarly, laboris directly subject to the power of the unions who often bargain and get unreasonable offers or compromises fromcertain parties, in other cases they might pose a disadvantage to the labor market itself.
A study conducted in highlyunionized 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 threereasons mentioned results in a high bargaining power of the suppliers in the airline industry.14It is an almost impossible process to change suppliers for airline companies; most firms have long-term contracts withtheir suppliers. Planes normally require a high capital investment, which explains the long-term deals companies enterinto. The challenged posed in the entrance into the airplane industry is represented in the form of the high initial capitalneeded. 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 thenumber of suppliers in the industry will remain relatively low in the near future.
Based on these points we conclude thatthe bargaining power of suppliers poses a low threat. Customers are price sensitive in the sense that prices and offersare considered essential to them. We should include that in general, airports are in limited supply and we need airportsto land planes and board passengers, Suppliers are under the threat of bankruptcy if they are more profitable more thatbuyers are.15We have summarized the power of suppliers in three main factors beginning with fuel.
The price of fuel is one of themain issues to take note of when addressing the airline industry, which is greatly unstable because of geopolitical andother factors such as taxes and exchange rates. Fuel suppliers such as Shell, British Petroleum and Chevron Texaco areconsidered market giants; Fuel providers have an excellent bargaining position as they can increase fuel prices withoutregarding the airlines as an important customer group. To prevent losses in the form of costs from fluctuating market13 As mention before in Threat of substitute14 (Porter’s Five Forces Analysis of the Airlines Industry in the United States, n.d.); (Grant, 2016, pp. 95, 96); (Annual investor relations report, 2003); (SupplierPower (one of Porter’s Five Forces), 2013)15 (Grant, 2016, p. 95); (Why a Boeing 777 costs $320 million, 2014)4prices of fuel airline companies regularly hedge fuel. Hedging can save a lot of money for the company by reducing therisk exposure when market prices fluctuate.
To demonstrate the fluctuations of market table referred to shows anExample of fuel hedging and the total saving from that approach.16 OPEC also plays a role, the more OPEC cuts the suppleof oil, which is needed for airplane fuel, airline companies have to depend more and more on hedging.17One major shift will be the use of certain natural resources such as; algae, flax, coconut husks or even using cooking-oilto produce airplane fuel, often called “Bio Fuel”; this is a huge advantage because the airplanes engines will not have tobe replaced, changed or even renewed because of the newly produced fuel.18 One example would be Airbus; they alsosay the technology, in which it and the Bavarian government are investing more than 10 million euros ($11 million)between them19.Secondly, aircrafts are considered one of the most important and highest expense in the airline industry. The mainsuppliers within the airline industry are the manufacturers of aircrafts like Airbus and Boeing, Two major determinantsin terms of aircrafts and their manufacturers are sale or lease basis, which means that it mostly depends on thecompanies and whether they want to have the aircrafts as assets on their balance sheet or would prefer a higher ROAby applying the lease basis.
Moreover, at the current stage, aircrafts for long distance travel cannot be substituted byany other product, which strengthens the bargaining power of the suppliers even more.20 Boeing and Airbus respectivelyhave been the two major suppliers of aircrafts to the airlines over the world.21 The strong position fuel suppliers andaircraft manufacturers hold in the industry need to be taken into account when operating an airline.22Labour comes third in our inputs, it is subject to the power of the unions who often bargain and get unreasonable andcostly concessions, which are granted rights or a privilege from the airlines, plus, another point to keep in mind is thatstrikes affect the industry greatly.One example on how the strikes have a great effect, German airline Lufthansa declared (2015) that it lost at least 10million euros ($10.
8 million) a day from the longest strike in its 60-year history.23 Another is the general union strikeexample of Eastern Airline Workers’ Strike (1989, U.S.) and Alaska Airlines flight attendant strike CHAOS (1993).24To summarize, all suppliers have tremendous bargaining power with the airline industry. There are few fuel providersand no reliable alternative to fuel.
There are very few pilots in the job market.25 Mechanics for airplanes are in shortsupply and planes cannot be flown without being serviced. Flight attendants provide services that cannot replaced easilyand 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 thatcustomers behavior is highly affected by price, which can pose a tough competition.
Certain analyses have proved to beimportant 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-fueltechnologies. For aircraft supplier deals, having a low-cost reliable maintenance deal is optimal. Labor can be improvedby the company’s interest in reserve pilot academies to supply any events such as a strike or a general shortage. Thiswould enable the company to safeguard through certainties at all times.