Factors control the direct, and in some cases

Topics: BusinessIndustry


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Last updated: September 19, 2019

Factors that are connected with the bargaining power ofsuppliers include the threat of forward integration, which is when companiesattempt to control the direct, and in some cases the indirect distribution ofits products, it also includes the concentration of suppliers in the industry. Theposition suppliers’ play decreases the ability for competitors in the industryto earn higher profits.1The main power of the suppliers inthe airline industry can be summed up by the effects it has on all three inputsthat airlines are composed of in terms of fuel, aircraft, and labor. Forinstance, the price of aviation fuel can be described as constantly affected bythe flux in the oil prices as offered in the global market, which can gyrate wildly.Similarly, labor is subject to the power of the unions who often bargain andget unreasonable offers of compromises from certain parties, in other casesthey might pose a disadvantage to the labor market itself.

Third, the airlineindustry needs aircrafts that are mainly manufactured by both Airbus, andBoeing. This is why the power of the suppliers is categorized as high accordingto the Porter’s Five Forces framework.2It is analmost impossible process to change suppliers for airline companies; most firmshave long-term contracts with their suppliers. Planes normally require a highcapital investment, which explains the long-term deals companies enter into. Itis difficult to enter into the plane manufacturing industry because of thecapital needed. The amount of money and expertise needed to make even one planeis around 200 million dollars, not to mention the test trials and specialistsbeing hired for this sole purpose.

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For the above reason, it is clear that thenumber of suppliers in the industry will remain relatively low in the nearfuture. Based on these points we conclude that the bargaining power of suppliersposes a low threat. Customers are price sensitive in the sense that prices andoffers are considered essential to them. We should include that in general, airports are inlimited supply and we need airports to land planes and board passengers,Suppliers are under the threat of bankruptcy if they are more profitable morethat buyers are.3 To be exact,Power of suppliers can be summarized in three main factors:We have summarizedthe power of suppliers in three main factors beginning with fuel.Theprice of fuel is one of the main issues to take note of when addressing theairline industry, which is greatly unstable because of geopolitical and otherfactors such as taxes and exchange rates.

Fuel suppliers such as Shell, British Petroleumand Chevron Texaco are considered market giants; Fuel providers have anexcellent bargaining position as they can increase fuel prices withoutregarding the airlines as an important customer group. Toprevent losses in the form of costs from fluctuating market prices of fuelairline companies regularly hedge fuel. Hedging can save a lot of money for thecompany by reducing the risk exposure when market prices fluctuate.

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