Industry analysis

1, Background of airlines industry

An industry is a group of firms whose products have so many of the same attributes that they
compete for the same buyers who have relatively similar customer needs (Strickland, 2001)

Industry analysis is conducted by the business entity or an entrepreneur/investor to identify the

factors which are influencing the sector that they have already or thinking about investing in.
Understanding the environment surrounding the industry and the factors that are influencing them
helps to anticipate future trends and gives the investor information to make an investment decision
with confidence.

The ministry of trade and industry has classified industries in Ethiopia into 10 major divisions as
follows:

Divisions TITLE OF CATEGORY

1 Agriculture, hunting, forestry and fishing
2 Mining and Quarrying
3 Manufacturing
4 Electricity, Gas and water supply
5 Construction
6 Wholesale and retail trade; repair of motor vehicles, Motor cycle, personal and
household goods, hotels and restaurants, import and export
7 Transport, storage and communication
8 Financial intermediation, Insurance, real estate and business services
9 Community, social and personal services
10 Private household exterritorial non-governmental organizations, representatives of
foreign governments and other activities not adequately defined
Source: Ethiopian Standard Industrial Classification (ESIC)
Based on the classification provided above airlines industry categorized under Transport, storage
and communication industry.
The airline industry is very productive and profitable; hence it faces numerous competitive
challenges and threats that can impact the performance and profitability of the players in the
industry. The airlines in the market and Investors interested in them can analyze it as a potential
investment and conduct a fundamental analysis to gain a clear picture and position of the airline
industry. This information supports better investment decisions.

Airline companies vary in their scope. There are international airlines, national airlines, and
regional airlines. They have different competitors, and their strategies also differ based on their
market.

2, Airline industry Porter's Five Forces

Porter’s Five-Forces Model of competitive analysis is a widely used approach for understanding
the intensity of competition in an industry and for developing strategies in many industries. Many
key aspects of using Porter's Five Forces for the airline industry are passenger traffic, operating
expenses, fuel prices, and landing and maintenance costs. Another key factors are competition
from low-cost carriers who have initiated the cutthroat price war affecting every player in the
market. Let us review Porter's five forces airline industry in detail.

 Competition in the industry(strong force)

 The threat of new entrants (low to medium force)

 The bargaining power of suppliers(strong force)

 The bargaining power of customers(strong force)

 Threat of substitute products or services(medium force)

Competition in the industry (Strong force)

The airline industry competitor’s analysis shows that the rivalry in the airline industry is extremely
strong based on several reasons. Since it is a high investment business option, the number of
competitors is not increasing phenomenally. This industry has entry and exit barriers; companies
need substantial investment to vent into this business. Also, exiting is not easy because of long-
term commitments and agreements.

So, how can we deduce that the competition in the industry in Porter's five forces model airline
industry is strong? It is based on the competition between existing companies and the power of
suppliers. The competitive industry competitors analysis shows that no company can count on
extra profits and the fares from different airlines are more or less the same. So, they will have to
count on more expensive measures to combat this competition.
The threat of new entrants (low to medium force)

New entrants may use lower pricing by reducing extra costs and offering innovation to put pressure
on airline industry. However, this is a low to moderate force in the competition. The entry and exit
barriers are moderate, and the initial investment to start a coffee shop is not exuberant. So, locally
new entrants have the potential to compete with giants like airline industry. Studying Porter's five
forces example, airline industry, we can see that the brand image, brand loyalty, and market share
of airline industry can mitigate this risk effectively. It has the infrastructure, efficiency, and very
high product quality as its defense against this threat. Exclusive access to raw materials and
suppliers is another factor contributing to airline industry ' competitive edge.

The bargaining power of suppliers (strong force)

The power of suppliers in the airline industry is a strong force in Porter's five forces in the airline
industry. There are three main suppliers in the airline industry, including fuel, aircraft, and labor.
External factors influence all these because the oil price is fixed based on global fluctuations. The
second factor is aircraft companies, and there are two big suppliers, i.e., Airbus and Boeing. So,
the bargaining power of these suppliers is very strong. The third factor is labor, which always
challenges companies with union politics and demands.

The bargaining power of customers (Strong force)

The airline industry has always remained very competitive. Still, with the online ticketing and
distribution system, customers have direct access to schedules and fares that helps them keep the
most economical decisions. The entry of low-cost carriers has also increased the bargaining power
of customers in Porter's five forces in the airline industry.

Threat of substitute products or services (medium force)

There are many alternatives for passengers to replace air travel. They can travel by road, train or
water transport. However, air travel is still the best option when time is a factor. So we can
conclude that this is a low to medium force. This factor is more impactful in regional travel, where
short distance makes road and train travel more economical. In international travel, this factor has
a very minimal effect. www.edrawmax.com

Industry life cycle

An industry life cycle refers to stages through which are an industry evolves. Every industry goes
through these stages, and the duration of each stage may vary from a few days to decades
depending on different factors. Mainly, there are four stages of an industry life cycle:

1. Introduction- This is the early stage of product development and commercialization in the
industry life cycle. This stage is characterized by unclear demand trends, low or negative
profits due to the costs of developing products, and huge research and development costs.
Only a few companies can survive this stage.
2. Growth- This is the period when consumers understand the product and begin to gain more
and more acceptance. This stage is characterized by higher profits, higher sales, and
increased competition.
3. Maturity- It is the stage after the growth stage, which is characterized by falling prices,
extensive publicity, an increase in the number of new competitors, a decrease in industrial
profits, and a growth rate slower than the rate of economic growth.
4. Decline- Due to new product development or obsolescence, the industry is in a low or
negative growth rate stage. When an industry goes into recession sales, profitability and
prices will fall.

The airlines industry is currently in the growth stage of its life cycle. With increasingly fierce
competition, different airlines have started to give a service at full capacity and companies like,
Ethiopian airlines are also involved in factory expansion projects. The industry has also
achieved higher profits and sales in recent years.
 Business cycle and industry characteristics

The business cycle and characteristics of industries can be classified into 5 as:

1. Cyclical industries- are industries in which are sensitive to changes in the economy. This
types of industries have direct relationship with the economy.
2. Countercyclical industries- are types of industries that are inversely proportional to the
economic activity.
3. Growth industries- are industries which experience a higher growth rate regardless of the
economic conditions compared to other industries.
4. Defensive industries- are industries characterized by being insensitive to changes in the
economic condition.
5. Interest sensitive industries- are industries (usually financial sector) that are sensitive to
changes in interest rates.

As we tried to explain the airlines industry is strongly and positively related to the GDP (economy)
and is a cyclical industry. As a country’s and world economic situation improves, the performance
of airlines industry also increase. However, during the economic recession, because the people
don’t have the intention to travel and the government do not have enough disposable income to
support the industry, the airlines industry performance also declined.

Generally the objective this industry analysis is to identify sunshine industry and avoid investing
in sunset industry. We have analyzed the environment of this industry and able to identify airlines
industry is a sunshine industry and investing in this industry is profitable.