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

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We 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