The main power ofthe suppliers in the airline industry can be summed up by the influence it hason 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 asconstantly 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 ofthe unions who often bargain and get unreasonable offers or compromises fromcertain parties, in other cases they might pose a disadvantage to the labormarket itself. A study conducted in highly unionized industries found that themore the unions have influence, the lower the profitability is in the industry.Third, the airline industry needs aircrafts that are mainly manufactured by bothAirbus, and Boeing.
The mixture of the three reasons mentioned results in ahigh bargaining power of the suppliers in the airline industry.1It is an almostimpossible process to change suppliers for airline companies; most firms havelong-term contracts with their suppliers. Planes normally require a highcapital investment, which explains the long-term deals companies enter into. Thechallenged posed in the entrance into the airplane industry is represented inthe form of the high initial capital needed. It takes millions of dollars tomanufacture one plane for example, the Boeing 777 costs around $320 million, notto mention the test trials and specialists being hired for this sole purpose.
Forthe above reason, it is clear that the number of suppliers in the industry willremain relatively low in the near future. Based on these points we concludethat the bargaining power of suppliers poses a low threat. Customers are pricesensitive in the sense that prices and offers are considered essential to them. Weshould include that in general, airports are in limited supply and we needairports to land planes and board passengers, Suppliers are under the threat ofbankruptcy if they are more profitable more that buyers are.2 We have summarized the power of suppliers in three mainfactors beginning with fuel. The price of fuel is one of the main issues to takenote of when addressing the airline industry, which is greatly unstable becauseof geopolitical and other factors 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. To prevent losses in the form of costs fromfluctuating market prices of fuel airline companies regularly hedge fuel.Hedging can save a lot of money for the company by reducing the risk exposure whenmarket prices fluctuate. To demonstrate the fluctuations of market tablereferred to shows an Example of fuel hedging and the total saving from thatapproach.3 OPEC also plays a role, the more OPEC cuts the suppleof oil, which is needed for airplane fuel, airline companies have to dependmore and more on hedging.4