Threat of Entry from new competitors Reaction from the existing players Reaction from the existing players can affect seriously to the potential new entrants. And that’s what exactly happening in this case. Before the starting operation of Southwest Airlines, three other existing players in the airlines industry had reacted severely. After the approval application from the TAC (Texas Aeronautics Commission), immediately Braniff, Continental and Trans Texas had obtained a temporary court order to protect TAC from issuing a certificate to fly to the newly entered Southwest Airlines.
This whole court order procedure had been longer till June, 1971. So, for the serious reaction of the existing players, Southwest had to fight for four years (1967-1971) to get the certificate or formal order of flying. Also, two days before the starting of inaugural flights, again Braniff and Texas International convincing the district court judge came up with an injunction to keep Southwest from the beginning airline service. So, for the serious reaction from the existing players, threat of entry from new entrants is low and which leads to attractiveness of the industry goes up.
Entry Barriers Learning and experience curve effect Learning curve has a major impact on the industries attractiveness as experience people know better about the industry that how to serve. When, experience people come up with the new entrants to establish the business, its effects the business. As, in this case, in the initial stage of Southwest Airlines, Lamar Muse was brought as Southwest’s CEO and Muse was an aggressive and self-confident irline veteran who knew the airlines business well and he had the entrepreneurial skills to handle the challenges. Also according to the comment of other people as Herb Kelleher, Muse was the person exactly what they needed. Now, also from the case we could see that, the most perfect and experienced person Muse handled the challenges in the initial stage of Southwest most confidently and cleverly. So, he had made his work force stronger by recruiting some talented veteran executives who always knew better to handle the airline industry.
This experience and better known about the industry workforce had helped Southwest to grow up quickly and fight against the obstacles. So, as here learning curve helped the new entrants to grow up, threat of entry from new competitors increased and which leads to down the attractiveness of the industry. Capital Requirement Airline business needs a standard amount to run and also it needs a continuous operating revenue. For a new company to start up this business needs a standard capital as itneeds a lot of money to buy planes and other equipments.
Muse started to raising new capital to purchase planes and equipments and getting into the first year operation through private investors and an initial public offering of stock and was able to raise $7 million in capital to start up. But still he needed more money as in discount he was able to negotiate for three Boeing for $12 million. Also, regular operating revenues are needed to run the business smoothly and that’s why a small number of passengers flying Southwest stretched the companies financial resources to the limit
So, in the airlines business, a huge amount of capital is required from the very beginning and that’s why threat of entry from new competitors goes down as carrying this huge amount its really difficult for a company to start an airline business and attractiveness of the industry goes up. Brand preference/ Customer loyalty Brand preference can prohibit new entrants because then it would be tough for a new company to establish itself and grabbing the market share.
But as per the case, there were two kind of passengers available as business travelers who rather than airline preferences, looking for matching with their timing and another was the price-sensitive leisure travelers who would fly where they would get the low-fare or their convenient fare. So, as price was the major factor of preference rather than brand, there were always scope for the new competitors to get in and that’s what exactly done by the Southwest airline. And when brand preference or customer loyal doesn’t exist, threat automatically increases and attractiveness goes down. Regulatory Policy
