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【Abstract】Porter （2008） reports that return on invested capital （ROIC） essentially reflects how well a company can generate earnings from the money it invests in itself. If a company’s returns are greater than its cost of capital， it’s creating value for shareholders. Based on the data and Porters Five Forces Framework， this paper gives suggestion about whether readers should invest in Airline stock.
【Key words】Michael Porter’s five forces model； ROIC； soft drink industry； airline industry
【摘要】邁克尔·波特的《新论竞争五力》文中写道，投资资本回报率（ROIC）反映了一家公司能够从自己投资的资金中所获得收益的情况。如果公司的回报大于其成本，则为股东创造了价值。本文基于波特五力模型分析，给出读者是否应该投资航空公司股票的建议。
【关键词】波特五力模型 投资资本回报率 软饮料产业 航空公司
I. Introduction
There are a number of metrics that can be used to evaluate a company or industry. One such financial metric is Return on Invested Capital （ROIC） which is calculated by dividing earnings before interest and taxes by the difference between average invested capital and excess cash. In order to compare industries as different as soft drinks and airlines， ROIC is an important metric in comparing industries as different as soft drinks and airlines as it takes into account the capital investment required. During the timeframe presented in Porter’s article， the average ROIC in the U.S. for the soft drink industry was 37.6% （90th percentile） and for the airline industry was 5.9% （10th percentile）. During the same time period the average ROIC for U.S. industries was 14.9%. Porter’s five forces （established rivals， customers， suppliers， entrants， and substitute offerings） can be used to explain the difference in ROIC for these two industries.
II. Porter’s Five Forces Framework Analysis
When comparing the airline and soft drink industries， the marketing spend as a percent of sales is comparable. With 42.3% and 27.5% of the market in 2015 respectively， Coke and Pepsi are the leaders of the soft drink industry . From 2009-2011 Pepsi spent $2 billion （3% of 2011 sales） and Coke spent $3billion （8% of 2011 sales） in advertising. In the airline industry， American Airlines and Delta are the largest in the U.S. The marketing spend for American Airlines in 2014 was $27.8 million and for Delta was $50 million. Based on the respective revenues for the two companies in 2014， this comes out to 4.22% and 8.38% of revenue for Delta （$27.8M/$659M） and American （$50M/$597M）， respectively. Both the soft drink and airline industries have low margins and both compete heavily on price. Based on these metrics， the intensity of rivalry is similar within both the airline and soft drink industries. Power of customers is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company’s margins and volumes， then the customer holds substantial power. The customers of the airline industry’s products are anyone who needs air travel. The differentiation in the airline industry comes from price competition and service. There are no real switching costs between companies in this industry. Many customers are constantly looking for lower prices between companies. Customers have strong bargaining power in airline industry. The major channels for the soft drink industry are supermarkets， fast food fountains， vending machines， and restaurants. In soft drink industry， supermarkets are the main distribution channel. Supermarkets buy large volumes of soft drinks， allowing them to buy at lower prices. On the contrary， an individual purchase is relatively insignificant. The individual customers put low pressure on soft drink industry.
Power of suppliers is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company’s margins and volumes， then it holds substantial power. The power of suppliers in the airline industry is immense because of the fact that the three inputs that airlines have， in terms of fuel， aircraft， and labor， are all affected by the external environment. For instance， the price of aviation fuel is subject to the fluctuations in the global market for oil. Similarly， labor is subject to the power of the unions who often bargain and get costly concessions from the airline companies. Third， the airline industry needs aircrafts either on outright sale or wet lease basis which means that the airlines have to depend on the two biggest companies， Airbus and Boeing， for their aircraft needs. In the airline industry， companies cannot easily switch suppliers. Most firms have long term contracts with their suppliers. This is the reason the power of the suppliers is high in the airline industry according to Porter’s Five Forces framework. In the soft drink industry， the circumstances are different. In this industry， the bargaining power of suppliers is low， as there are many suppliers. Also， the main ingredients in soft drinks include carbonated water， phosphoric acid， sweetener， and caffeine， are basic goods that are available quite easily. In terms of equipment manufacturers， the suppliers generally provide the same products. The number of equipment suppliers is not in short supply， so it is fairly easy for a company to switch suppliers. Suppliers are not concentrated or differentiated， and this takes away much of suppliers’ bargaining power. New Players are companies that threat entrance， and the capture of market share. For the airline industry， the threat of new entrants is low， being heavily regulated by the Federal Aviation Administration， the Department of Transportation， etc. Firms entering the airline industry have to sacrifice millions of dollars in startup costs and operating expenses， with little assurance of profitability， let alone prevail. Existing firms leverage their capital， sacrificing short-term gains， to oppress new players， and maintain their leadership positions in the long-term. Not to mention， purchasing behaviors tend to favor the popular and well-known airlines， making it difficult for newcomers to attract customers. For the soft drink industry， existing firms have both cost and performance advantages， due to prior capital expenditures and economies of scale. Soft drinks themselves are not hard to produce， and the only proprietorship is on patented flavors and brands， but entering the industry requires a lot of capital， due to manufacturing costs. Established brands， such as Coca Cola， and their market dominance， control of distribution channels， and economies of scale magnify entrance deterrence.
Substitutes are products that consumers could purchase， in lieu of main product being discussed. Strategic substitutes are products that provide the same function， but are in a different form than the main subject. Substitutes for airlines are high， and include， cars， buses， trains， boats， motorcycles， etc. Such substitutes can offer cost savings， but these means of transportation cannot offer consumers the same experience， and time savings， that airlines can. This， coupled with the fact that certain transportation vehicles are limited in their abilities， i.e.， cars cannot cross an ocean， boats cannot function on land. People are able to travel across multiple states， countries， and even continents， through airlines. Flying is， for certain situations， the only feasible option， and the substitutes do not suffice. For the soft drink industry， there is an abundance of soft drinks substitutes. Consumers can choose from multiple alternatives， including but not limited to， carbonated beverages， teas， coffees， etc.， but there are not many reasons to purchase substitute， rather than established brands. Costs， tastes， and availability， do not differ enough to entice consumers to change their purchasing behaviors and shift their preferences due to brand loyalty.
III. Conclusion Porter’s five-force framework is a qualitative tool that applies to industry analysis. The framework helps analyze a firm’s competitive stance in its industry and Porter notes that “the point of industry analysis is not to declare the industry attractive or unattractive”.
From an investment point of view， the airline sector can be a minefield for investors because there are at least two major problems airlines have to deal with in terms of growing profits： fuel and labor costs. There are times when major airlines only have to deal with one of those issues， but when a carrier is grappling with both dilemmas at the same time， investors should stay away.
Given the negative correlation to oil prices and the highly discretionary nature of the business， airline stocks， broadly speaking， have the tendency to be volatile or high beta values. Those traits in stocks are coveted by active traders that can move in and out of positions within a single trading day or in just a few days. Said another way， airline stocks can be great trades， but lousy investments.
References：
[1]Sanger-Katz，M.（2015，October 2）.The Decline of ‘Big Soda’.The New York Times.Retrieved from：http：//www.nytimes.com/2015/10/04/upshot/soda-industry-struggles-as-consumer-tastes-change.html？_r=0.
[2]Zmuda，N.（2012，January 30）.Pepsi Plays Catch-Up With Coke，Adds $500M in Spending.30 Jan 2012.Advertising Age.Retrieved from：http：//adage.com/article/news/pepsi-pours-fortune-marketing-drinks-indulgent-snacks/232405/.
[3]Sasso，M.（2016，January 11）.Delta Passes United to Become No.2 in U.S.After American.Bloomberg.Retrieved from：http：//www.bloomberg.com/news/articles/2016-01-11/delta-passes-united-to-become-no-2-u-s-airline-after-american.
[4]Morrison，M.（2015，July 13）.American Airlines Launches Global Agency Review.Advertising Age.Retrieved from：http：//adage.com/article/agency-news/american-airlines-launches-global-agency-review/299470/.
[5]Gianatasio，D.（2016，February 8）.Delta Air Lines Launches a Media Agency Review Incumbent DigitasLBi expected to defend.AdWeek.Retrieved from：http：//www.adweek.com/news/advertising-branding/delta-air-lines-launches-media-agency-review-169521.
[6]Karp，A.（2015，January 20）.Delta posts $659 million 2014 net profit；fuel hedging hit lowers earnings.Air Transport World.Retrieved from：http：//atwonline.com/finance-data/delta-posts-659-million-2014-net-profit-fuel-hedging-hit-lowers-earnings.
[7]American Airlines Group Reports Record Fourth Quarter and Full Year 2014 Profit.American Airlines Newsroom.Retrieved from：http：//hub.aa.com/en/nr/pressrelease/american-airlines-record-2014-profit-earnings.
[8]S.W.（2014，February 23）.Why airlines make such meagre profits.The Economist.Retrieved from：http：//www.economist.com/blogs/economist-explains/2014/02/economist-explains-5.
[9]Porter，M.E.（2008，January）.The Five Competitive Forces That Shape Strategy.Harvard Business Review.24-41.
作者簡介：刘春迪（1991.06-），女，汉族，天津人，硕士，就读于天津外国语大学，研究方向为国际商务英语。
【Key words】Michael Porter’s five forces model； ROIC； soft drink industry； airline industry
【摘要】邁克尔·波特的《新论竞争五力》文中写道，投资资本回报率（ROIC）反映了一家公司能够从自己投资的资金中所获得收益的情况。如果公司的回报大于其成本，则为股东创造了价值。本文基于波特五力模型分析，给出读者是否应该投资航空公司股票的建议。
【关键词】波特五力模型 投资资本回报率 软饮料产业 航空公司
I. Introduction
There are a number of metrics that can be used to evaluate a company or industry. One such financial metric is Return on Invested Capital （ROIC） which is calculated by dividing earnings before interest and taxes by the difference between average invested capital and excess cash. In order to compare industries as different as soft drinks and airlines， ROIC is an important metric in comparing industries as different as soft drinks and airlines as it takes into account the capital investment required. During the timeframe presented in Porter’s article， the average ROIC in the U.S. for the soft drink industry was 37.6% （90th percentile） and for the airline industry was 5.9% （10th percentile）. During the same time period the average ROIC for U.S. industries was 14.9%. Porter’s five forces （established rivals， customers， suppliers， entrants， and substitute offerings） can be used to explain the difference in ROIC for these two industries.
II. Porter’s Five Forces Framework Analysis
When comparing the airline and soft drink industries， the marketing spend as a percent of sales is comparable. With 42.3% and 27.5% of the market in 2015 respectively， Coke and Pepsi are the leaders of the soft drink industry . From 2009-2011 Pepsi spent $2 billion （3% of 2011 sales） and Coke spent $3billion （8% of 2011 sales） in advertising. In the airline industry， American Airlines and Delta are the largest in the U.S. The marketing spend for American Airlines in 2014 was $27.8 million and for Delta was $50 million. Based on the respective revenues for the two companies in 2014， this comes out to 4.22% and 8.38% of revenue for Delta （$27.8M/$659M） and American （$50M/$597M）， respectively. Both the soft drink and airline industries have low margins and both compete heavily on price. Based on these metrics， the intensity of rivalry is similar within both the airline and soft drink industries. Power of customers is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company’s margins and volumes， then the customer holds substantial power. The customers of the airline industry’s products are anyone who needs air travel. The differentiation in the airline industry comes from price competition and service. There are no real switching costs between companies in this industry. Many customers are constantly looking for lower prices between companies. Customers have strong bargaining power in airline industry. The major channels for the soft drink industry are supermarkets， fast food fountains， vending machines， and restaurants. In soft drink industry， supermarkets are the main distribution channel. Supermarkets buy large volumes of soft drinks， allowing them to buy at lower prices. On the contrary， an individual purchase is relatively insignificant. The individual customers put low pressure on soft drink industry.
Power of suppliers is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company’s margins and volumes， then it holds substantial power. The power of suppliers in the airline industry is immense because of the fact that the three inputs that airlines have， in terms of fuel， aircraft， and labor， are all affected by the external environment. For instance， the price of aviation fuel is subject to the fluctuations in the global market for oil. Similarly， labor is subject to the power of the unions who often bargain and get costly concessions from the airline companies. Third， the airline industry needs aircrafts either on outright sale or wet lease basis which means that the airlines have to depend on the two biggest companies， Airbus and Boeing， for their aircraft needs. In the airline industry， companies cannot easily switch suppliers. Most firms have long term contracts with their suppliers. This is the reason the power of the suppliers is high in the airline industry according to Porter’s Five Forces framework. In the soft drink industry， the circumstances are different. In this industry， the bargaining power of suppliers is low， as there are many suppliers. Also， the main ingredients in soft drinks include carbonated water， phosphoric acid， sweetener， and caffeine， are basic goods that are available quite easily. In terms of equipment manufacturers， the suppliers generally provide the same products. The number of equipment suppliers is not in short supply， so it is fairly easy for a company to switch suppliers. Suppliers are not concentrated or differentiated， and this takes away much of suppliers’ bargaining power. New Players are companies that threat entrance， and the capture of market share. For the airline industry， the threat of new entrants is low， being heavily regulated by the Federal Aviation Administration， the Department of Transportation， etc. Firms entering the airline industry have to sacrifice millions of dollars in startup costs and operating expenses， with little assurance of profitability， let alone prevail. Existing firms leverage their capital， sacrificing short-term gains， to oppress new players， and maintain their leadership positions in the long-term. Not to mention， purchasing behaviors tend to favor the popular and well-known airlines， making it difficult for newcomers to attract customers. For the soft drink industry， existing firms have both cost and performance advantages， due to prior capital expenditures and economies of scale. Soft drinks themselves are not hard to produce， and the only proprietorship is on patented flavors and brands， but entering the industry requires a lot of capital， due to manufacturing costs. Established brands， such as Coca Cola， and their market dominance， control of distribution channels， and economies of scale magnify entrance deterrence.
Substitutes are products that consumers could purchase， in lieu of main product being discussed. Strategic substitutes are products that provide the same function， but are in a different form than the main subject. Substitutes for airlines are high， and include， cars， buses， trains， boats， motorcycles， etc. Such substitutes can offer cost savings， but these means of transportation cannot offer consumers the same experience， and time savings， that airlines can. This， coupled with the fact that certain transportation vehicles are limited in their abilities， i.e.， cars cannot cross an ocean， boats cannot function on land. People are able to travel across multiple states， countries， and even continents， through airlines. Flying is， for certain situations， the only feasible option， and the substitutes do not suffice. For the soft drink industry， there is an abundance of soft drinks substitutes. Consumers can choose from multiple alternatives， including but not limited to， carbonated beverages， teas， coffees， etc.， but there are not many reasons to purchase substitute， rather than established brands. Costs， tastes， and availability， do not differ enough to entice consumers to change their purchasing behaviors and shift their preferences due to brand loyalty.
III. Conclusion Porter’s five-force framework is a qualitative tool that applies to industry analysis. The framework helps analyze a firm’s competitive stance in its industry and Porter notes that “the point of industry analysis is not to declare the industry attractive or unattractive”.
From an investment point of view， the airline sector can be a minefield for investors because there are at least two major problems airlines have to deal with in terms of growing profits： fuel and labor costs. There are times when major airlines only have to deal with one of those issues， but when a carrier is grappling with both dilemmas at the same time， investors should stay away.
Given the negative correlation to oil prices and the highly discretionary nature of the business， airline stocks， broadly speaking， have the tendency to be volatile or high beta values. Those traits in stocks are coveted by active traders that can move in and out of positions within a single trading day or in just a few days. Said another way， airline stocks can be great trades， but lousy investments.
References：
[1]Sanger-Katz，M.（2015，October 2）.The Decline of ‘Big Soda’.The New York Times.Retrieved from：http：//www.nytimes.com/2015/10/04/upshot/soda-industry-struggles-as-consumer-tastes-change.html？_r=0.
[2]Zmuda，N.（2012，January 30）.Pepsi Plays Catch-Up With Coke，Adds $500M in Spending.30 Jan 2012.Advertising Age.Retrieved from：http：//adage.com/article/news/pepsi-pours-fortune-marketing-drinks-indulgent-snacks/232405/.
[3]Sasso，M.（2016，January 11）.Delta Passes United to Become No.2 in U.S.After American.Bloomberg.Retrieved from：http：//www.bloomberg.com/news/articles/2016-01-11/delta-passes-united-to-become-no-2-u-s-airline-after-american.
[4]Morrison，M.（2015，July 13）.American Airlines Launches Global Agency Review.Advertising Age.Retrieved from：http：//adage.com/article/agency-news/american-airlines-launches-global-agency-review/299470/.
[5]Gianatasio，D.（2016，February 8）.Delta Air Lines Launches a Media Agency Review Incumbent DigitasLBi expected to defend.AdWeek.Retrieved from：http：//www.adweek.com/news/advertising-branding/delta-air-lines-launches-media-agency-review-169521.
[6]Karp，A.（2015，January 20）.Delta posts $659 million 2014 net profit；fuel hedging hit lowers earnings.Air Transport World.Retrieved from：http：//atwonline.com/finance-data/delta-posts-659-million-2014-net-profit-fuel-hedging-hit-lowers-earnings.
[7]American Airlines Group Reports Record Fourth Quarter and Full Year 2014 Profit.American Airlines Newsroom.Retrieved from：http：//hub.aa.com/en/nr/pressrelease/american-airlines-record-2014-profit-earnings.
[8]S.W.（2014，February 23）.Why airlines make such meagre profits.The Economist.Retrieved from：http：//www.economist.com/blogs/economist-explains/2014/02/economist-explains-5.
[9]Porter，M.E.（2008，January）.The Five Competitive Forces That Shape Strategy.Harvard Business Review.24-41.
作者簡介：刘春迪（1991.06-），女，汉族，天津人，硕士，就读于天津外国语大学，研究方向为国际商务英语。