STRATEGIC ALLIANCE IN THE GLOBAL AIRLINE INDUSTRY
Global airline alliances are in their maximum ascendancy. However, the airlines, which are not involved in the alliances, aspire to be their associates or are in the process of acquiring membership.The most famous airline alliance includes the Sky Team, Star Alliance, and Oneworld team, etc. The top three have the lump sum market grip in the industry. The European Quality Alliance is created by Swiss Air and SAS. These airline companies have realised the need to unite for a common goal.
The reasons for the formation of the various airline alliances may include the following:
- To reach success in the airline industry; this aim would not be achievable otherwise if a single airline decided to venture into it alone.
- Private investment into another state governed business. This has improved the world of competition. It is beneficial for the customers who require low fares and good service delivery.
- To weaken the stiff legal environment, which a single airline company would never achieve. An alliance, therefore, makes it easier to wrestle the legal tussles.
- Expansion of a network routes without actual equal investment. This is achieved through the mutual agreement with a different company that runs in that direction.
The smaller airline member benefit greatly from these mergers. A good example is the EgyptAir, which has recently acquired US FAA accreditation for its maintenance and repair facility. The Lufthansa team initiated this process; otherwise, it would not have received that status. However, it may be difficult for the other airlines that are not in the alliances since large market holders in the airline industry may join to suppress the upcoming airlines. The evidence is the case when most of the global alliances rejected the membership request of Etihad Airways. Due to their decision to create their own alliance, Etihad Airways could survive.
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Alliances may decrease competition and, thus, dictate market prices in that industry. This should be a special concern for many customers using the airlines since close alliances within the airline industry will definitely result in rise of the fares. A reduced competition in any market will have a negative impact on the consumer since this tends to be a monopoly.
The impact of an airline alliance on a domestic one may directly influence their geographical scope, the competitiveness of other airlines that operate within that particular market, and the extent to which competition is held between the airline and other alliance. Airlines in an alliance have competitive advantage over those that are not their members due to unlimited code sharing and multiple listings of the same flight in that area.
Success in the airline industry
There has been a huge rise in the number of alliances signed by airline companies in the last few years Morrish, S (2002, p 23). This was a great benefit to the airline companies, who would rather establish friendly relationships with the competitors aiming to capitalise high profit and good market share holding. These benefits are mostly obtained from complementary goods and services that one company intends to outsource from its competitor that provides the same and at a good quality.
Through the combination of separate resources, knowledge and skills of different companies in the airline business, one company is able to harness a wide range of service delivery to its customer. This results in the airlines’ success in that respective industry due to the customer’s satisfaction and loyalty. Mr Cagliari stated that the formation of Aeroflot alliance had had a stable and beneficial effect towards airline success.
Brueckner and Whalen (2000) developed models to show that the customers would buy air travel based on the network scope of a particular airline. A wider network scope of a particular airline directly implies the success of that airline in the market. This is especially relevant to the business travellers who would need more services to numerous destinations in the world. A survey of 600 businesses by Oxford Economics for IATA (2006) found that over 90% of passengers transferred to an airline that was within the same alliance as well as more favourable.
Creation of a competitive environment
The availability of the private airline companies has otherwise led to the competitive environment unlike in the earlier years, when the airlines were normally owned and run by the state governments. This competitive environment had a positive impact on services provided by these private companies unlike state government monopoly.
The competition has always been an epitome of increased urge for every company to perform better than its rival. Thus, the formation of the global airline networks encourages all these competitors to work together with the aim of quality service delivery. This is different from the time when the government owned airlines dictated the prices, routes, and service delivery to its customers. Nowadays, the customer decides which airline company to use depending on its friendliness and quality of customer service, which can only be achieved through an integrated and strategic airline alliance.
The legal environment
An airline alliance may be the only option of tackling the routes and markets predominantly monopolised by huge airline companies that have high investment and a long history in that market. An alliance of the smaller airlines will thus enable them to run efficiently on a level ground with already established airline companies in that route and market.
There are various market barriers, which hinder the growth and development of the upcoming airline industries. This has now prompted these airlines to unite into one front to make an alliance or block in order to gain access to the market that would be difficult otherwise. These alliances enable the airlines to be cost-efficient due to the combined cost sharing mechanism.
In response to the potential harmful results of the alliances, the regulators have decided to impose remedial measures in some areas. If some airlines consider limiting entry of some game changers in the industry, the regulators require from them to give up slots in that area. The US administration terms these processes as carve-outs. Lufthansa and Star Alliance partners obtained carve-outs in some hubs in Washington- Frankfurt and Chicago-Frankfurt markets.
However, it raised such questions as whether this legal environment in the issues of carve-outs may restrain efficiency of the airline and the alliance or it works to hamper the anticompetitive harm.
Expansion of route networks without the actual addition of flights and other costly investments
The cooperation between airlines is called interlining, where the various airlines can establish joint fares and coordinated schedules of their flights. A customer can therefore use a single ticket to travel to a particular destination even using various link up planes throughout the journey.
A single airline company will thus have the capability of expanding its market to wider location without actually reaching that destination. It can sell a seat in a certain mutual airline in such a way that the customer can only buy a single ticket that can be widely used. These contractual agreements between different airlines provide a market advantage without necessarily requiring a major flight investment in that specific market. However, this can only be possible if the airlines in that alliance share a common airport facility, which includes a lounge and a check in, well-coordinated flight schedule in order to avoid compromising the customers, and connection service in order not to lose passengers’ luggage.
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Exploiting a market that would have been an uphill task for a single airline
Various markets may be lucrative. Otherwise, they will need large start-up cost. Therefore, formation of an airline alliance helps to collect the resources from different companies and exploit the identified market. The cost sharing will be beneficial to the airlines in the alliance F(ernandez, L. & Pablo E, 2014, p 15).
Benefits of These Alliances to Individual Airlines
There are various benefits that the individual airline gets due to their membership in a certain alliance (Sanger J, 2011, p 46). Some of these benefits include:
- Generation of high revenue as compared to single airline company
- Equal market penetration, especially for the smaller airlines, as compared to the large and already established airlines
- Stabilizing shaky airline that may be at the verge of collapse
Generation of high revenue
OneWorld Alliance is the second largest airline alliance able to serve over 135 countries in the world. According to the historical sources, it earned more than 52 billion dollars in 2002, having transported over 230 million customers within its market.
The synergies of cost brought a great success while sharing lounges, information, and technology since they can share the same code. There are also savings due to fuel cost decrease where an Alliance buys the fuel in huge quantities.
Etihad Airways partner may be a new entrant into this alliance system, and it seeks to capitalise commercial gains and relations. It may start with small numbers, around six airlines, but it seeks to expand rapidly in order to compete some of its rivals financially (Kleymann, B, 2004, p 23). Etihad Airways, at one time rejected by the global alliance networks, decided to create own alliance called the Etihad Airways Partners. This has effectively enabled it to cooperate with its rivals in the industry.
Cost efficiency was also reached due to joining all the airlines in the same airport terminal. The services rendered at the airport terminal are provided to all the airlines in that alliance. These include check-ins, ground-handlings, and lounges. All these bilateral relationships ensure the greatest value of equity to the involved companies (Kuzminykh 2014, p 7).
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Alliances provide greener grass for the low cost carriers
The small members may obtain major benefit if they join a prominent and a widely branded alliance group. For example, The Royal Jordan Airlines extended its network coverage without incurring any costs. This opportunity usually arises in a domestic market where the local airline may be the predominant service provider (Park, J, 2000, p 55). An evident example is Star’s Air Canada with the domestically strong West Jet or One World’s Qantas and the other airline called Virgin Australia. These alliances enable them to be low-cost and exploit the domestic market and market niche that may be realised or monopolised by any other airline.
JetBlue, which has high presence in the John F. Kennedy airport in New York, has enabled the small low-cost carrier airlines to provide a wide range of on-carriage services. Moreover, this airline is not widely represented in the air networks in the Unites States of America (Wang 2014, p 34).
Supporting some shaky airlines that will otherwise collapse in the absence of an alliance
The Korean air suffered from cockpit management issues leading to accidents few years ago. It was assisted directly by Delta that helped rebuild the efficient operation system. The idea of being a member of alliance has a positive impact on a shaky airline that would collapse in a non-favourable market. The other strong airlines can support the weaker airline through shared codes and passengers of that route (Coles, J 2014, p 25).
The example is the deal signed by KLM and North West airlines. Through this alliance, the two airlines enabled a unified marketing activity as well as joint group handling, marketing, catering, and maintenance of these airlines at the decreased cost.
Joint airline alliances provide an equal market penetration, especially to the weak organisations as compared to their strong competitors in the market. Through their cooperation, the companies have attempted to achieve worldwide global market coverage in order to meet the needs of the customers (Creager, 2014, p 23). The members of these alliances can comfortably use the alliance name as a marketing tool to their advantage.
The Economy of scale
This issue relates to the economics of transporting a good density of passengers within a particular alliance. Even though the economies of scale may be minimal, they are generally substantial (Jui C. (2014, p 27). This has enabled utilisation of seats and the use of lower and larger unit cost aircrafts in some smaller cities (Gudmundsson, V, (2004 p 18). If the airlines can increase the number of passengers in that city, the economics of scale will properly work for them. This achieved by the low-cost carriers in the airline alliance that provide low fares for the regions in order to attract more customers (Czipura 2007, p 21).
Therefore, these companies must involve large numbers of passengers that would want to connect from the smaller towns travelling to the larger destination cities (Jenns, F, 2013, p 32).
Forms of management that are used to manage these alliances in order to achieve their cooperate objectives.
In order to work effectively, the alliances need to create a member team that can run the day-to-day activities of the alliance, for example, revenue management, marketing, and sales. This concerns organisational structure and administrative roles of the alliances. For example, the Star Alliance network appointed a team called ‘The Alliance Management Team’, which is the executive body of this alliance (Gudmundsson, V, (2004, p 20). It runs the marketing, advertising, purchase roles of the alliance effectively. These executive member boards will comprise of representatives from each single airline in the alliance. The partners will share the responsibility of funding, supervising and managing the entire entity (Heymann, E, 2006, p 15).
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The association of pilots is the newest entry into the executive board of the alliance (Schofield 2012, p 12). Though they may not have the same power as the other executive members, their contribution is valid. Their representation of pilots of the alliance enables them to dictate or issue advice depending on the nature of problems raised by the pilots.
The members of the airline alliances have systems that enable them to run effectively. These include their own local chapter within the airline; they are also a member party of the nationwide airline union and their Alliance Group (Yong, G, 2006, p 38).
However, an alliance with a smaller number of members seems easier to manage. The evident example is Sky Team Alliance against Oneworld Alliance. The latter has a less limited number of members; therefore, it is easier to coordinate the activities as compared to the larger Sky team Alliance (Saglietto 1991, p 44). Currently, Oneworld has 11 members while Skyteam has 17 members.
The members can play an active role in decision-making processes concerning all key issues through active participation in numerous committee meetings and other deliberations. Their requests and suggestions can be considered only during these deliberations. Otherwise, they face a risk of being party to agreements that do not follow their respective policies (Vidar, S, 2001, p 29).
Even the smallest airline companies in the alliance may have veto powers in cases of granting the membership to the new entrants. If a single member airline considers that a new member may challenge its market share in a particular region, thus leading to its disadvantage, the airline has the power to veto (Achim, C, 2007, p 31).