Question Strategic alliances in the airline industry Q Following the process of economic globalisation and regional integration, strategic alliances have become increasingly common in the last twenty years around the world. After the rapid development of corporate linkages in manufacturing industries, the 1990s have witnessed an increase in alliances in service industries. The progressive deregulation of many service sectors has considerably facilitated the development of corporate linkages. Since the early 1990s, airline companies appear to be particularly active in forming alliances. Available studies show that a number of alliances signed by airline companies has continuously increased and that signed agreements have become more complex. This case study analyses the evolution of alliances established by major airline companies. Strategic alliances: a condition for success? In the era of economic globalisation, strategic alliances can be regarded as a sine qua non condition for success. They represent an important source of competitive advantage and increasingly determine the global performance of firms. Strategic alliances can have different purposes. They can be a means to turn actual and potential competitors into allies and to develop new business by associating with providers of complementary goods and services. The objective is to reach critical mass and global presence needed for effective competition. Cooperative agreements also allow to create value through the combination of previously separate resources, positions, skills, and knowledge sources. Firms can also learn quickly about unfamiliar markets. The competitive environment of airline companies Following the process of deregulation, the competitive environment of airlines has witnessed considerable changes over the past few decades. Until the 1980s, a majority of airlines were state owned and run for reasons of national prestige. The liberalisation of air transport markets had led to the privatisation of major airline companies such as British Airways .Moreover, national governments gradually reduced their control over route allocation and pricing, thus allowing the creation of private airline companies. Consequently, the environment of airline companies has become increasingly competitive. The global airline market has historically been dominated by US companies, which can partly be explained by the importance of their domestic market. The legal environment of airline companies As in many other sectors, critical size and global market presence have become important factors of competition. However, despite the internationalisation of civil aviation, the airline industry is still characterised by important market entry barriers. National markets are thus dominated by established by major carriers that operate at the most busiest and desirable airports. Moreover, government bilateral agreements limit the ability of airlines to minority equal investments. In the same way, prohibitive antitrust rules and strong corporate cultures represent important barriers to the formation of mergers and acquisition. Consequently, airline companies prefer to establish strategic alliances, allowing their corporate identity. These hybrid forms of organisation enable airline companies to remain cost efficient and to gain access to new markets without heavy investments. The formation of bilateral agreements In the early 1990s, interlining and code sharing agreements have proliferated as very popular forms of cooperation between airlines. When airlines practice interlining, they establish joint fares and coordinated flight schedules, but each company retains its own identity. Flight segments are clearly labelled as to which carrier is providing the service. Code sharing alliances enable airlines to sell seats on flights provided by other airline companies (e.g. flights from regional airports to an international airport, so-called 'hub' for onward connection to inter-continental destinations). Airlines can thus expand route networks without adding actual flights. Code sharing involves the issue of one single ticket which may reflect a single carrier through to the final destination, even if the actual passage involves two or more different airlines. Code sharing arrangements can be accompanied by other joint activities such as the coordination of flight schedules, shared airports facilities (check-ins, lounges), joint maintenance, procurement policies, staff training, and connection services (e.g. coordination of bagging checks). Interlining and code sharing agreements are contractual alliances that provide marketing advantages without requiring equality investments. The strategic alliance between KLM and Northwest Airlines In 1993, KLM and Northwest Airlines signed an extensive cooperation agreement, with the objective to create a unified global airline system. The cooperation has involved a high integration and coordination of flights through extensive code sharing and joint marketing activities, including the creation of a joint frequent flyer program. Cooperation has also been extended to group handling, sales, catering, information technology, maintenance, and joint purchasing. Covering a wide range of activities, the agreement signed by KLM and Northwest Airline can be considered as the first integrative alliance formed in the airline industry. The creation of airline networks The 1990s have also witnessed the creation of several global alliance networks. In 1994, Austrian Airlines, SAS and Swissair decided to create 'European Quality Alliance' (Qualiflyier). In 1997, Air Canada, United Airlines, Lufthansa, SAS (which decided to leave the European Quality Alliance) and Thai Airways launched 'Star Alliance'. In 1999, American airlines, British Airways, Cathay Pacific, Canadian Airlines and Qantas created the 'One World' alliance. In 2000, AeroMexico, Air France, Alitalia, CSA, Czech Airlines, Delta Airlines and Korean Air established 'SkyTeam'. Through multilateral cooperation, airline companies attempt to achieve global market coverage and to meet the need of international customers. Compared to bilateral interlining and code-sharing agreements, global airline networks cover a broad range of activities: code-sharing, coordination of flights, scheduling, advertising, reciprocal frequent flyer programmes, sharing of airport facilities, sharing of computer reservation systems, interchanges of flight-crew personnel and aircraft. They allow to realise added revenues and to improve passenger services and customer satisfaction. Affiliated airlines also use their membership as a marketing and communication tool. Their degree of commitment is generally higher than in bilateral agreements. The 'Star Alliance' network An analysis of the strategy followed by the members of global airline networks reveals that most of them had already been linked by bilateral agreements before the creation of the multilateral alliance. It appears that the network had emerged from several bilateral agreements. In order to improve their global market presence, member airlines of the Star Alliance network have extended their cooperation to other important carriers: Varig Brazilian Airlines joined in 1997, ANA All Nippon Airways, Ansett Australia, and Air New Zealand in 1999, Austrian Airlines Group (Austrian Airlines, Lauda Air and Tyrolean Airways), Singapore Airlines, British Midland and Mexicana in 2000, Asiana Airlines and Spanair in 2003. The Star Alliance network has become the first airline network worldwide. The 16 affiliated airlines allow a broad geographic coverage. In 2002, the network offered 688 destinations in 124 countries and transported 292 million passengers reaching total revenues of 67.5 million US dollars. The Star Alliance network appears to be the most integrated airline network. In order to improve the coordination of activities the members of the network recently decided to appoint an 'Alliance Management Team' (AMT), which represent the executive body of partnership. The funding and supervision of this entity are shared by the alliance partners .Its function is to observe contributions and benefits of members, to collect information about member performance and to maintain behaviour norms with the networks through neutral coordination. The entity has also become a focal point for communication and exchange between alliance partners. The 'One World' network After its creation in 1999, the OneWorld alliance has been extended to Finnair and Iberia in 1999 and to Aer Lingus and LanChile in 2000. After the merger of Air Canada (member of Star Alliance) and Canadian Airlines (member of One World), Canadian Airline left OneWorld in order to integrate the 'Star Alliance' network. The OneWorld alliance has become the second largest airline network in the world. Eight member airlines allow to serve in 550 destinations in 135 countries. In 2002, they transported 230 million passengers, and total revenues reached 50 billion US dollars. The 'SkyTeam' network SkyTeam has become the third global alliance network: its six members offer 512 destinations in 114 countries. In 2002, affiliated airlines transported 228 million passengers, and total revenues approached 40 billion US dollars. The geographic coverage of SkyTeam is certainly less extensive, but the coordination of activities seems to be easier because of limited number of members. Table 1: Major networks established in the global airline industry Name of network Affiliated airline companies Year of foundation Fleet size Number of destinations Number of passengers Star Alliance · Air Canada · Air New Zealand · ANA All Nippon Airlines · Asiana Airlines · Austrian Airlines Group (Austrian Airlines, Lauda Air, Tyrolean Airlines) · Bmi britishmidland · Lufthansa · Mexicana Airlines · SAS Scandinavian Airlines · Singapore Airlines · Spanair · Thai Airways International · United Airlines · Varig Brazilian Airlines 1997 2058 688 (124 countries) 292 million per year (10700 daily flights) One World · Aer Lingus · American Airlines · British Airways · Cathay Pacific · Finnair · Iberia · LanChile · Quantas 1999 2000 550 (in 135 countries) 230 million per year (8500 daily flights) Sky Team · AeroMexico · Air France · Alitalia · CSA Czech Airlines · Delta Airlines · Korean Air 2000 1224 512 (in 114 countries) 228 million per year (8200 daily flights) The 'European Quality Alliance' network The European Quality Alliance network ceased to exist, mainly because of management difficulties and because of insufficient geographic coverage. In fact, the multilateral character and the relatively high degree of integration make alliance networks relatively difficult to manage: coordination problem and conflicts concerning contributions and benefits are more likely to arise than in bilateral agreements. Moreover, given the increasing globalisation of the airline market, it seems necessary to achieve global and not only regional market presence. Major airline networks The global airline market is currently dominated by three major airline networks: Star Alliance, OneWorld and SkyTeam. Over the past few years, competition between these three global networks has increased considerably. The analysis shows that strategic alliances formed in the global airline sector have considerably changed over time: bilateral interlining and code-sharing agreements have gradually evolved into integrated airline networks. Airline companies collaborate within networks while remaining competitors. Moreover, competition between different airline networks has considerably increased. The evolution of the alliance policy of airline companies shows that competition between individual airlines coexists with competition between groups of airlines. Because of the dominant position the three major airline networks, the membership of one of these networks can be considered as a competitive advantage. (Ghauri and Cateora, 2010) Answer all four questions: 1. Critically analyse the strategic and environmental factors responsible for the formation of the global airline networks? (40 marks-1400 words) 2. Critically evaluate the strategic benefits or otherwise of membership of these alliances to individual airlines. (30 marks-800 words) 3. Evaluate critically the forms of management that are used to manage these alliances in relation to achieving their corporate objectives. (30 marks-800 words)