Airline Alliances

  • Category: Business
  • Words: 1915
  • Grade: 95
History and Formation of Alliances

Before 1978, the airline industry was significantly different than its operations today. The industry was heavily regulated. Routes and rates were fixed. The atmosphere made it difficult for competitors to enter the market. During the time period before 1978, departure frequency and name recognition were the main competitive drivers. Currently, the differentiation between airlines circulates around price and destination. The industry was at maturation with little growth or competitive stimulation.

In 1978, the US government passed the Airline Deregulation Act of 1978. In the same year, the United States concluded liberal bilateral agreements with Singapore, South Korea, and the Philippines. Many changes occurred as the industry was amongst a free market. Many nations followed in the privatization movement including Canada, Europe, Australia, Japan, Brazil and India. Privatization allowed airlines to work independently. In result, competition changed greatly. The number of US domestic airlines immediately escalated from 36 to 123. These new smaller airlines entered the markets selling tickets 30-40% lower than the established pre-regulation airlines. Profit margins for the airlines slimmed creating new financial planning. The airlines that once focused on image differentiation now became more concerned with pricing and route selection. These transformations shook the foundations of many large airlines such as Northwest and Continental.
In order to retaliate, the more mature airlines developed competitive strategies. These companies began establishing their hubs, frequent flyer programs, and computerized reservation systems. The additions of the hubs allowed the airlines to reduce the number of flights by providing mass appeal to popular destinations. This helped in cost reduction for the major airlines. By 1986, the airline numbers dwindled to the most of the original airlines and had a record-breaking year of $1.6 billion in profits.

In the late 80's and early 90's, the remaining airlines, such as American, Delta, and United, began to increase their fleet by 60%. Unfortunately, trends in airline travel were downward slopping creating financial difficulties for most airlines. During the early 90's, airlines such as Pan Am and Eastern were liquidated while Continental and TWA filed for bankruptcy. In desperate acts searching stability, the airline industry began to look internationally for foreign partners that would allow them access to more profitable destinations. The first alliance was formed in 1993 between KLM and Northwest. The formation of strategic alliances began as result to the Deregulation Act of 1978.

Foreign markets are attractive to domestic airlines because the U.S. market is slow growing and has an abundance of competition. International markets, such as the Asia Pacific, needed a strong airline presence. A strategic alliance allows airlines to have access to their partners' terminals and airspace. They also share flight schedules, flight codes, employees, revenue, and capital investments. Alliances are developed under the following three different umbrellas:

1) Marketing Alliance
A marketing alliance is the simplest of all alliances. The airlines involved share flights and connectors. These types of alliances are more significant in smaller markets where a carrier does not need full penetration. These alliances are very common in the industry because they are simple agreements for tactical purposes.

2) Equity Alliance
An equity alliance requires airlines to buy into one another. Because of this the arrangement is more permanent. An equity alliance is difficult to establish because many countries have high restrictions concerning equity sharing.

3) Frequent Flyer Alliances
This alliance is a marketing strategy to create loyal customers. By using one of the airlines within the alliance, the customer earns free trips, hotel accommodations, rental cars and upgrades.

The most popular alliance is the marketing alliance. It allows airlines to share benefits without compromising ownership. In addition, many governments limit foreign ownership so they remain domestically controlled. For instance, the US only allows 25% of foreign equity into their airlines.

Alliances have become increasingly important to the growth of the airline market. Currently, 54% of the world's airlines operate under international multi-alliance networks. Smaller, domestic airlines are beginning to form national and regional alliances as well to increase their market share.
These motivations help to gravitate airlines together as the international markets become important to the stability and growth of the industry. One statistic shows that domestic markets will only grow 3.9% over the next three years while international travel is projected to double that.

Current Alliances
Star Alliance

The largest of the alliances is the STAR Alliance. It is made up of twelve members with annual passengers of 317.55 million, 322,857 employees, 894 airports, $396.8 billion in revenue passenger miles, daily departures of 9,967, 129 countries served, and a fleet of 2,299. As of 2001, the members of the alliance were Air Canada, Air New Zealand, ANA, AnsettAustrailia, Austrian Airlines, BMI, Lauda, Lufthansa, Mexicana, Scandinavian Airlines, Singapore Airlines, Thai, Tyrolean, United, Varig.

oneworld is the second largest alliance with eight airlines, Quantis, British Airways, American Airlines, Cathay Pacific, Finnair, Iberia, LanChile, Aer Lingus. The alliance offers frequent flyer sharing, employees 260,000 people in over 130 countries serving 550 destinations. oneworld creates value by "treating the continents of the world as individual stepping stones, fares are based on the number of continents you visit and your class of travel". Another benefit is access to over 340 airline lounges.

SkyTeam is a fairly new alliance formed in 2000, made up of AirFrance, Delta, AeroMexico, Czech Airlines, Korean Air plus the soon to be added Alitalia. According to their website, the following are the top benefits to their passengers:
·        Earn miles toward elite status on your preferred SkyTeam airline and redeem on any member airline
·        Have complimentary access to most of our 289 member lounges worldwide
·        Obtain a guaranteed reservation if you are a SkyTeam Elite Plus member even if your flight is sold-out
·        Enjoy a choice of 7091 flights to 472 destinations worldwide
·        Receive more fare options to more destinations
·        Connect through our extensive worldwide hub network
·        Get standardized SkyTeam procedures for your convenience
·        Ease your SkyTeam connecting flights with single check-in
·        Make travel arrangements and get information at any of SkyTeam's 743 ticket offices worldwide
·        Experience in-flight service built around your needs

Another collaboration that combines frequent flier programs is Qualiflyer. It was formed in 1998 and has as its members Swissair, Austrian Airlines, Sabena, Crossair, Lauda Air, Tyrolean Airways, AOM, TAP Air Portugal, Turkish Airlines, Air Littoral and AirEurope. They boast over 900 destinations in Europe, Asia, North and South America, Africa and Australia, and have arrangements with over 4,000 hotel partners, and Avis, Euro car and Hertz rental car. Additionally, they will keep record of customer preferences such as seat preference, dietary or religion meal requirements and share this throughout the system.

KLM and Northwest
The smallest of the collaborations in number of members is the one between KLM and Northwest. However, these two combine to offer more destinations and fly more flights than Qualiflyer. According to Northwest, the combination provides customers with service to more than 750 cities in 120 countries on six different continents.

Advantages of Alliances

Airlines may have several reasons for joining or not joining an alliance. The most important reason to join is the airline's interest to lower costs. First of all, the cost of jet-fuel can be lowered with bulk purchases. Additionally, the costs of maintenance and service will decline and catering becomes cheaper if several airlines order the same meals at the same delivery service. Thus, cooperation in both purchasing and services, as well as in terms of technical development can be realized. Other areas that allow cooperation are marketing agreements, jointly used electronic distribution channels, and global advertising campaigns. Further on, pilots can be exchanged more easily within an alliance and training costs can be economized, too. Only one airline has to provide pilot training, and then all other airlines can send their pilots to be certified.

One advantage for all joining airlines is the possibility of route sharing and thereby the possibility of expanding their networks. Some routes may not be profitable, but in order to stay competitive they have to be served. Within an alliance, the partner who can serve the cheapest has to fly the route. This allows cost savings and airlines within the alliance are able to withdraw parallel flights that are not fully occupied.

By joining an alliance, airlines have the ability to develop new or expand existing markets without being forced to buy extra planes. Small airlines that do not have a lot of equity capital can lease aircraft from others. If equity capital is needed, the larger airlines can assist. Airlines are also able to share sales and profits and coordinate schedules, prices and flight routes within the alliance. Thereby, the profitability improves and other airlines cannot easily pose a threat on them. Secondly, frequent flyers are dedicated to the alliance airlines through bonus programs. At the same time, competition declines within the national market and no hostile encroachments do take place. If one of the airlines still makes operative losses, other airlines can cover them.

One important reason for joining an alliance is code sharing. For passengers and airlines, this means a larger number of destinations with less ticketing efforts. Through the use of collective infrastructure and the need for customers only to check in once, the airlines gain competitive advantages compared to others. This provides large economies of scale, most notably for smaller companies. The increasing competitive advantage vis-à-vis other airlines meets the interest of both the airline's customers and their shareholders.

Disadvantages of Alliances

Alliances have negative effects as well. First of all, the establishment of big alliances might threaten the existence of small, independent airlines. This would lead to a job reduction and the loss of competition. An oligopoly of only some market dominating alliances might then lead to increasing fairs and decreasing service because of the lack of competition. Therefore, the antitrust division is concerned about pooling and tries to avoid the distortion of competition.

Another disadvantage is that airlines loose their independency. Depending on the contract, they very often cannot decide on destinations, fares, and services to provide. Additionally, well performing airlines might not accept that they have to pay for someone else's losses.

Deregulation and privatization has greatly changed the airline industry within the last twenty years. The formation of alliances has permitted as well inhibited great strides in the industry. Our group believes that the advantages outweigh the disadvantages for those among the industry and consumers. We recommend that the airlines continue and strengthen especially among these difficult times. The recent happenings have impacted airlines worldwide. Along with this primary recommendation, we also suggest that airlines within the alliance come together to support one another financially as many are in jeopardy. Without some of the airlines the alliance will lose some of its potency. Within the past two weeks, KLM has recently filed for bankruptcy creating a difficult situation for Northwest. The future for the alliance is not yet known. Because of this, alliances should look at other alliances for possible mergers to help save the industry.
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