Global Passenger and Cargo Airline Industries - Essay Example

Task Global passenger and cargo airline industries have tasted periods of profitability and losses in the past with the latter being attributed to hikes in fuel prices, and airline manufacturing materials. Dynamics of the industry have also had an impact on the new and existing airline companies. Such dynamics in the industry are reflected in aspects such as competition going notches higher, security measures being in constant upgrading and companies merging and venturing into business partnerships at high rates. In 2004, Air France acquired KLM Royal Dutch Airlines. The company changed its name to Air France KLM, though the two companies operate separately. Delta Airlines had a merger with Northwest Airlines in the years between 2008 and 2010 that made the former become the world’s No.2 passenger carrier after United Airlines. The company still maintains the Delta name. We also visit United Airlines that merged with Continental Airlines in 2010 to become the world’s largest airline company/carrier. Airline acquisitions and mergers have implications on airline customers and employees. These business moves have some interlinked factors that are important in understanding what really takes place; Efficiency, approvals, competition, strife and benefits to the airline customers (Kelly et al, 2002). In the airline industry, mergers and acquisitions are purely strategic and are pursued after putting several factors into consideration: Service quality and image of the other airline, possibility of the other airline company to have partnerships with airlines considered industry rivals and the area covered by the other airline, which is of interest. Strategically speaking, an airline entity would merge with another airline company that operates on different routes from those that it operates. This expands flight coverage and helps in avoiding overlapping of flights in any given routes. One of the effects of acquisitions and mergers on airline customers is that air fares increase. Such business moves reduce the number of operators thus reduction in competition. The result is an increase in fares and rates. Acquisitions and mergers are most active when there are equity markets with low volatility and low rates in interests. There is also an upward trend in mergers and acquisitions, when stocks trade in low multiples. Mergers and acquisitions have the tendency of being instigated and driven by market conditions and factors that are favorable (Kelly et al, 2002). The drive to transact mergers and acquisitions mainly starts with the parties involved who have strategic objectives that are to be achieved at the tail end of such transactions. The strategic objectives of selling and buying converge in a manner that fuels the transaction process. For instance, the parties involved may enter into such agreements in order to stay afloat in the market or the merger and acquisition plan will facilitate a leaner, profitable, and successful company. These transactions could be done with the objective of strategically positioning the resultant business entity for the necessary growth. There are strategic reasons that explain the existence of these kinds of businesses: financial growths, achievement of vertical integration, outdo competition, asset acquisitions, expansion into new markets, gaining of intellectual property (IP), acquisition of new customers and clientele, expansion into complimentary services and products, and the need to outdo threats on entity services and products (Bierly & Coombs, 2004). There were developments that led the above named airline companies to venture into these kinds of agreements. United airlines merger with continental airlines was driven by the urge to create the world’s most lucrative airline that would taste success in the competitive domestic and global airline sector. The resultant entity would offer unique and superior services and products to its prospective customers. The resultant company would also serve a global airline network of 370 destinations. The merger would also see the company’s workforce enjoy benefits and prospects. These would create a platform for guaranteed sustainability and profitability, which would add value to the company’s shareholders (Bierly & Coombs, 2004). United airlines sought the services of APCO Worldwide to create an all-encompassing strategy touching on the external, internal, web and media communication regarding the merger. APCO acted as an advisory and consultancy agent to the United’s merger team. The 17.7 Billion dollar merger that brought together Delta Airlines and Northwest Airlines Corporation was driven by the need to provide airline prosperity to the new airline entity and provide customers with an easier alternative access to the outside world. The merger would create a global outfit that would be suitable to large corporate bodies around the globe and willing to negotiate favorable travel deals with the company with the capability of meeting travel needs virtually in all destinations of the world (Kelly et al, 2002). This business move would propel the resultant company to greater heights with a No.1 or No.2 market share in every world market. The move would rank Delta airlines at the top of USA’s domestic aviation market in addition, to being the topmost carrier from USA doing business across Africa, Europe, and Middle East. It would also be the No.2 carrier doing business in Latin America and Caribbean regions. Competition has also been of top notch, and this has propelled the companies to restrategize how to make good business. Technology has also pushed companies to merge with the aim of combining efforts and acquiring new technological advancements (Bierly & Coombs, 2004). SECTION 2-JOINT VENTURES AND STRATEGIC ALLIANCES Global Airline joint ventures and strategic alliances are rooted in the basics of network economics and the global economy. It has been seen that no airline has made strides in efficiently serving all destinations that its customers frequent by use of its own aircrafts. To satisfy these customer demands, airline companies seek commercial partners that can lend a hand in providing huge network coverage and diverse service options. Emergence of rival competition has led to expansion of their presence in the global aviation industry by strengthening their domestic networks (Bierly & Coombs, 2004). European airline companies and carriers were for sometime restricted from accessing the domestic American market and were initially in favor of restricting flight rights to and from member entities as a way of safeguarding their competitive and strategic positions. As a result, most large airline carriers in America are relatively green to global airline operations in contrast to their counterparts from Europe (Yasuda, 2005). Airline companies, therefore, venture into cooperative business arrangements for a number of reasons and these reasons vary depending on the markets in which they operate on and the partners involved. For instance, airline companies may want to consolidate a viable network that would help in propelling business growth and additional financial revenues. They may scheme into joint ventures and premeditated alliances as a way of minimizing expenditures and minimizing risk exposures. It could also be a way of sharing the risks that may arise when new routes are launched. It could as well be driven by the urge to create technological and informational projects. Airline companies may also form strategic pacts and joint ventures in order to address key deficiencies in their networks of operation (Yasuda, 2005). Strategic alliance and joint venture agreements mostly involve two carriers or airline companies and only operate in limited airline routes with the aim of providing linking and connectivity to each other’s existing networks. Tactical alliances mostly involve one independent airline company that is not subscribed to a larger alliance of strategy `1. Examples of these alliances include Virgin Atlantic and continental alliance, which operates on a code sharing agreement. Another example is American and jet blue alliance which operates on an interline and “frequent flyer programme” (FFP) kind of arrangement. Air France is in a tactical alliance with Fly Be, and the mode of operation is based on a code-sharing platform. Tactical alliances are rather common, and this has prompted a number of global airline carriers to join the global alliances, which comprise three-branded strategic alliances-Sky Team, Star Alliance, and One world. Membership into these worldwide alliances does not prevent member airlines from creating tactical alliances with other non-allied airline companies and in some cases with members allied to other global alliances (Yasuda, 2005). Airline members in any global alliances multilaterally coordinate to come up with the largest possible airline joint entity and network. This offers a wider scope for the needed revenues and profits that propel growth in any given airline company. Basic levels of integration and cooperation are essential to global alliance members, sometimes involving agreements on code sharing and some members in these alliances seek to attain higher cooperation and integration levels to achieve maximum benefits from the alliances that they are subscribed to. Global airlines’ alliances provide a platform for air transport providers to cooperate in many aspects such as meeting customer needs, but they remain steadfast competitors due to the variance of the levels of cooperation and integration among and between alliance members. Joining global alliances may not represent reduced competition in the airline industry. In fact, analysis of competition distinguishes between integration levels within the global alliances and the possible effects of competition. Similarities of the analysis are evident regardless of the nature of the alliance being analyzed-whether tactical or strategic (Bierly & Coombs, 2004). Strategic alliances are formulated to deal with competition and uncertainty and this eventually yields competitive advantages. These advantages are temporary than those created through complementary alliances that are strategic. Complementary alliances are either vertical or horizontal. The basic reason why this is the case is because complimentary alliances have a firm focus on the development of value in comparison to competition and uncertainty minimizing alliances, which seem to be created to deal with competitor’s behavior, as opposed to attacking the competitors. Those who participate in corporate strategies use them to develop and integrate knowledge and information for future success. Management knowledge is crucial for companies to achieve highest value; firms should organize it and properly distribute to those involved with the formation and use of alliances. Successful commercialization of innovations may lead firms to opt for cooperation and integration with other organizations to integrate their knowledge and resources. Airline companies incorporate alliances to transform themselves or to use their competitive advantages to seize opportunities surfacing in the rapidly changing global airline sector and economy. A network alliance strategy is effective when formed by airline firms that are clustered together, and these alliances can be grouped into three: joint venture, non-equity alliances, and equity alliances. In joint adventures, airline companies form legal, independent firms in order to collaborate and share their resource capabilities to achieve strategic advantages in the markets. Experience and expertise in any field is of the essence when seeking to achieve formidable competitive advantage (Chesbrough, 2002). In joint endeavors, the airline firms involved share resources and participate in the management of operations equally. Joint ventures are optimal alliances and different from what independent airline companies do in the competitive market with their own resources by developing competitive advantages through combining their potencies. Coordination and integration of airline operations and marketing strategies allow access to new market opportunities around the globe, transfer of vital intelligence data and technical information (Bernstein and Weinstein, 2002). In Equity Strategic Alliances, ownership stakes are not equal. Companies own different percentages of share stakes in the newly formed airline entities. Their specific contributions and input in resources and capabilities determine the sharing of the formed company with the ultimate aim of creating competitive advantages (Bruckner, 2007). The international face value of strategic alliances firmly focuses on the correlation between two airline companies or more with diverse management capabilities and operational activities. Diverse airline cultures and practices are a blend into one in the strategic alliances when adopted in any given country. Non-Equity Strategic alliances This kind of alliance is less formal compared to joint strategic ventures. In pursuit of advantages over competition, two airline companies or more form an alliance on a contractual basis rather than a very different company thus: the companies involved do not take equities. They operate on the premise of sharing their different but unique capabilities to stay relevant and afloat over competition (Chesbrough, 2002). The relationship is, therefore, informal among the partners. In this kind of setup, less partner relationships and commitments are needed than in any other types of strategic alliances. The implementation phase of non-equity alliances is simple compared to the other types of alliances. Thus, it does not call for much experience like the others. In complex situations where success calls for the expertise and knowledge, nonequity alliances are not advisable due to their informality and minimized commitments This alliance has been preferred by many companies but in varied forms like distribution agreements, licensing agreements and supply contracts. External factors like technology uncertainty and dynamic economic environments fuel commitment in these alliances. Rival competition encourages greater commitment with the involved partners (Bruckner, 2007). Success and survival in business calls for partnerships and work relations that have proved necessary during this era of globalization. Partnerships assist in making outsourcing decisions. Outsourcing means acquiring support activity from other firms. Outsourcing decisions and verdicts help to create nonequity alliances. Magna International Inc., a leading supplier of sophisticated and advanced automotive systems, modules and components have entered a number of nonequity strategic alliances with automotive manufacturers who have outsourced the company’s services (Bernstein and Weinstein, 2002). Technology-based and capital intensive companies that exist in the aviation industry form strategic alliances to push towards success. For instance, quite a number of surveyed executives in the airline industry state that strategic alliances are key to their companies’ success (Kelly et al, 2002). In addition, strategic alliances enable partners develop value that they could not have developed on their own (Folta & Miller, 2002: 88). It also facilitates entrance into domestic and global markets more easily and quickly. In large airline companies, strategic alliances account for 20% or more of revenue. Dynamics and movement of airline markets is unpredictable, complex, and unstable. A combination of all these leads to the creation of strategic alliances that aim for long-term advantages in competition, with the involved airline firms seeking to source new competitive advantages while creating and adding value by use of their existing resource capabilities. Quick access and integration into new markets and successful phases of transition in the ever-dynamic fast-cycle markets calls for entity alliances where resource capabilities are pooled together in a more appropriate manner to achieve market goals (Chesbrough, 2002). Therefore, airline entities need comprehensive views and reviews on their strategies, capacities, and operational efficiency. Massive portfolio investments defined by these parameters are necessary when sparking discipline and upholding it in strategies formulated by the new airline entities (Bernstein and Weinstein, 2002). Large orientations as regards business volumes are vital characteristics of airline markets, where airline firms with their resource capabilities come up with strategic alliances. In 1993, Star Alliance came into existence consisting of Lufthansa airlines (Germany) and United Airlines (USA). A number of other global airlines have so far joined this group. Partners in the alliance share their resource capabilities to do business in almost 1000 airports spread across the continents. Star Alliance’s main goal is to “pool the best airline routes globally with the aim of offering travel services through shared booking.” Changes brought by strategic alliances have seen airline companies set up facilities in other countries to minimize production costs. Access to low-cost labor and energy resources are some of the factors behind such establishments. These location facilities foster strategic alliances in the global airline sector. Favorable positioning in a suitable location compels Airline firms to manage effectively their facilities guided by the aim to gain fully from the location’s advantage (Bernstein and Weinstein, 2002). Section 3: Key Opportunities Acquisitions and mergers are beneficial to airline companies when weathering through hard times. The company suffering from various market problems and is unable to overcome them; it can go for an acquisition deal. A strong airline company with a heavy market presence can buy out the weak firm, and a more competitive and cost efficient company can be generated. Here, the weak airline company benefits maneuvers out of difficult situations after acquisition by the large firm, and the joint company develops a larger market share. This opportunity looms large for the airline companies in the coming years. When firms form a new company, production operations are larger scale, and there are strong chances that their will be a reduction of the costs of production. A market share increase is a benefit of mergers and acquisitions (Folta & Miller, 2002). In case a company acquires a distressed one, the resultant company can experience an increase in market share. The new company is often cost-efficient and competitive as compared to its weak parent entity. Mergers and acquisitions will also create value generation platforms for the companies involved. Shareholder values in an airline company would be greater after a merger or acquisition agreements, and this would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions succeed in cost efficiency through the implementation of scales of economies (Folta & Miller, 2002). These kind of deals in the airline industry also lead to gains in tax and more so to revenue and profit enhancements through gain in market shares. Airline companies go for Mergers and Acquisition knowing that, the joint company created will generate more value than what the independent companies would. In summary, an airline company wishing to make its presence felt in a new market will go for merger deals with other suitable airline companies, and, this is a good opportunity for growth in years to come. An airline company is further faced with the opportunity to avail administrative benefits and profits. Innovation of new products and services will also be enhanced in the quest to satisfy customer and market needs (Folta & Miller, 2002). The company’s research and development department introduces such products and services into the market with the aim of beating the competition and acquiring larger market shares. These are some of the key opportunities that will come up in the aviation industry if key industry players pursue merger and acquisition deals aggressively. The airline transport industry is set to offer quality passenger benefits in the coming years. It should be noted that this is a very dynamic and demanding type of business where customers are given the highest priority. We should expect airline passengers to be enlisted for travel schemes based on mileage pints as a promotion and market strategy by the airline companies. There are also limitations that are to be expected in the airline industry incase merger and acquisition deals are pursued in the future: These kinds of deals require government approvals, often from variant government levels and authorities in order to establish the pros and cons of the merger and acquisition deals. Time is also a limiting factor because these deals take a lot of time to materialize. Tight considerations are undertaken (costs and operational issues) which are complex and large in magnitude. These kinds of deals also spark strife related to seniority of staff, work ethics, regulations, and rules that must be minimized at all costs. The airline sector and the economic strategic alliances that come with it are crucial options for achieving competitive advantages. Formidable cooperative strategies with partners that include customers and suppliers are vital when developing alliances. In the forthcoming years, development of strategic alliances and joint venture firms will open new business opportunities where partners will utilize their excess and/or complementary resource capabilities and create new entities to get a deal with rival competition. Effective management of alliances in the airline sector will subject the alliance partners in question to financial growth, new airline destinations, and ultimately customer satisfaction in the coming years. Interdependency and mutual trusts have become important for airline strategic alliances (Das & Teng, 2001). Companies value partnerships that are created with other entities known for upholding trustworthiness. In this kind of business relationship characterized by mutual trust, companies are psyched up to maximize use of the available resources for their own entity benefits and growth. New markets will be identified and explored, customer services will improve, security will be at top most, and key business deals in the global corporate world will be achieved (Das & Teng, 2001). References Bernstein, J., & Weinstein, D., 2002,’Do endowments predict the location of production? Evidence from national and international data’, Academy of Management Journal, Vol. 56, No.1, pp. 55-76. Bierly, P.E., & Coombs, J.E., 2004,’Equity alliances, stages of product development, and alliance instability’, Journal of Engineering and Technology Management, Vol. 213, no.3, pp.191- 214. 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