Aviation in the Global Context - Essay Example

Strategic Alliance, International Alliance along with Merger and Acquisition in Aviation Industry s back to 1919 when International Air Traffic Association was established through alliance among six European airlines with a view to establish co-ordination in international air transport. It was followed by the Aviaco and Iberia alliance in 1948. The 1960s witnessed the American airlines forming a domestic alliance to co-ordinate their service and provide a more integrated service to their customers. Air France opted for many bilateral agreements from 1940 to 1970. The first contemporary alliance took place in 1975 when Middle East Airlines went on to form a code sharing agreement with Iberia (Madrid to Beirut). FFP or the first frequent flier program started back in 1980 with Air UK and KLM Royal Dutch Airlines joining hands. The earlier alliances were marked by “joint flights, maintenance consortia, schedule coordination, ground handling, through fares, management contracts and catering joint ventures. Over time, with the development of computer reservation system (CRSs), early alliances involving joint flights evolved into code-sharing, a popular form of alliance agreement in the 1990s.” (Li, 2000, p. 65) Merger and Acquisition on the other hand was mostly seen in domestic airlines where several small domestic airlines generally came together to form a single body that owing to its size managed to reap of the economies of scale, scope and density. Merger and Acquisition on International scale was not so common owing to the fact that in most of the cases cross border ownership is restricted (Giovanni, 2002); as mentioned by Evans (2001) “non-European Union investors cannot hold a majority stake in any European Union airline.” (Evans, 2001, 234). However in recent times the merger of KLM and Air France with the later taking the main role might be an example that such type of business ventures in not far away (EMCC, 2008, p.1). Furthermore any alliance is incomplete if it fails to get the antitrust immunity (ATI) from the government of the respective country that will enable the cooperation on the financial issues. This paper takes a two way approach to discuss the rationale of airlines adopting a global alliance or Merger and Acquisition strategy (including cross border M&A) with a critical analysis of the strengths and weaknesses of the two approaches. The second part of the paper provides a close and critical view of antitrust immunity that is a culmination of freedom, which is provided to various airlines alliances and encompasses “scheduling and pricing decisions, as well as the right to form revenue-sharing joint ventures (Bilotkach and Huscherlrath, 1998, p.1)”. It leads a pros and con analysis of the antitrust immunity grant to the global alliances on behalf of the government (with specific reference to the North Atlantic market). The rationale behind International alliances Mergers and acquisitions in the airlines industry began to occur more often after USA deregulated its domestic market. These mergers occurred essentially because the airlines needed to collect capital and grow fast in order to respond to the industry’s challenges especially in a competitive framework. In fact owing to the severe deregulations, the instances of mergers in UK market is less than US (Cheng-Jui-Lu, 2003). As mentioned by Pels (2001) “The incentives for an airline to enter an alliance are similar to the incentives for a carrier to adopt a hub-and spoke network” (Pels, 2001, p.4). The rationale behind the international alliances can be discussed in terms of a set of external and internal drivers. These external and internal drivers together forms the ambience of an alliance Among the external drivers, information drivers, economic restructuring and global competition are of utmost importance. The present era is much different that of 1970s. The advent of the computer reservation system (CRS) led to the immense benefit of code-sharing as a form of alliance among the international airlines. In code sharing the partner airlines are with a two digit code of the other airlines and books ticket on its behalf. Nowadays most of the ticket booking is done through internet and one or the other CRS software. The density of booking is centered among those who appear in the first page of the search engine and that are where the code sharing comes into effect. Sharing codes among the airlines through forming an alliance has managed to bring more passengers to the code sharing airlines. This has made code sharing an effective hassle free mode of alliance that is immensely common among airlines. In recent time deregulation of airline industry through the disengagement of the governments is a common phenomenon to notice. However, regulation in aviation industry is still a major bottleneck to the free entry of a particular company into other nation and therefore, economic restructuring still leaves a window of scope for global alliances. In this era of globalization, passenger traffic through airlines has increased many folds and openness has led to open competition among the operating companies in the aviation industry. To maximize the global pool of passengers in a cost effective way, global alliance has become very relevant among the aviation companies (Evans, 2001, pp. 233-236). Regarding the internal drivers, risk sharing, economies of scale scope and learning, access to assets, resources and competencies and shape competition are very important. Global alliance reduces the risk of a particular partner and spreads it among two. Any development procedure has become very costly nowadays. If an alliance can be formed this cost can be shared. If risk is considered in terms of exploring a new route then with adequate information on both the end of the route might serve as a better hedging against the risk. Here two separate routes might be merged by two partners who are with ample information on these two routes. It has been witnessed that “it enhanced the market power of both Swissair and SAS. Competition in the hub-to-hub markets was effectively eliminated. This was possible as both carriers held dominant positions in their respective hubs (Morrish and Hamilton, 2002, pp. 405-406).” Through a global alliance an airline can enjoy economies of scale owing to a much larger reach of passengers. However, such economies of scale are rare in aviation industry. Global alliance also increases the opportunity for any airline through the expansion of its horizon. Furthermore with the increase of interaction among the people engaged in different airlines, work becomes a learning procedure. If more than one airline agrees on baggage management, ground staff sharing, hanger sharing etc, then it is obvious that they can reduce their cost of operation as well. Partner airlines may also help each other to address mutually exclusive shortcomings and draw backs. Alliance formation can act as both defensive and offensive strategy. On one hand it can reduce the competition through making a business competitor an ally. On the other it can help to form a fort against an enemy in a particular market through joining with other airlines with similar interests (Evans, 2001, pp. 236-237). As it reflects from the above discussion that global alliance from a producer point of view is beneficial. However, it is often been argued that such alliance will eventually cut off the competition and will give rise to the monopoly power in the aviation market. Such development is non-beneficial for the customers and they will end up in paying higher prices. However empirical evidence on the same is not available and it reflects that consumers as well benefits from the global alliance of the airlines (Bilotkach and Huscherlrath, 2012, p.4). Though, all that glitters is not gold. Global alliance has often been found as short living, lacking stability or durability and in times both of them. Rhoades and Lush (1997) provided an interesting explanation of the above phenomenon. They have opined that factors working in favor of stability and durability often produce a counter current against each other that usually results in such break ups. High stake of the participating partners in an alliance makes it hard for both of them to put down their baton, but increasing complexities with high stake rises the friction among them and makes it unstable. On the other hand low stake and lower complexity though leads to stable alliances yet they might be short living considering the fact that once narrow objectives of one or both the firm is met there is little incentive and stake for them to stick for the same in long run. They have also opined that neither stability nor durability refers to a successful completion of an alliance (Rhoades and Lush, 1997, pp.109-113). Global alliance though is a form of coordinated action but it never risks the legal identity of the participating companies. Merger on the other hand results in the surrendering of the legal autonomy of at least one partner to the other. Hellmers has put forward another important characteristic of merger “the payment of a premium, which clearly distinguishes it from an alliance.” (Hellmers, n.d., p.5). According to Hellmers, mergers in aviation are characterized by horizontal mergers. These mergers are often between a small target and big buyer company or between equals (Hellmers, n.d., p. 6). Since mergers are more integrated form of togetherness than alliance, hence cost reduction ability of the airlines participating in mergers is much more than that of alliance. Under merger greater cost efficiency can be achieved in terms of ease of flight and fuel procurement. Such facilities are restricted under alliance. Merger has also the potential to shed incompetent workers while under alliance such facilities are unavailable. Both merger and alliance increases the reach of the airlines in terms of newer destinations and passengers. However, with changes in destination and passengers a quality issue often knocks at the door of these companies and owing to legal barrier it becomes impossible for them to address these problems properly with efficiency. It has been observed that this kind of problems are much more in mergers that in alliances. It is also witnessed that a buyer with adequate beforehand information on the new market ends up as a looser after merger owing to the fact that they have already reaped up much of the benefits of the new market before the merger. Merger might thus only get passed as an option if the buyer is lacking appropriate information on the new market. This comparison gets complicated considering the fact that an alliance might be achieved without or little investment unlike merger, which seeks huge investment. A merger is quite like managing two companies by one head and thus the burden of risk and capital falls upon the head of one company and there is much difference between the two concepts bigger and better (Hellmers, n.d., pp.5-12). Whatever it seems from the theory, the practical evidence leads to an ambiguous conclusion. It does not absolutely favor either merger or alliance rather simultaneous operation of both has been found. It seems that airlines with overlapping flight zone are better off if they go for a merger and airlines with little common route are better off opting for alliance. Owing to the fact that the aviation industry is highly regulated even today merger is tough to achieve. Again alliance might be highly unstable and with much less durability than merger. In the long run irrespective of form of integration; level of coordination together with the power to generate optimum synergies that does matter. 1. Bilotkach, V. & H. Kai (2010), Antitrust immunity for airline alliances, Econstar, available at: http://econstor.eu/bitstream/10419/42214/1/640254357.pdf (accessed on March 13, 2013) 2. Evans, N. (2001), Collaborative strategy: an analysis of the changing world of international airline alliances, Tourism Management Vol. 22, 229-243 3. EMCC, (2008), Managing change in EU cross-border mergers and acquisitions, European Foundation for the Improvement of Living and Working Conditions 4. Cheng-Jui-Lu, A. (2003), International Airline Alliances, KLuwer Law International. 5. Giovanni, J. (2002), What Drives Capital Flows? The Case of Cross-Border M&A Activity and Financial Deepening, CIDER, University of California 6. Hellmers, J. (n.d.),“Alliances vs. Mergers in Passenger Air Transport”, University of Applied Sciences 7. Li, M.Z.F. (2000), Distinct features of lasting and non-lasting airline alliances, Journal of Air Transport Management Vol. 6, 65-73 8. Morish, S.C. and R.T. Hamilton (2002), Airline alliances-who benefits? Journal o Air Transport Management, Vol.8, 401-407 9. Pels, E. (2001) A note on Airline Alliances, Journal of Air Transport Management, Vol. 7, 3-7 10. Rhoades, D.L. and H. Lush (1997), A typology of strategic alliances in the airline industry: Propositions for stability and duration, Journal of Air Transport Management, Vol. 3, No. 3, pp. 109-114 Read More