Alliances and the Airline Industry - Essay Example

EXTENT TO WHICH ALLIANCES HAVE BECOME A CHARACTERISTIC OF THE AIRLINE INDUSTRY Module Module Module Leader Introduction An alliance is an agreement between two or more parties, made to advance common goals and secure, common interests. Alliances make business sense motivated by cost reduction and improved services to customers among other factors. Strategic alliances are common to any industry, and their presence felt within the airline industry. An airline alliance is an agreement by at least two airlines to work on a substantial level. Deregulation of the airline industry in the United States in 1978 led to the formation of the alliance. The deregulation was the most notable event that brought about the radical changes within the industry. M. Potter claims that Alliances are a means to extend or reinforce competitive advantage, and not a sustainable means of creating it. Oum, Taylor, and Zhang (1993) offer a universal definition: a worldwide airline network composed of a group of related airlines that provide services to consumers. They do so through a common computer system, automatic baggage transfer system, fares and ticketing, joint marketing, code sharing of flights and coordinated flight schedules. This paper will discuss the extent to which alliances have become a characteristic of the airline industry. Why did airlines come about? Deregulation of the airline industry lead to the formulation of alliances. The effects of deregulation were quick to filter though it took almost a decade for the European countries to follow. The airlines could now choose the ways they wanted to take and fix the prices as they found it fit without any regulatory interventions. It thus enabled airlines to work according to demand-supply and other market factors. Airlines gained their freedom, and they had to fend for themselves in taking careful steps in order to walk the paths of positive financial bottom lines. Globalisation has set in new rules and with Increased Competition for and from new markets, the ground markets have altered airlines to adapt slowly to these challenges. Alliances have contributed highly to solving such problems as described by Harrigan (1988, p.67). With the Privatisation and unpredictability of the new market and its inherent vulnerability to global incidences, the industry had to adapt itself to aliening with the privatised industries as a survival mechanism. From basic code-sharing agreements, these alliances have come along the way, and today involve a closer co-operation between partners. They ensured they integrated with even the non-flying partners like hotels and credit card companies. The hotels and credit companies play an extremely significant function in the development of the global airline industry. Airlines had to integrate their flight Routes by flying from shared hub points and common terminals and coordinating their flight schedules. Thus, passengers who want to connect from one alliance partner to another can do so with little inconvenience and effort. Airlines in an alliance offer fares that favour a combination of alliance partners because they have an integrated route network in place. This includes fares around the world that display the alliance global network. It permits travellers to travel round the earth entirely using the members of a single alliance leading to the Low Cost Revolution. Member airlines have linked their mileage programs in order to satisfy the consumer craving for miles. This helps them to reward travellers for flying within the alliance network. M. porter says that Alliances are frequently transitional devices. They proliferate in industries undergoing structural change or escalating competition, where managers fear they cannot cope. They are an indication to uncertainty, and comfort provider. Strategy and airline alliances De la Sierra (1995) claims that in order to gain a competitive advantage in the global marketplace an alliance has to be internationally strategic. It must posses the following characteristics: The two or more firms that unite to pursue a set of agreed upon goals remain independent subsequent to the formation of the alliance The partner firms share the benefits of the alliance and control over the performance of assigned task The partner firms contribute on a continuing basis in one or more key strategic areas eg technology, products etc. The alliance should have broad objectives to be competitive. According to Burton and Hanlon (1994), alliances are central to the business formulation strategy. Although there are many objectives, the list below highlights a few prominent ones. The main objective of an alliance in the airline industry is to access foreign market. 1) Being part of an alliance enables the carrier to offer a large number of flights to a much wider choice of destination leading to enhanced marketing opportunities. 2) To allow ticketing and seat arrangement for connecting flights to be completed at the origin point thus benefiting the connecting passers by the use of computer reservation systems. 3) Airlines benefit from the economic of scale resulting from an increased scope of operations. 4) Increase market feed by enabling airlines that are dominant in their home markets to enter into an alliance with an international airline to provide feed to their airlines. 5) Increase traffic on the airlines’ routes since higher traffic levels allow the airline to operate larger, more efficient aircraft at higher load factors, which in turn leads to lower unit operating costs. 6) Reduce costs through the sharing of facilities and services aircraft maintenance and ground handling 7) To project on the growth of international travel versus domestic travel, intensified fare competition 8) Market withdrawal costs, aircraft system development and gate/ slot constraints including human resource development and a desire to match strengths and weaknesses. What benefits have the airline industry gained from being in an alliance? The airline industry has gained a competitive advantage over other industries in the global marketplace. The strategic alliance between the airlines partners has become a common business strategy that has enabled members to benefit as follows: Ability to offer a wide range of airplane airline partners Ability to offer better lounge/ airport facilities Ability to reach more destinations A greater ability to reward passengers A faster mileage accrual A cost-effective monolithic customer retention/ acquisition strategies Access to extended passenger database The ability to better up their sell opportunities The ability to offer round fares/ circles fares A simplified mileage accounting A globalised airline operation An increased aircraft utilization An increased cost efficiencies A dedicated professional management for meeting alliance objectives A joint development to easy to use services for passengers A large and international partner portfolio etc There are three existing Global Alliances; Star Alliance, Sky Team and One World. They all aim to provide benefits such as miles and award settlement, recognition of high tiers, data exchange, and web booking tools. The phases into a strategic alliance Phase one: this is the first step into getting into an alliance. Here, there is code sharing by members, a joint FPP (Frequent Fryer program), there are joint sales and shared lounges. There is an alliance logo but separate airline brands. Entry and exit at this phase is relatively easy. Phase two: in this case, there is common ground handling, joint maintenance, joint sales in third countries, joint call centers, common IT platforms, joint purchasing, but still separate airline brands. The exit from an alliance is difficult but possible. Phase three: in this phase, there is franchising, joint product development, sharing of aircraft and crews, single operating company, passengers, cargo and a single alliance brand. The exit from an alliance becomes exceedingly difficult or impossible at all. Brief explanation of terms Heide (1994, p.77) states that the code sharing is an example of cooperation between airlines whereby one carrier allows another one to share a route and market it under its own flight number. Bilateral code sharing has picked up with the development of airline alliances. Code sharing can be broken down into two predominant forms: ‘parallel’ and ‘complementary’. Parallel code sharing occurs where two airlines operate flights on the same route allowing both to gain advantages of increased frequencies and shared resources. Complementary code sharing transpires where two carriers join to increase global reach by tapping into routes operated by both carriers. FPP (frequent flyer programs) is a consumer loyalty program that is that is the most visible joint product of the alliance on the customer’s side. The FPP points available on a flight show clear characteristics that a consumer considers in deciding which airline product to purchase. Conclusions Close relationships between airlines become possible by alliances. International strategic alliances are main strategies in the development of global airline markets. A study has shown that 66% of passengers use an alliance carrier. This supports the fact that alliances play a critical role in the aviation industry today. Alliances have made it possible for airlines to be able to sell on a regular basis and accept sharing of tickets, transfer luggage between flights and other conveniences. Having discussed all this, its right to say that alliances have become a characteristic in the airline industry, in that, airlines cannot do without the alliances. References De la Sierra, M, and Cauley (1995). Managing Global Alliances: Key Steps for Successful Collaboration. Addison-Wesley Publishing: England. Harrigan, K.R. (1988). ‘Strategic Alliances and Partner Asymmetries’. Journal of International Business, Management International Review, pp. 53-72. Heide, J.B. 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