Airline Alliance Case Study

Akanksha

A PRESENTATION BY
Robin
Ajay

Nitish Business School, New Kavish
Era
Era Business School, New Delhi

Vatan

AJ/ Ajay K K Raina,Archit
AJ/ Ajay Raina, PGDM
PGDM 2012-14

The Overview
 Case study about alliances in airline industry
and issues therein.
 Built around the fact that selling abroad by
exporting home-country production may not be
advantageous because of cost differentials,

changes/modifications that are necessitated,
trade barriers and such like factors.

Era Business School, New

AJ/ Ajay K Raina, PGDM

Partnerships
Acquisition

Merger

JV

SA


What is it? A, M, JV or a SA?



The Case: Introduction
 Airlines alliances involve combining of routes,
sales, terminal services and frequent flier
programmes.
 Most of the leading airlines of the world have
such alliances.

 Many airlines own stakes in other airlines too.
 There have been mergers too even though

original identities have been retained in certain
cases.

Analysis of the Case
 Intend covering this part in the following

sequence:-

 General issues.
 PEST analysis to understand emerging trends in the

industry.
 Forces 5 Forces Model Analysis to understand the
complexity and challenges faced by any single airline
to compete in the industry(generic; Singapore
Airlines).
 Alliances as strategy.
 Spectrum of alliances.
 Governance issues.
Era Business School, New
Conclusion with questions.

General….
 Alliances between airlines on international markets have become a

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dominant feature of the airline industry.
Many customers today, particularly those travelling on business,
demand a seamless service on international markets „from
anywhere to anywhere‟.
However, no airline is able to efficiently provide such a service on
its own aircraft, and few city pairs can generate sufficient traffic to
justify a daily non-stop service.
In order to meet customer demands at an efficient cost, airlines
have had to seek commercial partners to help them provide the
network and service coverage required.
Passengers have always been able to arrange an itinerary on two or
more airlines, through the interlining mechanism managed by IATA.
However, this arms-length cooperation did not allow the integration
and efficiencies that were possible.
Cross border mergers, which would be typical in other industries,
are prohibited for airlines by restrictions on foreign ownership.
Nevertheless, since the early 1990s, the need for network
cooperation led to a rapid expansion of alliance relationships, as a
close Business School, New
Era substitute for mergers.

…General
 Alliance formation is typically associated with high-tech

firms and R&D intensive manufacturing industries but
the airline industry is an example of a service-oriented
sector where various kinds of alliances have also
proliferated.
 One of the most important developments in the
international airline industry in recent years has been
the rapid expansion of global airline alliances among
airline competitors.
 Large airlines are spreading their wings by including
airlines of various sizes from all parts of the world into
their alliances.
 These have involved cooperation between two or more
airlines in a wide range of commercial and operational
areas, for example, scheduling, purchasing, marketing,
and frequent flyer programs.


The Issues…..
 Historically, air transport has always been seen to have

an inherently strategic role. It has obvious direct
military applications, but it is also highly visible and, for
a period, and in some countries still, was seen as a
“flag carrier”, a symbol of international commercial
presence.
 The modern air transport industry is one that
increasingly operates within a liberal market context.
 There is a further aspect to liberalizing international
services stemming from the interaction of domestic air
transport with international markets.
 Globalization inevitably means higher demands for the
movement of people and goods between countries
which, given the largely commercial orientation of
modern air transport, will bring forth additional supply.


….The Issues…..
 Forces

in the global marketplace increasingly
require companies to collaborate with local and
overseas partners for market efficiency and
responsiveness.
 This trend is echoed in the development of alliance
activities within the airline industry. Nowadays most
airlines participate in some form of strategic
alliance.
 An airline alliance is an agreement between
multiple independent partners to collaborate in
various activities to streamline costs (e.g., by
sharing sales offices, maintenance facilities, ground
handling personnel, check-in and boarding staff
etc) while expanding global reach and market
penetration.


Why Alliances?
 Such alliances blur competitions.
 Why Necessitated?
 Regulations and Trade Barriers.
 Costs.
 Competition.
 Sluggish economies.
 Terrorist threats.
 High oil prices.


Regulatory Controls
 Regulatory controls in place to have domestic

control even in developed countries.
 Activities regulated: Landing rights.

 Specific aircraft and airports.
 Frequency of flights.
 Fly beyond.

 Over flight.
 Fares.

 IATA – uniformity of fares, meal charges, baggage

allowance and safety.
 Privatisation andNew
Era Business School, deregulation of industry. PGDM
AJ/ Ajay K Raina,

Cost & Competition
 High cost of running; ways to spread costs: Ownership of critical capabilities.
 Use of gates, generators and ground

transport.
 Sub-leasing.
 Alternate flying days.
 Reservation systems.

 Competitiveness

affected when travellers
find the need to change two different
(though allied) airlines during a journey.


PEST Analysis

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Political/legal
•Continued liberalisation and open skies policies
•Privatisation of state owned airlines.
•Reduced government regulations.
•Rising terrorism.
Economical
•Recession, a substantial decrease in air travel across the world.
•Increased competition from low fare airlines.
•Increased oil prices.
•Difficulty in determining demand and costs due to recession.
Social
•People have more airline choices.
•Customers have become more sophisticated and demanding.
•Increased trend to travel and work abroad.
•Fear of air travel due to terrorism threats.
•Prestige point in under developed/developing world.
Technological
•Online ticketing
•SMS based services.
•Net connectivity and ease of planning the travel with multiple options available.



Inferences from PEST
 A significant political trend is the introduction of the

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open skies policies because of globalization and
liberalization. This allows airlines to compete in a more
open and fair way.
Some of the main economical trends include the rise in
oil prices and the initiation of global alliances.
Globalization allows airlines to engage in capacity
sharing and price controls, which ultimately leads to
more fierce competitions.
One of the important social trends is the increasing
consumer demand for more empathy and personal
attention on premium airlines.
Technological aspect is one of the crucial determinants
as the airline industry is looked at as a pioneer in the
innovation and use of information technology.
Most airlines now sell tickets online, utilize SMS services
and provideSchool, New
Era Business self-service technologies.

Porter‟s 5 Forces Analysis
Substitutes
•
•
•

•
•
•
•

Buyers
First class
Business class
Economy
class
Long Haul
travellers

Other premium
airlines
Other cheaper
airlines
Road/ Rail/Sea

Singapore Airlines
Industry: Service
Rivalry: Malay air,
Emirates Air, Cathay
Air
“cut throat no-frills”

•
•
•

Threat of Entry

Suppliers

•
•
•
•
•
•

Oil/ Fuel.
Aircraft.
Airports.
Food & Wine
Entertainment
Employees, pilots,
cabin crew etc

Start up costs
Establishment
Costs
• Licensing Issues.
• Economies of
Scale
Era Business School, New Politics.
•
•
•

Inferences from 5F Analysis
 Because of the aggressive nature of the industry, it

is hard to sustain competitive advantages.
 For SIA, the industry is very crowded, not only with
airlines that share the same strategic position but
also with an emerging trend for cutthroat pricing by
other airlines who pose a threat for SIA.
 Bargaining power is high for both buyers in
choosing among alternatives and suppliers due to
unavoidable production costs such as fuel supply
and airport contracts.
 Barriers to entry are high due to the complicated
licensing procedures and high capital requirement,
which holds for both new entrants and existing
airlines. School, New
Era Business

Alliance as Strategy
Airlines Alliances
Increase
Market
Share
Corporate
Strategy

Strengthen
Market
Position

B
A
R
R
I
E
R
S

Gain
Market
Share

Competitive
Advantage

Reduce Costs

Airlines Alliances


Spectrum of Alliances
Phase 1: Revenue
Generation

Phase 2 : Cost
Reduction

Type of Agreement
- Code sharing
- Joint Frequent Flyer
Programs
- Network co-ordination
- Schedule/ Capacity
coordination
- Joint sales
- Shared lounges, etc.
- Alliance logo

But

Separate airline brands

Relatively easy to
entry and exit

Type of Agreement
- Common ground handling
- Joint maintenance
- Joint sales in third
countries
- Joint call centres
- Common IT platform
- Joint flights
- Joint purchasing
But
Still separate airline brands

More difficult but
possible to exit

Commercial Alliance

Phase 3 : JV
Orientation
Type of Agreement
- Joint product
development
- Sharing of aircraft and
crews
- Joint passenger and
joint cargo services
ventures)
- Full merger

Single alliance brand

Very difficult or
impossible to exit

Strategic Alliance

Elements of Governance
FORMAL
1. Goal
2. Legal from
3. Financial agreements
4. Scope and exclusivity
5. Decision making

INFORMAL

6. Communication structure
7. Culture
8. Trust/commitment


Forms of Alliances
Forms of
Airline
Alliances

Characteristics of Participating Airlines

Horizontal
Alliances

In the airline context, horizontal alliances are alliances
between airline competitors. They are long-term agreements
involving an exchange or combination of some resources
among airline competitors (same product and same markets)

Vertical
Alliances

Most vertical alliances in the airline industry are co-operations
that exist between airlines and car hire firms, hotels, travel
agents, and other companies involved in travel and tourism
(suppliers, intermediaries and distributors)

External
Alliances

May be limited to joint ventures in marketing promotions; for
example, frequent flyer bonuses, travel insurance, special
offers on fares, package holidays, etc. or may be separation
of some of the specialised activities to external alliances, eg
handling of New
requirements by
Era Business School, an airline‟s internal computing K Raina, PGDM an
AJ/ Ajay
IT firm.

Going Back to SIA
 1972 – Birth; remains innovative but aloof till 1995.
 1995 – Alliances with Air NZ, Cathay Pacific,

Malaysia Airlines, Silk Air, KLM, Vietnam Air, Swiss
International.

 2000 – Added Air Canada, Virgin Atlantic, Air

France, Ansett, Asiana, British Airways, United
Airlines, Scandinavian Airlines, Air India.

 2005

– Plus Royal Brune, Austrian Air, Tiger
Airways, British Midian, Lufthansa, Ana Air, Easyjet,
Ryanair.


How did it work for SIA?
Singapore Airlines
Cathay Pacific
Emirates

Global

Regional

Easy Jet
Ryanair
Southwest

Low Cost

Air Charter
Hooters Air

Personalised

Key Benefits/Drivers
 Market access to overcome restrictions over route

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access and airline ownership imposed by national
governments;
Cost reductions and economies of scale, scope and
density;
Coordinated schedules and prices to optimize the
demand for, and capacity of, each flight;
Opportunities to reshape industry structure; and
Raise barriers against new entrants.
Note: These benefits do not necessarily improve
the offering for consumers, but – undeniably – they
are powerful drivers of alliance formation.


Question No 1
 Discuss a question raised by the manager of
route strategy at American Airlines: Why should

an airline not be able to establish service
anywhere in the world simply by demonstrating
that it can and will comply with the local labor
and business laws of the host country?



Our Considered View
Yes, it should; reasons
 Competition forces carriers

to become efficient or else
go out of business, instead
of being subsidized by
regulated route and fare
structures.
 Survival of mega-carriers
leads to economies of
scale in the handling of
passengers and cargo.

No, it should not; reasons

 Local interests are often ill-

served by deregulation since
airlines
are
free
to
discontinue service and to
wage predatory price wars
that put competitors out of
business.
 There may eventually be too
few survivors to allow for
the competition.
 Politics, national security
and consumer welfare.

Conclusion:-A major consideration is whether economic interests in
the airline industry are better served through such an arrangement
or not. But other issues related to political relations, cross culture
issues etc have over-riding implications. AJ/ Ajay K Raina, PGDM

Question No 2
 The president of Japan Air Lines has claimed

that U.S. airlines are dumping air services on
routes between the United States and Europe,
meaning they are selling below their costs
because of the money they are losing. Should
governments set prices so that carriers make
money on routes?



Issues
 It is very difficult to separate profits and losses on a

route-by-route basis. While fares and loads on
certain routes may seem to be low, they may in
fact be generating marginal revenues that make
major routes profitable.
 If governments were to set prices above a certain
level, traffic and revenues, and hence profitability,
may all fall.
 The issue of profitability raises the question of
subsidies. It is nearly impossible to determine
whether dumping is taking place when competitors
receive so many direct and indirect subsidies.
 Conclusion. Not favoured.

Question No 3
 What will be the consequences if a few large

airlines or networks come to dominate global
air service?



Likely Implications
 The consequences would be both positive and negative.
 On the positive side, passengers should be able to

travel almost anywhere in the world on a single airline
(or network).
 That in turn should minimize the risk of missed

connections and lost baggage.
 Operating economies should be realized as a result of the
higher utilization of airport gates and ground equipment.

 Consequent savings may or may not be passed along

to passengers through lower prices.
 On the negative side, it is quite possible that

 Minimal competition would lead to poor service and/or

high prices.
 In addition, competition among the destinations
associated with particular airlines may decline, as would
the special services
niche K Raina,
Era Business School, Newoffered by the AJ/ Ajayairlines. PGDM

Question No 4
 Some airlines, such as Southwest and Alaska

Air, have survived as niche players without
going international or developing alliances
with international airlines. Can they continue
this strategy?



Assessment
 When there is sufficient traffic on a route, there is little

need to have feeder or connecting routes for an airline
to be profitable.
 Without the need for hubs to make connections, such
airlines can operate from smaller/isolated airports.
 They avoid the costs associated with the transfer of
bags to connecting flights and the payment of overnight
expenses to passengers who miss connections on
bigger hubs.
 Such airlines can overcome disadvantages from smallscale operations by targeting their promotion to
regional and niche groups and by running low-cost
operations that charge low fares.
 Conclusion.

Niche operators can survive in an
operational mode that does not attempt to expand
and/or modify their operations too much.





Airline Alliance Case Study

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