Table of Contents
Strategic and Environmental Factors
Global airline alliance (GAL) is a relatively long-time inter-organizational cooperation agreement, which provides the possibilities for the sharing of resources and / or management structures of two or more independent organizations (airlines) located in two or more countries for the joint execution of tasks related to a corporate mission of each of them. Alliances are inherently represented by some combination of airlines as financially dependent on each other and remaining in a full independence, aimed at increasing their competitiveness and their share of the air transport market. With the growing globalization of the world economy, airlines began to think about ways of their further development. Large companies that have taken an extensive network of the erhead lines have become more stable in the ever-changing market environment. However, airline giants sometimes have difficulties with managing the overgrown bureaucracy, having a large overhead.
Being aware of the advantages and disadvantages of giant economic structures, the airlines took the path of integration. Some major airlines were originally based on the concept of the alliance. For example, Sweden, Norway, and Denmark have created an integrated airline SAS as the national carrier of these three countries, realizing that cooperating is better than competing more than 50 years ago (Bowen 2010).
In the 80-ies, airlines have chosen the strategy of globalization of their activities. Some achieved a rapid growth in traffic on international airlines (e.g. American Airlines) (Dudek & Hawlena 2013). Airlines realized that they will not survive in an increasingly competitive environment for a market share of air transportation being alone. Consolidation took place in several directions:
- Complete merger of equal airlines;
- Integration of the main and regional airlines;
- Creation of the first marketing and strategic alliances.
Alliances inherently represent some combination of airlines as financially dependent on each other, however, remaining in full independence, in order to increase their competitiveness and their share of the air transport market (Holmberg & Cummings 2009). However, there are many issues in the development of alliances. Airlines have different development strategies, unequal levels of service, unmatched flight schedules, and a variety of tariffs. Addressing these problems requires a lot of time and effort on the part of all airlines that have formed an alliance.
In a globalized economy, the airline that has not found a partner is unable to resist such alliances alone. The main cause is the universal joint of airlines' efforts to provide significant advantages in the competition with other associations and unions. According to IATA (International Air Transport Association), almost all international airlines are partners in commercial cooperation (2013). Strategic alliances have become visible only in recent years, but they have a significant impact on the future structure of the international air transport industry. The reason for this is that the prevailing concept of national ownership of airlines in air transport business has long been activated, and only recently, states began to show signs of favour to varying degrees of foreign ownership of airlines. State ownership has become ineffective, the privatization of state owned airlines began. Some airlines have been transferred to private ownership of 100% of the shares (British Airways, Air Canada, Japan Airlines, and Air New Zealand). Others have done it partially (KLM) (Gibson 2010). Airlines stopped using government subsidies and guarantees of the loan repayment.
This trend has had serious consequences for the development of the global air transport. Particularly noticeable this trend became in Western Europe after the creation of the Single Market in the air transport. The Treaty of Rome in 1957, on the basis of which the European Economic Community (EEC) was created, which then was transformed into the European Union (EU), provided the right of every citizen of the Community to organize a business in any state that is a member of the EU. This position was reinforced in the third package of air transport liberalization of the EU, in the section relating to the licensing of private aircraft carriers and harmonizing rules for issuing operating licenses to enterprises with collective ownership by community members or citizens of one of the member states of the EU (Havel & Sanches 2014).
While the right of establishment a business in another member state is now accepted in full volume, not a single airline is established or acquired partial or full ownership by a citizen of the same state. For instance, Air France owns a 50% stake in the Iberia airline, British Airways has 49.9% stake in the TAT French company and 49% of German airline Deutsche BA (Macchiati & Siciliano 2007). In accordance with the third package of air transport liberalization of the EU, British Airways could theoretically hold specified airlines, however, in practice, its share of foreign airlines does not exceed 50%. Moreover, German airline Lufthansa has a 50% stake in the Euro-Berlin airline and 13% in Luxair Luxembourg Airlines. Airline SAS owns 40% of the British Midland airline, etc. (Macchiati & Siciliano 2007).
In the US, the Federal Aviation Act restricted the voting interest in the shares of US airlines to 25%, which was regarded in the past as limiting of foreign investment to 25%. However, the financial difficulties that the airlines faced forced the government to seek for additional sources of funding. As a result, the policy was changed, and state governments allowed the US air transport foreign nationals to invest up to 49% of total assets in the US airlines, provided that the foreign shareholders will not receive control over US airlines (Havel & Sanches 2014).
Today, the trend to do a redistribution of the market in favour of big players is obvious. An independent activity of the companies, as a rule, is economically inefficient and increasingly puts the company out of the market. In turn, the agreement on the alliance can have a positive impact on the business, including the provision of financial support. Different forms of strategic cooperation may be also a part of the alliance. Such agreements focus on reducing costs and risks, as well as on improving the quality and degree of access to the products. Trying to hold positions in the market, companies are going to cooperate with competitors to implement the joint projects. It is no secret that alliances are used in various industries for the purpose of holding competition and strengthening a position in the market. The aviation sector is no exception. According to many experts, joining the alliance is the best way out for airlines that guarantees stability and successful development (Holmberg & Cummings 2009).
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Rather than engaging in price competition and struggle for spheres of influence, the airline industry is focusing on improving profitability, particularly in those markets where they have already taken a strong position. Acquisitions, joint ventures, and other strategic alliances are becoming standard business practices to help in the current situation of economic uncertainty to optimize the cost and the amount of excess capacity (Tugores-García 2012). Trends in the development of the modern market for international passenger traffic are not in a stable demand (they fluctuate), a shift in demand from Europe and North America to Asia and Latin America, increasing the concentration of air traffic in certain areas, rising the cost of fuel price for air services, expanding the network of hubs, formation of alliances and mergers, as an attempt to resist the strong competition and optimize costs.
In general, the union with alliances and joint ventures empower their members who reach certain agreements, including those about the routes, schedules, and pricing decisions (Holmberg & Cummings 2009). At the same time, despite the undeniable benefits for the consumer, this development raises concerns of antitrust authorities. Activities of alliances, particularly in the aviation industry, involve risks that can have serious negative financial consequences, badly affecting the company's business reputation. In this regard, it is necessary to understand the nature of the agreements, as well as limitations and restrictions imposed by antitrust authorities.
In addition, it is important to define the market at which an alliance operates. To do this, it is important to find out what kind of services (here transportation of passengers, cargo standard, and express mail service can be included) are in the market and what their territorial basis is. Market definition helps to establish the scope of application of antitrust law regarding prohibited activities of economic entities, abuse of dominant position, and the range of market participants, namely competitors. For example, in the case of passenger transportations, traffic can be split into regular and charter flights.
With regard to the regulation of alliances, the antitrust laws of the EU and the US are prohibited agreements, arrangements and concerted practices, as well as an abuse of the dominant position, affecting or likely to have a potential impact on free competition in the market. In connection with this, agreements shall be prohibited in terms of setting and price-fixing, customer allocation, and partition information affecting the competition. Thus, in 2010, the European Commission imposed a fine on “11 air cargo carriers, including Air Canada, Air France-KLM, British Airways, Cathay Pacific, Cargolux, Japan Airlines, LAN Chile, Martinair, SAS, Singapore Airlines and Qantas with the total amount of 799,445,000 euros” (CNN Wire Staff 2010). Carriers coordinated their efforts to manage price elements in the period from December 1999 to February 2006. Organizational cartel activities included establishing contacts both bilaterally and multilaterally.
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Assessing the work of the alliances, antitrust authorities pay attention to the nature of the agreement, the possibility of competition between smaller market participants, the fact whether clients can use the services outside a particular market, and the level of exchange of the most important information. Also, the structure of the market shares of the participants and competitors, and the ability of new members to enter the market shall be evaluated. Moreover, in terms of impact on the market, a restrictive role of prices and demand is to be considered. Besides, it is important to identify the specific situation where alliance agreements have a positive impact on the market (Cavalcante 2013). One key question is whether the positive result of the alliance will outweigh the negative one. In other words, the effectiveness of agreements is set depending on whether they worsen or improve competition in the market.
The Strategic Benefits and Otherwise of Membership
Competitive advantages for the airlines lay in their ability to improve the match service. Typically, the service is provided by other companies. Therefore, strategic aviation alliances exercise general acquisition of aircraft, reduce the cost of leasing, since each aircraft is operated longer. Airlines share the costs of the operation of flights, ie, these are expenditures that are made by corporations for the number of places that the company has. Through such alliances, the company is gaining new regions or distributes the flights that are less in demand.
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Taking part in aviation alliance, the airline receives a significant benefit which, firstly, is in the formation of a supply chain of customers, which stabilizes the demand for services. Secondly, it is in reduction of operating and fixed payouts. Third, it is in achieving and economy of scale, which is the distribution of fixed costs on the other sales volume. Fourth, it is in the creation of new types of income. Fifth, it is in access to foreign markets with minimal costs, without additional equipment costs and a license to fly. Finally, sixth benefit is in the creation of competitive advantage relative to other companies.
Airlines take mutual participation in the programs of regular consumers. Regular consumers are people who constantly use the services of companies that are the members of the alliance. Participation in the programs of airlines provides benefits for consumers, because it makes it possible: (a) to purchase tickets at the same time on a global scale and at low cost; (b) to have access to the nomination of additional requirements regarding the services of hotels, rental cars, communications, etc .; (c) to make use of the tickets replacement between the airlines; and (d) to choose the global flying routes (Swelbar 2009).
From the point of view of the creation of airline alliances, the following advantages of alliances should be highlighted:
- The possibility of expanding the network of routes and reducing unprofitable lines;
- Significant improvement in product quality of the airlines through the use of additional features of partnership schedule;
- Optimization of connections and increase in the transfer flow;
- Comprehensive improvement of service provided;
- An additional benefit of expansion a joint presence in the airline industry;
- Expansion of the sales network, tariff policy coordination;
- More efficient use of the fleet;
- Sharing of airport services, conducting marketing and cost minimization;
- Implementation of the advanced development and innovation strategies with a partner;
- The ability to decentralize routes and to unload the needed airport (hubs);
- The outlined before benefits of lower costs. Airlines increase revenues and, therefore, can significantly improve the profitability of all alliance members.
One of the key benefits of joining the aviation alliance for the carrier is getting an expanded code-share and interline (Friedenzohn 2010). The positive effects of this influence passengers as well. One airline can not cover the entire market, it has a limited number of aircrafts and destinations. However, when it comes to the alliance, the customer is able to book a flight even around the globe (the so-called tariff round-the-world), while some flights are provided not by the same airline but by its alliance partners. The more partners, the more opportunities the carrier gers to be virtually present in all the world. In addition, within the alliance, carriers can achieve a significant cost reduction: as a rule, they combine the cost of sales offices, operational capabilities (up to computer systems), personnel (working at the front desk and the departure gate for the flight), accounting, part of the investment and procurement.
Another important feature of the alliance, which benefits both their members and passengers, is the integration of bonus programs for frequent flyers. By participating in the loyalty program of a carrier, the customer can collect miles and then spend them on the services and benefits provided by another carrier partner in the alliance. For example, these are perchasing a premium ticket with the further service upgrading to receive priority at check-in or confirmation of the place with waiting lists, or even increasing the baggage allowance. Association of lounge-systems and business lounges, optimizing transfers, and thus saving time, which is essential for business travelers, are also revealed as the main benefits of any alliance for airline passengers of its members.
However, entering the alliance is not always easy. Entering any alliance means that the company agrees to all the rules that exist within the alliance. A necessary condition for membership in the alliance is providing a full package of benefits and services provided by this association carriers. Therefore, the airline has to set up coherent systems of telecommunications, as well as training of staff, in accordance with the requirements of the alliance. There are several reasons for the failure of strategic alliances. Some of the most common reasons are given below (Brueckner & Whalen n.d.):
- Failure to understand and adapt to a new style of management;
- Inability to study and understand the cultural differences between organizations and individuals;
- Lack of confidence in the leader and companions;
- Withdrawal from the strategic goals;
- Operating and geographic overlays.
The Forms of Management
Competition in the market makes an air passenger company search for ways to increase its competitiveness. Each airline chooses one of the competitive strategies, trying to use its advantages. The key competitive advantages that the air passenger companies can get are reduced to the following groups: price, reliability, regularity of flights, a modern fleet, staff, comfort and service, convenience of location, prestige, and others (Caggero & Bartolini 2011). Any air passenger company tries to use its strengths in management.
The most important advantages are the efficiency of the economy and production activities of the company, the degree of involvement, image and place of the company in the global aviation market, as well as the safety and convenience of transportation. To improve its image, companies seek to increase comfort, and to improve service and reliability of its personnel. Many airlines focus on the production and tradition in their strategies, where the main focus is on people and modern innovations. For now, a traditional set of methods and tools of managent is already proved.
The first quantitative method for improving the managent of air carriers is to expand the route network within the geographic boundaries of the target market. This measure helps to increase the number of passengers in a quantitative way. An effective way of increasing the number of destinations is to participate in the integration of the world's airlines. A consistent measure of improving the competitiveness of airlines is increasing the number of routes, while also expanding its fleet. The presence of outdated crafts deprives many airlines from the opportunities to enter the international market, which significantly reduces the possibility of the airlines to achieve positive financial results (Lufthansa 2013). Thus, the need to update the park is fairly obvious: if an airline independently increases the number of routes or the frequency of flights, it also needs to expand its fleet, which will serve for the new flights.
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It is also important to note that the basis for the success of the modern airline is a competent and strategically aligned approach to the formation of the fleet. An efficient, comfortable, and reliable fleet will allow the company not only to improve the operational efficiency of air traffic, but will also attract new passengers, reducing the adverse effects on the environment. Thus, the expansion of the fleet is not only the answer to increasing the number of routes, but also an opportunity to reduce costs due to less energy consumption. By replacing the aircraft fleet, an airline can significantly improve its competitiveness.