Air Freight VI:Air Cargo Alliance and Merger

Dr Narudh Chermakara

MAY 16

Why alliance and Merger

• Economic Considerations- Economy of Scale• Regulatory Considerations- Airline ownerships• Operational Considerations• Network coverage

Hench strategic alliance is the answers

Types of Alliance and Agreement• Prorate Agreement- Revenue sharing from multi-sector service with more than

one carrier (Multilateral prorate for multiple carriers)- Generally divided on the basis of general cargo rate under

45kg- Calculated in proportion of rate for the sector it operated

to the sum of the whole length - Special method may be used (such as great circle distance)- What is great circle distance?

• Codeshare- Airline designator code on a flight

flown by another carrier (Operating carrier)

- Non-operating airline can market the service as its own

- The operating carrier either get a net rate or a commission

- Advantage: No need to fly the route that cannot sustain on its own

- Highly popular among passenger carriers

Block space agreement

• Buying an agreed capacity/space on the flight of another airline

• A subset of code-sharing• Hard-block• Soft-blockCAPACITY SWOP- Reciprocal block space agreement (Bilateral)

Joint Venture

• Pooling agreements• Sharing revenues and costs with pre-arranged

agreements.• Has to be approved by the anti-trust authority.• The aim is to increase revenue and reduce

costs. HOW?

Revenue Enhancement

• Improve access to more destinations (Esp, the restricted markets)

• Increase access to smaller destinations (which can’t be sustained on its own)

• Access to slot-constraint airports• Coordinated feeder traffic with min connecting times• Price-leadership on member’s hub-to-hub markets• User-friendly booking system for inter-carrier

shipments

Revenue Enhancement

- The deeper the level of integration of the alliance, the better revenue enhancement potential (Aiming for Seamless experience)

Cost Reduction

• Reducing duplications in sales, distribution, admins

• Network rationalisation• Co-ordination of slots/fleet• Joint airport services – sharing facilities• Joint operation systems (IT)• Joint Purchasing (i.e. Chinese buying Airbuses,

Lion Air, Air Asia)

Air Cargo Alliance

• Similar to Star/Oneworld/Skyteam alliances

WOW Alliance

• Found in 2000• Original members: - Lufthansa Cargo (Left 2009)- SAS Cargo (Current Member)- Singapore Airlines Cargo (Current Member)- JAL Cargo (Left 2010 after shutting down its cargo

operations)

- Not as successful as passenger airline alliance

SkyTeam Cargo

Mergers and Acquisitions (US Airlines)

Mergers and Acquisitions

• Popular, particularly in the US mainline• Quick way to expand its network and size• To put a jigsaw in the missing link • Could be within one country or trans border (e.g. Air

France/KLM, Lufthansa-Swiss/Austrian)• Subject to antitrust, politics, labour issues.• It has become a major trend in recent development

in airline industry• Exercise: Which airlines should merge together?

Price-Fixing Scandal• Cartel activity within the industry• Price-fixing • Example: TG was fined 7.5 m AUD by the Australian court along

with 13 other carriers

• Airlines/transport business are prone to fare war. Very hard to differentiate its products.

• Therefore, secretly to set an agreed price is the way to avoid price war in the market (Which is illegal)

• Exercise: Report the cases of Price-Fixing in the cargo industry.