case study on getting airlines alliances off the ground

Era Business School, New Delhi

AJ/ Ajay K Raina, PGDM 2012-14

A PRESENTATION BY

Akanksha Robin Ajay Vatan

Nitish Kavish Archit Era Business School, New Delhi AJ/ Ajay K Raina, 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.



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.

Conclusion with questions.



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

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 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 and deregulation of industry.



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 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

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 provide self-service technologies.



Porter‟s 5 Forces Analysis Substitutes

• 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 • Start up costs • Establishment

Costs • Licensing Issues. • Economies of

Scale • Politics.

Suppliers • Oil/ Fuel. • Aircraft. • Airports. • Food & Wine • Entertainment • Employees, pilots,

cabin crew etc

Buyers • First class • Business class • Economy

class • Long Haul

travellers



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.



Alliance as Strategy Airlines Alliances

Airlines Alliances

Strengthen Market Position

Increase Market Share

Corporate Strategy

Gain Market Share

Reduce Costs

Competitive Advantage

B A R R I E R S



Spectrum of Alliances

Phase 3 : JV Orientation

Phase 2 : Cost Reduction

Phase 1: Revenue Generation

Strategic Alliance Commercial Alliance

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

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

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 More difficult but

possible to exit Relatively easy to entry and exit



Elements of Governance

1. Goal

2. Legal from

3. Financial agreements

4. Scope and exclusivity 5. Decision making 6. Communication structure 7. Culture

8. Trust/commitment

FORMAL

INFORMAL



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 an airline‟s internal computing requirements by an 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

Easy Jet Ryanair

Southwest Air Charter Hooters Air

Global

Regional

Low Cost Personalised



Key Benefits/Drivers Market access to overcome restrictions over route

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 No, it should not; 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.

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.



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 offered by the niche airlines.



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 small-scale 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.