An Analysis Of Global Alliances
As a matter of survival, airlines within the current environment are constantly reviewing and altering their strategies. An important component of any airlines’ strategy to remain viable and maintain competitive advantage in today’s setting is to pool resources and share risk, known as an alliance. A broad definition of an alliance that occurs in the aviation industry is the “collaboration between two or more firms that retain their autonomy during the course of their relationship” (Kleymann & Seristo, 2004). To that end, there are certain variations of airline alliance in vogue today, in particular the Global Airline Alliance. Starting with a synopsis and identification of these alliance groups, the discussion will move to a selection and analysis of benefits and shortcomings that can be associated with global alliances from a business and consumer perspective. From here, an appreciation will be gained of the major airline alliances and typical rationale of alliance strategies.
Currently, the most popular forms of coalition in the airline business are the non-equity marketing alliances known as Airline Alliance Groups (Kleymann & Seristo, 2004) or Global Multicarrier Alliances (Cools & Roos, 2005). At the present time, the main global multicarrier alliance networks are Star Alliance, One World, and Skyteam (UBM, 2010). These alliances are predominantly a massive global network of multilateral codesharing and joint resource Air Service Agreements (ASA’s) between carriers. This allows a central point of contact for the passenger to “ensure a convenient, smooth and efficient worldwide travel experience” (Star Alliance, 1997). Although individual airlines are aligned under the umbrella of a single corporate entity, distinct airline brand identities and cultures are retained. These alliances have set out to revolutionise seamless air travel for the international passenger from hub to hub and beyond. Additionally, the synergies created were only possible due to astute governance of previously implausible collaboration. To that end, airline conglomerates now understand “The best way to generate real business growth and expansion is by forging the appropriate strategic partnerships” (Borovich & Yeheskel, 2001).
From an airline business perspective, membership in a global alliance has one distinct, instantaneous and strategic advantage. Almost overnight, all member airlines’ geographic route structures will have expanded without costly capital investment in infrastructure and assets. This allows airlines to service routes that were previously deemed non-profitable or inaccessible, albeit on other alliance members’ aircraft. This “complementary alliance” (Oum & Park, 1997, as cited in Chen & Ross, 2000, p. 328) has the flow on effect of generating untapped markets within the domestic environment and yielding higher load factors for all alliance members aircraft operations. Henceforth, this produces larger revenues which in turn diminishes overhead costs and maintains more efficient airlines by lowering unit cost base (Doganis 2001, p. 76). While this contributes to diversification and larger profit margins for collaborating airlines, the traveller can be confident airfare cost will remain relatively reasonable assuming competition remains viable on any given route. This is a beneficial outcome for all involved, both airline businesses and the consumer.
A comparable example where alliances between two airlines operating on the same route is however, considered anti-competitive (Chen & Ross, 2000, p 328). Here the competing airlines could strike a codeshare accord, typically after a tenuously long and protracted battle attempting to gain market share. This is routinely known as a “parallel alliance” (Oum & Park 1996, p. 190), however this is unfortunately likely to result in cartel type price fixing. This form of alliance generally benefits the airlines as it narrows competition and has a propensity to create a higher demand for a particular service, hence higher airfares (Chen & Ross, 2000, p 328). Conversely, the pre-alliance scenario utilising “capacity dumping” (NZ Parliament, 2006), where supply exceeds demand, only profits the consumer with ridiculously low and unsustainable airfares. This invariably serves to strengthen the dominant market leader’s position by financially eliminating the competition in the long term. These types of alliance are inherent of predatory behaviour with very little consumer benefit and require antitrust immunity (Bilotkach, 2005, p. 168). An example of this type of arrangement within the global alliance networks does exist, although on the exceedingly competitive North Atlantic route between Lufthansa and United Airlines (Kleymann & Seristo, 2004, p. 23).
While codesharing is one weapon with which to condense costs, create better margins and maintain a reasonably priced service, it is not the only resource available to benefit allying partners and the consumer. One only needs to visit any of the global airline network’s websites to see a large scale joint marketing experience. Consequently, “Extensive market presence plays an essential role in major airlines’ plans for survival and prosperity” (Kleymann & Seristo, 2004, p. 113), and this influence is an effective tool when multiple powerful brands are combined. For the smaller airlines within the alliance groups, association with some of the mega-carriers alone is a sufficient marketing device to increase recognition and augment passenger numbers. This is simply a case of “if passengers do not find you, they will not fly you” (Bammer, 2000, as cited in Kleymann & Seristo, 2004, p. 121). For the bigger carriers in the group, enhanced economies of scale (Doganis, 2001, p. 76), scope and density (Kleymann & Seristo, 2004, p. 39) beckon, to provide growth quickly while mitigating a host of regulatory and economic barriers. This coincides with the global alliance concept “To contribute to the long-term profitability of its members beyond their individual capabilities” (Star Alliance, 2010, p. 6). Another advantage of such extensive market sway is the collective consumable and asset purchasing power. Doganis states, the Star Alliance group is estimated to save between five to seven percent each year with this strategy (2001, p. 78). In contrast, these combined marketing regimens can be inflexible and force a loss of individual brand identity. As the global alliance brand builds its own characteristics, it will be perceived by the customer to deliver a certain expectation, and if not all of the alliance members fit the model, they may be forced to compromise their own identities to conform, or risk being extricated. This is known as the “domino effect” (Kleymann & Seristo, 2004, p. 17).
The airlines are not the sole profiteer from this vast marketing onslaught. Customer satisfaction, retention and relationship quality is the target of any marketing strategy, and with immensely large global brands and reputations at risk, standards will always be under scrutiny. The consumer perception of these alliance groups is that of a “seal of quality” (Kleymann & Seristo, 2004, p. 39), and all members are logically required to exact some consistency over the service spectrum. To that end, the global alliance groups have combined value adding resources to meet or exceed the expectations of the “high value international traveller” (Star Alliance, 2010, p. 6). Some pertinent examples are: priority check-in, lounge access, additional baggage allowances, priority boarding, global ticketing, common terminals and priority baggage handling. As aforementioned, the consistency and variation with which these additional benefits are delivered can provide a potential drawback. Products vary from brand to brand, for example; Air New Zealand has a premium economy seat (Star Alliance, 1997), of which not all airlines utilise. A customer that purchases this seat flying from New Zealand to Germany with alliance codeshare partner Lufthansa (McCaw, 2010), would in all likelihood be downgraded to an economy seat from England or the United States. Furthermore, differing cultures can also play a role with service delivery. Once again, the customer flying from New Zealand to Germany may enjoy the relaxed Kiwi attitude, but may be overwhelmed by the clinical and formal German approach, or vice versa. Henceforth, Kleymann and Seristo suggest successful brand image and customer fulfilment is particularly relevant to quality and consistency of service (2004, p. 121).
Global alliances offer many joint benefits to consumers from airlines prospering within their own niche, which could not be possible without reliance on international partners. While the phenomenon of globalisation is a reality and people seek to condense and simplify work, time and travel experiences, global airline alliances fit the mould as a reaction to seek balance. At present, the rules of international aviation preserve sovereignty and do not endorse a truly competitive environment. While grandfathering provisions of landing rights at major airports and governmental influence in survivability of flag carriers ensues, the only room for growth from independents is to collude. At this point in time, global alliances serve the needs of both consumers and airline businesses. As with every decision, there are good and bad consequences and not all choices will gratify everyone. Global alliances endeavour to satisfy the majority, while sustaining the future of the alliance members to provide a useful service. Until all nations relax rules around freedoms of the air and airline foreign ownership, so as to furnish a genuine open skies policy, these mega-conglomerates will flourish.
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