Professional Documents
Culture Documents
Airline Industry
Marion M. Bennett*
Department of Management Studies, University of Surrey, Guildford, Surrey GU2
5XH, UK
ABSTRACT
In recent years the airline industry has been in
turmoil. Declining loads, overcapacity and a
reduction in prices in real terms has resulted
in massive nancial losses. At the same time,
the industry has been undergoing change
engendered by, among others, deregulation
and privatisation. Combined, such pressures
have led to airlines forming alliances. This
paper addresses the benets and pitfalls. To
illustrate these points a case study of British
Airways is introduced. The paper concludes
by speculating on the impact such alliances are
having on the airline industry. 1997 by John
Wiley & Sons, Ltd.
Received 12 March 1996; Accepted 2 August 1996
Progr. Tourism Hospit. Res. 3, 213223 (1997)
No. of Figures: 1 No. of Tables: 3 No. of Refs: 29
Keywords: strategic alliances; airlines;
partnerships.
INTRODUCTION
I
n the 3 years leading up to the end of 1992 the
worlds scheduled airlines made losses of
$11.5 billion which is greater than all net
prots since services began 74 years ago (Harkes,
1993). Such losses have resulted from a combina-
tion of factors, namely overcapacity, declining
load factors, a world-wide recession and a move
away from rst and business class travel. During
this period, airlines have been forming partner-
ships with other airlines fostering the process of
globalisation. It is estimated that there are more
than 280 link-ups across the globe involving 136
airlines which vary in form from simple interline
agreements to substantial equity stakes (Gal-
lacher and Odell, 1994). Signi-
cantly, 60% of these alliances have been formed
since 1992. The emergence of partnerships on a
global scale requires research into their impact
on the airline industry. The aim of this paper is to
provide an overview of the development of
strategic alliances in the airline industry includ-
ing an analysis of reasons for their emergence
and speculative assessment of their potential
impact.
THE ESSENCE OF PARTNERSHIPS
A partnership, it can be argued, is akin to a
marriage in that its success depends upon
compatibility, trust and understanding. By
denition a partnership involves at least two
separate entities. It falls short of a merger
although the success of a partnership may lead
to a more committed form of collaboration.
Partnerships vary in the form that they take
and as such they have been variously dened as
networks, joint ventures and strategic alliances
(Porter and Fuller, 1986; Lorange and Roos, * Correspondence to: M. M. Bennett.
PROGRESS IN TOURISM AND HOSPITALITY RESEARCH, VOL. 3, 213223 (1997)
CCC 10773509/97/03021311 $17.50 1997 by John Wiley & Sons, Ltd.
1992). They range from the formal to the infor-
mal and the tactical to the strategic. At the
crudest level, the airline industry has embraced
two types of partnership which can be cate-
gorised as tactical (informal) and strategic
(formal).
Tactical partnerships are loose forms of collab-
oration which exist to gain marketing benets.
They do not usually involve major resource
commitments and nor, as a result, are they high
risk in nature. Such partnerships are encapsu-
lated in code-sharing and feed agreements that
commonly occur between major and minor
airlines. This is best exemplied in the United
States where the hub and spoke networks have
facilitated alliances between commuter/regional
airlines which feed passengers into major air-
lines operating on dense trafc routes.
Consequently, virtually every major US airline is
now tied in with at least one regional airline.
Indeed, by 1986 all 12 major and four national
carriers had formed code-sharing alliances with
commuter airlines (Williams, 1993). Table 1 lists
the major alliances in 1986.
Strategic partnerships tend to be longer where
commitment is sometimes demonstrated by way
of equity stakes either on an exchange or single
carrier basis. A strategic alliance has been vari-
ously dened as
a particular mode of inter-organisational
relationship in which the partners make
substantial investments in developing a
long-term collaborative effort and common
orientation. (Mattsson, 1995)
organisational arrangements and operating
policies through which separate organisa-
tions share administrative authority and
form social links through more open-ended
contractual arrangements as opposed to
very specic arms length contracts. (Go and
Hedge, 1994)
a partnership or long-term, non-equity rela-
tionship that permits partners to meet
strategic goals. (Lau, 1994)
Lau (1994) differentiates a strategic alliance from
an equity investment joint venture on the basis
that a strategic alliance does not require large
capital resources. In the airline industry many
strategic alliances revolve around the need for
such resources making this particular denition
invalid.
With no universally agreed denition of a
strategic alliance, it is appropriate, for the pur-
poses of this paper, to devise a workable
denition. A strategic alliance then can be
dened as a relationship between two or more
organisations which is based on a foundation of
common goals and objectives and entered into to
full strategic ambitions which may or may not
be mutual. Such a broad denition encompasses
the many specic motivations which facilitate
alliance formation and which are considered in
this paper.
Within the airline industry the strategic alli-
ance incorporates shared airport facilities
(check-in, lounges), improved connections (syn-
Table 1. Code-sharing alliances in 1986
Regional carrier Major partner(s)
Air Wisconsin United
Metro American/Eastern
Mid-Pacic Continental
Atlantic Southeast Delta
Henson Piedmont
Horizon Air Alaska
Simmons American/Northwest
Britt Continental/Eastern
Air Midwest American/Eastern/TWA
PBA Continental
Skywest Delta
Express Airlines 1 Northwest
Aspen United
Comair Delta
Pan Am Express Pan Am
West Air United
Pennsylvania A/l US Air
Business Express Delta
Bar Harbor Eastern
Brockway Piedmont
Wings West American
Suburban US Air
Royale Continental
CC Air Piedmont
Rocky Mountain Continental
Chautauqua US Air
Gull Air Continental
Command American
Metro Express 11 American
Crown Airways US Air
Source: Williams, G. (1993) The Airline Industry and the
Impact of Deregulation, Ashgate Publishing Ltd.,
Aldershot.
M. M. Bennett 214
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chronised schedules), reciprocity on frequent
yer programmes, freight coordination and mar-
keting agreements (code-sharing and block
selling). To a large extent, the strategic alliance
incorporates the main features of tactical/mar-
keting alliances, although within the airline
industry there are a great many examples of free-
standing tactical alliances which exist to obtain
the benets of loose collaboration. While such
marketing alliances have existed for many years,
the emergence of the straetgic alliance is a
considerably newer phenomenon in the airline
industry. As a competitive strategy, the strategic
alliance has gained increasing prominence in
recent years across all sectors of industry. Signi-
cantly though, the failure rate of such alliances
is high, with research indicating that up to half of
all audiences fail (Sanker et al., 1995).
MOTIVATIONS
The body of opinion (Porter and Fuller, 1986;
Pfeffer and Nowak, 1976; Faulkner, 1995) sug-
gests that there are ve generic reasons for
entering into a strategic alliance:
(1) To achieve economies of scale and learning.
Thayer (1994) contends that the concept of the
strategic alliance is rooted in the notion that
complementary partners can achieve economies
of scale. Unquestionably, a prime motive for
collaboration amongst airlines is to improve
protability. This is achieved through shared
airport facilities, combined sales operations, etc.,
in combination with an extended network. Econ-
omies are gained through elimination of
duplication and a reduced workforce. There are
also economies to be derived from marketing in
terms of both advertising and code-sharing.
Acquiring new skills and learning from the
operations of another more successful company
are also recognised motivators (Hamel et al.,
1989). Arguably, this generic reason could be
extended to include economies of scope on the
basis that airlines are extending their marketable
networks through franchising, code-sharing,
block spacing and equity stakes in other airlines
(Hanlon, 1996).
(2) To gain access to the benets of the other rms
assets. Due to the regulatory framework of
bilaterals and capacity restrictions combined
with the start-up costs of operating on a new
route, an alliance can offer relatively easy access
to a route. Congestion is a particular problem
both in the sky and on the ground in that slots
and gates at many airports are at maximum
capacity. With the additional obstacle of grand-
father rights, access to the market can be dif-
cult. Allying with another airline also reduces
costs in terms of the supply of aircraft to operate
on a route. Access to products is therefore as
signicant in many respects as access to market.
Linked to both is the human resource issue in
that an alliance surmounts the hurdle of restruc-
turing or mobilising the workforce, an
acknowledged concomitant of expansion. Access
to the market is also important. Harrigan (1992)
states that lower regulatory barriers are opening
up the door for a variety of rms to enter
formerly protected markets through joint ven-
tures. This factor helps explain the strategic
alliances between European and US airlines,
which to date form the majority of partnerships,
in that a US partner provides access to the
worlds biggest domestic market (accounting for
approximatley 40% of the world aviation mar-
ket) while a European partner provides a link
into the newly liberalised aviation market. The
latter is signicant due to heavy congestion at
major European airports such as Heathrow.
(3) To reduce risk by sharing it. There can be little
doubt that setting up an operation on a route is a
high-risk strategy, particularly if such an opera-
tion adds capacity. Such additional competition
can lead to efforts by incumbent airlines to
protect their market, resulting in price wars and
predatory pricing. An alliance with an airline
already operating a route reduces the risk. It also
means that the incumbent airline is exposed to
less competition. Given the small size of many
markets together with the costs involved in
operating a route, collaboration can assist air-
lines in lowering costs and encouraging
protability. Given the lack of prots of the
airline industry in recent years, there can be little
doubt about the high risk nature of this sector.
Indeed, perhaps the best example of collabora-
tion in this sector due to such risks is the
collaborative venture between Boeing and Air-
bus to develop a superjumbo which can carry up
to 1000 passengers.
(4) To help shape the market, e.g. withdrawal of
capacity in a mature market. This is crucial to
understanding airline alliances. Overcapacity is
an acknowledged problem, one solution being to
Strategic Alliances in the Airline Industry 215
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reduce the number of airlines. By collaborating
through alliances, airlines are, in effect, reducing
the competition. Sabena, for example, actively
views its blocked space agreements as a means of
reducing express capacity (CAA, 1994). Equally,
in the alliance between KLM and Northwest
only one service is offered on each Amsterdam
US route even though two services are shown in
the timetable. In the alliances between major and
regional airlines in the United States, a signi-
cant outcome has been a decline in competition
(Williams, 1993).
(5) Speed in reaching the market. There are two
major structural changes which are affecting the
airline industry. The rst is deregulation. The
protection afforded by regulations which have
been endorsed by governments (usually with a
vested interest in ag carriers) is gradually
giving way to free competition. Such deregula-
tion has already occurred in the aviation markets
of the United States, New Zealand, Australia and
Canada. Within the US, which accounts for 40%
of the aviation market, the situation has been
reached whereby ve carriers hold 95% market
share between them. Within the European Union
liberalisation is not due to be completed until
April 1997, at which time member states will be
permitted to y freely within the EU. Recent
alliance formation with and between EU airlines
is directly attributable to the fact that in 1997 the
skies of the EU will be open.
A twin engine of deregulation is privatisation.
Governments of developed nations are under
increasing nancial and political pressure to
relinquish control of their ag carriers with the
result that collaboration between airlines of
different nations becomes not only possible but
inevitable. The airlines of southern Europe
which are heavily loss-making have been kept
aloft by hefty and highly controversial payments
of state aid authorised by the Union. With the EU
policy on state aid of one time, last time, such
troubled carriers as Olympic, Alitalia and Iberia
will look for partners, preferably stronger ones,
to ensure their future existence. For example,
while Iberia is a loss-maker, it does have access
to slots at Madrids congested airport; similarly
Alitalia is an attractive partner in that it is a
major shareholder in Aeroporti de Roma, Romes
primary airport, which monopolises ground
services.
Underpinning this need to reach the market is
globalisation. The changes taking place in the
airline industry are fostering global competition
which poses difculties for airlines wanting to
expand or go it alone. To secure a place in the
aviation market of the future, a presence is
needed in the six major markets: North America,
Pacic, Europe and the markets between them.
This globalisation of the marketplace is a major
force driving alliances (Faulkner, 1995; Roberts,
1992; Ohmae, 1989) in that strategic alliances
enable airlines to compete on a global scale by
offering extensive route networks. Certainly, it is
a commonly held belief that by the turn of the
century only a handful of mega-carriers will
exist. The pressure therefore exists for airlines to
consolidate their positions if they are to survive
into the next century.
(6) Survival. In addition to the ve traditional
reasons for alliance formation, a sixth can be
added, that of survival. This is particularly
pertinent to the airline industry where losses
have become commonplace and where in Europe
liberalisation unfolds fully in 1997. Conse-
quently, attention is largely focused on Europe
where alliances are increasing in number. For
example, in 1994 Swissair conrmed its intention
to acquire a sizeable stake in Sabena. The
rationale for this alliance is Swissairs isolation
from the EU which has caused problems in
acquiring slot and route permits at European
airports. For Sabena, which is heavily loss-
making, the Swiss carrier can provide much
needed nancial resources. Signicantly, Air
France relinquished its 25% stake in Sabena
while Swissair maintained its equity links with
Delta and SIA. As alliances proliferate, so com-
plexity intensivies and nationalism weakens.
ALTERNATIVES TO ALLIANCES
The importance of size within the airline indus-
try is well recognised, but if size is so important
are there not alternatives to alliances to achieve
growth? Strategic growth can be undertaken
either organically or via mergers and acquisi-
tions, but there are problems associated with
both. The former, for example, is hampered by
market access, in particular that of congestion
and slot allocation. The latter is complicated by
legal and political considerations apropos for-
eign ownership and anti-trust rules and is
compounded by national pride. Pertinent to both
M. M. Bennett 216
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is the lead time involved which highlights the
point made earlier about reaching the market
quickly. It is perhaps for this reason that alliances
are currently in vogue. It must be acknowledged,
however, that there are successful examples of
organic growth (American Airlines) and mergers
and acquisitions (British AirwaysBritish Cale-
donian), although examples of the latter tend to
involve airlines of the same nationality. Given
the desire of airlines to establish themselves
quickly in the global marketplace, alliances are
the most obvious option.
Yet size in itself does not guarantee success as
the fate of Pan Am testies. There are examples
in the industry of airlines which have chosen to
go down the route of becoming a niche player.
The most notable and successful example is
Southwest airlines which in 1993 became the
most protable US airline. However, examples of
niche airlines that have not become tied to major
airlines are in the minority.
As evidence of a further alternative route to
growth, some airlines have turned to franchising
as a means of achieving a presence on a route
which would not be economically viable to
operate alone. British Airways (BA) is an exam-
ple of an airline which has adopted this method;
this practice is reviewed in the case study on
BA.
CRITERIA FOR SUCCESS
Stafford (1994) argues that the key factors
responsible for a successful partnership are:
(1) the cooperative strategy;
(2) the relationship; and
(3) the partner.
The pivotal component is the partner (Dev and
Kelin, 1993). Having selected the alliance
approach as the route forward, airlines then need
to decide upon a partner. As observed above, an
alliance has been compared to a marriage (Faulk-
ner, 1995) and like a marriage, a partnership
must be compatible (Walters et al., 1994). To
achieve compatibility, Ohmae (1989) proposes
the following criteria:
(1) trust and understanding;
(2) exibility during the alliance;
(3) cultural compatibility;
(4) mutual benets.
In airline terms, all four are important. Trust
and understanding are often demonstrated by
way of commitment via equity stakes. In the
SwissairDeltaSIA alliance, each airline has a
5% stake in the others. According to a 1994
survey by Airline Business (CAA, 1994), of the
280 alliances in existence 40% involved an equity
holding by one or both airlines. Linked to trust is
exibility. An example of a failure to be exible
occurred in 1987 in a short-lived alliance
between BA and United Airlines in which the
two airlines code-shared over Chicago. How-
ever, United Airliness introduction of services to
the UK in 1991 brought them into direct competi-
tion with BA and the alliance was terminated.
Cultural compatibility is perhaps best demon-
strated by the case of Air France which has
formed alliances with six African airlines moti-
vated by Frances ex-colonial ties (CAA, 1994).
Mutual benets is a prime motivator for entering
into an alliance. An airline might benet from
increased passenger feed while the other may
gain from the marketing benets of being asso-
ciated with a major airline. Certainly this has
been the case in the US where major and minor
airlines enter partnerships. In this situation both
benet from a higher screen display on the CRS.
The overall aim must be to have a winwin
situation, although it is inevitable that the
balance of benets will be skewed. For example
in the BAUS Air tie-up BA reportedly derives
$100m benet from the alliance compared to US
Airs $20m. Yet given that US Air has teetered on
the brink of bankruptcy, nancial gures alone
do not provide the whole picture in terms of
benets. Another example is the alliance
between KLM and Northwest where reciprocity
of frequent yer programmes (FFP) has resulted
in more miles being earned on KLM, but higher
redemption rates on Northwest ights.
PITFALLS
While there are unquestionable benets to be
gained from an alliance, the success rate is poor.
This is because there are a whole host of
challenges of both a practical and political nature
that need to be faced. First there are practical
issues of how to organise the alliance such that it
generates benets for both parties. Specically
this might include coordinating route schedules,
managing FFP exchange and reorganising
human resources. Invariably this will involve
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rationalisation of one sort or another. With the
elimination of duplication in routes served and
check-ins, fewer staff will be required.
Undertaking these tasks can be highly prob-
lematic and intensies as the number of partners
increases. This was borne out in the ill-fated
attempt to form Alcazar in 19921993, an alliance
of four airlines. The objectives of unifying four
separate airlines and forming a single multi-
national management structure and ight
network were tantamount to merger and were
problematic from the outset. In an effort to seek
solutions 17 committees were formed compris-
ing representatives from each airline.
Of equal importance to practical problems are
those of a political nature. Generally these centre
on the issue of control. For example in the case of
Alcazar, it was alleged that its ultimate failure
was due to choice of the US partner. This was
due to existing partnerships between KLM with
Northwest and Swissair with Delta. A further
example concerns a proposed merger in 1991
between BA and KLM which failed over the
equity issue with BA wanting more than KLM
was willing to concede. The real issue at stake
was national pride in that KLM was 38% Dutch
government owned and they did not want to be
seen to be selling the national airline to a foreign
country.
The degree of the problems encountered and
the ability to nd solutions relates to the motives
for the alliance and the potential benets to be
gained. This in turn emphasizes the importance
of choice of partner. In the case of BA, an airline
which has embarked upon building a global
alliance, numerous alliances have been formed
which vary in both problems encountered and
benets to be gained.
CASE STUDY: BRITISH AIRWAYS