Alliances in the Airline Industry

Topics: Airline, Airline alliance, Star Alliance Pages: 13 (4350 words) Published: September 2, 2009
Executive Summary
Throughout the years there has been an increase in strategic alliance formation in order to combat a number of factors creating uncertainty in the market and to share knowledge and know-how. The formation of alliances has also occurred in the Airline industry; this report discussed how these alliances gain economies of scales and synergies. The deregulation of the airline industry has open doors to more competition sand to further agreements such as the “open skies”, these agreements allows airlines to serve consumers more efficiently by offering extensive domestic, continental and intercontinental service networks. Through the formation of alliances, airlines have created economies of scale through extensive use of a hub-and-spoke network and through technological advancements. Economies of scope have also been created through the increased supply like guaranteed seats availability, blocked slots arrangements and profits made from code sharing operations on a global scale. The formation of alliance has created clear benefits for both the consumers and the airlines. The first is code-sharing which allows airlines to sell seats on partner’s aircraft as if it were its own, by doing so the airline is able to offer more destinations. Secondly airlines can offer frequent-flyer programmes give passengers an opportunity to earn free tickets through accumulation of air miles. Thirdly airlines benefit from utilizing intangible resources like technology, reputation and corporate culture, also by maximising physical assets when airlines do not need to own and operate their own air crafts to earn revenues Alliance also has a number of disadvantages that will affect the consumer and the airlines. These include; (1) reduction of competition, (2) oligopolization of the market and the danger of creating cartels, (3) the industry is becoming more concentrated with 80% of international air travel tied up in the three major alliances,(4) there will be a clear reduction in the number of flights and (5)entering into an alliance can be very draining in terms of time and resources. Alliances in the future will still continue to play a major role in the airline industry through the continue innovation of the air fleet and the expansion of alliances because passengers demand travel to destinations beyond a single airlines network. The future for airline alliances holds still a lot of potential especially for airlines in the developing and emerging nations.

Strategic alliance in the airline industry started in 1978 when PanAm entered into an agreement with Air Afrique. This trend of forming alliances grew faster after airline deregulation. Strategic alliances has been defined by Wheelen and Hunger as “an agreement between firms to do business together in ways that go beyond normal company dealings, but full short of a merger or a full partnership.” This definition embraces the facts that alliances are not just contracts of sales or supplier they are a sharing experience and knowledge. Throughout the years we have seen a number of alliances being formed this is mainly due to; (1) Globalisation, (2) Deregulation, (3) Uncertainty in the market and (4) gain access to new international markets. Many companies also joined an alliance in order to reduce the financial risks and research and development costs. Alliances have been historically formed for the purpose of sharing knowledge and know-how in order to maintain competitiveness and create innovation. Analysis of Alliances

In 1978 US domestic air transport deregulation had a dramatic effect on airline industry on a whole. Air services came under a threat of fierce competition where choices of low pricing and a possible growth of oligopolistic behaviour among airlines could consequentially lead to anticompetitive conduct. After US deregulation many countries had followed in their own domestic markets. US concluded ‘Open skies’ with many...
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