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... [continues]
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