Presentation On Impact Analysis Of Strategic Alliances

Impact Analysis of Strategic Alliances

INTRODUCTION  Deregulation has brought various changes in functioning of

the aviation industry.  Alliances are strategies that are used by the companies while involving partnership.  Strategic airline alliances are dominating in the current air transport industry with the largest airlines of the world which belongs to the alliance groupings – Star Alliance, Oneworld, SkyTeamand Wings; which represent 56% of world’s Revenue Passenger Kilometers (RPK).

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PURPOSE OF THE STUDY  To study the impact of alliances.  To study the disadvantages created by alliances.  To understand the benefits of the alliances.

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LIMITATIONS OF THE STUDY  The data used in this dissertation reinforced the proposed

theoretical framework. However, before saying anything conclusive it is important to recognize that some cultural biases could exist.  Research results although encouraging the work on the boundaries of the firm, still has some limitations due to nature of the data.  Although the research has been done all to reduce the subjectivity but as the research was mostly based on human perceptions related to various factors, which may lead to a subjective result.  Time available for the completion of the project was limited.

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STRATEGIC ALLIANCES  It is a formal relationship between two or more parties to

pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.  Partners may provide the strategic alliance with resources.  The alliance is cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts.  The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.

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TYPES OF AIRLINE ALLIANCES

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1. Cost Sharing Ventures  It involves two or more airlines jointly purchasing equipment,

thereby benefiting from bulk discounts.  Example: In late 1990s, joint purchasing of a fleet of around 100 Airbus A 318/319 aircraft by three Latin American airlines (Group TACA, TAM, and LAN Chile). They were not cooperating.

2. Asset pools  These occur in the area of maintenance, where airlines might

pool the spare parts (in some cases even engines) they store at outstations or joint warehouses. 

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3. Pro-rate agreements

 This is the simplest form of commercial agreement.  An agreement on the revenue which airlines A pays airline B if

B carries A’s passengers on a route operated by B.

4. Code sharing  On a single route or across larger parts of the respective

networks.  Airline A sells a flight under its own airline designator code, even though that flight is operated by another airline, B (i.e. A & B ‘share’ a designator code

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5. Feeder  Special form of code-sharing between a larger and a smaller

partner.  A smaller (typically regional) airline flying under its own brand operates a code share to a larger airline’s hub.  Example: Eurowings (prior to Lufthansa’s investment) used to be a fully independent regional airline, feeding KLM’s Amsterdam hub from several cities in Germany, cooperating with Air France on routes to Paris, and also operating some routes solely on their own code.

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6. Marketing alliances  Includes joint advertising (sometimes under an alliance

brand name), joint sale, and joint frequent flyer programmes; these typically go together with strategic and sometimes regional code shares.  Marketing alliances are frequently multilateral, and require extensive coordination between partners.  A typical marketing alliance is Oneworld.

 

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7. Joint ventures  JV is a ‘complete’ marketing alliance in which JV partners apply

joint pricing and revenue sharing on a route or a set of code shared routes.

8. Integrated Feeder  It is between a larger carrier and a regional airline where the

smaller airline operates fully and exclusively under franchise to feed its partner.  The larger airline establishes ‘dominated network’ around it.  Example: In USA, where major carriers have their integrated feeders. In Europe, a dominated network is maintained by Lufthansa with regional airline Lufthansa Cityline and also by British Airways. 11

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9. Equity stakes  Equity stakes are sometimes a way to pre-empt competitors from

tearing up with a third airline. In other cases, they are sought because they are assumed to ‘cement’ an alliance, providing the investor with better control over its partner.  Swissair was an airline which pursued a policy of buying equity in its alliance partners. (Upto 2001)  Other equity links include SAS/Lufthansa in Spanair, SAS in bmi British Midland International, Singapore Airlines in Virgin Atlantic and Air New Zealand.

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REASONS BEHIND BUILDING STRATEGIC ALLIANCE  It enables business to have competitive advantage over their

competitors through access to a partner's resources, including technologies, capital, markets and manpower.  To save time and boost productivity by not having to develop their own, from scratch.  To benefit from more-established channels of distribution, marketing and better-known companies.  For various other reasons like cost reduction, manufacturing, geographic expansion, and other supply chain synergies.

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CONTD…  Co’ involved in alliances earn as much as 18% of their

revenues from their alliances.  Due to increased intensity of competition.  Need to operate on a global scale.  Alliances with international partners can leverage the growth.

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GLOBAL AIRLINE ALLIANCES 15

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STAR ALLIANCE  It is the world's first and largest airline alliance.  Founded in 1997, its name and emblem represent the five

founding airlines, Air Canada, Lufthansa, Scandinavian Airlines System, Thai Airways International and United Airlines.  Star Alliance is headquartered in Frankfurt am Main, Germany.  It has 21 full and 3 regional members, with another three expected to become full members by 2009.  The alliance's market share is 28% of the global market based on revenue passenger kilometers (RPK).

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SKYTEAM  SkyTeam is the second largest airline alliance in the world.  It has 11 full members with 2 pending members.  Aeromexico, Air France, Delta Airlines and Korean Air launched

the SkyTeam on June 22, 2000.  SkyTeam also operates a cargo alliance called SkyTeam Cargo.

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ONEWORLD (ONEWORLD MANAGEMENT  It is the third largest airline alliance.  Oneworld was established in 1999.  Its management company is based in Vancouver, British

Columbia, Canada.  It has 10 members and 17 affiliates.

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RESEARCH METHODOLOGY  Research design

It is descriptive.  Data Collection

ü Primary Data: FAQ’s and One-on-One interviews were conducted. ü Secondary Data: It has been collected from various sources - magazines like Business world, business and marketing magazine, ET500 by ET intelligence group, Aviation Times and Economic Times. Articles and other data from internet were also taken into consideration to get the relevant information.

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IMPACT OF ALLIANCES a) Passenger Traffic  It provide a seamless travel which causes the increase in passenger traffic.  And also play an important role in the joint FFP which helps in an upsurge in traffic. ü Rate of increase in traffic will likely to be stabilized. b) Traffic by route type Types of routes:  Hub-hub routes  Hub-non-hub routes

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CONTD… c) Traffic by type of cooperation

   

Types of cooperation: FFP Code share Strategic Alliance with antitrust immunity and Strategic Alliance without antitrust immunity

 

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CONTD… d) Traffic by alliance groupings Three major Alliances are:  Skyteam  Oneworld  Star e) Traffic by airline size  Large size airline  Middle size & Small size airline

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CONTD… f) On the members of alliance in terms of branding

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CASES OF FAILED ALLIANCES  CASE I

In the late 1980s, SAS bought stakes in a number of airlines, including Danair of UK, LAN Chile, Continental Airlines, and charter carrier Spanair. Cross-shareholdings were planned with Swissair and Finnair. Reason: e) Failed to secure sufficient management influence over their partners. f) Strategy was too expensive and involving links with carriers that would not bring real scope benefits to SAS.

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CONTD…  CASE II

In 1998, Dutch KLM and Alitalia announced a full merger of their activities. It involved little overlap between partners. KLM provided financial assistance to help Alitalia setting up operations at its newly opened and poorly performing hub at Milan-Malpensa airport. Reasons: e) Alitalia had failed to restructure its internal organization. f) Alitalia had not achieved an acceptable level of operational reliability at Malpensa airport. g) Also the incompatibility of company and national cultures.

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DISADVANTAGES  Global alliances between airlines could be damaging in the

long run as it reduces the competition on primary international routes and then making it harder for nonaligned airlines to compete nationally as well as internationally. The competition is likely to reduce if there is no new entry in the markets.  When a financially distressed airline involved in a merger, there is a sharp rise in the fare levels. Thus, the passenger has to bear the price discrimination in competitive markets.  Drive the competitors out of the market.

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CONTD…  It may expose the airline to several obstacles such as

entrench competition, hostile government regulations and additional operating complexity.

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BENEFITS  It is the opportunity to achieve its objectives & it also help

the company in using the newly acquired capabilities (knowledge, technology and expertise) by itself and for its own purposes.  It also help in reducing the operating cost.  Airlines can make use of the strategic arrangement to reduce their individual airline’s financial risk.  It helps in winning the political obstacle.  Provide added value to customers.  Strengthen reputation – credibility.

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CONTD…  Synergy and competitive advantage are fundamentals that

lead businesses to greater success.  Access to new markets, expand customer base.  Increase market presence.

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SUCCESS FACTORS  Set up of realistic and specific goals and objectives.  Apt resources to be allocated to the alliance.  Communication amongst the airline partners should continue

and success should be measured from time to time.  Value proposition clearly understood by both airline partners.  Senior management commitment.  Cultural fit – management philosophies.  A clear prospect and understanding of future path of the alliance is necessary.  Trust and co-operation among the partners are necessary.

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CONCLUSION Strategic alliance is useful and it can exist in many forms. As already mention, cooperation in the code-sharing, combining of knowledge, skills and technology, marketing of each other’s using existing distribution networks and cofunding of projects are the collective forms of strategic alliances.

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THANK YOU

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