The Benefits of Global Airline Strategic Alliances

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Throughout recent decades, three large-scale airline alliances, Star, Oneworld and SkyTeam, have formed and become dominant forces within the industry. They include many of the largest airlines, notably Lufthansa, United and Delta, and have a worldwide reach, which led to their designation as global airline strategic alliances (GASAs). Some experts have raised concern over the dominant position of these groups, claiming that they foster anticompetitive behaviour and hurt consumers. This essay promotes the opinion that the formation of alliances was ultimately slightly beneficial for airlines, passengers, and the industry at large.

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The Definition of GASA

Each of the words that form the acronym GASA, other than “airline,” which is self-explanatory, warrants an investigation. It is logical to begin with the term “alliance,” which is then described by the adjectives. Per Pride and Ferrell (2016), an alliance is a partnership formed to create a competitive advantage, distinct from a joint venture due to the closer integration and the retention of each member’s brand identity. The “global” distinction derives from the scale of the organisations discussed in this essay and the nature of airline operations. Min (2019) claims that the primary purpose of an airline when it joins an alliance is to extend their markets efficiently via code-sharing agreements. When numerous businesses from different regions join such a partnership, they eventually provide shared coverage that covers a majority of the world.

The “strategic” aspect of the alliance warrants an analysis that goes in more detail than the other two items. As Rühle (2017) states, the first airline alliances were simple but have since expanded to complex multi-partner arrangements that cooperate in different business segments and assign each member a specific role. The strategy aspect comes from this integration, with airlines choosing to combine their resources to create advantages in the long term. Samunderu (2019) describes the primary objective of the effort as the maximisation of efficiency through cost-saving and synergy creation. In addition to expanding their routes, GASAs can also generate economies of scale, which potentially enables their members to perform better than they might be able to alone.

The Emergence of GASAs

The First Airline Alliances

Alliances between airlines have a lengthy history, but GASAs have only emerged relatively recently. Cook and Billig (2017) note that the rudimentary forms of a partnership, inter-line and code-share agreements, were first formulated decades ago to expand airlines’ market access. With that said, they did not meet the requirements for a strategic alliance because the companies only agreed to take on each other’s passengers without committing further to the partnership. Taneja (2016) suggests that the beginning of the modern form of the strategic alliance was the 1997 joint venture between Northwest and KLM, which reduced the operating costs of both and started a trend. Shortly after seeing their success, airlines worldwide began imitating the structure and generating increasingly large alliances. Global ventures would emerge soon after, though they would go through some permutations before reaching their current state.

The Origins of GASAs

Various airlines sought to expand their reach and improve their performance by creating and joining alliances, but only a small number of such arrangements reached global success. Halpern and Graham (2018) name the three current GASAs, Star, Oneworld and SkyTeam, though they also mention an unnamed fourth alliance that dissolved and merged into these three. The Star Alliance was formed when Lufthansa’s executives saw an opportunity for expansion despite lacking the resources for such an effort and contacted four other airlines whose CEOs they knew personally (Faulkner et al., 2019). The other two would follow, starting small but eventually expanding into large networks, with the Star Alliance having 28 members at the moment (Faulkner et al., 2019). Their current power and reach in the market make it unlikely that similarly powerful alliances can emerge using the same approach.

Effects of Alliance Formation

It is challenging to estimate the effects of joining an alliance on a company’s passenger number or revenues because its performance in the event of it choosing not to enter remains unknown. However, Vasigh and Fleming (2016) find that, compared to airlines that did not join alliances, the traffic growth of those that did was 9.4% higher on average, with Star and SkyTeam showing the highest growth. At the same time, the passenger counts of Oneworld members decreased following its formation. This result may be interpreted in numerous ways, making the effects of joining a GASA, specifically, inconclusive. With that said, Kleymann and Seristö (2017) cite a Gemini Consulting report suggesting that a tightly integrated alliance can help cut the costs of its members by over 10%. With GASAs presenting the most robust platform for such efforts, they have the potential to benefit a company in that regard substantially.

The Effects of GASAs on Aviation

GASAs and Passengers

On the surface, GASAs appear to be a danger to consumers, especially in regions where their members control a majority of the flights. The emergence of large and powerful alliances that outperform and eventually eliminate the competition would create the ideal conditions for an oligopoly that could raise prices without receiving a backlash. However, alliances are not mergers, and each member within one still operates independently to a degree. As Forsyth and Wolf (2016) highlight, fare coordination within an alliance is illegal, and members compete with each other in city-pair markets, possibly more aggressively than in locations where partnerships are not present. As a result, the problematic theoretical effects of GASA formation may not have necessarily manifested for fares.

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Empirical studies find that this assertion is most likely accurate, but they also highlight several other noteworthy findings. Brueckner and Singer (2019) claim that, between 1997 and 2016, alliance airlines have been consistently charging lower fares than their non-alliance counterparts, and antitrust immunity (ATI) also reduced prices instead of increasing them. However, prices do not necessarily communicate the entire customer experience, and there may be some issues in widespread GASA protection. Fageda et al. (2020) review the data of the study by Brueckner and Singer (2019) and find that, while prices decreased when it was granted, so did the quality of the services provided. As such, the choice to reduce the amounts of regulation applied to GASAs will not necessarily benefit passengers but rather achieve a neutral and possibly undesirable change.

GASAs and Airlines

The potential for financial performance improvement is the primary reason why an airline may seek to join a global alliance. Kiraci (2019) finds that when Latam Airlines, Delta Airlines, and Japan Airlines chose to join GASAs, their financial results improved. However, the same research shows that Austrian Airlines’ and Singapore Airlines’ performance has become worse following their joining, and many other companies saw no changes. As such, it is impossible to conclude that carriers either consistently benefit or are harmed by the decision to join an alliance. This finding contradicts the theory and the ideas proposed above, as, despite the traffic growth and cost reductions associated with partnerships, there is no improvement. There are multiple reasons why such a tendency may be taking place, though none of them has been conclusively proven to be the primary factor.

Other empirical studies confirm the result that the decision to join an alliance does not affect an airline’s performance. Min and Joo (2016) theorise that the possible causes are either that the structure fails to generate the advertised efficiency improvements or that the lack of differentiation created by shared facilities offsets the advantages. The second idea is consistent with Forsyth and Wolf (2016), who propose that the increased substitutability of alliance partners leads them to reduce prices as a means of competing, driving down revenue. Douglas and Tan (2017) provide the additional explanation that non-alliance competitors, particularly low-cost carriers, have remained viable, defeating one of the primary purposes of forming the partnerships. Despite their efforts, alliance members generally fail to extract any benefits from their new environment that are not offset by other considerations.

GASAs and Competition in the Aviation Industry

A significant potential effect of alliances, and GASAs, specifically, on the industry is the elimination of members who do not join one because they are no longer competitive. Dobson (2017) notes governmental concerns over such a scenario, which have led to the discussion around granting them antitrust immunity. Zou and Chen (2017) also claim that code-sharing agreements with alliance partners are more profitable than those with unaffiliated airlines. With that said, as described above, it is likely that the situation has not taken place in reality, with non-alliance competitors remaining sustainable. While there may be some competitive advantages to joining an alliance, they may not be significant enough to drive any substantial changes in the industry. Competition continued taking place as usual, with unaffiliated airlines finding approaches, such as differentiation, to offset the efficiency advantages conferred by GASAs.

With that said, competitiveness in the aviation industry is not well-understood, in general, in part because it is challenging to find appropriate metrics. Gillen et al. (2019) make the case that bilateral air service agreements may not be applicable because of the emergence of carriers, which can help members circumvent restrictions. As such, a different approach is required, one that accounts for the new developments in the industry and provides a more accurate picture. Seo (2020) reviews the usage of simple accounting metrics as well as specialised instruments such as traffic, passengers and load factor changes but finds that a comprehensive framework has not emerged yet. As such, while alliances appear to have not had a significant effect on competition in the industry, they may have had consequences that are still not clear.

GASAs and the Structure of the Aviation Industry

While the formation of GASAs may not have changed competition in the airline industry substantially, it may have changed how it is organised. The global nature of the alliances is significant because it means that large, renowned airlines such as Lufthansa gained access to destinations worldwide. Graham et al. (2016) claim that the creation of alliances intensified hub-based traffic and assert that the motivation for alliance creation may have been the domination of long-haul routes. GASAs now control a large share of intercontinental traffic, which is not facing active competition from new threats such as LCCs at the moment. They appeal to upper-class travellers who need high-quality services and can afford them, using alliance-wide standards to establish a consistent standard. However, this trend may be changing recently, as LCCs transition into the long-haul market and challenge the dominance of network carriers.

It is challenging for LCCs to apply their traditional point-to-point, small-airport model to international travel. The no-frills approach can also be problematic, as services such as catering become substantially more needed on lengthy flights. The illiberal nature of the sector, which often places severe restrictions on this transit mode, is also an issue due to the difficulty new non-alliance entrants may have had in securing the necessary permissions. However, Renold et al. (2019) claim that with the relaxation of policies and the introduction of newer, more efficient aeroplane models, LCCs have been entering the market and may be viable. Soyk et al. (2017) add that they can achieve savings of up to 33% over legacy hub carriers, 24% of which are sustainable. They can translate this advantage into lower prices, attracting cost-conscious customers and becoming a valid threat to GASAs. However, long-haul LCCs are still a relatively new phenomenon, and it is challenging to predict how the situation may develop.

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Conclusion

Overall, GASAs appear to have restructured the airline industry, sometimes achieving positive results, but generally failing to create substantial improvements. The passengers benefited from slightly lower fares compared to non-network carriers, but the airlines saw few to no performance changes. Competition in the industry also did not change meaningfully, mostly focusing on price over innovation due to the homogeneity of the services provided by alliance carriers. It is possible to argue that the global reach offered by GASAs enabled their members to avoid competition with LCCs. However, this trend may be coming to an end, as LCCs are entering the long-haul market and demonstrating substantial cost advantages.

References

Brueckner, J. K., & Singer, E. (2019). Pricing by international airline alliances: A retrospective study. Economics of Transportation, 20. Web.

Cook, G. N., & Billig, B. (2017). Airline operations and management: A management textbook. Taylor & Francis.

Dobson, A. (2017). A history of international civil aviation: From its origins through transformative evolution. Taylor & Francis.

Douglas, I., & Tan, D. (2017). Global airline alliances and profitability: A difference-in-difference analysis. Transportation Research Part A: Policy and Practice, 103, 432-443. Web.

Fageda, X., Flores-Fillol, R., & Lin, M. H. (2020). Vertical differentiation and airline alliances: The effect of antitrust immunity. Regional Science and Urban Economics, 81. Web.

Faulkner, D., Child, J., Tallman, S., & Hsieh, L. (2019). Cooperative strategy: Managing alliances and networks (3rd ed.). Oxford University Press.

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Forsyth, P., & Wolf, H. (Eds.). (2016). Liberalisation in aviation: Competition, cooperation and public policy. Taylor & Francis.

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Halpern, N., & Graham, A. (Eds.). (2018). The Routledge companion to air transport management. Taylor & Francis.

Kiraci, K. (2019). Does joining global alliances affect airlines’ financial performance? In C. Akar & H. Kapucu (Eds.), Contemporary challenges in business and life sciences (pp. 39-60). Ijopec Publication.

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Min, H., & Joo, S. J. (2016). A comparative performance analysis of airline strategic alliances using data envelopment analysis. Journal of Air Transport Management, 52, 99-110. Web.

Min, J. (2019). Protecting trustworthiness in strategic alliances: Open versus closed alliance networks to prevent organisational disruptions. In T. K. Das (Ed.), Managing trust in strategic alliances (pp. 75-102). Information Age Publishing Incorporated.

Pride, W. M., & Ferrell, O. C. (2016). Foundations of marketing (7th ed.). Cengage Learning.

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Samunderu, E. (2019). Air transport management: Strategic management in the airline industry. Kogan Page.

Seo, G. H. (2020). Competitive advantages of international airline alliances: A critical review. Journal of Business and Public Administration, 11(1), 139-145. Web.

Soyk, C., Ringbeck, J., & Spinler, S. (2017). Long-haul low cost airlines: Characteristics of the business model and sustainability of its cost advantages. Transportation Research Part A: Policy and Practice, 106, 215-234. Web.

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Vasigh, B., & Fleming, K. (2016). Introduction to air transport economics: From theory to applications (2nd ed.). Taylor & Francis.

Zou, L., & Chen, X. (2017). The effect of code-sharing alliances on airline profitability. Journal of Air Transport Management, 58, 50-57. Web.

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