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Strategic Alliances - Alliances in Aviation Sector and its Benefits and Impacts
Solution
Executive summary
The paper is written to understand the importance of strategic alliance in the airline industry. It considers various management decisions that are crucial to managing the alliance and the factors that are important for such alliance. The paper finds out that alliance in airline industry s crucial for any individual aircraft carrier to enter into a market that is unreachable on the individual ground. The individual companies can use this alliance to enter the market of their choice without thinking or working enough through various political, economical, technological, social, or legal environments.
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Introduction
This paper details the change in the aviation sector that has brought more standardization and better management. The first question analyzes the drivers that are relevant to the today's globalized economy for the formation of global airline networks. The second question addresses the important decision making of an airline company while selecting any new foreign market taking the example of the last entrant of Star Alliance called Eva Air. The third question evaluates the joint management that is used to manage the Star Alliance about achieving its corporate objectives.
Drivers Responsible for Global Airline Networks
There are various globalization drivers that are responsible for the various airlines going global. The move of airlines towards global networks is because it provides profitability by helping them use new sources of revenue along with keeping the cost of investments low. The various collaborations have benefited greatly in various forms. However, these benefits vary from airlines to airlines depending on the code share routes, and the output an airline can generate from the same.
This section will help to understand the global drivers that changed the focus of airlines towards alliances that are helping them use the efficient market and resources, and help them generate ample revenue that keeps them going. The alliances help airlines counter the economic issues and keep them immune from any antitrust laws. Also, key drivers like joint marketing and entry into the exclusive club of airlines get them the stage from here they can garner customer and sponsors' trust.
Mentioned below are few of the key drivers who take credit for pulling airlines to go global:
(i)Economies of Scale
Economies of Scale states that per unit cost go down when size of production of product or services increase. The cost reduces more over time as the companies learn and specialize in the increased production (Iatrou & Oretti, 2007). Taking this concept into consideration, it can be said that as the economies of scale of airlines regarding a number of aircraft, seats and fuel goes up (in tandem with growing number of passengers), their costs of operation falls. Also, longer be the route of an airline, more beneficial it will be for it utilizes this driver that leads to reduced fuel costs and other included elements. The alliances, if done with international airlines, it gives the company more opportunity to fly longer distances in other countries, thus increasing the opportunity to utilize economies of scale.
(ii)Economies of Density
Economies of Density states that the per unit costs go down when there is a surge in traffic, and not just by expansion in the size of the fleet or seats (only the current traveling goes denser due to a high number of traffic). This can push airlines to use airplanes that are large, thus saving costs and delivering a high load in every flight. This can also lead to better utilization of facilities such as manpower, and others. Airlines can achieve this driver of growth through a merger with other airlines or say with global alliances.
(iii)Economies of Scope
Economies of Scope states that more the different kinds of output, less will be the cost of producing them together. Regarding airline business, it can be achieved when airlines add more nodes – destinations – to their flying destinations. This increased access to new routes helps it reduce the cost per unit. In the airline business, it said that the airlines form alliances mainly due to the same reason – Economies of Scope. This driver will be more beneficial for smaller airlines than the bigger players.
(iv)‘Codes Sharing Routes’ Leading to Large Revenue
In alliances, airlines agree on code share, that helps them mutually arrange the schedules and fares, that helps their passengers with hassle free traveling experience and, in turn, generate far greater revenue. This agreement also leads to a reduction in the average travel fare.
(v)Marketing and Branding Benefits
The alliance gives an airline opportunity to sell its tickets to any location wherever the alliance has spread its wings; thus, any individual airline does not have to rely on its distribution channel anymore. This wide network of ticket distribution improves its image in the eyes of flyers, particularly when they see the range of destinations their favorite airline covers. This raises the brand value of the particular airline, thus providing more opportunities in the future. The access to the alliance will help the airlines to get the benefit of "indirect free advertising", or it can be said that any local airlines can demonstrate itself as a global brand and can promote at all the access points globally.
(vi)Financial Economies
Financial Economies states that increase in scale gives the company more security from risks and better return on its assets, and also there is less fluctuation in cash flow of the company. The increased network and access to different markets, airlines get the opportunity to know and grow in the new market (OECD, 2008). If – instead of relying on their own countries funding – they generate funds from various economies around the world, then it will protect them from the impact of any failing economies in one part of the world. Their interconnectedness will keep their cash flow running all the time, and they will have enough buffer to sustain the loss.
(vii)Joint Purchasing
Joint purchasing of raw materials or any of the supplies from suppliers by the alliance helps them get appreciable deals, whether it is spare-parts, fuel or crew training. Even aircraft can be purchased at better prices when deals are done jointly.
(viii)Control on Barriers to Entry
The alliance reduces the barriers to entry for any particular airlines into any new market. It helps in cost-effective entry and that too with the access to slots, as airports that have constraints on its capacity are less likely to allow new airlines to schedule the arrival or departure. The alliances, in general, dominate the airports and enjoy a greater degree of control.
The other benefit is that the alliances utilize the economies of density, thus provides facilities to the passengers at lower costs that can’t be achieved by individual service providers (Swelbar, 2015). Also, there is less regulatory observance towards these alliances which is the key that helps new partners in a grand alliance to access the market without any fear of regulators and fear of losing on any compliance issue.
(ix)Learning
The globalization helps gain more exposure and learning, which leads to improved efficiency. It helps airlines to learn different managerial perspectives from various airlines inside out and improve their service quality. Not only the management ideas, but technologies can also be shared that can improve the daily operations that can lead to better customer service.
According to Iatrou and Oretti (2007), when any airline joins the network, they are introduced to various processes that even requires them to improve or completely change their current operational practices, information technology, management structure, and others. This leads to a series of sessions that allow the new entrant to learn multiple of things that are more advanced and standardized. These integrations and changes help the incumbent to become more competitive and get the edge on the market in comparison to other airlines.
The alliances also help in combined improvements on any individual components of the alliance. The alliances bring more heads to think in one direction; that leads to more innovative thinking and processes that are beneficial for the passengers and the respective companies in return.
Alternative Strategy for New Foreign Market
When an individual airline tries to enter into foreign market on its own, it faces numerous challenges, few of them are mentioned below:
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(i)Political: The political situation of any country impacts the large investments done by incumbent airlines. If the political situation is stable, then it will be easier for the airline move ahead, but if there is the unstable political situation, then it has to face various challenges such as changing rules and regulations that will impact its decisions.
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(ii)Economic: The economic situation of a country decides whether an airline should enter into that market. Failing economy may bring fewer travelers, thus poor revenue and a growing economy indicates a surge infrequent flyers, thus more revenue.
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(iii)Social: The social characteristics will decide whether the people will accept the new airline. Their choice is paramount in airline or mode of travel selection, thus impacting the company's revenue. If the social factor is favorable such as people prefer to use aircraft more than other modes of traveling, then it will be a profitable decision for the airline.
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(iv)Legal: There are various regulatory frameworks in various countries, and compliance to all those regulatory issues is important for any airline to conduct their business. Therefore, the airline has to see whether it can fulfill all the regulatory requirement of the chosen country before investing its money and time over it. Regulatory issues can be various such as compliance to environmental laws, passenger safety laws, and others.
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(v)Airport Capacity: The airline has to see whether there is enough capacity for scheduling its arrival or departure time at the airport that it will be using.
As in most cases, airports do not allow more new schedules due to lack of capacity, and it will be a big constraint even if the airline fulfills all the criteria above.
Thus, from above, it can be stated that if an individual airline decides to enter into the foreign market, then it has to face various issues before even creating a roadmap to play in the new market. However, the same airline can choose alternative route to enter the same market with less cost and without even juggling with all the elements of barrier (Debbage, 1994). The alternative route is to join any existing alliance that is operational in that particular country. The alliance will help it in various ways such as no prior requirement to judge the regulatory framework, or bother about the airport capacity. This is the most cost effective mode of entry into the country of choice as almost all the issues are already taken care of by the existing alliance.
Example: Eva Air
Eva Air is a Taiwanese aircraft carrier of Evergreen Group based in Taiwan, founded by Chang Yung-fa on March 8, 1989. Eva Air is the last carrier to join Star Alliance in 2013 (Evaair, 2015). The entry of Eva into the alliance has given it access to more than forty countries which has helped its passengers enjoy the benefit of traveling around on their favorite carrier. Eva Air now provides its passengers benefits such as frequent flying points that are redeemable for any aircraft carrier of Star Alliance, better connection to all the local and international destinations without bothering about delays, access to exclusive lounges of Star Alliance at various airports, less fares due to the increased economies of scale, access to round the world fare options, and access to Star Alliances' air-passes.
Thus, we can see that how joining an alliance has helped Eva Air to improve its customer serviceability and thus more passengers in return. Not only better customer services, but it has also surpassed tedious job of getting access to different countries individually. It is now able to move anywhere in the premise of Star Alliance without any restrictions.
The joint service of Eva Air with Star Alliance gave it access to code-sharing, easy baggage check-in, joint operating schedules (thus haggling for schedules at individual airports), VIP lounge access, and cooperative development of market programs. Now passengers and cargo of Eva can seamlessly make connections to places like Hong Kong, Macau, Penang, and Bangkok.
This alliance has also helped Star Alliance to increase its network to new geographic locations such as Kaohsiung in Taiwan and Surabaya in Indonesia. This mutual benefits will work as a building block for both in the long term.
Star Alliance Management
The Star Alliance joint management manages the organization through performing the following function:
It acts as a central point for communication and exchange of information, facilitating the access to expertise and experience possessed by particular companies.
It protects the network against ‘stowaways’ through its neutrality and by observations of the individual companies and their actions.
It acts as an archive of information on results and best practices regarding the approach to the market, and innovation.
It maintains defined standards of behavior within the network, applying – if necessary, sanctions against those who violate them.
There is few internal competition in the Star Alliance, and it has two below mentioned effects and management decisions:
The network flexibility increases and more innovations get introduced, and it also secures the supplies. However, one down side is, it has the potential the break the business to such a level that none of the partner airlines will be able to achieve the economies of scale.
It helps determine the premise between the optimal and excessive competition. Few partners preference will be a higher order or use of the suppliers and buyers within the network. However, this step will not help much to the Star Alliance in the long run due to various associated issues.
The major focus of management of Star Alliance stays on its management of Human Resource. The airline members of the Star Alliance cooperate predominately on a non-equity basis in many business fields (Goh and Uncles, 2003). The management has kept the focus on two ends of management, that is, standardization and specialization. The standardization is required as the business of Star Alliance is dependent on multinational customers. These multinational customers are in the habit of comparing standards from all over the world. Therefore, standardization becomes necessary (StarAlliance, 2015). There are two types of international travelers can be found for Star Alliance, either businessman or tourist. Businessmen having the broad knowledge of various things around are more demanding than tourists who are not much concerned.
The Star Alliance management allows the selection of employees on a regional level and is by the respective airline. Being an organization that has large employees diversity, does not face issue about language or cultural barriers. Due to the presence of multinational competitors like One World and Sky Team, the organization has focused on standardization as it influence the global market and calls for a strategy that focus more on this particular factor.
The management of Star Alliance has tried to differentiate itself on various parameters such as customer needs, distribution channels, and availability of substitutes, market structure and fulfilling the host government demands.
To tackle customer needs, Star Alliance focus on individualization strategy. The individualization strategy calls for adaptation according to the region, nation, or at the local level. The distribution channel in different countries requires country specific travel agents, global distribution systems, online bookings, call centers and ticket desks which Star is taking care.
Conclusions
This study concludes that in today's highly globalized and competitive market, it would be wise to choose the strategy that calls for less investment with a better benefit like the airlines industry. It has remodeled itself gradually into a network that is not only integrated, but it is also standardized and managed in such a manner that it is becoming a role model for other industries. The alliance in aviation has helped airlines to break the barrier to entry and now they are able to enter into the country of their choice without much haggling.
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Debbage, Keith G. "The International Airline Industry: Globalization, Regulation And Strategic Alliances". Journal of Transport Geography 2.3 (1994): 190-203. Web.
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Evaair,. "Airline Partners - EVA Air | America". N.p., 2015. Web. 13 Dec. 2015.
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Evaair,. "Star Alliance Network - EVA Air | America". N.p., 2015. Web. 13 Dec. 2015.
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Goh, Kevin, and Mark Uncles. "The Benefits Of Airline Global Alliances: An Empirical Assessment Of The Perceptions Of Business Travelers".Transportation Research Part A: Policy and Practice 37.6 (2003): 479-497. Web.
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Iatrou, Kostas, and Mauro Oretti. Airline Choices For The Future. Aldershot, England: Ashgate, 2007. Print.
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OECD,. The Impacts Of Globalisation On International Air Transport Activity. Guadalajara, Mexico: OECD & International Transport Forum, 2008. Print. Past Trends And Future Perspectives.
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StarAlliance,. "Member Airlines - Star Alliance". N.p., 2015. Web. 13 Dec. 2015.
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Swelbar, William. "The Benefits Of Airline Alliances". Forbes. N.p., 2015. Web. 13 Dec. 2015.
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