Getting Airline Alliances off the

Ground
(International Business 2: Case Study)









Submitted By:
Manisha Tripathy
Roll No 55
PGDM IB (2013-15)
Most of the worlds major airlines are in or have announced that they will join an alliance
whereby they combine routes, sales, airline terminal services, and frequent-flier programs.
These alliances have blurred the competitive distinctions among the major international
carriers. However, there are several factors that make it important to form collaborative
arrangements in the international airline industry. The factors like cost, regulations and other
competitive forces have risen recently to pose serious threats to the overall performance and
revenues in this industry.
Q1) Discuss a question raised by the manager of route strategy of American Airlines: Why
should an airline not be able to establish service anywhere in the world simply by
demonstrating that it can and will comply with the local labor and business laws of the host
country?
Ans 1) When considering either the international or simply the domestic environment, a major
consideration is whether economic interests in the airline industry are better served through
regulation via the market. The market competition forces have enabled the international
carriers to become more efficient or else go completely out of business. Rather than subsidizing
the business through regulated routes and fares, the major carriers aim to achieve economies
of scale in handling the passengers. However, this also leads to price wars by the airlines to
force each other out of business and the local interests of the passengers are not served. It
further leads to high entry barriers and the few survivors in the industry then enjoy free reign in
the market.
Political dimension is another aspect that does not allow such freedom of operation in the
airlines industry. Because most governments see airlines as a key national industry, they
oppose giving foreign carriers access to domestic routes on grounds of both national security
and consumer welfare.
Q2) The president of Japan Air Lines has claimed that U.S. airlines are dumping air services on
routes between the United States and Europe, meaning they are selling below their costs
because of the money they are losing. Should governments set prices so carriers make money
on routes?
Ans 2) It is quite possible that though the fares and loads on certain routes are low, they
generate marginal revenues such that the major routes become more profitable. Thus it is
difficult to separate profit or loss based on routes. In case governments set prices such that the
carriers make money on these routes, it may result in fall in traffic and revenues, thereby
decreasing the profitability of the airline companies.
The subsidies received by these airlines also make it difficult to determine whether they are
selling below their costs or not.
Q3) What will be the consequences if a few large airlines or networks come to dominate
global air service?
Ans 3) It could lead to both positive and negative consequences. On the positive side,
passengers should be able to travel almost anywhere in the world on a single airline or
network. It should minimize the risk of missed connections and lost baggage. Operating
economies should be realized as a result of the higher utilization of airport gates and ground
equipment. The consequent cost savings may be passed along to passengers through lowering
the air fares.
On the negative side, it is quite possible that minimal competition would lead to poor service
and high prices. In addition, competition among the destinations associated with particular
airlines would likely decline, as would the special services offered by the select few airlines.
Q4) Some airlines, such as Southwest and Alaska Air, have survived as niche players without
going international or developing alliances with international airlines. Can they continue this
strategy?
Ans 4) When there is sufficient traffic on the city pairs that a route serves, there is little need to
have feeder or connecting routes for an airline to be profitable. In fact, without the need for
hubs to make connections, some airlines can operate in smaller airports. They can avoid the
costs associated with the transfer of bags to connecting flights and the payment of overnight
expenses to passengers who miss connections. In addition, they may be able to overcome any
disadvantages from small-scale operations by targeting their promotion to regional and niche
groups and by running low-cost operations that charge low fares. They can survive in their
present operational mode and that attempts to expand or modify their operations might make
them more vulnerable.
Q5) Based on industry analysis of global airlines industry, comment on the future prospects of
the industry and your recommendations for an airlines company.
Ans 5) The factors like deregulation and terrorism have brought about a lot of change in the
aviation industry worldwide. It has lead to rapid rise of low cost airline catering to select
customer segment. But the nature of this industry is very aggressive and hence it is very difficult
to sustain competitive advantages. There are several airline carriers operating within the same
strategic intent and also emerging with a trend of price wars. The bargaining power is high for
both buyers in choosing among the alternatives and suppliers due to unavoidable costs such as
fuel supply or airport contracts. The initial gains achieved by the airlines start to erode in the
long run. Hence it is of utmost importance to strategize in such a way that the profits are
sustainable.
Few of the recommendations based on the industry analysis are listed below:
The strategic alliances lead to higher load or passenger traffic for the airlines. Hence, the
higher the load factor, the more is the profitability.
The companies should go for multiple alliances. They can have agreements with more
than one international or domestic carrier, thereby reducing the competition and
increasing the market share.
Forming alliances with the domestic carrier is a good strategy while entering into a new
country market. It helps the international players gain a strong foothold in the market.
By way of forming alliances, the companies can also leverage their best practices that
have proven their worth in the international markets. This induces more efficiency in
the collaboration and hence higher profitability for both the parties.
In order to reduce the government intervention and gain their trust, the private airlines
should constantly improve on their existing services at lower fares. This would also help
them gain economies of scale and scope.
The alliance partners should work in tandem to coordinate flight schedules and air fares
such that the demand and capacity of each flight is optimized, resulting in higher profits.
It can also be used as a barrier against new entrants and can reshape the entire industry
structure.