International Business - Alliances in Aviation Industry - Case Study Example

International Business: Alliances in Aviation Industry Q Deregulation has emerged as one of the contributor to the formation of the global airline networks. The changes in ownership from government to private entities means the forces of demand and supply have greatly influenced operations of many airline companies. As with any industry, dependence on forces of demand and supply leads to creativity and innovativeness as companies attempt to remain ahead of competitors in terms of sustainability in customer attraction. Competition resulting deregulation in the aviation industry has been the outcome of a number of factors including granting operators the freedom to choose favorable routes, set the prices based on company analysis of costs and revenues. The immediate industry response to deregulation was increased competition in the market as new entrants sought to take advantage of the new investment opportunities. Further, increased competition was perceived as having a negative outcome for the industry particularly as price wars resulted in reduced prices. The low cost of travel, although favorable to consumers, resulted in increased pressures on the bottom lines for the companies operating in the airline industry. Government ownership provided protection and capacity enhancement to national carriers to ensure they offered services in targeted markets. However, this protection from home countries does not exist, which implies the adoption of private arrangement between companies is important for expansion and improvement of quality of services (Forsyth, Button and Nijkamp, 2002). Additionally, global airline networks results in reduction of competition in the market. Strategic alliances between airline companies allow partners to overcome various entry-level restrictions imposed by authorities on markets and routes. Motivation for global is as a result of provisions in Article 1 of the Paris Convention of 1919 which grants power over regulatory activities pertaining to air traffic to authority under which the airspace falls (Cento, 2008). Countries have been granted exclusive power to control airspace to the extent that they see fit depending on their internal perception of issues such as economic contribution and security matters. A sovereign state, therefore, has all the right to decline request for an airline company to operate from their territory. Forming global alliances is an effective strategy for airline companies to overcoming challenges that result from this legal impediment top their operations. Therefore, partners involved in this arrangement will have increased presence in a given market through formation of virtual monopolies in markets existing between specific hubs controlled by partners. This approach to network and route operations prevents the partners from developing competition as internal expansion is discouraged. Creation of market feed is also an essential motivator for the entering into an alliance with other airline companies. Companies that have established their dominance in local markets will seek to increase the number of passengers through formation of alliances that results in international airlines feeding the domestic airline. The reasons for strategic alliances in the airline industry have similarities with what others industries have experienced over the years. According to the study by Oum, Park and Zhang (2000), note the rationale for the alliances can be attributed to organizational need to attain economies of specialization that result from specialization. In the airline industry, specialization of knowledge makes it possible for companies focus on areas of competitive advantage particularly in a given field. The airline industry has continued to achieve maturity over the years with continued improvement in technology proving to be a decisive factor. The companies in the aviation industry have sought to respond to the changes by adjusting their strategies to respond to the changes to ensure they deal with the need for growth and to fight increased competition from bigger companies. Therefore, part of the reason for airline industry to adopt strategic alliances is the need for survival in an environment where failure to adopt the latest trends might spell doom. While it is important for airline to expand their own networks, the existing limitation in terms of resources makes it difficult for them to create the required technological, financial and technological capabilities. Therefore, strategic alliances have emerged as an important alternative for improvement of services without undertaking changes at company level (Cento, 2008). Differences in size and revenue generation between established companies and new entrants into the industry during the 1980’s are also one of the factors that necessitated formation of alliances. For instance, within the American aviation industry, the 1980’s was characterized by increased competition between established companies such as United and Delta and low-cost operators. The established companies were able to maintain their market share due to marketing advantages large size and enhanced scope of networks making it impossible for the smaller start-ups to compete in the same market with the established operators. Consequently, formation of alliances was perceived as a solution as it would allow the companies to pull their resources together. Through these alliances, the small operators increase their capabilities to market and sale passenger services to more customers using increased number of routes (Doganis, 2005). Adoption of customer cantered approaches in offering gods and services to customers can be attributed as a motivating factor for the development of global airline networks. Customers in the airline industry are increasingly being attracted to airline companies belonging to alliances with larger networks. Passengers perceive such networks as having the capabilities to offer services at a reduced cost while also generating efficient transport programs due to increased flyer programs. Consequently, alliances represent airline companies’ reaction to the needs of their customers to have convenient travel program. While satisfying customer demand for efficiency, the companies also generate the benefits of economies of scale necessary to remain competitive in the industry (Oum, Park and Zhang, 2000). Formation of alliances in the aviation industry is also related to organizational needs to manage resources and risks. Strategic alliance provides these advantages for partners since they can exploit the partners’ existing skills and resources gaps in addition to organizational capabilities. The resources made available for members include those related to managerial, financial, technical and physical ability of one or a combination of partners. However, the advantages of gaining control over these sources can also translate into increased risk generated by the relationship with partners and performance in the new environment. However, formation of partnership also provides increased capability in market analysis based on familiarly in operating in particular markets. Global alliances in this case appears to be effective in dealing with unknown markets as partners with experience in their hubs will provide the necessary guidance to influence the operations of the new entrant into the market. On the surface, the strategic and environmental factors that influence the decision to form an alliance appear to be the need to establish competitive advantage. However, a deeper analysis of the aviation industry indicates high level of uncertainty that operators have to deal with in order to increase profit margins. While alliances result in enhanced strategic capabilities and reduce level of competition, it also results in addressing environmental uncertainty. Environmental uncertainty in the aviation industry results from demand and competitive uncertainty. Demand uncertainty as an environmental factor motivating formation of alliances in the aviation industry results from a player’s realization they cannot match the level of operation efficiency achieved by competitors. Therefore, to reduce the level of competition a company will seek an alliance with others in the market to generate the desired capabilities. This partnership will therefore guarantee the company sustainable demand due to sharing of revenue with highly competitive companies operating in the market (Doganis, 2005). Competitive uncertainty is the motivation of a company to achieve market power motive though alliances that reduce the level of competition. Competitive uncertainty in the aviation industry is because of interdependence some airline companies operating in a particular market. However, existence of competitive interdependence is only possible for markets where the operations of a particular airline company have direct consequence on the market position of other companies. In this case, competitive interdependence can potentially result in uncertainty in the particular market as the actions of one Airline Company can generate retaliation from competitors. Therefore, companies have no way of making a determination on whether competitors will respond to their action with retaliatory action that results in direct effects on its share of the market. Consequently, companies will seek alliances with such competitions to ensure the partners analyze a predetermined action in advance. Reactions that follow such arrangement will therefore be favorable for all the members of the alliance, as they will tweak the strategies depending on market share controlled by ever partner (Forsyth, Button and Nijkamp, 2002). Q.2 On strategic front, formation of global airline networks reflects airline companies’ quest to create competitive advantage over competitors through sharing of limited resources that might include and not restricted to brand assert, access to market capabilities, improving the quality of service delivery, all which contribute to improvement in profitability for the partners. These alliances are also experienced in practical aspects of the company operations through strategic commitment by management to have a substantial portion of existing routes linked up in addition to working together in essential areas of airline businesses (Oum, Park and Zhang, 2000). Global airline networks have therefore, provided a platform for airline companies to increase the level of operations at a global scale Therefore, collaboration in formation of global airline networks experienced on both organizational management level and in practical aspect, which is the utilization of vast route networks resulting from the alliance, is an essential part of business strategy in the airline industry. The advantages rousting from the creation of these airline networks ensures the companies establish technical efficiencies that is a result of the lowered production costs with smaller airlines taking advantage of enhanced quality of services offered by large companies. For instance, while each maintains distinct maintenance bases, the alliance allows the partners to consolidate these facilities existing in different geographical regions. Such advantages are also translated to other company activities such as scheduling, baggage transfer, and introduction of single check-in system, airport lounges in addition to interparty agreement about the airline company taking responsibility for the passenger’s journey up to the destination (Oum, Park and Zhang, 2000). However, the key driver for strategic alliance between companies is meant to increase geographical reach because of the increase in networks. Companies that operate based on this framework are thought of as enjoying the benefit of improved quality and quality of services. However, these perceptions of the companies are subject to the level of acceptance demonstrated by the targeted customers. The direct result of increased networks is the frequency of flyer programs accessible to passengers translating into convenience for customers choosing the services of partner companies. This convenience attracts more passengers due to their perception of the ability of existing networks to be flexible to their needs in terms of access to various regions of the world. Therefore, formation of alliances is an important strategic approach that improves the image of various companies in the network as they increase the number of routes without necessarily upgrading their individual network systems. Passengers find such capabilities an attractive prospect while the company enjoys low unit production costs and the resulting economies of network density (Oum, Park and Zhang, 2000). One of the factors that modern business organizations cannot ignore is their ability to attract new customers to their services. Therefore, marketing becomes essential, as the number of customers attracted to a particular company will depend on how the management has positioned their services as a product that meets all the expectations in terms of quality. Alliances create marketing advantage for airline companies as they pool resources and capabilities (Forsyth, Button and Nijkamp, 2002). One of the marketing advantages for the organizations in this arrangement is the frequent flyer programs available for members of the alliance, which is attractive for most passengers as they enjoy a wider choice. Marketing advantage generated by global alliances is achieved through the practice of code-sharing, which makes it relatively easy for coordination between operating carrier (airline operating a particular flight) and marketing carrier whose codes are displayed on the board. Apart from code-sharing policies, airline companies that have adopted strategic alliances have also adopted block space agreements that have transformed how members operate flight to different destinations of the world. Block space agreements are important for airline companies seeking flexibility as they can book a number of seats for their passengers from Partner Company at a wholesale price (Cento, 2008). This creates flexibility in the sense that the airline company can offer connection services for patients seeking taking a different route midway through the journey. The block space agreement is also effective when one of the partners is authorized to operate in given routes (operating carrier) and the other is not (non-operating carrier). In such cases, the non-operating carrier has a chance to purchase a block of seats at wholesale from the partner with operating carrier. The non-operating carrier then sale the tickets to passengers at retail price, earning the non-operating carrier some profit from routes that it does not operate. Evaluate critically the forms of management that are used to manage these alliances in relation to achieving their corporate objectives Deregulation of the aviation industry has increased the presence of private sector players in the airline industry. The industry is now influenced by demand and supply factors, which ensure companies, strive to develop the best approaches to enhance their positioning (Doganis, 2005). However, even without the strict rules of early periods of development in the industry, there is a number of restriction constricting operations of members. The limitations imposed by restriction are evident in the forms of management that alliances in the aviation industry take. The formation of strategic alliances by operators in the aviation industry is a response to various governmental legal frameworks in addition to reality in the industry and company practices. These restrictions prevent carriers from undertaking mergers and acquisition as part of their positioning to exploit existing market potentials. The implication of these realities is that alliances between carriers has emerged as the best approach in cutting cost while increasing company presence in new markets (Forsyth, Button and Nijkamp, 2002). Existing opportunities for alliances provide for carriers to exercise their autonomy in the management of core organizational operations. Companies under different forms of alliances have greater autonomy due to factors such as government banning entry into a particular airspace or restriction of foreign ownership. Therefore, vertical integration of operations of alliance partners becomes impossible. Therefore, existing alliances are mostly managed through a horizontal distribution system that accords partners specific responsibilities depending on their capabilities. However, this arrangement has to respond to the need of the operators to main competitive advantage in markets of operation especially when other alliances with greater pool of resources exist. Based on the need for horizontal system of management, alliances in the aviation industry take three important forms. Firstly, there is the management based on interline alliance. Interline alliance provide for companies to coordinate their routes to ensure partners take full advantage of existing resources. Coordination of activities between companies involved in this alliance include collaboration in areas such combined use of member’s facilities, code sharing and involvement in combined operations. Secondly, management of the alliance can be developed in terms of broad commercial alliances. This is improved level of cooperation between carriers and might include mutual agreement on development of joint operational systems in addition to the organizations carrying out joint marketing programs. .apart from agreements on code sharing, partners in such an arrangement can also share frequent flyer programs (Forsyth, Button and Nijkamp, 2002). The broad commercial alliance approach to management of operations can also feature agreements on transfer of traffic at hub airport to carriers managed by partners. This form of management has significant impact on each airline company’s capability as it provides a framework on which members benefit from the pool of recourses while ensuring customers enjoy the benefit of resources that are beyond the capability of a singly company. Thirdly, airlines can form management policies that are based on equity alliance, which reflects a higher level were partners cooperate in almost all their activities. Swapping of equity ensures and shares ensure the partners establish extensive linkages in their operations. Equity alliance provides an augmented level of inter organizational operations where partners might go as far as sharing all the available routes depending on existing capacities. The form of management will therefore be dependent on extend allowed partners to utilize resources provided by others in the alliance. While interline alliances demand minimal level of cooperation for the management, equity alliance might translate into closer ties between members of the alliance. For instance, members of the interline alliance might not have a joint management team but rely on constant information flow through correspondence. In most cases, dominant partners will want to have their representatives in key positions in order to influence the decisions and protection their majority investments tied by the alliance agreement (Forsyth, Button and Nijkamp, 2002). However, operations under equity alliance make it necessary for the organizations to increase the level of their cooperation as success depends on streamlining management practices. Therefore, equity alliances in aviation industry require a joint team of directors to coordinate activities between members. However, these practices must be made under the approval of authorities in the countries where the carriers originate to ensure they are within the legal requirement. Management of the alliances has the purpose of controlling available resources and revenues to ensure all the members of the alliance benefit depending on their level of contribution to overall success of the partnership. The rise of airline alliances reflects the realization of benefits that companies operating under this arrangement might generate both in the short time and long-term. However, members of the alliance must realize the need for any arrangement to reflect the needs of customers. While the alliance results in large economies of scale for the companies and observation of legal requirements, this must not be pursued to the detriment of customers’ need for quality and efficient services. References Cento, A., 2008. The airline industry. London: Springer. Doganis, R., 2005. The airline business. London: Routledge. Forsyth, P., Button, K. J. & Nijkamp, P., 2002. Air transport. Cheltenham: Edward Elgar Publishers Oum, T. H., Park, J. & Zhang, A., 2000. Globalization and strategic alliances: the case of the airline industry; Oxford, UK: Pergamon. Read More