Free Custom «The Benefits of Global Alliances in the Airline Industry» Essay Paper

Abstract

Various claims have been made regarding the benefits of airline global alliance. However, in most cases, the claims were based on the views of the airline operators. In this regard, this paper takes a different approach to look at the benefits from the customers’ perspective. The paper first gives a brief description of the airline industry and the emergence of alliances. Therefore, it provides some background overview about Star Alliance and why it was formed. The paper studies the customers or business travelers perceptions of the importance of global alliances. The study showed that a small number of travelers are not sure about the benefits of global alliances. Similarly, the study also considers the role of global alliances in determining customers’ choice on the kind of airline to board. However, compared to other benefits, the benefits of alliances do not play a major role in determining customers’ preference.

Keywords: airline alliances, global alliances, travelers, frequent flyers

The Benefits of Global Alliances in the Airline Industry: Case of Star Alliances

Introduction

Strategic alliances are very important features across various sectors in the modern world. As the global market changes, companies are required to work together with both local and foreign partners to remain responsive and efficient (Child, Faulkner, & Tallman, 2005). It is argued that companies in strategic networks enjoy significant advantage in the global market (Li, 2010).  This trend is also reflected in the airline industry. Currently, most airline companies operate in strategic alliances. For instance, in 1994, there were over 270 alliances formed between 136 airlines. After a period of 6 years, in 2000, the number of alliances increased to 579 among 220 airlines. It is perceived that airlines which are not a part of global alliances are disadvantaged. Therefore, they might be niche players (Li, 1998).

 

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Generally, there have been many studies on global alliances but most of them have concentrated on operational and strategic issues concerning the firms. Some of these issues include management issues, types of alliances and partner relationships. Even the specific research on alliances has been mainly based on the companies’ point of view. Some studies have addressed issues that affect the success of the firms, the traffic output, and the marketing implications among others (Gulati, 2007).

There has been minimal attention given to how the customers feel about the whole process. For instance, customers’ perceptions on the benefits of global alliances, how important they are, and whether or not they contribute to choice and preference of the airline to travel by. However, there are no documented materials on answers to such questions. Therefore, this study explores the significance of global alliances based on the consumers’ perspective. The study first reviews the claims made on the significance of alliances from the travelers’ point of view compared to the views of the airline operators. Thereafter, an empirical study of the claims is conducted by considering the customers’ perceptions on these benefits as well as the impact of the benefits on choosing the airline to travel by. The focus will be mainly based on the Star Alliance as an example of the ‘global alliance’ in the airline industry.

Historical Background

There has been tremendous growth in the airline industry since the early days. At the moment, there are various comprehensive alliances, revolutionary information systems, and comprehensive business models among the key issues in the industry. When the Airline Deregulation Act was introduced in 1978, the Civil Aeronautics Board experienced reductions in its powers especially in controlling the market entry and pricing among other airline functions. When deregulation broke down, a number of international carriers collaborated with foreign partners in attempt to expand the routes of their networks. It is for this same reason that Star Alliance came into existence (Lavie & Rosenkopf, 2006).

The Chicago Convention held in 1994 came up with some control measures in the international market. The frequency of travel, airline routes, and fare were controlled by this agreement. These restrictions were experienced for a while as a protection framework was used in governing international travels. In the 1980s, some airlines began working on ‘code sharing’ which was a joint effort strategy that allowed airlines to make advertisements of other airless like they owned them (Uzzi,1997). Such advertisement mainly aimed to create the perception of a larger presence in different regions, thus, improving the chances of making more sales. However, the Gulf War experienced in 1991 and 1992 was very detrimental to the airline industry. As consequence of the military conflict the price of fuel increased by a huge margin which meant that the airlines had to increase the fare. As a result most people cut down on their air travels (Hoffmann, 2007).

One of the greatest problems that the airline industry faced was overcapacity. An empty seat in a plane definitely means reduced profits. Due to increased demands many airline companies procured new aircrafts in the late 90s. At some point, the number of aircrafts in the market exceeded the number of the passengers flow. As a result, companies made low profits towards the late 90s. Nonetheless, a new level of awareness arose in the airline industry in the mid-90s. This shift in events came about as a result of the need to gain a competitive edge in the industry. The formation of strategic alliances allowed for a major growth in the market share thus creating major alliances across the world. Over 500 alliances emerged in the late 90s. Ultimately, all these alliances consolidated into five major carrier alliances that exist today (Li, 2010). These are the Star Alliance; KLM Northwest alliance, the Qualiflyer alliance, Oneworld, and SkyTeam.

Data Analysis

Star Alliance came into existence on May 14, 1997. It was the first and largest alliance in the world with headquarters in Frankfurt. In the beginning, it only had five airlines namely Lufthansa, United Airlines, Air Canada, Scandinavian Airlines and Thai Airlines International. However, the alliance has since grown to 28 members. Even though, the airlines are housed under one alliance, they still operate as individual entities. Every line that joined the alliance had different reasons but one common reason was the desire to spread their wings and expand in an efficient way. The members of Star Alliance agreed on this issue and broadened the scope of their businesses(Child, Faulkner, & Tallman, 2005).

In carrying out the study, a cross-sectional survey was conducted on a sample of air travelers. The procedure has also been administered in various studies such as Child, Faulkner, & Tallman, 2005. Scholars have come up with numerous limitations of this process but numerous procedures were implemented to minimize on the problems. Some of the strategies included the use of four techniques to increase response rates, incentives such as book prizes, a personalized cover letter from the university, and follow up letters among others. A reconnaissance study was first carried out to check the sequence and structure of the questionnaires as well as the clarity and meaning of the questions. Thereafter, four various types of questionnaires were used to reduce any form of biasness. The study was based on business travelers who fly more than any other travelers. Additionally, this is the group of flyers that target FFPs. Analysis of job roles, travel frequency and demographics made it possible to check the samples (Child, Faulkner, & Tallman, 2005).

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The instruments of data collection were developed in three steps. The first step was looking at secondary data from academic journals, trade press, airline websites and promotional materials. Thereafter, information from these sources was used to design questionnaires to obtain relevant information from the respondents. A good number of the questions were concerned with business travel but some sort to obtain detailed information on the pleasure of ravel and the type of business operated by the respondents (Li, Li, Liu, & Yang, 2010). Some two versions of questionnaires were also used to test the question order effect.

The study received 212 replies that were pooled together. A half of the respondents were in middle or senior management positions, 20% were in top management while 30% were in specific professional roles. To avoid gender biasness, equal number of men and women were engaged in the study. Most of the respondents belonged to at least one FFP.

Advantages of Alliances

The greatest advantage of this strategy is that customers can fly to various parts of the world in any of the member airlines. In doing so, individual airlines understand their partners schedule and therefore are able to lean on others in developing routes (Child, Faulkner, & Tallman, 2005).

Alliances provide invaluable flexibility to members. This can be seen in the opportunities to negotiate on various agreements with non-alliance members. For instance, airlines can share mileage points on frequent flyer programs. Therefore, customers benefit in the sense that their scope of travel is widened across various destinations using multiple airlines. According to Christensen (1997), customers have the opportunity for greater network access. Therefore, customers have a chance to select on extensive networks. Lorenzoni & Lipparini (1999), suggest that consumer retention and loyalty can be improved by providing services assembled in networks. Therefore, when an airline extends its networks with other airlines, it should be able to offer better services to its customers. For instance, an alliance enables an airline to offer various choices to the passengers that non-alliance airlines would not be able to feature (Christensen, 1997).

According to Li, Li, Liu & Yang (2010), the idea of alliances is outstanding because it provides the customers with various options and opportunities. On the same note, alliances are advantageous to the business operators as they create room for seamless integration and increase the overall scope of business. Customers also benefit from the concept of seamless travel when changing from one airline to the other, which is best achieved by the use of code-sharing. This strategy involves the processes of an airline attaching a designator code to certain services operated by other members of the alliance. The strategy is considered to be customer oriented. Star Alliances implements this strategy by allowing members to share revenues and profits through a specific formula. It also offers various code-share flights for customers and promises a convenient but quick transfer of check-in processes.

Airlines often offer preferential treatment in various services such as baggage handling, check-in process, and airport standby among others so as to retain customer loyalty. Therefore, in an alliance, the priority status for a customer in one airline is applicable in other member airlines and this offers priority benefits for customers across the alliance. Customers also have the privilege of access to lounges of partner airlines. Before the formation of alliances, customers could only use lounges of airlines that they were flying. However, now priority customers can access more lounges. For instance, Star Alliance has over 500 lounges that become accessed by its customers (Li, Li, Liu & Yang, 2010).

According to Doz & Hamel (1998), global alliances enhance benefits in frequent-flier programs. Currently, a larger number of customers belong to some frequent flier program unlike in the past where benefits from one program could not be transferred to the other. Therefore, frequent flier points can be accrued by using airlines within an alliance. This eliminates the need for customers to be members of multiple FFP programs. In so doing, customers can accrue more points and benefits by joining one program. Additionally, customers are able to redeem their points with any partner airline in various destinations.  

Currently, alliances are so entrenched in the airline industry that it would be difficult for a new comer to stand out on his own. There is the benefit of reducing overheads and increasing services. Additionally, Doz & Hamel (1998) assert that operating under global alliances reduces customers’ perceptions of risk on travelling and therefore increases the service level. Lavie & Rosenkopf (2006) allege that a customer will be comfortable knowing that he/she has a number of options of flight to be able to connect from one point to the other unlike in situations where one has to wait for a specific airline. Furthermore, in case a customer opts to change flight, he has numerous options of changing the schedule, airline or route within the alliance network. Therefore, global alliances offer room for flexibility at last minute of planning.

The mission of the Star Alliance is to enable the growth of broader results beyond the capabilities of an individual airline. According to Hoffmann (2007), customers have specific issues that they would wish to see in global alliances. First, they would like to have global access in the sense that affiliate airlines can come in handy whenever one of the airlines has problems. Therefore, the alliance allows this to happen by opening access to services from affiliate airlines. Customers are also keen on maintaining their travel status because it allows frequent flyers to make use of their miles whenever they need to without any restrictions. In fact, this is the most valuable advantage for the customers. Additionally, they want their travel experiences to be the same in all airlines.

Governance of The Star Alliance

The governance of the alliance has also changed tremendously. In the inception stage, there were only five airlines and therefore the management was a bit easy. However, with the larger number of airlines the situation has changed. As a result, it was necessary to come up with a fulltime staff. However, the early years were very frustrating for the alliance because of the difference in the cultural requirements. With time, the project management skills improved and helped in expediting numerous business routines (Li, 2010). The processes were later streamlined with time and they became natured in the operations. Although some processes are still being fine tuned, there have been substantial improvements in the alliance since its inception.

Another impressive aspect of the alliance was the delicate blend of collaboration and competition. Some people would expect members of an alliance to be fighting for customers and routes to increase their profits. Although there was a bit of jostling for position during the early stages, the members soon realized that the alliance could be more effective if they leaned on one another for assistance (Child, Faulkner, & Tallman, 2005). Therefore, rules were put in place to prohibit members from executing hostile actions on other members. This was a key step that enabled working environment for collaboration. In the early stages, it was evident that every member had different views on how to improve the internal processes. For instance, the Air Canada felt that it was better if the sales units of all members were centralized in same cities (Zajac & Olsen, 1993). Similarly, not every member was comfortable in the beginning. For instance, Lufthansa Airline was so frustrated in the beginning especially on the idea of sharing lounges. The airline considers its lounges to be the best in the world and therefore sharing it with other members is frustrating because they invested so much in the process. To this point, the Lufthansa Airline continues to raise complaints on this issue. This clearly indicates that not all members of an alliance would realize immediate benefits. Therefore, members had to adapt to the situation so as to realize the benefits (Zajac & Olsen, 1993).

The Culture of Star Alliance

The culture of the Star Alliance is based on the consensus driven model. This created deficiencies and benefits too. The most obvious benefit is that every member has a chance to raise his views o what steps the alliance should take. On the other hand, it was difficult to gain a consensus on the exact decisions to be made. Such situation is common for most alliances because of the different views held by different members.  The Star alliance has been able to improve on the buy-in process although with pain and compromises. The greatest challenge for any organization is an inconceivable disaster related directly to the industry which originates from the absence of the specific road map on how to tackle such a situation (Child, Faulkner, & Tallman, 2005). An example of a catastrophic event is the 9/11 disaster which really tested the business model of the alliance and pushed it to the extreme end.

However, the members of the alliance regrouped immediately after the disaster because they realized that such tragic events would change the aviation industry. Some of the strategies that were adopted include; joint purchasing, consolidation of projects, and avoiding duplication of various processes at call centers and airports. This was mainly done to establish cost reduction to make cost savings. The event also made the members to rely heavily on one another and therefore realize the benefit of the alliance (Hoffmann, 2007). Most members were able to stay afloat during the period of the tragedy.

Results

The main focus of the findings was to understand the perceptions of the travelers on the impact of global alliances. Respondents were asked to agree or disagree with statements related to the benefit of the Star Alliance. Additionally, they had the option of stating whether they were unsure about the statements. In general, the study found out that most travelers were aware of the benefits even though there were some misconceptions too. About 60% of the respondents understood the benefits while 40% were either incorrect or unsure. However, 83% of the respondents had clear knowledge on how to accrue FFP points. This is an indication that this was a key area for most of the travelers (Christensen, 1997). Most airlines have focused their promotion and advertisement efforts on the benefits of FFP and that could explain why most travelers were keen on the issue. The following sections describe the results of specific questions that the respondents answered.

Do you understand what code-sharing is about?

The question that had most incorrect answers was that on code-sharing. 36% of the responses were wrong. It indicates that most respondents had misconceived ideas on some benefits of Star Alliance. For example, although code sharing is a common term in the airline industry, 36% of the respondents thought that it meant customers were able to fly on planes owned by specific airlines that they found appealing. It is necessary to note such kind of misconceptions because they might affect customers’ perceptions on global alliance. Moreover, it could influence customer expectations, which in its turn could damage the airline’s image if customers were placed on different aircrafts from what they expected (Christensen, 1997). There have been a number of complaints regarding deception to customers on this arrangement.

Based on the distribution process, 78% of the respondents showed that they were aware of the benefits of the alliance. It indicates that about a quarter of the respondents were not aware of the benefits. There was a significant difference in the responses of travelers who had been flying for the last one year and those who were not frequent flyers. This indicates that frequent flyers must have had frequent communication about the alliance from the airlines they use (Christensen, 1997). Additionally, there was a significant difference between respondents who indicated that they preferred a certain alliance than those who had no preference.

How do you rate the significance of global alliances?

Based on the question regarding how travelers rate the importance of global alliances, there were various key issues to note. First, a large number of the respondents were in consensus with the fact that the introduction of Star Alliance has improved the network access and contributed to better FFP benefits. 62% of the respondents strongly agreed with this fact. However, many respondents were not sure of the specific benefits for every frequent flyer such as extended lounge access, seamless travel, and transferable priorities. 40% of the respondents were uncertain. When the responses were tabulated, it was realized that travelers with more FFP benefits had fewer uncertain responses.

To find out if the travelers’ ratings of the benefits were related to the choice and preference of alliances, there was a t-test conducted. It compared those who preferred a certain alliance and those who didn’t. The results showed that while most of the respondents who indicated their preference to a certain alliance understood the benefits, this did not reveal any difference on why they considered some benefits to be more important than others. To some extent, this might restrict attempts to use alliances to determine customers’ preference. When the respondents were asked whether they could different benefits of the Star Alliance from other alliances, about 63% were not sure in their answers. Although this is a common issue in a competitive market, it serves as a potential source of worries for brand managers. Uncertainties by consumers affect the valuation of a certain brand and it can increase risk perceptions by consumers (Gulati, 2007). According to Koza & Lewin (1998), consumers are keen on the organizational size and age establishment of an organization. Therefore companies that have been in the market for a long time are likely to be more appealing to the customers than the newly formed companies. This great percentage of uncertainty is an indication that customers are likely to remain with the market leader.

However, most respondents did not see any difference in different alliances. Therefore, if consumers do not see any difference, belonging to a certain alliance has no specific advantage for airline operators. Therefore, it is unlikely that airlines have loyal customers. To a great extent, this issue raises questions on the significance and effectiveness of global alliances in the airline industry. However, it gives the new airline a chance to consolidate and defend their positions in the industry (Gulati, 2007).

Do alliances affect your flight preference?

Respondents were also asked about their needs for pleasure flights and business flights and list factors that influence their choice. Secondary data was also collected from past studies. There were four major factors related to the benefits of global alliances. Nonetheless, it was clear that the benefits are not highly rated by the customers. Some of the most important factors according to the respondents were staff friendliness, safety, fewer stopovers and modern aircrafts. Seamless travel was the first major factor from global alliances but it came in the sixth position after the five issues mentioned above. Other benefits for global alliances such as extended lounge and network access came in towards the end of the list which is an indication that they were not highly valued (Li, 1998).

Although the study shows that consumers do not have hold global alliances in high esteem, it could be stated that very few travelers appreciate the benefits. However, members with high status of FFP consider global alliances to be very important. Unfortunately, this did not affect their choices. There were similar results recorded using the purchase probability measure. Respondents who considered the benefits of alliances to be important had a higher probability of using airlines from one global alliance. In general, it could be stated that the respondents did not consider benefits of alliances to be very important. In fact, they considered the basic factors such as safety and modern aircrafts to be more important than the global alliances (Gulati, 2007). However, those with the highest levels of FFP considered global alliances to be more important.  On the other hand, even the travelers who considered importance of alliances did not indicate their urge to use aircrafts from the same alliance although. One explanation of this kind of scenario is that most travelers’ expectations of the benefits are low and therefore they do not pay much attention to whatever the alliances do. This should be a point of concern for airline operators because they try so hard to maintain customer loyalty.

Discussion

There are strong views on the formation of global alliances. Some of these views deal with market access, coordination, cost reduction, and the opportunities to improve and reshape the industry. However, these views are not formed with the needs of the consumers in mind although some spin-off benefits could be available. On the other hand, there have been many initiatives publicized and advertised as consumer benefits. This study has given clear consideration on this issue (Li, 1998). To be specific, there has been more emphasis on the benefits that arise from global network access, extended access to lounges, seamless travel and ability to transfer priority status among others. All these issues are not only meant to benefit the travelers but also to give operators different advantages from their competitors.

Therefore, a number of questions can be asked about these claims. For instance whether or not consumes feel that the benefits of alliances are important and whether they influence their preferences. These questions initiated mixed reactions from different respondents. Noticeable benefits can help to nudge consumers to make their choices, which could be very important to the business travelers and also help established airlines to defend their competitive market positions. However, this does not have any fundamental shift in the attitudes, perceptions and behavior of the travelers. In fact, it could be stated that the airlines joining their forces since the operators understand that consumers have a wide range of carriers that can use (Doz & Hamel, 1998).

Therefore, these findings raise some critical questions to the operators. For instance, where should their efforts concentrate in future?  Therefore, there is a need for clear marketing communication for the travelers to reduce misconceptions and understand the benefits. At the moment, the records are mixed up which makes it difficult to understand the results. Since the significance of the benefits varies from one traveler to the other, there is a need for some degree of customization to create a clear marketing communication (Koza & Lewin, 1998). Moreover, there is a necessity for careful management of expectations. It does not make sense to inform travelers about different benefits they can enjoy when it is difficult to prove how the benefits can be obtained. If the travelers’ expectations rise, it could widen the range of implications.

Similarly, travelers should be able to identify the inevitable. For instance, it is very difficult for members of one alliance to differentiate between the airlines. It has been proved by the study due to the fact that most respondents indicated that they could not differentiate between one alliance and another (Li, 1998). Some even believed that the alliances were identical. Therefore, it could be argued that the success of a global alliance heavily depends on the market position of member airlines. However, this is not an indication that all alliances are the same, though the customers prove the opposite.

The fact that travelers do not see any differences in the alliances also raises critical questions on the ability to sustain advantages that one partner may have. For instance, Star Alliance ventured into the Australia in 1998 (Doz & Hamel, 1998). This was when Ansett airline became a member. Consumers expected to benefit from the alliance immediately. However, this was not the case since it took several years to accrue FFPs. Similarly, offering these benefits did not guarantee consumers to travel in a certain airline different from others. Moreover, it is not easy to predict changes in the behaviors of travelers. For instance, most travelers are more concerned with the safety and not the type of alliance. Therefore, alliances are only likely to influence choices by dealing with basics. Customers do not care about alliances. Furthermore, they do not keep track of the changes in the alliances. All they need is moving from one place to the other in the most efficient and safe way.

According to Yoshino & Rangan (1995), global alliances are linked with some public policies. For example, if the main reason is to avoid the regulated structure of aviation in the world market, then liberalizing markets would make it unnecessary to have global alliances. This would also abolish any consumer benefits.

Limitations

Most of the information on the benefits of alliances was derived from promotional material reflecting the views of the operators. As it has been indicated, most travelers are not aware of the benefits. Therefore, there is need to carry out in-depth research on business travelers to complement these findings.

Similarly, the findings relate to a small group of respondents whose views may not be applicable to other people in diffident countries. Although there were checks to avoid biasness in the samples it is not advisable to generalize the findings to all travelers. Because of time limitations, it was not possible to use a large sample size. Financial constraints also called for the study to settle on a small sample size and work on one alliance. It would give more accurate results if more alliances were compared to fully understand how global alliances work. Therefore, more localized studies should be conducted to determine the exact situation in every alliance. Furthermore, global alliances are changing over time as new alliances come up. Therefore, it would require a recourse of longitudinal studies because of the changing times which is not easy to analyze. Nonetheless, the study was very fulfilling and all the objectives were achieved.

Conclusion and Recommendations

Based on the study, the most important step that the Star Alliance should take into consideration is a further integration of its services. The consultative business model is very efficient because it offers travelers larger network coverage in the sense that they can use airlines of the alliance to travel to many parts of the world. Additionally, the benefits of frequency flyer programs can be redeemed from a large number of airlines. However, one issue of concern is inconsistency in integration.

Two approaches could be implemented to achieve consistency in integration. The first approach could be implemented by creating a centralized and robust IT department that incorporates all systems. Even taking into consideration high costs of the issue, it would make the operations more efficient and simplify dissemination of information across all the alliance members in a more precise and efficient way. Many customers complained of losing their luggage or being denied access to some lounges yet these are services that the alliance claims to offer. Such inconsistencies can break customers’ loyalty. Therefore, Star Alliance can benefit from high customer retention rates if they follow up on such issues and ensure that their customers are satisfied.

Another approach lies in development of necessary tools that would give the exact value of the alliance. At the moment, it is not easy to state how much the alliance is worth by simply adding up the values of every airline. The IT infrastructure would be able to calculate with precision the value that every airline adds up to (Martin & Salomon, 2003). In this way the net worth of the alliance could be identified. At the moment, it could be argued that the alliance adds some value but the addition is not done in a definitive way. Introducing metrics could help airlines to calculate the exact amount of value they accrue from the alliance and be able to determine whether it is necessary for them to stay or move to a better alliance.

It does not make business sense to keep airlines together if the profit margin is questionable. It is much better to keep all the data in one table so us to understand how every member is fairing on in the alliance. A good example of how annual tables can be used to such goals is the annual league table by Merrill Lynch. Nonetheless, it is not enough to have data and keep it. There should be metric development within the organization to address the strengths and weaknesses of the alliances. Doing this would provide the accurate picture of the net worth of every airline. Ultimately, alliances should be based tangible result and efficiency.