Introduction
Firms in the travel business such as the airline industry are affected by changes that occur in the macro and microenvironments. Therefore, they should not be passive to environmental changes. On the contrary, they should adopt effective strategic management processes in order to counter the environmental changes. The adoption of effective strategic management processes enables businesses to identify and exploit available opportunities and be effective in dealing with threats. Over the past decades, the airline industry has been characterised by significant changes that have compelled its players to adopt diverse strategies. This paper involves a case study on the factors that have motivated the formation of global airline networks, the strategic benefits of strategic alliances, and the forms of management adopted in managing the alliances in order to achieve the corporate objectives.
Strategic and environmental factors
Strategic alliances have become a fundamental component across companies established in the service and manufacturing industries (Uddin & Akhter 2011). The global changes that are currently being experienced have motivated businesses to collaborate with other local and international players. Bartsch (2012) affirms that firms within a strategic network stand to exploit significant market advantages. The airline industry ranks amongst the economic sectors that have witnessed extensive establishment of global alliances. The alliances are based on diverse elements such as code sharing and coordination of diverse airline activities such as flight schedules. Currently, the industry is dominated by three main networks, which include SkyTeam, Star Alliance, and OneWorld (Bartsch 2012).
A number of strategic factors motivate the establishment of global airline network. First, airline companies integrate strategic alliances in an effort to expand their strategic capabilities. According to Uddin and Akhter (2011), airline companies are motivated to join global network by the need to develop adequate competitive advantage through knowledge transfer. Knowledge has become an essential element in organisations’ pursuit for competitive advantage. Additionally, knowledge is increasingly being regarded as an intangible organisational asset and a differentiating competitive factor (Riege 2005). However, managing knowledge is challenging as it can becomes obsolete if new knowledge is not developed.
Global airline networks provide airline companies with an opportunity to gain from tacit and explicit knowledge, which are embedded in the respective strategic alliance members. The knowledge repositories developed by individual organisations are not easily accessible to competing firms (Stonehouse & Houston 2003). Subsequently, tacit knowledge can only be transferred through context-specific environment. The high rate of globalisation has increased the need for knowledge creation. Consequently, firms are under pressure to move into learning entities in order to attain optimal competitiveness and performance.
Strategic alliances enable airline companies to share knowledge, hence increasing their resource capability and market power. Transfer of knowledge increases the effectiveness with which organisations develop products that align with the target market, hence improving their market performance (Riege 2005). Therefore, one can argue that airline companies adopt the concept of strategic alliance in order to achieve strategic growth and to improve their value chain.
Another strategic factor that motivates the formation of global airline networks involves the need to cope with intense competition emanating from the external business environment. The airline industry is subject to economic changes such as global recession, which leads to a reduction in the level of profitability. During the negative economic cycle [recession], airline companies are forced to adopt downsizing strategies, for example, reducing their fleet size and carrier capacity. However, being a member of the global airline network provides airline companies with a safety net and it increases their market power. Flouris and Oswald (2006, p. 109) assert, ‘code sharing alliances enable airlines to sell seats on flights provided by other airline companies’. Code sharing agreement enables airline companies to sustain their sales revenue despite the prevailing economic changes. Thus, code sharing does not involve giving up market presence.
The global airline industry is experiencing an increment in the intensity of competition emanating from the entry of different industry players such as the low-cost airlines. The number of strategic alliances in the airline industry has increased considerably over the past few decades. Petrick-Felber (2014, p. 217) affirms that a ‘global total of 956 alliances were formed by 114 airlines resulting in an average of 8.4 alliances per airline’. Despite the high level of concentration within the airline industry, joining the global airline network increases the airlines’ capacity to cope with the competitive behaviour of new entrants. Uddin and Akhter (2011, p. 49) argue that strategic alliances ‘are usually formed to respond to competitors’ actions rather than attacking the competitors’.
The entry of new players such as the low-cost airlines has made the global airline industry to be extensively fragmented. It is estimated that there are over 200 airline companies in the world. All these companies are focused on maximising their level of profitability. The fragmented nature of the industry diminishes the likelihood of attaining the desired level of profitability. Furthermore, the capacity to maximise the level of profitability is further compounded by rapid change in consumer behaviour.
A study conducted by the International Air Transport Association [IATA] shows that customers are increasingly demanding seamless air travel services across different international markets. However, airline companies do not have the capacity to offer such services individually due to cost factor and efficiency, which pose a threat to airlines’ long-term sustainability (Stonehouse & Houston 2003). Consequently, the ability of individual airlines to deliver value to customers consistently in the wake of the changing customer behaviour is challenging. Conversely, cooperating with other industry players presents a great opportunity for airline companies to achieve a high level of operational efficiency due to the combination of resources, knowledge sources, and skills that are held by the respective airlines.
The establishment of strategic alliance has increased the customers’ ability to travel to different parts of the world due to bilateral agreements amongst the various players. An example of such agreement entails code-sharing alliances. Consequently, organisations global airline networks enable the respective airline companies to develop a global market presence. The leading global airline networks have established numerous routes, hence improving their strategic partners’ ability to connect between different destinations. The chart below illustrates the number of destinations of the respective global airline network.
Strategic alliances have increased the dominance of major global alliances. By 2011, the leading alliances [SkyTeam, Star Alliance, and OneWorld] accounted for over 80% of the total number of passengers across the Pacific and the Atlantic and just fewer than 80% of the total number of passengers across Asia and Europe (IATA 2011). Thus, alliances improve the probability of aligning with the customers’ travel needs.
In addition to change in customer tastes and preferences, the existence of legal and cultural constraints has also stimulated the establishment of global airline networks. For example, some countries have established anti-trust laws that limit foreign ownership of airline companies in their domestic market. These laws limit successful formation of full cross-border mergers in the airline industry. Flouris and Oswald (2006, p. 213) assert that antitrust laws ‘prevent the full integration of international airline services’. Nevertheless, joining global airline networks increases the likelihood of offering seamless air travel services across the world. For example, the alliance between Northwest Airlines and KLM in 1992 provided the two airlines with antitrust immunity (Flouris & Oswald 2006). The antitrust immunity provided mainly occurs based on two parts, which include collaborating in order to offer seamless travel services across smaller cities and offering non-stop travel services between hub cities.
Consequently, global airline networks have become an effective way through which airline companies can expand their international operations, and thus they can be considered being a close substitute for mergers and acquisitions (IATA 2011). Therefore, the need to deal with the limitations posed by the legal environment is key drivers in the establishment of global airline networks.
Benefits of strategic alliance
Individual airline companies gain considerably by being a member of strategic alliance as explained herein.
Strategic positioning
Strategic alliances provide airline companies with a defensive competitive weapon. Currently, the airline industry is characterised by a high degree of complexity arising from the diverse economic changes. The economic recession experienced in 2008 has motivated airline companies to rethink their business policy due to a decline in the level of profitability arising from different factors such as change in consumer behaviour.
Ringbeck, Gautam, and Pietsch (2009) emphasise that consumers have increasingly become price-sensitive in the recent past due to the adverse effects of the recession. Furthermore, price sensitivity within the aviation industry has increased due to the entry of numerous industry players. The intense competition has made customers to develop a high appreciation of value-for-money. Customers are presented with numerous options for domestic travel especially in the developed markets such as the US and Europe (Ringbeck, Gautam & Pietsch 2009).
Joining strategic alliances enable airline companies to match the intense competition in addition to coping with the prevailing structural changes. For example, strategic alliance enables airline companies to exploit the traffic within the global network. The partnership developed ensures that the airlines gain access to feeder traffic of the respective members. Accessing feeder traffic is particularly important for long-haul operations, which ensures that operational efficiency is sustained. Subsequently, strategic alliance enables airline companies to deal with the competition arising from short-haul carriers especially from the Gulf Carriers and other Low-Cost-Carriers. Consequently, the companies are in a position to sustain their traffic, hence improving their capacity to turnaround despite the prevailing market conditions. Moreover, the dominance of the global airline network leads to the creation of substantial entry barriers.
Internationalisation
The high rate of globalisation and economic changes, such as liberalisation of the airline industry by different government, present airline companies with an opportunity to achieve remarkable growth and level of profitability. One of the strategies that airline companies can adopt entails entering new markets, for example, the international market.
Strategic alliances provide an avenue through which organisations can overcome market entry barriers such as legal constraints. Moreover, strategic alliance ensures that individual airline companies can enter the international market rapidly, which is attained through the umbrella branding (Stonehouse & Houston 2003). The absence of strategic alliance means that the operation of network carriers would be limited to their respective regional markets, hence reducing their attractiveness to customers. Additionally, failure to join strategic alliances diminishes the growth expectation of respective companies.
Cost advantage
Joining strategic alliances enables individual airlines to develop economies of scale in their operation, hence increasing the likelihood of maximising their level of profit. For example, strategic alliance members share different assets such as check-in systems, lounges, and luggage-handling systems amongst other airport facilities. Moreover, cost advantage is derived from other activities such as joint marketing, aircraft purchasing, airline system, and software development (Holloway 2003).
Accessing resources
Strategic alliances provide organisations with an opportunity to supplement their existing resources. Das and Teng (2002, p. 448) affirm that strategic alliance ‘enables companies to explore complementary resources or capabilities and secure the missing resource from the partnership relationship developed’. Consequently, individual airline companies are in a position to leverage their capabilities, develop, and exploit synergies. For example, the airlines can leverage on the market knowledge possessed by local firms. Thus, their likelihood of succeeding in the international market improves. Therefore, resource-constrained airlines access diverse resources such as managerial, human expertise, technological, and financial resources.
Forms of management in strategic alliance relations
Managing strategic alliance is a complex undertaking due to the dynamics arising from the respective strategic partners. Thus, effective management and governance is a fundamental element in the success of strategic alliance. However, strategic partners can adopt different forms of management in order to succeed in attaining the desired corporate objectives. One of the forms of management is based on the transaction theory, which emphasises the importance of equity ownership. Strategic alliance can lead to the development of opportunistic behaviour amongst partners. Das and Teng (2002) argue that such behaviour is mainly common if the relationship is based on specific asset. Additionally, such behaviour can be developed if the market is characterised by extensive market uncertainty. In order to deal with such issues in strategic alliances, it is important for the respective strategic alliance members to establish an equity-based alliance management style.
Under this form of management, Kale and Singh (2009, p.49) assert that one partner ‘takes an equity stake in the other or both partners create a new independent venture wherein both take a stake’. The equity approach is critical in diminishing opportunistic behaviour of the members. Furthermore, strategic alliance creates an opportunity for the involved partners to incorporate effective hierarchical supervision of the association. Moreover, the equity form of governance ensures that the gains achieved from the strategic alliance are shared equitably.
The second form of governance in sustaining relationships in strategic alliance entails contractual management. Under this form of management, the role and activities of the respective members of strategic alliance are outlined clearly in a contractual agreement. Subsequently, the input of the partners is based on the established contract. Additionally, the contractual agreement outlines the limits within which the members should act. For example, one of the contractual provisions entails restriction on information disclosure to non-members/ third parties (Kale & Singh 2009).
The third form of management entails self-enforcing style, which is based on trust and goodwill, and thus it is considered as a relational form of governance. This form of management is considered effective due to its ability to minimise the cost of management, for example, by eliminating the cost of contracting (Kale & Singh 2009). Moreover, the trust developed between the strategic alliance members leads to the successful development of value-creation initiatives. Therefore, the strategic partners are in a position to develop initiatives that lead to value creation.
Conclusion
The global airline industry has increasingly become complex due to macro environmental changes. The industry is experiencing an increment in the intensity of competition arising from entry of diverse industry players such as low-cost carriers, Gulf carriers, and leisure carriers. Furthermore, the industry has experienced considerable change in consumer behaviour, as evidenced by the shift in customer needs, tastes, and preferences. Thus, achieving sustainability in such an industry requires businesses to incorporate effective business strategies.
One of the most effective models that can enhance the airlines’ competitiveness entails the formation of strategic alliance. The alliances provide individual airlines with an opportunity to access the international market, develop sufficient cost advantage, and access unique resources, hence improving their strategic position. However, it is imperative for effective forms of management to be adopted in order to succeed in achieving the desired corporate objectives. Some of the forms of management that airline companies should consider include equity ownership model, contractual management, and relational governance. These forms of management aid in establishing a strong relationship with the respective strategic partnership members.
Reference List
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