The Changing Role of Strategic Alliances in The Air Transport Sector 2006

Institiúid Teicneolaíochta Phort Láirge
The Changing Role of Strategic Alliances in the
Air Transport Industry
Seosamh Aodán Ó Murchadha
Dissertation submitted in partial fulfilment of the requirement for the MBSI in
Waterford Institute of Technology.
September 2006
The Changing Role of Strategic Alliances in the
Air Transport Industry
___________________________________________
Seosamh Aodán Ó Murchadha
MBSI
Institiúid Teicneolaíochta Phort Láirge
Supervisor : Gerard Arthurs
September 2006
Acknowledgements
The author would like to extend his gratitude to all those who were involved in the
completion of this dissertation, in one form or another. This thesis would not have been
possible without the assistance I received.
Firstly, I would like to thank my thesis supervisor, Gerard Arthurs, for his support,
encouragement and valued insights during this thesis.
Secondly, I wish to convey my sincere gratitude to those respondents who took part in
this study for giving up their valuable time.
Thirdly, I would like to thank my family and friends, particularly those who gave their
time for proof-reading.
And finally, I would like to thank my fellow MBSI classmates for their friendship and
support during the year.
i
Abstract
The commercial airline industry in Europe has been going through a period of
transformation over the past six years. The industry has long been prone to sustained
financial failure because of high fixed costs, vulnerability to political shocks and its high
capital intensity. The past six years have seen a change in direction with the increased
dominance of Low Cost Carriers (LCC’s). These air carriers use a low cost business
model to offer highly attractive fares to travellers and have been rapidly growing their
market share.
Increased competition in the industry, coupled with lower fares, has resulted in a real
need for traditional airlines to cut costs. One way in which carriers propose cutting costs
is through finding synergies by establishing co-operation with other carriers. In recent
years, airlines have been reassessing both the potential for co-operation with other
carriers and the value gained from the agreements and alliances of which they are already
a part.
This research project will contribute by gaining an understanding of the role played by
strategic alliances for both traditional airlines and LCC’s. It will evaluate senior
managerial perceptions of such strategic alliances and their usefulness in different
environments.
The research methodology included semi-structured interviews with a number of airline

executives, senior managerial staff and other academics. The research findings revealed
that the role played by strategic airline alliances has been continuing to evolve since their
establishment, however further changes will be necessary to ensure the financial viability
of such groupings into the future.
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A model was developed by which LCC’s could benefit from strategic alliance co-
operation in the form of minimal interlining arrangements and joint marketing. The
recommendations focused on co–location, joint internet sales and joint marketing
initiatives.
Further research might extend the sample selection to include a broader perspective of air
carriers. Further to this, research to establish a clearer view of passenger perceptions of
self-interlining would be of particular benefit, as the practice becomes more common,
especially amongst LCC’s.
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Table of Contents
Acknowledgements i
Abstract ii
Table of Contents iv
Chapter 1 – Introduction
1.1 Background 2
1.2 Objectives of Thesis 3
1.2.1 Value and significance of this research 3
1.3 Structure of Thesis 4
1.3.1 Literature Review 4
1.3.2 Method of Research 5
1.3.3 Findings Chapter 6
1.3.4 Discussion Chapter 6
1.3.5 Conclusions and Recommendations Chapter 6
Chapter 2 – Strategic Alliances and Airline Co-Operation
A Literature Review
2.1 Introduction 8
2.2 Definition 8
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2.3 Reasons for entering a Strategic Alliance 11
2.4 Types of Strategic Alliance 14
2.5 Alliance Challenges and Failure 16
Chapter 3 – Alliances in the Commercial Airline Industry
3.1 Introduction 19
3.2 The “Big Three” 19
3.3 CodeSharing 23
3.4 Aer Lingus and the OneWorld Alliance 24
Chapter 4 – Evolution of the Airline Industry
4.1 Introduction 28
4.2 European Competition Policy - Liberalisation of Routes 28
4.3 European Competition Policy – State Aid 30
4.4 The Emergence of LCC’s 30
4.5 Pending EU/US Open Skies Agreement 34
Chapter 5 – Research Design and Methodology
5.1 Introduction 38
5.2 The Research Process 38
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5.3 Problem Definition 40
5.4 Outline of Research Problem 40
5.5 Research Objectives 41
5.6 Research Question 42
5.7 Research Philosophies 42
5.8 Ontology, Epistemology and Methodology 43
5.9 Secondary sources of information, Data Collection 44
5.10 Primary sources of information, Data Collection 44
5.11 Qualitative research justification 46
5.12 Primary research design 47
5.13 Sample selection 48
5.14 Analysis of Data 50
5.15 Limitations 50
Chapter 6 – Research Findings
6.1 Introduction 53
6.2 Profile of Interviewees 53
6.3 Interview Findings 54
6.3.1 Interview Findings - Alliances when they were formed 54
6.3.2 Interview Findings - Change of Business Environment 57
6.3.3 Interview Findings - Alliances Now 63
6.3.4 Interview Findings - Airlines that become LCC’s 65
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6.3.5 Interview Findings - Alliances in Five Years Time 71
6.4 Conclusion 74
Chapter 7 – Analysis and Discussion
7.1 Introduction 77
7.2 Summary 77
7.3 Strategic Alliances and Airline Co-operation 79
7.4 Alliances in the Commercial Airline Industry 83
7.5 Evolution of the Airline Industry 85
Chapter 8 – Conclusions and Recommendations
8.1 Introduction 89
8.2 Conclusion 89
8.3 Model by which LCC’s could co-operate 91
8.4 Recommendations for future research 94
8.5 Concluding Comment 95
Glossary / Abbreviations 97
Bibliography 99
Appendices 108
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Chapter 1 - Introduction
1
Chapter 1 - Introduction
1.1 Background
Strategic alliances have become common in many industries, as companies pool their
resources in an effort to better their product offering and hence out-do their rivals. The
airline industry is no exception, with a large number of prominent alliances, as well as
many unilateral agreements, established between carriers.
The commercial airline industry is a highly challenging industry in which to operate. It is

prone to sustained financial failure because of high fixed costs, vulnerability to political
shocks and its high capital intensity.
Despite recent steps in the right direction, the airline industry remains a highly regulated
one, often making organic growth difficult. Issues such as limits on foreign ownership,
restricted access to markets, and state carriers role as a public service provider can result
in underperformance. Such restrictions have in some cases led air carriers to look to
alliances as a tool to manoeuvre around these restrictions, and grow their business.
There has been a radical ‘shake up’ in the industry in the past ten years beginning with
the introduction of the Southwest, revolutionary business model. Southwest’s business
model proved able to overcome the difficulties in the industry and produce healthy
profits. In Europe, Ryanair and easyJet followed and radically cut their cost base to
become Europe’s ‘no frills’ airlines. This business model, coupled with reduced fares that
they could now offer, proved highly attractive to travellers.
Traditional European airlines, both short and long haul, have also made changes to their
business model with the aim of cutting costs to maintain and grow their market share.
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Over the past decade, severe reduction in unit cost has become imperative to airline
survival.
1.2 Objectives of the Thesis
The purpose of the research is to analyze airline alliances from a strategic perspective and
to evaluate their usefulness with respect to the current and future environment in the
industry and specifically to;
1. Evaluate what impact the emergence and subsequent growth of the ‘budget carrier
business model’ has had on strategic alliances in the airline industry?
2. To analyse the impact that adopting a low cost business model has on the advantages
of alliance membership.
3. To propose a model by which low cost airlines could benefit from a strategic alliance.
4. To communicate the research findings to those involved in the study and other
interested parties.
1.2.1 Value and significance of this research
Although membership of the dominant global airline alliances is growing, a number of

the members who have transformed into low cost airlines are considering leaving these
alliances. The timing of this research is significant as AerLingus, amongst others, is
experiencing difficulties with its role within a strategic alliance (Irish Independent, 2004).
AerLingus plans to leave the OneWorld Alliance in early 2007. This is a clear example
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of an airline that has, or is at least in the process of, becoming a low cost / no frills carrier
(LCC). With this change of business model, AerLingus has found the benefits of alliance
membership erode.
There has been very little literature published to date, on the effects of changes in
business direction on the working of alliances, such as that of severe cost cutting
measures. This research will provide an insight into the reasons why some airlines are no
longer benefiting from these alliances. It will also demonstrate how lower cost airlines
may still be able to benefit from co-operation.
This research should benefit both the airlines experiencing this phenomenon and future
academics. Future academics may wish to broaden this research to include further
airlines, or examine whether co-operation through alliances is simply a delay tactic used
to defer the inevitable need to make changes to their companies, until bilateral
agreements permit open skies.
1.3 Structure of Thesis
In this chapter, the reader has been briefly introduced to the subject of this research, its
significance and the objectives of the thesis. The purpose of each of the following
chapters, is outlined below.
1.3.1 Literature Review
Chapter two examines the published literature on the topic of strategic alliances. The
chapter will examine the use of alliances, unspecific to the airline industry paying
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particular attention to the rational behind alliance formation, the common types of
alliances and alliance failure.
Chapter three will provide an overview of the role played by alliances in the commercial
airline industry. It will firstly examine the environment which led to the formation of the
alliances and look at the methods of co-operation used. Then it will look at both the
unilateral agreements between airlines and multilateral formal alliance formations within
the industry.
Chapter four will provide a short background to the airline industry in Ireland, examining
the changes in the business environment brought about by route liberalisation, EU
Competition regulations and the changing political landscape. This chapter will also
examine the LCC business model, and the impact that its success has had on the more
traditional ‘flag carriers’ and also the steps made by traditional carriers to address the
growing competition. Finally, this chapter will conclude with an examination of recent
developments in the industry.
1.3.2 Method of Research
Chapter five will outline the research design and methodology used, as well as examining
and explaining the research process. Importantly, this chapter will also include the
research problem, which is clarified in the research objectives and questions.
The methodology chosen for this research is qualitative research. The primary and
secondary sources of information used will be outlined, along with the justification for
the choice of research undertaken. The procedure used for sampling and sample selection
will also be outlined and the chapter will conclude with the limitations of the study.
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1.3.3 Findings Chapter
Chapter six will provide an analysis of the semi structured interviews undertaken. Firstly,
the interviewees will be profiled and then the chapter will outline the results of the
research. The results will be compared and contrasted to extract the key findings
emerging from the research. The chapter will then outline the perceptions of leaders and
leading personnel, from a variety of airlines and associated groups, as to their views on
the potential for strategic alliance co-operation.
1.3.4 Discussion Chapter
Chapter seven will discuss the primary research results identified in the preceding
chapter. This chapter will also investigate links with the literature reviewed, comparing
and contrasting the primary and secondary research in order to address the research
questions posed.
1.3.5 Conclusions and Recommendations Chapter
Chapter eight, the final chapter, will discuss the conclusions which can be drawn from the
primary and secondary research undertaken. This chapter will also proposes a model by
which LCC’s could benefit from a strategic alliance, through co-location, joint internet
sales and joint marketing initiatives. Recommendations will be put forward to such
carriers and for further study in this area.
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A Literature Review
7
A Literature Review
2.1 Introduction
Defined broadly as “any relationship between companies involving a sharing of

knowledge or resources,” (Vyas et al, 1995), Strategic Alliances have become
increasingly popular in recent years. The emergence of co-operating companies is part of
a broadly recognised move from the more traditional command and control management
approach of the past, to a new more flexible shared power management approach. This
enabling management style includes a willingness to embrace challenges in different
ways, made possible through the sharing of resources and power. With a global economy,
rapid product cycles, capital constraints, advances in technology and competition
legislation, no one firm has the capability to maintain and grow market share (Stanek,
2004). As a result, alliance formation has been increasing at approximately 25 % annually
since 1985 (Harbison and Peckar, 1998; Allio and Peckar, 1994 and Moll, 2000).
Intra and Inter industry co-operation is not new, as cooperatives have long built on
working relationships, to pool resources and share a common destiny. In more recent
years with increased importance placed on costly technology, recognition of the costs
associated with mergers and acquisitions and continued international market
imperfections, the scope for alliances has widened.
2.2 Definition
Drago (1997) defines a strategic alliance as “an agreement between two or more
organisations to work together and / or share resources for the benefit of the parties of
the alliance”.
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The use of this form of alliance has become increasingly popular in recent years as firms
look for new ways to maximise performance. Successful alliances can substantially
reduce costs for member firms. Rackham et al (1996), estimate that firms may achieve
better ‘bottom line results’ through alliances, than by internal cost reduction programs
such as downsizing or re-engineering. Further to the financial benefits, alliances also
open up the strategic possibilities including the creation of new market opportunities, as
found by Varadarajan and Cunningham (1995), increased economy of scale advantages
(Glaister and Buckley (1996)) and the creation of sustainable, long-term competitive
advantage (Bowersox et al (1992); Day (1994)). The relevance of alliances in the USA
was further increased by a 1991 US Supreme Court ruling which paved the way for third
parties to mount legal attacks on proposed takeovers. This added disincentive to engage
in mergers and acquisitions has forged closer ties between independent bodies, who
might otherwise have merged (Vyas et al.,1995).
With increased scope for their use, the activity of alliances has become central to
corporate strategy (Gulati et al, 1994) with one in eight executives believing that they
constitute an essential prime vehicle for corporate growth (CMA Management, 2000).
Drago (1997), lists some benefits of strategic alliances such as; reducing demand
uncertainty, reducing competitive uncertainty and reducing internal organisational
uncertainty. Demand uncertainty is caused by the unpredictability of consumer
purchasing behaviour. Competitive uncertainty is the interdependence of firms on one
another and how this defines their position in the industry. Inter-organisational
uncertainty refers to issues involving supply and distribution channels (Harrigan, 1998).
Drago also lists drawbacks of alliances such as decreasing organisation flexibility and the
time and effort involved in managing such alliances.
The potential uses, and hence benefits of strategic alliances, are as broad as the company
or project to which they are applied, yet attempts have been made to examine and
categorise these benefits. Ellram (1991), summarised these benefits into three categories;
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Financial Benefits, Technological Benefits and Management Benefits and Whipole and
Gentry (2000), added a further category, Strategic Benefits.
Figure 1, Dimensions of Strategic Alliances – Source : Vyas et al.(1995)
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2.3 Reasons for entering a Strategic Alliance
With alliances being formed for a multitude of different purposes, the rational behind
inter/intra industry competition in this way is equally broad ranging. However, the
literature does find patterns of rational. Coopers and Lybrand (1997), find that 54% of
firms that formed alliances, did so for joint marketing and promotional purposes. To add
to this, Wheelen and Hungar (2000), found that firms also join into such alliances to gain
technology, gain access to specific markets, to reduce financial risk, to reduce political
risk and to achieve or ensure competitive advantage.
Vyas et al, find that the maturity of the industry has a bearing upon their reasons for
alliance co-operation. They find that mature industries lend themselves toward alliances
aimed at market related factors, whilst growth or high-tech industries, favour alliances
aimed at technology related factors, as a view to increasing technology transfer. As
market related factors, Vyas et al list; gaining distribution, accessing materials and
resources, diversification to share risk and the gaining or retention of competitive
advantage, as issues important to mature industry alliance co-operation. In growth and
high tech industries, they suggest that the main issues of concern are technology transfer
and joint Research and Development (R&D). Technology transfer can be an attractive
alternative to costly individual investment.
A number of writers propose methodologies for successful alliances including

Ohmae(1989), Stafford (1994) and more recently Drago (1997). Drago, looks more
closely at firms motives for entering strategic alliances and proposes seven main
circumstances under which strategic alliances make sense for firms;
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Small Firms- to reduce environmental uncertainty.
Drago proposes that small firms can benefit from strategic alliances as they decrease
members environmental uncertainty. Small organisations often experience a lack of
resources and are more likely to be threatened by competitive uncertainty. Small firms
by their nature don’t have the power to influence the industry in which they operate. This
is often true in the case of the Airline industry, where due to the size of the industry, each
individual airline has little power of influence over the industry as a whole. Many
airlines have joined alliances to reduce the uncertainty associated with being a small
player in a large market.
Firms in a highly innovative industry- to increase influence in industry

Secondly, Drago proposes that organisations operating in a highly innovative industry
could use strategic alliances to reduce both market and operational uncertainty by
providing greater access to customers and by increasing their influence in the industry.
Component part suppliers – to reduce operational uncertainty

Drago’s third reasoning behind alliance entry is that firms which produce component
parts for larger technological systems are likely to benefit from strategic alliances. By
partnering with other component parts suppliers, firms can reduce operational
uncertainty, increasing their knowledge and control their role in the industry, leading to
an increasing ability to influence future direction. Membership may also bring about a
more prominent market position for the members of the alliance. An airline providing a
service to a passenger as part of a multi airline journey, is in many ways similar to a
component supplier as the service they provide is simply a component of the overall
service bought by the customer.
Firms with “ pure innovation strategies”- to reduce market uncertainty

Fourthly, Drago suggests that firms competing with “pure innovation strategies” rather
than those with “imitation innovation strategies” are likely to gain from strategic
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alliances. Such pure innovation strategy firms, which set industry standards, have greater
market uncertainty, which can be diminished by means of an alliance.
Firms entering new markets- to reduce market and operational uncertainty

Drago’s fifth proposal is that firms entering new markets are likely to have high market
and operational uncertainty and would therefore benefit from the membership of a
strategic alliance. Due to market imperfections, inter governmental agreements and
national regulations, airlines can not freely fly in many markets. Many alliances are
formed by airlines as a next best alternative to opening new routes into a particular
market.
Firms without an integrated strategy- use flexibility to co-operate

His sixth proposal is that firms that don’t compete with highly integrated “global”
strategies are more likely to benefit from a strategic alliance. When firms have an
integrated strategy, they require organisational flexibility, making alliance participation
difficult. Some larger airlines have highly integrated global strategies, yet still look to
alliance membership, perhaps judging that the benefits still outweigh the drawbacks.
Firms which lack resources- to benefit from shared resources

Finally, Drago proposes that firms that suffer from a lack of resources could benefit from
resources levered across parties of the alliance. The airline industry is a capital-intensive
industry, due mainly to the cost of aircraft. When coupled with strong competition and
fluctuating oil prices, air carriers often suffer from a lack of resources.
When we examine the airline industry with Drago’s proposals in mind, we can clearly see
why strategic alliances have become so popular. The airline industry is highly
competitive in nature and airlines are certainly vulnerable to competitive uncertainty. Air
carriers are highly susceptible to both market and operational uncertainty as demand and
levels of regulation are constantly changing. For these reasons we can see why airline
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alliances are viewed by airlines as necessary and have become the fastest-growing area of
competitive advantage since 1993 (Asian Business, 1997).
2.4 Types of Strategic Alliance
There are a number of types of strategic alliance. These can be categorised by means of
the objective of the alliance. Vyas et al. maintain that the type of strategic alliance
formed is a product of the technology involved and market related factors present in the
industry or market. Technology Associates and Alliances (1999), an alliance consultation
company, list the following type of alliances; marketing and sales alliances, product and
manufacturing alliances and technology and know-how alliances. Going somewhat
further, Coopers and Lybrand (1997), identified seven forms of alliance in their study.
The types of alliance they identified, in decreasing popularity were; joint marketing /
promotion [54%], joint selling / distribution [42%], production [26%], design
collaboration [23%], technology licensing [22%], research and development contracts
[19%] and finally other outsourcing purposes [19%].
Despite of input or scope, the potential gain from any alliance can only be fruitful to a
point. As a result, companies have become increasingly willing to engage in multiple
alliances. Known as ‘Octopus Strategy,’ firms are engaging in alliances for specific
projects or purposes such as risk diversification on large projects.
Vyas et al, propose four steps by which a company can examine the potential for alliance
formulation.
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Their G.W.A.P. (Group With Alliance Potential) model, shown below, suggests that
alliances are formed when there is;
1- Goal compatibility,
2- Synergy among partners,
3- Value Chain benefits and
4- Balanced contribution amongst partners.
Figure 2, G.W.A.P. – Dimensions of Strategic Alliances - Source : Vyas et al.(1995)
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2.5 Alliance Challenges and Failure
Elmuti and Kathawala (2001), explain that the trend toward strategic alliances in business
has, in many cases, not brought the desired results to those involved. It is hard to
measure the success or failure of an alliance. What constitutes a failure? Is it simply
when an alliance ends or must we look at degrees of success and failure? Kalmbach and
Roussel (1999), claim that over sixty percent of strategic alliances fail. Elmuti and
Kathawala studied the reasons behind the high failure rate. They suggest that a clash of
culture or personality, a lack of trust, a lack of clear goals or objectives, a lack of
coordination between management teams, differences in operating procedures or attitudes
among partners, relational risk of opportunistic behaviour, general performance risk and
the risk of creating a future strong competitor are the main reasons behind strategic
alliance failure.
Kalmbach and Roussel also point to other reasons such as; a breakdown in trust, a change
in strategy, the champions have moved on, the value did not materialise, the cultures did
not mesh and the systems were not integrated.
Vyas et al. simplify these findings into three categories; power imbalance, reduced
relevance of initial agreement over time and technology change. Power imbalance can
lead to strained working relationships, when either perceived or real imbalance exists, for
example in terms of size, resources, image or market access. The basis upon which the
alliance was formed, is likely to change over time. One company may find, that it no
longer needs the skills or knowledge provided by their partner, after a certain period of
time, especially where the knowledge is duplicable or if the firm has increased resources
(Vyas et al, 1995).
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Alliances often seem somewhat seductive, presenting a simple solution to a range of
strategic dilemmas, but they more than often end in disappointment (Koza and Lewin,
2000). Further that simply causing disappointment, some academics claim that alliances
are self-defeating, unstable and only transitional (Beamish and Inkpen, 1997; Das and
Teng, 1999; Kogut, 1989). Dyet et al.(2000), found that 50-80% of alliances result in
failure, research which is widely supported. In another study which examined the views
of 323 senior executives, it was found that only 39% of alliances met, or exceeded
corporate expectations (CMA Management, 2000). One of the most common form of
alliance failure is when the alliance is ‘still born,’ in that, the announced alliance never
gets up and running. Ring (2000), suggests that firms should avoid ‘love at first sight,’
and concentrate on how their objectives should be met.
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3.1 Introduction
This chapter will begin by examining the role played by the “Big Three” global airline
alliances; STAR Alliance, the OneWorld Alliance and SkyTeam. The objectives behind
each will be explored and their focus determined. The second section of this chapter will
look at the practice of Code-Sharing, and the benefits of such co-operation between
carriers. And finally, this chapter will examine the AerLingus experience as a member of
the OneWorld Alliance.
3.2 The “Big Three”
The airline industry is no exception to the increased predominance of strategic alliances

seen in other industries. Large global alliances such as the OneWorld, STAR Alliance,
SkyTeam, The Wings Alliance and the Global Excellence Alliance have emerged, as air
carriers team up with strategic partners across the world. Hamel et al. (1989), noted the
need to collaborate strategically with one’s competitors, in order to succeed. In many
ways, this is what airlines have been doing.
Strategic alliances in the airline industry were formed in the 1990’s, as a result of an
increasingly difficult business environment, which consisted of declining loads, over
capacity, a reduction in prices, massive financial losses, de-regulation and privatisation
(Bennott, 1997). With this difficult business environment, alliances of both strategic and
tactical nature, became an increasingly important feature of the global airline industry.
This was precipitated, primarily by financial pressures at the time and assisted by
deregulation, privatisation and globalisation which were taking place. They became an
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almost universal trend within the industry. In effect, alliances were the popular, arguably
long overdue, reaction by airlines to reduce over-capacity and improve economic
performance (Bennott, 1997).
The three largest, and most prominent, were the STAR Alliance, the OneWorld Alliance
and SkyTeam. Such alliances often offer combined purchasing and the sharing of services
and infrastructure, joint scheduling and marketing and a combination of frequent flier
programs, (Dennis, 2005).
Sullivan and Coughlan (2004), examined the use of horizontal distribution alliances in the
international airline industry. They describe alliances in the airline industry as;
‘horizontal distribution alliances,’ where entrant airlines form a partnership, allowing the
use of the channel resources of other airlines, in order to distribute their air service in the
market. In horizontal distribution alliances, the host acts as the distributor for the entrant
(Root, 1994). An example of this, common to the airline industry, included the use of
partner ground handling services within a market, as the entrant ‘piggybacks’ or rides on
the distribution system of the host (Terpstra and Simonin, 1993). Sullivan and Coughlan
point out that, similar horizontal distribution alliances are used in the pharmaceutical and
automobile industry, where companies borrow each others sales forces, to gain market
access. Horizontal distribution alliances are unique from vertical alliances, as often those
with which the partnership exists, was an industry competitor and may continue to be a
competitor in other markets. As a result, such alliances represent considerable risk to
those involved (Ryan, 1976). The co-operation could lead to the host gaining technology
from the entrant and hence becoming stronger, or the reverse, the entrant learning
sufficient knowledge of the market to no longer require the host.
Bennott points out the difficulty associated with organising the practical working
arrangements needed for alliance co-operation. Issues such as organising co-operation in
order to generate benefit for both parties in terms of co-ordinating route schedules,
managing FFP exchange and reorganising human resources to eliminate duplication are
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particularly difficult. As an example of these difficulties, Bennott points to the failed
attempt, in 1992, to form a four airline alliance to be known as ‘Alcazar,’ which failed to
resolve the practical issues regarding to the cooperation.
Chan (2000), analyses the tactics used by carriers in the highly competitive Asian airline
industry. He points to the 1990’s, as the point that saw the emergence of many types of
collaborative strategies on the Asia Pacific air travel scene. These collaborative strategies
were in areas such; as the development of new markets, air agreements and airline
alliances. Chan takes the example of Singapore Airlines’ entry into the ‘Global
Excellence Alliance’ with Swissair and Delta in 1995, where Singapore Airlines cited the
need to find quality sources of products and services at a cost saving to the three airlines,
as its motive for joining the alliance (Singapore Airlines, 1996).
Horizontal alliances amongst airlines are common as airlines frequently pool operating
assets, such as staff or aircraft, allowing each other increased access to markets without
large capital outlays (Gallacher, 1994).
When STAR, OneWorld and SkyTeam first began to take shape, they promised a wealth
of opportunity for enhanced revenues and cost reduction, and through the boom years of
the late nineties, the groupings delivered on the revenue gains, which in turn expanded
their network reach. (O’Toole, 2002). But in the subsequent years, particularly post 2001,
doubts have begun to emerge as to whether alliances are, any longer, the right vehicles to
deliver on costs.
A study conducted in mid 2002 by Cap Gemini Ernst & Young, suggested that the
present alliance business model was showing weaknesses (O’Toole, 2002). It highlighted
that nearly two-thirds of member airlines complained that alliance benefits had not yet
lived up to their initial expectations. They complained that there was a lack of delivery on
cost benefits, which had become the most important issue for cash strapped carriers. This
study found that :
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“Bilateral deals or specific alliances based on a single issue, service or region,
should, by definition, offer better focus and potential synergies in their chosen
areas.” - O’Toole, 2002
The chart below depicts the results from this study into executives’ views on levels of
effort put into integration at the time.
Figure 3, Alliance Effort - Source : Airline Business, July 2002
Despite the disappointment expressed in the rate of progress made by these alliances,
underlining difference began to emerge in the way that the groupings were progressing.
Network coverage was one of the original reasons behind the formation of the groupings
and despite initiatives such as joint purchasing, the size and shape of their combined route
networks, remains central to alliances attractiveness (Pinkham, 2002).
STAR had and continues to have, the largest reach, leading the class in terms of raw
frequencies, system capacity and destinations served (STAR, 2006). Further to this, their
carriers began forging relationships with some low-cost start up’s, such as Virgin Blue.
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Lacking the clear strength possessed by STAR, OneWorld highlighted it’s network
quality, whilst SkyTeam focused on it’s level of integration, as it’s unique selling point
(Pinkham, 2002).
OneWorlds’ momentum was slowed by multiple failed attempts to obtain regulatory

approval for collaboration between British Airway and American Airlines, as well as the
rapid growth of low-cost competition in Europe. Low-cost competition led to the need for
AerLingus and British Airways management to spend time adjusting their own
businesses models (Pinkham, 2002).
OneWorld has increased it’s number of code-shares and is in the process of adding two
new members; Malev and JAL to their ranks (OneWorld, 2006). STAR have continued to
grow, and presently have eighteen full members, as well as three further members, which
are part of their ‘regional membership strategy’ (STAR, 2006). SkyTeam presently has
nine member airlines (SkyTeam, 2006).
Despite the increases in their size, in the past five years, there has been little fundamental
change in the way they operate. This is despite a growing consensus that alliance players
need to redefine their objectives around achieving revenue and marketing benefits
(O’Toole, 2002).
3.3 Code Sharing
One of the fundamental forms of co-operation within the airline industry is that of code-
sharing. Power (2003), explains that the title comes from the use by airlines of their
partners flight designator codes. Code-sharing sees airlines either buying a number of
seats on a flight for re-sale, or more often, the host giving permission for the sale of seats
in another airlines name. In code-sharing, an airline is simply using another airline to
service its passengers, a practice common in the industry (Harris and Power, 2003).
23
Code-sharing has been used by alliance members, and non alliance members alike, as a
way in which to increased loads on flights. This is particularly the case where capacity
may not justify the use of two aircraft, on a particular route. Instead, two airlines share
the one flight and sell seats under their own names. Code-sharing can also act as a form
of market access, where regulations do not allow a carrier access to a particular market.
3.4 AerLingus and the OneWorld Alliance
AerLingus, the Irish flag carrier, joined the OneWorld Alliance in 2000. The AerLingus
experience of alliance membership is of particular interest to this study, as their strategy
has changed fundamentally since joining, and as a result, is “no longer convergent with
OneWorld’s” (One World, 2006). The alliance points out that their key target market is
the multi-sector, premium, frequent international traveller, while AerLingus has
repositioned itself as a low fares, point-to-point carrier (Creaton, 2004).
De-regulation of the airline industry happened earlier in Ireland than most other European
countries, leading to a transformation of the air carrier industry here. A number of
carriers were set up including; Ryanair, AerArann, City Jet, EuroCeltic, JetMagic,
Transair and JetGreen, which in turn lead to the Irish airline industry becoming much
larger than airline industries in other countries, including those with larger populations
(Creaton, 2004). The Dublin London route became the busiest in the world, as
competition lead to lower fares and increased sales and there were spin off effects for
tourism, seeing the Irish tourism industry become the fastest in the OECD (Creaton,
2004). De-regulation in Ireland caused a substantial increase in public support for de-
regulation, which later spread across Europe.
24
With de-regulation, AerLingus was exposed to intense competition which, amongst other
pressures, resulted in the re-modelling of the carrier as a low fares, point-to-point airline.
Aer Lingus experienced, what has become known as ‘distressed state airline syndrome,’
made famous after a speech from Olympic Air boss Rigas Doganis, (Fellman et. al, 2000
and Doganis, 2001), and was suffering from continuing substantial losses, over
politicisation, strong unions, over staffing, and no clear development strategy (Barrett,
2005). The repositioning has been broadly successful, as the company has returned to the
black and has obtained much higher labour productivity. Staff numbers were cut, the air
fleet was made more uniform, turnarounds were speeded up and passengers now pay for
meals on short haul flights.
In 2004, a Goldman Sachs report, commissioned by the Irish Government, recommended

that AerLingus leave One World, allowing it to further emulate Ryanair’s point-to-point
service. The report points out that these groupings have not been proxies for mergers and
are under pressure as individual airline business models move in different directions.
“Those airlines, like Aer Lingus, who are moving towards a point-to-point network, have
less to gain from expensive linkages with hub-and-spoke partners” – (Goldman Sachs,
2004).
At the time, the company estimated that only 30% of their passengers to London were
interlining amongst the OneWorld airlines. In New York, this figure was estimated at 7%,
while more than that many were catching connecting flights with JetBlue, organised by
the passengers themselves, over the internet (Goldman Sachs, 2004). Self-interlining with
JetBlue required no agreement or involvement on behalf of AerLingus, allowing each
flight to operate as an independent point-to-point service.
The exit of AerLingus from the alliance, is likely to take place in early 2007, with no
plans for the airline to join another alliance (One World, 2006).
25
Despite numerous studies being conducted on the use of such alliances within the airline
industry, there seems to be a lack of research into how a change in strategy or business
model, effects a carrier’s suitability or interest in alliance membership.
26
Chapter 4- Evolution of the Airline Industry
27
Chapter 4- Evolution of the Airline Industry
4.1 Introduction
The purpose of this chapter is to give a brief introduction to the evolution of the airline
industry, particularly over the past fifteen years. The airline industry was, and to some
extent remains, a highly regulated industry. Two of the main regulatory regimes which
impact upon airlines are; competition policy and the international traffic rights system of
bilateral treaties (Goldman Sachs, 2004). This chapter will examine the steps taken by the
EU toward eliminating these barriers, by creating a liberalised air service market within
the EU and opening negotiations with the US on the potential for an “Open Skies”
agreement.
This chapter will begin by looking at the deregulation of the sector and the liberalisation
of routes which followed. Secondly, this chapter will look at the regulation of states
subsidies. The third section of this chapter will look at the emergence and growth of
LCC’s, examining their methods and business model. The fourth section looks at the
proposed “Open Skies” agreement between the EU and the US.
4.2 European Competition Policy - Liberalisation of Routes
In the eighties, AerLingus was one of the more successful of the Irish semi-state
companies and was protected by a lack of political appetite for any initiative that might
jeopardise its position. Despite this, in 1986, the then Minister for Transport Seamus
Brennan convinced the Irish cabinet to back his proposal, to allow Ryanair fly to London
Luton. This was, arguably, the first real step toward liberalisation of the heavily regulated
Irish air transport industry, after a brief failed start-up by Avair. The step to support
Ryanair was also in line with the first phase of the EC’s 1987 policy to liberalise the
28
market. A subsequent Irish government decision saw Heathrow given to AerLingus,
while Ryanair was allowed to fly to Stanstead (Creaton, 2004).
Sorensen and Dukes (2004), point out that during this time, the European Council had
adopted a program, aimed at completing the internal market by 1992. Such a goal
required the promotion of economic integration in all areas including the airline industry.
Over time, it became generally felt that business travel and tourism, were not very well
served during the first twenty years of the European Community, because the air
transport sector in Europe was very fragmented (Sorensen and Dukes, 2004).
While 1990 saw the second EU liberalisation package, this time covering all non
domestic traffic flows and pricing, yet there was still a strong feeling that air transport
was failing in it’s function, as a driving force for economic integration. The internal
market for the air transport sector was finally completed by the end of 2002. This created
a community-wide air transport market and the old protectionist system disappeared. Air
carriers were, from that point on, permitted to operate without the need for government
permission (Sorensen and Dukes, 2004).
Liberalisation in the market broadly had the desired effect with gradually growing
competition emerging, despite issues such as capacity restrictions at airports. This newly
competitive environment put pressure on air carriers to reduce cost, or risk going bust, as
was the case with Sabena.
“The single best motivator that we had was when there was a Ryanair aircraft
sitting out on the ramp outside our window.”
– David Kennedy, Ex CEO of AerLingus. Source – (Creaton, 2004).
The liberalisation process in Europe demonstrated that air transport responds to normal
market forces. The response of the, so-called, flag carriers was to establish the system of
strategic airline alliances, upon which this research is based.
29
4.3 European Competition Policy – State Aid
The liberalisation of the European air transport industry was only part of the effect that
European competition policy has had on the industry. Competition regulations were also
put in place, governing issues such as; anti-trust, mergers and state-aid.
The objective of competition policy, in relation to state aid, was to ensure that
government support does not interfere with the smooth functioning of the internal market
and to enhance structural reform (DG Competition, 2003). As part of this policy of
promoting competition in the industry, state subsidies to national flag carriers were
ended. The policy motivation for this was to prevent national favouritism and thus
promote opportunities for trade and competition among the member states (Wise, 2005).
Competition policy within the EU is more strictly enforced than elsewhere in the world
and the Commission can force a Member State to end aid provision and order the
recipient of illegal aid to return it. These policies on state aid have the effect of
preventing governments from “rescuing” failing carriers. Despite their owners, the
government, being willing to provide new equity, Sabena, Alitalia and Olympic have
suffered from these restrictions and have been, or are likely to be, wound up (Goldman
Sachs, 2004).
4.4 The Emergence of LCC’s
Southwest Airlines Company, a Texas corporation, was established in March 1967 by

Rollin W. King (Lovelock, 1975). Southwest was the first airline to brand itself as a low-
fares airline, designing a business model that would allow it to provide scheduled flights
30
at a very low cost (Creaton, 1994). Southwest’s business model was revolutionary, yet
simple, focusing on the following principles;
- Flying short routes with great frequency

- Not allowing booking of onward connections with Southwest or an other airline
- Flying to secondary airports
- 25 minute turn-arounds squeezing as many flights as possible per day.
- Used a single type of aircraft minimising training and purchasing costs
- Simple onboard service
- No assigned seats
- Entertainment by cabin crew’s zany antics
- Controversial marketing (Creaton, 2004)
This combination of principles became part of what is now known as a low fares airline.
It’s success was quickly proven as passengers flocked to book these cheap tickets. The
revolutionary business model proved able to overcome the difficulties in the industry and
produce value creation. There was a clear cost advantage over other US airlines of as
high as 20 to 40% (Creaton, 2004).
31
Figure 4, Low Cost Carriers - Source :Soerensen (2004)
32
The concept crossed the Atlantic to Europe with the deregulation of the market in 1990,
with the establishment of Ryanair and EasyJet, and more recently Go, Buzz, Basiq Air
and bmiBaby. These all followed the “low fares” model and have steadily grown market
share in a rapidly increasing number of countries across Europe, and more recently
Morocco. They have rapidly overtaking the established carriers in market capitalization
on the stock exchanges.
Traditional “flag carrier” airlines and Low Cost Carriers (LCC’s), have different yield
management philosophies: Under the No-Frills model, prices increase with demand.
A seat on a flight is a scarce commodity. Whilst under the full service model, the focus is
on business traveller. A seat on a flight is a perishable commodity (Soerensen, 2004).
Figure 5, Yield Management Philosophies - Source : Soerensen (2004)
Creaton (2004), points out that the emergence of LCC’s since the 1990’s, brought about
considerable change in the airline industry, not only by increasing competition, but by
introducing an alternative method of flying to travellers.
33
“...there is going to be the Mother and Father of all Fare Wars. There is going to
be a ferocious bloodbath...” - Micheal O’Leary, 25 April 2004
The response of the traditional network carriers to the emergence of LCC’s was laid out
by Vagn Soerensen, the Chairman of Association of European Airlines. He pointed out
the need to create customer focus and cut costs (Soerensen, 2004). They have begun to
create customer focus by:
- Implementing new & simplified fare structures

- Using new revenue report architecture
- Maximising existing investments in aircraft, IT and staff and
- Reducing wastage & inefficiencies
They are cutting costs by:
- Simplification & increased utilization of their fleet

- Reviewing their routes
- Reducing staff numbers and using more suitable contracts of employment
- Reducing distribution commissions and increasing the use of on-line booking
- Rationalising procurement procedures
(Soerensen, 2004)
4.5 Pending EU/US Open Skies Agreement
Now that the internal EU market for air transportation has been opened up, the EU has
focused its attention on the USA. Internal liberalisation resulted in growth in the industry,
increased competition and overall benefits for travellers. The EU’s view is that similar
34
benefits would result from the opening up of routes across the Atlantic by what has been
referred to as an “Open Skies” Agreement.
Sorensen and Dukes (2004), explain that under the current system, national majority
ownership and control of airlines is required under bilateral air service agreements. These
agreements therefore restrict cross border acquisitions and mergers, along with restricting
carriers from expanding their services internationally. Another important aspect of these
agreements is the traffic rights which they permit. In most cases, foreign airlines are also
restricted from carrying passengers between two points within a foreign country. Without
this right, known as Cabotage, airlines access to the foreign country is severely limited
and their expansion into the foreign market is impossible. Soerensen and Dukes refer to
the current international traffic rights regime, as a relic of an outdated concept of air
travel as an activity under close national control. Other agreements include further
restrictions, such as the Irish requirement that fifty percent of Atlantic traffic, stop off in
Shannon.
With the opening up of the internal EU market to competition, a situation was created
whereby US carriers could operate to European airports and beyond to other EU or third
country airports, while European air carriers could only operate into designated US
airports but not into other US airports. This clearly put European carriers at a significant
handicap as the EU internal market was open to the US air carriers, while the US internal
market was closed to EU air carriers (Soerensen and Dukes, 2004).
With this in mind, the EU hoped to establish a fully open market with the US. This would
include full market access and the removal of restrictions on ownership and control. It
was also envisaged that a consultation procedure between parties be established, to deal
with issues arising from differing views on state aid to carriers. The ‘Open Skies’
negotiations began in Washington in October 2003.
35
Although these are the ultimate goals of the EU, the EU/US Air Transport Agreement in
its current form doesn’t go quite that far. Whilst issues such as market access, wet leasing
and competition have found general agreement, a number of issues which are continuing
to cause contention include; Cabotage, the right to fly between two foreign countries (7 th
Freedom rights), domestic wet leasing (with crew), state aid and slot allocation.
In August, 2005, The EU and the US signed a preliminary accord, which is likely to
result in greater international competition and expanded service across the Atlantic. The
most significant breakthrough from the European perspective, was the agreement to grant
7th freedom and hence eliminate the requirement for European airlines to take off from
their home country when going to the United States. The European Union would
essentially become one country for the aviation world (Phillips, 2005).
The second stage of the negotiations were scheduled to begin in October 2006 with
Stefaan De Rynck, the EU transport policy spokesman, pointing out that the one issue left
to work out was that of control of airlines by non-US citizens. This issue is not strictly
part of these negotiations, however it makes up part of the context of the deal. A decision
by the U.S. to relax the current tight rules against European airline investment in U.S.
airlines, could result in a flow of new money into the ailing U.S. airline industry (Phillips,
2005). Presently, a law limits foreign investors to 25 percent voting equity in a U.S.
airline.
However, the deal has been recently delayed, when Washington announced that it would
put off relaxing restrictions on foreign ownership of it airlines, citing the need for U.S.
Congress to discuss security issues. Despite this setback, the EU and the U.S. have said
they hope the pact could enter into force on March 25, 2007, in time for the beginning of
the summer season (Xinhua, 2006).
36
37
5.1 Introduction
This chapter will provide an outline of the methodology used to conduct the primary
research, aimed at achieving the stated research objectives of this thesis. It will then
outline the research that was conducted and justify the rational behind the choice of
methodology.
The sections that follow provide an overview of the research process and the steps
involved. The research problem will be outlined and the research questions will be
defined. The design of the research will show the nature of the investigation and the
rational behind the decisions made. Finally, the limitations to the methodology used will
be discussed.
5.2 The Research Process
There is some discrepancy among authors, as to the number of steps that should be
involved in a research process, however practically all writers accept that researchers
should follow a set of steps (Hussey and Hussey, 1997). Dibb et al., (1991) sum up the
benefit of following such a set of steps, highlighting the need for controlled research;
“to maintain the control needed for obtaining accurate information… The difference
between good and bad research depends on the quality of the input, which includes
effective control over the entire marketing research process.”
Bryman (2001), developed a simple six step model which explains the basic principles by
which qualitative research is conducted. The model is relevant to this study as it has been
38
decided to use qualitative techniques in this research. The choice of qualitative rather
than quantitative techniques is discussed later.
Brymans six step model recommends the following, as a sequence for conducting
qualitative research;
1/ Ask general research questions

2/ Select relevant sites and subjects
3/ Collect the relevant data
4/ Interpret the relevant data
5/ Perform the conceptual and theoretical work
6/ Write up the findings and conclusions
Bryman also suggests that steps four and five should be repeated to ensure a tight
specification of research questions are asked.
Whilst Brymans’ theory is a good introduction to research methodologies, there are many
variations of these basic steps, aimed at best performing the type of research required. As
this thesis is exploratory in nature, aiming to propose a model as an outcome, Creswell
(2003)’s Induction Model for Research, was deemed to be relevant to this particular study
and was hence followed.
Creswell’s five step model aims to formulate a theory as an outcome of the research
undertaken. In order to develop a theory, Creswell suggests that the following steps be
followed;
1/ Firstly, information is gathered through interviews or observations.

2/ Next, open ended questions are asked of participants, or the researcher records field
notes.
3/ Thirdly, the data is analysed to form themes or categories.
39
4/ Then, the researcher looks for broad patterns, generalisations, theories or theses.
5/ Finally, the researcher compares generalisations, or theories to past experiences
and literature.
In the case of this study, the stated aim of proposing a model is dependant on the outcome
of the findings of the other research objectives. Where the potential for such a model to
be formulated exists, one will be proposed.
5.3 Problem Definition
The Research Problem is the need for research to be able to focus on a distinct problem or
issue (Hussey and Hussey, 1997). This explorative phase is only possible if the author
first carries out some exploratory research in the area (Chrisnall, 1991). As part of this
research, in depth secondary research was firstly undertaken, from a variety of sources.
Secondly, a number of pre-interview discussions were conducted, to determine the
appropriate focus of the research. These pre-interview discussions were undertaken with
one academic with experience in the area and two high level airline analysts. The focus of
the research was also discussed with academics and others with a knowledge of the issues
surrounding the industry.
5.4 Outline of Research Problem
Much of the literature conducted on alliances and inter corporation co-operation, suggests
that companies can benefit from closer co-operation with their counterparts (Rackham
1996, Varadarajan and Cunningham, 1995, Glaister and Buckley (1996), Bowersox et al
(1992) and Day, 1994). With this academic optimism and such positive perspectives
aired, on the potential for synergies and cost reduction, it is not entirely clear why in the
40
air transport industry, there seems to be a split in opinion. In the air transport industry,
inter-airline co-operation has been a highly prominent factor for many years, with many
companies joining up to the three main global strategic airline alliances, but at the same
time, a whole range of other companies, in the same industry, are not interested in such
co-operation. As a result there is a need to understand what makes strategic alliance co-
operation such an attractive proposition for some carriers, whilst remaining not attractive
to others. For example, since this research began, the OneWorld alliance has formulated
plans to admit two new member carriers JAL and Malev, while AerLingus has decided to
leave the grouping.
In this context, the purpose of this study is to examine the attitudes to alliance co-
operation of a number of industry leaders, both those from companies involved in
alliances and those opposed to such groupings. It is therefore the author’s intention, to
investigate these issues by conducting an exploratory study into the differing benefits of
alliance membership, whether perceived of real, to different air carriers in the industry.
5.5 Research Objectives
Research objectives are simply a statement of what information is needed (Aaker et al.,
(1998). Such objectives are necessary, in order to guide and control the process of data
collection and analysis, and to ensure that the most accurate results are obtained from the
research conducted. Although this research is exploratory in nature, a number of set
objectives of research have been stated for further clarification. In order to propose such a
model, it is vital that a number of issues are first more clearly understood.
41
This study will specifically;
- Examine the role played by Strategic Airline Alliances

- Evaluate the attitudes of industry leaders, from differing cost base philosophies, as
to the usefulness and potential benefits of alliance membership
- Evaluate the differing attitudes to alliance co-operation of leaders of traditional
carrier airlines, as opposed to those of low cost, budget carriers.
5.6 Research Questions
- What impact has the emergence and subsequent growth of the ‘budget carrier
business model’ had on strategic alliances in the airline industry?
- Why do some air carriers join strategic alliances?
- What factors have impacted upon the benefits of alliance membership?
- What impact has adopting a low cost business model had on the advantages of
alliance membership?
- Can Low Cost Carriers (LCC’s) benefit from strategic alliances?
5.7 Research Philosophies
When it comes to performing primary research, there are a large number of different
philosophies and approaches in common use. One study lists no less than forty five
different approaches to qualitative research (Tesch, 1990, cited Dey, 1993). As this study
is essentially exploratory in nature, where the ideas and objectives become more clearly
defined through the research (Cooper and Emory, 1995), it is important to understand the
strengths and weakness associated with different research methods. Each method has
intrinsic strengths and weaknesses which need to be taken into account.
42
5.8 Ontology, Epistemology and Methodology
The methodology should not be chosen until an ontological and epistemological

perspective for the study has been chosen (Bryman, 2001). Ontology refers to the nature
of social entities and the way in which we view the world, “the reality.” Epistemology is
the relationship between the researcher and reality. Put simply, it is important to ensure
that the perspective and past experience of the researcher, is taken into account when
choosing a methodology.
This can sometimes be referred to as the paradigm. Hussey and Hussey, (1997) describe a
paradigm, as the “total conceptual framework, in which the researcher may operate, or a
process of scientific practice, based on people’s philosophies and assumptions about the
world and the nature of knowledge.”
Two main paradigms; Positivism and Phenomenology, each have their own associated
strengths and weaknesses, which must be considered.
- The positivism view, assumes that the “social world exists externally and its
properties should be measured through objective methods, rather than be
subjective inference” (Easterby-Smyth et al., 1999). It assumes that the world is
peripheral and objective, and focuses on observed facts, often lacking the depth
needed to gain a true understanding of the process underlining the phenomenon
(Gill and Johnson, 1997).
- Under the Phenomenological view, researchers should attempt to understand and

explain why people have different experiences, rather than searching for outside
causes for their behaviour. Phenomenology assumes the world is socially
constructed and subjective and that the observer is part of what is being observed,
43
focusing on meaning, whilst developing ideas through induction from data. It
seeks to understand, rather than perhaps quantify, certain naturally occurring
phenomena in the social world. Qualitative research tries to understand a
phenomenon, in its context, where reality is what the subject says it is from his or
her own specific experience (Gill and Johnson, 1997).
5.9 Secondary sources of information, Data Collection
The secondary sources used during this research, were broad and included Waterford
Institute of Technology’s library facilities. These included; access to books, past theses
and journals and other electronic databases.
Further to these in house sources, the internet search engine Google (www.google.ie),
online databases, such as Emerald (www.emeraldinsight.com) and ABI (www.abi.com),
and airline websites were also used as sources of information. Journals such as Airline
Business and Flight International were also extremely useful, as sources of information.
5.10 Primary sources of information, Data Collection
As with any research project, a number of issues were considered when deciding which
method of data collection would be used. Firstly, the goals and objectives of the research
were re-examined. In this case, the purpose of this research is to examine airline
management perceptions of strategic alliances. The possibility of conducting either
quantitative or qualitative approach was considered.
Research methodologies generally fall into one of two categories, quantitative or

qualitative, where quantitative methodologies seek to describe the general
44
characteristics of a population and qualitative research provides conclusions which
account for the particulars of every case (Hyde, 2000; Yin, 1994).
Quantitative
Quantitative research is objective, focusing on the collection of numerical data. It
involves the analysis, measurement and statistical testing of the data to achieve broad
research findings. (Adapted from Hussey and Hussey, 1997)
Quantitative evidence uses numbers, counts or measurements, to attempt to give precision

to a set of observations. It often utilises highly standardised approaches to research
covering very wide samples. It is well suited to how much? how long and when?
questions, dealing well with phenomenon already ‘institutionalised’ in organisations. It
often results in fitting individuals’ behaviour into predetermined categories, leaving data
which is context-stripped. It often gives little insight into the causes behind phenomenon
(Egan, 2006).
Qualitative
Qualitative research is more subjective, focusing on perceptions and understanding the
social world. It involves examining and reflecting on opinions of phenomena to achieve
more deep research findings. (Adapted from Hussey and Hussey, 1997)
Qualitative research often involves detailed observations of a natural setting, yielding rich
data for deep analysis. Cycles of data analysis, enable interpretation to be achieved,
however this process can be perceived to be ‘messy’. Qualitative research is normally
based on evidence not easily reduced to numbers. It is more useful with how? And why?
questions. Due to the nature and process of collection of data, reliability concerns exist as
qualitative research is stronger on long narratives than on statistical tables. Furthermore,
as a small sample size is normally involved, the validity of the research can be
45
questioned. Despite its weaknesses, this approach to research, normally gives a real
insight into the causes behind a phenomenon (Egan, 2006).
5.11 Qualitative research justification
The chosen research method for this study was qualitative, as the subject at hand does not
lend itself to quantitative research. There are a number of reasons for this; firstly, the
nature of the study, examining the perceptions of airline leaders, does not lend itself to
numerical analysis, in a way likely to yield findings. Secondly, as this study focuses on
the causes behind a phenomenon rather than quantification or measurement of the
phenomenon, qualitative research would be more effective in producing useful results.
And thirdly, the population, of potential respondents, is relatively small and would not
allow for in-depth quantitative research.
The research will lead to an understanding of the perception and purpose of strategic
airline alliances, by some of Europe’s airline managers. Quantitative techniques would
not give the depth of understanding or meaning that is attained with qualitative work.
This view is supported by the literature on research methodologies. Qualitative research
seeks to translate and come to terms with the meaning, not the frequency of certain
phenomenon (Van Maanen, 1983).
Kahn and Cannell, in Saunders et al. (1997), define the interview as ‘a purposeful
discussion between two or more people.’ Patton (1990), adds to this by saying “the
purpose of interviewing, then, is to allow us to enter into the other persons perspective.”
On this basis, we can deduct that interviews can provide substantial assistance in
gathering valid, and reliable, data that is relevant to the research objectives.
46
After an examination of the quantitative and qualitative methods available, and their
appropriateness to the research at hand, a methodology was determined. The chosen
methodology used for the collection of the primary data was semi-structured, qualitative,
in-depth interviews. Semi-structured, in-depth interviews can determine the cause of a
phenomenon, and help seek new insights, especially in relation to exploratory studies
(Robson in Saunders et al., 1997).
Face to face, in-depth interviews were judged to be the most appropriate method for
primary research, yet taking into account difficulties of gaining access, qualitative
questionnaires will be used, where face to face interviews are not feasible or permitted.
5.12 Primary research design
The research design specifies the procedures used for collecting and analysing the data
necessary to help identify the problem, helping to solve the problem at hand (Tull and
Hawkins, 1980). A design is good when it ensures that the data obtained is relevant to the
research problem and was collected objectively and economically (Green and Tull, 1975).
The purpose of qualitative research is not to measure, but to provide insight through
experiencing attitudes and behaviours which are dismantled, interpreted and integrated
into a composite of the research issue (de Ruyter and Scholl, 1998).
In-depth interviews are a form of non-disguised questioning in which respondents are

encouraged to provide information in as unrestricted a fashion as possible (Parasuraman,
1991).
Research is normally categorised into two main styles; exploratory, and explanatory or
descriptive research (Malhotra, 1996).
47
Exploratory Research
Exploratory research is research that is conducted when there are an inadequate number
of studies on the research issue or problem. This research aims to gain more knowledge
in the subject area for more thorough investigation at a later stage (Hussey and Hussey,
1997).
Explanatory Research
Explanatory research describes, or defines an area of knowledge and obtains information
to provide an accurate profile of events, objects or persons (Hussey and Hussey, 1997).
Explanatory research can be less flexible but often results in more easily measured results
(Adams et al., 1985).
As there is an inadequate number of studies on the research issue at hand, this study will
be mainly exploratory in focus, however it will endeavour to also conduct more in-depth
descriptive research, where possible.
5.13 Sample selection
The sampling process has been simplified by a number of academics into a series of
sequential steps which are shown below, however the reality of the selection process is
often more practical than these models demonstrate. Clearly, there needs to be a solid
rational behind the choice of interviewees, as they must be in a position to provide the
information required, however it is more likely that convenience and snowballing will
also play a strong part in the sample selection. Snowballing refers to the process by which
one interviewee may suggest another potential interviewee to contact, and the process by
which this lends to further access. Regardless of how access was granted, it is imperative
to ensure that the selection is justified in terms of the study’s objectives.
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Tull and Hakins (1993) outline one such model of sequential steps for conducting sample
selection. Their scheme recommends an ordered approach to sample selection such as the
following;
1- Define the population

2- Specify sampling frame
3- Specify sampling unit
4- Specify sampling method
6- Determine sample size
7- Specify sampling plan
8- Select the sample
As the focus of this study is leaders in the air transport industry, the population can only
be limited by rank, or experience and is therefore indefinable. Instead of this population
based approach, it was decided to ensure to contact all the airlines, every airline flying
into Dublin airport, as well as some academics and other experts in the field. By
following this approach, the researcher ensured that a broad representation of companies
and individuals, with differing views on strategic airline alliances, would be included in
the study.
As part of this process, a number of pre-interview discussions were conducted to

determine the appropriate focus of the research, and the likelihood of gaining access to
interviewees. These pre-interview discussions were undertaken with one academic with
experience in the area and two high-level airline analysts.
On the basis of these pre-interview discussions, it was suggested that a mixed approach of
snowballing and convenience sampling could be followed, once the sample was
representative of the industry, both those involved in alliance co-operation and those not
49
involved. With this, a list of fifteen potential interviewees was drawn up. Through
snowballing, this later rose to thirty.
This sample represents five airlines, two which are strategic alliance members, one
adamantly opposed to alliance co-operation, one in the process of leaving a strategic
alliance, and a further one which ended co-operation in 2001. Further to this, two airports
were represented as well as a number of academics, who had published material on this
topic.
Twelve interviews were conducted and one respondent replied in writing.
5.14 Analysis of Data
The interviews will be conducted by M.P. 3 Dictaphone and the transcripts will be used
for analysis and comparison. This will enable the researcher to observe any trends on
contradictions that may occur. The transcripts were typed and made available to
respondents on request. The results are discussed in the next chapter.
5.15 Limitations
There were a number of limitations highlighted as weaknesses in the chosen methodology

which had the potential to impact on the study;
Firstly as the industry is such a highly competitive one, it was perceived that some
interviewees might prove unwilling to discuss the rational behind their decisions.
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Secondly, as a number of prominent airlines are notorious for their go it alone, bravado
image, it was envisaged that representatives from these carriers may be unwilling to
consider, or perhaps, be seen to consider, alliance co-operation, something that they
might feel would go against their companies personality brand marketing.
Thirdly, due to the timing of this study, during the busiest months of the industries year,
response levels could not be estimated in advance, especially responses from those in a
sufficiently high management position to be relevant.
Fourthly, as the research is qualitative in nature, which can be affected by bias from the
researcher, the risk of this leading to subjective understanding or interpretation of what
was communicated by the respondent was also highlighted.
Finally, it was envisaged that some of the interviewees may attempt to purposefully
mislead the research, perhaps in an attempt to limit competitor knowledge. Time will also
be a considerable limitation to the research. It will not be possible to interview all the
airlines operating in the region, nor some of the prominent academics in the field. At this
time, only a select number of the main regional airlines will be included.
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6.1 Introduction
The object of this chapter is to provide an analysis of the semi-structured interviews that
were conducted as part of the research process. The interviews were based on the
literature review outlined in chapter two and three. The first section of this chapter will
profile the interviewees and the second section will outline a full account of the
interviews and the issues that were discussed. Answers and findings will be compared
and contrasted to extract the key findings emerging from the research and outline the
perceptions of the industry leaders and leading personnel in relation to strategic alliances.
6.2 Profile of Interviewees
A sample of six airline leaders, two academics and two senior financial analysts and three
further senior airline staff were interviewed over the course of five weeks in China,
England, the USA and in Ireland. In the interest of confidentiality, none of the
respondents will be named. Instead, each respondent will be allocated a number from R1
to R 13.
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6.3 Interview Findings
The following are the findings from the interviews conducted.
6.3.1 Interview Findings - Alliances when they were formed
Before the interviews were conducted, a brief outline of the areas to be covered, the
interview approach and the research objectives was given to the interviewee. The first
section of the interview, discussed the participants’ views of the purpose of alliances
when they were formed, and why airlines joined these alliances.
Airline alliances were set up to create a round the world network, providing
seamless travel at improved cost. Alliances also brought buying power in terms of
aircraft, fuel, ground handling equipment, computers and systems. (R5)
They would increase their marketing reach, by having this connection with large
(airline) companies. That was the strong belief at the time, hoping that they could
capture a market and hold on to it within the members of the alliance. (R2)
Airlines join alliances with the hope of an expanded product and reduced costs.
Coupled with code-sharing, alliances can offer passengers round-the –world
service. Alliances look for synergies in sales, I.T., ground handling, purchases,
frequent flyer lounges and, in offering customers the ability to use frequent flyer
points on a variety of airlines to an increased number of destinations. For the
smaller, national airlines, it brings a sense of world recognition. (R6)
The many sections of alliances were clarified by a further respondent, who highlighted
the areas of co-operation that make up the alliance.
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The alliance is made up of a number of sections. There was the purchasing group,
focusing on economies of scale to obtain better prices. Then there was the
revenue group that frequently reassesses the breakdown of fares. There was also
an advertising group and a number of other groups that looked at handling
synergies, code sharing possibilities and so on. (R3)
The issue of code-sharing, and the direct impact that this form of co-operation has on
boosting sales, was explained as a further reason for airline co-operation.
Something you have to take into consideration is the way that airline flights show
up in booking systems.. it’s a certain hierarchy. One airline to the same airline
connections show up before a one airline to another airline connection... you
want to be the first airline that shows availability for the customer… if you tack
the same airline code on that second one, it moves up in availability. It makes
your display more prominent. (R7)
The significance of regulation in the air transport industry, and in particular, the
restrictions on cross ownership, was also highlighted as one of the main reason why
airlines join strategic alliances.
The airline industry still remains highly regulated so foreign ownership is, for
example, precluded in a lot of incidences. I will reference the KLM North West
arrangement, where although it wasn’t a take over, it was as good as a takeover,
where there were national and political interests… (R9)
The legal structures do not allow cross border mergers. B.A. could not merge, so
it sought some of the benefits, via alliances. (R10)
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They were a way of circumventing the regulatory impediment... In normal
instances, in that kind of deal (KLM – NorthWest), one company would have
bought the other, there would have been a significant equity release, there would
have been a cross ownership…(R9)
A number of interviewees also addressed the issue of market value. The issue of market
value was particularly important, in the run up to an initial public offering (IPO).
..there was a value attributed to being part of the (alliance)... because at that
stage they were untested. They were, they had potential which hadn’t been
realised or demonstrated and hasn’t in a lot of cases been realised but it was
potential and there was a value associated with that potential.(R9)
Finally, the benefits of the alliance brand image, and the uniformity of service was also
mentioned as a factor, with a number of respondents highlighting the need for brand
association and a quality image.
(Alliances offer) a seamless customer proposition. Customer support whilst on

his/her journey. A Consistent message to the customer – far better than lots of
different code shares. (R10)
The numerous aspects of alliance co-operation, pursued by air carriers since their
establishment, summed up the rational behind airline interest in such associations.
Essentially alliances are there to build global networks. They use the synergies of
somebody’s networks, feeding into yours and the mutual benefits of traffic flows
between airlines…the global reach element… (Later) it moved into the marketing,
global reach, access to additional passenger volumes, plus there was an
opportunity for what was seen as cost reduction, with common procurement...(R9)
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6.3.2 Interview Findings - Change of Business Environment
The second main section of discussion, referred to the interviewees’ perceptions of the
changed business environment within the international airline industry, since the
establishment of the alliances. The impact that such changes may have had on the
benefits of alliance membership was also discussed.
The role played by the internet, and the development of direct sales through this medium,
was the first issue to emerge as a significant factor of change in the business
environment, since the establishment of the airline alliances.
Air South West in America and Ryanair in Europe, pioneered internet booking
and they have made it so common that it became part of the psychic of air travel.
(R2)
The big mistake they made (legacy carriers), they did not realise the power of the
Internet and the power of choice that people wanted to have. (R2)
So it became ingrained with people who were travelling and they took to it like a
duck to water, to book online.(R2)
The second main factor to emanate from the discussions was the impact that the
emergence of budget LCC’s has had on the industry. This was seen as highly relevant by
some respondents, whilst others felt it had no impact.
With the arrival of low cost carriers... they ignore it (alliances)... the game has
moved. (R1)
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Competition brought change because carriers had to concentrate on that and in
AerLingus’s case, competition was not hitting the other OneWorld members as
badly. (R5)
(LCC’s) actually created choice for people and people wanted choice. People
want the flexibility, so instead of being corralled....hold onto the choice. (R2)
The impact of LCC competition on the service provided by legacy carriers was also
highlighted.
..for a route to be competitive with what are called the low cost carriers, all the
benefits, which were added to an airline ticket have been taken away, much to the
dismay of the travelling public. The alliances have been fragmented and diluted
so much, it definitely has affected the attractiveness of specific airlines to
travellers, to the business traveller. (R8)
This view was strongly opposed by one respondent, who pointed to the different role
played by point-to-point, budget carriers as opposed to legacy carriers.
The emergence of LCC’s (has had) almost no impact. Alliances focus on

transferring passengers between networks. Budget carriers are rarely a
replacement for those types of journey. (R10)
Competition between alliances has made alliance membership more important.

(R10)
The importance of the growth in use of secondary airports, rather than main hubs, was
highlighted by interviewees, as a major factor of change.
58
There are now three businesses. Long haul is to key destinations, short haul that
will go to hubs and there is the short haul going point to point. (R1)
Airline alliances tend to derive or present their value through hubs. (R4)
Alliances really work for airlines through hubs. When they use this form of
connectivity... AerLingus are adding routes... virtually all of which are point to
point. (R1)
However in some cases, this view was not accepted as a factor of change for all sections
of the industry.
Budget, point-to-point concept competition has had no impact. Alliances focus on

transferring passengers between networks. Budget carriers are rarely a
replacement for those types of journey. (R10)
The next issue to emerge, was that of the geopolitical fall-out, which resulted from the
2001 attacks in the US. These were highlighted as having an impact on the industry as a
whole, which changed the relationship between companies in the sector.
There was a small decrease in the number of passengers for two weeks. This resulted
in companies putting the squeeze on their creditors. Shell, for example who were
supplying us with fuel, wanted money on the nail. They had been giving us thirty days
credit but after 9/11 they wouldn’t. (R2)
Most airlines are fire fighting, you know. (R2)
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The fourth aspect of change, to be highlighted by respondents, related to joint purchasing.
The potential benefits to members, offered by joint purchasing, were seen to have never
been fully utilised, as interviewees agreed that this has declined in importance.
The buying aspect never developed or got that far, because competition grew and
there was low aircraft purchasing anyway, at that time. (R5)
Joint procurement is less important, we aren’t all going to buy the same WPS, so
don’t bother starting that type of activity. (R10)
The purchasing group is less important as …less on board goods are wanted.
(R3)
The changing role of marketing, as a benefit of alliance membership, proved to be a

highly contested issue. A number of interviewees pointed to the continued importance of
marketing reach, in particular access to each others websites, while other respondents felt
it had become market specific and of little significance.
The benefits of alliance membership have grown... People are more familiar with
alliances today. In one respect, with their marketing power and reach has
expanded, because people are more familiar with alliances. (R7)
The benefits of the marketing aspect, is small, as most (passengers), if travelling

to Ireland, would check AerLingus.com anyway. (R3)
The failure to develop, to its full potential, the marketing aspect, was seen as a significant
failure of alliances to add benefit to members.
(The) British Airways website is very poor... It’s going to... it’ll get better. (R2)
60
(The inability to book tickets from the OneWorld website is) purely inefficiency,
you know... that’s just purely bad management, that’s...bad execution...obviously
every airline, part of One World, would love if you could do that. (R2)
We have these destinations on certain partners’ routes, so we’ll do that kind of

marketing, but I don’t see us promoting it (partners’ routes), as an end
destination. (R7)
These views were entirely contradicted by one respondent, suggesting that marketing is
the most important aspect of one of the alliances.
One World... is very much a branding exercise. It’s very much a marketing
concept, rather than driving down what was the true power of the alliance. (R9)
Along with contradicting views of the performance of alliances, on the marketing front,
the overall relevance and desirability of such initiatives was questioned. The importance
of direct sales, over sales through other channels, was pointed out, as having changed.
If you are selling through the web, you want to make your website the first port of
call, not just to sell your own tickets, but to (sell all) the other things. (R4)
Another factor seen to have changed, in terms of the business environment, was related to
the deregulation of ground handling services. Interviewees agreed that the use of alliance
counterparts’ handling teams, at each others hubs, has generally played a less important
role, than when alliances were first established.
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(There was) handling through alliances, where they had agreed to use each
others handlers. But these were not always the cheapest. (R3)
Many of these changes in the business environment, were found to have added to the
difficulty of maintaining mutually beneficial agreements, particularly where carriers
suffered lower profitability.
Code sharing agreements that had to be continually re-negotiated were dropped.

(R3)
I think the choice to leave, is the fact that they are getting less than they would see
as a fair share of the income...which is one of the fundamental problems... who
gets what out of interlining. (R4)
With the Aer Arann, AerLingus agreement, due to the low cost of tickets, it meant
continually re-negotiating the figures involved, and eventually it was stopped.
(R3)
The value that they (AerLingus) are getting out of the One World alliance is not
as big as they thought, it brings a lot of extra costs, manpower costs and so on.
(R2)
Despite these generally negative impacting changes in the business environment, some of
the interviewees were positive about the changes. The benefits of direct sales, increased
passenger flexibility, industry consolidation and changed ground handling possibilities
were seen by some as positive factors. The benefits gained, from steps toward co-location
of alliance partners, in the same terminals at major hub airports, was pointed out as
another positive change, which improves alliance efficiency.
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There has been some co-location which has helped immensely… geographically
co-locating. (That’s) what we are planning to do in terminal five, in Heathrow. In
Madrid, we co-located in the new Madrid terminal to help connections but it’s
also helping operations. (R7)
6.3.3 Interview Findings - Alliances Now
The next section of the interviews, referred to participants’ perceptions of the role played
by alliances, at the present time. On the whole, respondents’ views mirrored their
companies current strategies, as regards alliance membership. However, many of the
respondents did acknowledge their counterparts views and positions.
The slowed progress toward closer co-operation and the delay in implementing real
change, was highlighted as a weakness in the current alliance system.
The old talk was that in five years time there will be five major airlines or groups in
the world... which turned out to be complete rubbish. (R5)
They have become static. There has been no move in the alliances toward ever closer
union in the last six/seven years. (Alliances are) still a useful association to have, but
the control of companies has come back to the airlines. (R1)
Contradicting these views, the positive role played, in terms of customer benefits, plug-in
technologies and the increased need to access alliance passenger flows, were highlighted
as major advantages of such associations.
(The) concentration is on the customer proposition and behaviours. (R10)
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Carriers from developing countries such as India join, as they are operationally and
technically behind. STAR alliance has operational features you can plug into. They
focus on software and knowledge, shared cost through purchasing, consolidation and
co-location. (R12)
Air Portugal joined STAR to access feeder passengers and to enhance their image.
Air India feel that their brand is already strong, but are likely to choose STAR, due to
the operational features available for them to plug into. (R12)
An important factor to emerge from the interviews was the perceived different directions
that the three main global alliances are going, in terms of control and decision making.
STAR alliance was seen as the most closely controlled alliance, followed by OneWorld,
which has dominant partners, with SkyTeam seen as the most democratic alliance.
Essentially, if you’re sitting around the table with ten carriers, who notionally have
the same input into the alliance structure as any other, then you will get consensus
and sub-optimal results. OneWorld is not a combination of equals. (R9)
When you have nine bankrupt carriers and one solvent carrier, the solvent carrier is
King. A powerful carrier...can dictate strategy for the weaker carriers. The weaker
carriers are more dependant on Lufthansa, than Lufthansa are on the weaker
carriers. (R9)
In OneWorld, there is less dominance of any particular airline and not as many
mandatory systems to join, but carriers must meet certain conditions. (R12)
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SkyTeam is perhaps the most democratic of the alliances. SkyTeam has a minimal
brand awareness, if any, globally. STAR has the deepest integration, with strong
brand awareness and very good frequent flyer programs. Lufthansa has a lot of
influence in this alliance. OneWorld are in between the two. There is less dominance
of any particular airline and not as many mandatory systems to join. Carriers must
however meet certain conditions. (R12)
6.3.4 Interview Findings - Airlines that became LCC’s
The fifth section in this chapter, discusses the expressed views of the respondents in
relation to the experience of airlines that chose to become LCC’s. This section of the
interviews sought the respondents’ perceptions of the impact that such a change of
strategy would have on alliance membership.
Firstly, all interviewees broadly agreed that LCC’s are not interested in alliance co-
operation. By not offering connectivity, using secondary airports and wanting to make
direct sales at minimum cost, the interviewees generally agreed, that the linking of
systems, and other forms of co-operation, was not worth while for LCC’s.
It costs money to belong to an alliance, which goes against the budget carrier’s
best offensive – low fares. (R6)
(Low Cost) airlines don’t want to share their client base. (R8)
They (alliances) are inherently so costly, the inverted commas “Full Service”
carriers, they need to cloud the issue with the illusion of greater degree of service.
A greater degree of service, means facilitating connections that actually are not
necessary if you are on point-to-point flights. (R4)
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Legacy carriers find it difficult to work in co-operation with LCC’s, in terms of
fares and price structures. Alliances generally want a first and or business class
product to offer across the routes. Not likely to be part of what a budget carrier
would offer. (R6)
Ryanair are not interested in alliances because they don’t need through ticketing.
There would be too high a cost of linking systems and interlining. (R5)
Despite a broad contention, one interviewee did highlight one particular example which
may contradict this.
Air Asia, run by Conor Mc Carthy and Tony Fernandes, are an exception. They tied
themselves into a Malaysian agreement on domestic routes, including interlining. But
this unusual move may have been a result of pressure from the governing authorities.
(R12)
With general agreement that LCC’s would not be interested in alliance co-operation, the
next section to be discussed was on the process by which an airline implements a change
in strategy, and becomes a LCC. Such airlines, need to cut costs by slimming down their
cost base, and removing all sources of cost, not directly associated with their purpose. It
was agreed that this directly impacts upon an airlines’ choice to re-assess their
membership.
As long as the benefits outweigh the costs, (AerLingus) would remain members. Our
business strategy has changed, and if the cost value proposition hadn’t changed
within the context of One World, we wouldn’t have left the OneWorld. (R9)
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The purchasing group is less important as a carrier becomes a LCC, as less on board
goods are wanted. (R3)
…they see that the value that they are getting out of the OneWorld alliance, is not as
big as they thought, and it brings a lot of extra costs, manpower costs and so
on…Alliance co-operation for LCC’s must not incur risks or costs. (R12)
What is it going to do, in terms of cost per mile per seat? (R8)
The cost associated with membership of such an alliance, was broadly seen as too high to
make economic sense for a LCC. This was particularly the case, where the traditional
sources of benefit gained, through alliance membership, were no longer relevant to the
carrier.
The existing airline alliances are, pretty much, only suited to cater for full service /
traditional airlines, or at the very least, (those that) maintain a traditional, two class,
frequent flyer program etc. offering, for the lucrative business traveller. (R6)
The next issue to emerge, in relation to airlines becoming LCC’s, was the difficulties
associated with their change in strategy, relative to the other alliance members.
When we (AerLingus) changed our product and our business strategy, there was
obviously a tension between the expectations of other OneWorld carriers and what
we were doing. We were removing business class, charging for onboard products... It
was completely inconsistent with the OneWorld vision and image. (R9)
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Current requirements for joining OneWorld, dictate certain levels of service that have
to be matched between all the carriers... and a low cost carrier couldn’t match that
level of service... AerLingus decided to become a low cost carrier, and therefore their
model no longer suits the alliance model. (R7)
Basically, our low cost carrier concepts were moving away from alliance objectives,
in the area of fares, fare structures and a withdrawal of business class on European
flights. (R6)
While there was broad agreement that LCC’s were following a different strategy, to other
alliance members, some interviewees did point out that other alliance members were
following a, somewhat, similar strategy.
Issues of product expectation, in relation to the alliance, are less of an issue now that
other alliance members are following a lower cost model on short haul. (R3)
What AerLingus initiated became the benchmark and was copied. (R9)
As all carriers (in an alliance) develop a LCC mentality for their economy product,
alliances can continue to exist. (R6)
The third issue to emerge, in relation to carriers becoming LCC’s, relates to the frequent
use of non hub airports by LCC’s. If a carrier, which decides to implement a LCC
strategy, wishes to use non hub airports to reduce costs, this will inevitably reduce their
connectivity where alliance members are not also using such secondary airports. Not
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offering connectivity or interlining, was highlighted as a choice likely to impact on the
benefits of alliance membership.
If carriers no longer wish to provide passengers with more global networks, then
why stay in an alliance. It is and should be driven by the customers. Does the
market need access to a global market? Does this airline want to provide that
access? (R10)
Budget carriers aren’t interested, because they operate point-to-point. Airline

alliances tend to derive, or present their value through hubs. (R4)
LCC’s are not welcome in the major existing alliances, because they don’t
interline passengers and they can’t sell connecting journeys. The philosophy is
totally different. (R10)
OneWorld is focused on high yield connectivity, not necessarily the market we

were following. (R9)
Further to this, the cost associated with the transfer of baggage in interlining was
highlighted as being too costly for LCC’s to consider.
The last person along the line is responsible for their bags, even when they had
nothing to do with it. (R2)
It doesn’t make economic sense... if you are point to point, why would you take on
liability for another carrier. (R4)
Along with being seen as too costly, they were also seen as been un-necessary, as general
agreement emerged, that many LCC passengers are willing to self-interline.
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People want the choice, so what now is happening? You’ve got interlining, but
decided by the passenger. (R2)
When you get into low cost travel, you get into a different mentality. You get
passengers who are able to spend a lot more time doing something like that (self
interlining). (R7)
Respondents then highlighted a separate issue, that of market value. Respondents

suggested that there is a negative market value associated with a LCC being a member of
an alliance, particularly in the run up to an IPO.
There is a negative market value associated with being a member, in terms of

operational flexibility. (R2)
The main difficulties associated with co-operation between airlines, is probably

the time it takes to tie in and maintain various I.T. systems and linking flight
schedules, where possible. (R6)
When it came to discussing marketing for a carrier re-inventing itself as a LCC, the
importance of direct sales, through your own website, was again highlighted.
If you are selling through the web, you want to make your website the first port of
call, not just to sell your own tickets, but the other things… (R4)
Despite a broad contention, that alliance co-operation was likely to be too costly for a
LCC business model, one respondent did highlight the success that some small
carriers have made of co-operation with larger carriers.
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Some smaller carriers can be very successful through co-operation, once they
don’t need to develop their own brand strategy.. Tyrolean, MESA and GB
Airways were particularly successful. GB Airways embarrassed BA by earning
higher profits on BA franchised routes. (R12)
Finally, the future plans of the airline, in relation to growth and development, were seen
to be an important factor. One respondent saw this as the deciding factor behind the
alliance membership decision for air carriers.
The alliance membership decision is basically, airlines deciding whether they are
going to become bigger or just be a feeder-carrier. (R12)
6.3.5 Interview Findings - Alliances in Five Years Time
The final issue discussed in the interviews was that of the respondents’ perceptions of the
role played by strategic airline alliances in five years time. The respondents’ views
highlighted a broad spectrum of points of view, ranging from their complete demise, to
their complete domination of the global airline industry.
Issues such as the impending open skies agreement, continued changes in the business
environment and patterns of co-operation were mentioned by respondents from across the
spectrum of views, with both positive and negative outlooks on the future of alliance co-
operation. A small number of respondents were either highly positive or highly negative
in their views, however the vast majority of respondents saw a continued role for
alliances, with changes in the way they co-operate.
A number of the respondents predicted the ultimate failure of airline alliances.
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The advantages of alliance membership will decrease now as the advantage of
market entry won’t be such an important factor, with the open skies agreement.
(R8)
There will always be agreements on markets, but the alliances will be watered
down and AerLingus is ahead of its time in recognising their (alliances) demise.
(R5)
Airlines will leave alliances... it’s just the way they are going in terms of this
business model, the necessity to go it alone, rather than go together. (R8)
It’s too strategic for B.A. at the moment but if the bilateral in to the US changes,
then suddenly anti-trust immunity is no longer an issue with America. (R9)
Emirates and Virgin Atlantic are exceptions, as they are global carriers but are
not involved in alliances. Emirates is one of the most successful air carriers.
(R12)
Don’t underestimate the tension between Cathay and B.A. or Qantas and Cathay,
They are in each others markets. They are fighting in each others markets. When
the global benefits start to diminish, they will reassess their situation. (R9)
In almost complete contradiction, a number of the respondents saw the continued growth
and importance of alliances.
Not everybody wants to fly low cost. (R8)
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I think they’ll be bigger. I think we will be able to also be more operationally
connected than we have been able to do, because with new technology that comes
along, we will be able to jump on the bandwagon together. (R7)
The role of airline alliances in five years time will be the same as now, but with
some of the players, larger ones, having merged. 80% of the world’s air service
carriers will be in the three alliances by then. (R10)
Airlines from developing countries are still interested in joining alliances, as they
are operationally and technically behind. (R12)
The majority of respondents envisaged the airline alliances playing an important role in
the industry into the future, however they also pointed out the need for changes in the
way in which these alliances work together.
I still think there is a market position for the, lets call it ‘full service,’ part of the
industry, where-by you have interlining between airlines, but it needs a lot of
cleaning up, an awful lot. It drives cost, it drives inefficiency, like the man power or
person management ... it’s crazy. (R2)
You can’t take it as you read, that the alliances are back in business big time. They’re
mutating (they will become)…a spider network... purely an operational linking up of
customers with a much larger, I’d suggest, level of need. It’ll offer customers
interlining. Far less prominent than they were with the OneWorld alliance. (R1)
I think what they’ll (British Airways) do is, they’ll change significantly the alliance
model that’s in place… keep it simple vanilla as possible... and cut costs on it to scale
down the intricacies or complications that are in the model. (R2)
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In an effort to explain the varied views of the future role played by airline alliances, a
number of the respondents offered suggestions. Their suggestions are well represented in
the example below;
The role played by alliances in five years time, all depends on what role, if any,
LCC’s have in formal or loose alliances. Otherwise pretty much the way they look
now. (R6)
6.4 Conclusion
The primary research findings were outlined in this chapter. These findings addressed the
research objectives to evaluate the perceptions of airline industry leaders and academics
to the changing role played by alliances. It was found that airlines joined these groupings
for a number of reasons, which were mainly focused on; global reach, cost reduction and
joint initiatives in marketing and purchasing.
The findings also assessed the changes in the business environment, since the
establishment of these alliances. It was found that there have been a number of major
changes in the industry, including the emergence of LCC competition, deregulation and
the emergence of internet powered, direct sales.
The role presently played by alliances was also assessed, with particular attention placed
on the attractiveness of such a grouping to an airline adopting a low cost strategy. It was
found that the economic benefits of such an alliance were unlikely to be positive for a
LCC and that such a carrier was unlikely to suit the model and strategic aims of alliances.
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Finally, the role that the ‘big three’ strategic alliances will play in five years time was
addressed. It was found that alliances will play a role into the future, particularly in
providing long haul services, however changes will be necessary to make the operation of
these alliances more economic.
In conclusion, it was found that the role played by strategic airline alliances has
continuously evolved since their establishment, however further changes will be
necessary to ensure the financial viability of such groupings into the future.
The following chapter will discuss and analyse these findings and explore the links with
the literature reviewed in previous chapters.
75
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7.1 Introduction
Primarily, the objective of this chapter is to summarise the main points of the research
and then present the overall conclusions emanating from the study. The primary research
conducted, set out to access the attitudes and perceptions of airline industry leaders to
strategic alliances. This chapter will discuss the primary research results, which have
been identified in the preceding chapter, and links which can be made with the literature
reviewed.
This chapter is divided into four main sections. Firstly, this chapter will summarise the
main points of the research and then present the overall conclusions emanating from the
study. The following three sections will examine the main findings following the
structure of the literature review. This structure should assist the reader in appreciating
the experiences of the respondents, in the light of the literature already examined in
previous chapters.
7.2 Summary
The main findings from the study indicate that the role played by strategic airline
alliances is changing, as a result of the changing industry environment and, in the case of
some airlines, changing passenger demands.
Whilst alliances remain a useful connection to have, the industry now seems to be split
between long haul, legacy carriers, to whom alliances are proving increasingly important
and short and medium haul, lower cost carriers, who view alliances as costly and
restrictive.
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The literature identifies reasons that cause alliances to fail, and whilst some of those
difficulties were associated with alliances in the air transport industry, the findings
indicate that alliances can still provide advantageous for certain airlines.
The business environment within which the major three alliances were set up has
changed, leading to a mutating of the role played by these alliances, in order to continue
to benefit their members. Despite these changes however, the main reasons behind an
airline’s choice to leave an alliance, was found to be a combination of a change in
strategy direction from the other members and a realisation that the economic value of
membership did not materialise.
In terms of the rational behind the setting up of the alliances, the findings indicate that
airlines were interested in the potential advantages to them, in the form of global reach,
joint procurement, joint marketing and sales, the circumventation of market entry
restrictions, access to feeder passengers and brand awareness.
The findings, as regards changes in the business environment, since their establishment,
pointed to a number of issues, including internet sales, increased competition, low cost
point-to-point flights, the end of government assistance in Europe, the use of secondary
airports and ground handling deregulation.
The role played by strategic alliances now, was found to be different to that envisaged
when they were first created. The findings also suggest that there are fundamental
differences in the operation of the different alliances, particularly in relation to decision
making. Alliance members seem to be air carriers with a particular interest in either
providing long haul flights or providing a link to hubs, from where such services are
available. Other carriers join alliances, and in particular the STAR alliance, to benefit
from the technical and operational know-how which is associated with that alliance.
Those not interested in alliance membership are focused on point-to-point flights, with
direct sales and operational flexibility. The findings also suggest that there have been
78
little effort made toward further alliance consolidation in the past number of years, with
power being transferred back to the airlines, in some cases.
The role played by alliances into the future, did not produce conclusive results, with
predictions of both their exponential growth and their demise given. What was found
however, was that with the likely continued reduction in market entry restrictions, as well
as increased competition from LCC services, some carriers may re-assess the value that
they gain from membership of such alliances. Despite this, the findings do suggest that
the demand for full service seats, particularly on long haul routes, will continue, with
some passengers still demanding ‘seamless interlining’ through hubs.
7.3 Strategic Alliances and Airline Co-Operation
Chapter two looked at literature relating to the reasons why businesses enter alliances, the
types of alliances that exist and the challenges associated with alliance co-operation to
avoid failure.
Reasons for entering a Strategic Alliance

Coopers and Lybrand (1997), found that almost fifty five percent of firms that formed
alliances, did so for joint marketing and promotional purposes. The findings of this
research suggest that marketing and joint sales, remains one of the most important factors
in the OneWorld alliance. It also plays a strong role in STAR and SkyTeam, the other
two main global alliances. The alliances use each others websites to market their tickets,
in effect, pooling their resources to promote all the routes they serve.
Other rationale, behind entering a strategic alliance, were listed by Wheelen and Hungar
(2000). They found that firms also join into such alliances to gain technology, gain access
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to specific markets, to reduce financial risk, to reduce political risk and to achieve or
ensure competitive advantage. The results of this research conclude that airlines entering
strategic alliances, do so for broadly similar reasons.
Alliances share technology in order to provide connectivity between their systems. STAR
alliance provides plug in technologies, whilst OneWorld carriers connect their existing
systems, such as Amadeus, Central, GI Reference and StarFocus.
All three of the main global alliances provide access to specific markets for their
passengers. This form of market entry is necessary where restrictions apply to airlines
flying to destinations themselves, or where by loads would not justify the establishment
of such routes.
Alliance membership, and the choice of a carrier to act as a feeder operation as part of a
larger system, reduce financial and political risk as future passenger flows can be
estimated in advance.
Joint Purchasing initiatives were aimed at cutting costs for carriers, hence helping to
achieve or ensure competitive advantage.
Drago 1997, looked more closely at firms motives for entering strategic alliances and
proposed seven main circumstances under which strategic alliances made sense for firms;
Four of his proposed circumstances are backed up by this research, as explaining why
airlines join strategic alliances.
1. Small Carriers - joined to reduce environmental uncertainty, by accessing

passenger flows.
2. They can then be described as “component part suppliers” as they provide some
of the entire service demanded, reducing their operational uncertainty.
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3. Carriers entering new markets- to reduce market and operational uncertainty. In
the airline industry, they operate code-shares or sell tickets on alliance members
flights.
4. Carriers which lack resources- to benefit from shared resources. This was found to
be particularly the case with the STAR alliance.
Types of Strategic Alliance
Coopers and Lybrand (1997), found joint marketing / promotion alliances to be the most
frequent, accounting for 54% of all alliances formed. This is backed up by the findings of
this study, as airline alliance engage in joint marketing and promotion, however alliances
in the airline industry operate on multiple fronts and are not limited to these. They also
include joint selling / distribution, found by Coopers and Lybrand to be the second most
frequent, accounting for 42% of all alliances formed. Consisting of a mixture of the two
most frequent alliance types, airline alliances are clearly following initiatives, which are
popular in many industries.
The ‘Group With Alliance Potential,’ (G.W.A.P.) model, formulated by Vyas et. al
(1995), suggests that alliances are formed when there is;
1- Goal compatibility,
2- Synergy among partners,
3- Value chain benefits and
4- Balanced contribution amongst partners.
Interestingly, the findings of this research suggest that, many of the alliance groupings in
the airline industry do not entirely fulfil the criteria of G.W.A.P. Goal compatibility on
the whole, is generally strong, as airlines focus on providing high quality connectivity
and uniformity of service, however when it comes to synergies among partners, value
chain benefits and balanced contribution amongst partners, the picture is less clear.
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The findings suggest that whilst some synergies did exist amongst partners, notably the
use of each-others’ ground handling staff, this is no longer the practice. Furthermore,
members of the same alliance continue to directly compete on many routes, where
synergies clearly exist for rationalisation. Secondly, as all members of alliances in this
industry operate at the same step of the value chain, value chain benefits do not exist in
this case. Thirdly, whilst contributions are balanced within SkyTeam, the results from
this study show that this is not the case with STAR or OneWorld.
Alliance Challenges and Failure

The literature reviewed on alliance challenges and failure in chapter two looked at some
of the difficulties associated with alliance co-operation. Kalmbach and Roussel (1999)
pointed to a number of factors which put a strain on these types of relationships. The
factors they list are as follows; a breakdown in trust, a change in strategy, the champions
have moved on, the value did not materialise, the cultures did not mesh and the systems
were not integrated.
Whilst this research did not directly address this topic, the research findings emanating
from this study, suggests that the largest factor, which resulted in AerLingus leaving the
OneWorld alliance, was their change in strategy, accompanied with a realisation that the
value associated with membership, did not materialise.
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7.4 Alliances in the Commercial Airline Industry
Chapter three looked at the role played by alliances, particularly the three main players;
STAR alliance, the OneWorld alliance and SkyTeam. The use of code-sharing by airlines
to increase sales and loads was then examined. Finally, chapter three looked at the
experience of AerLingus, as a member of the OneWorld alliance.
The “Big Three”

The literature reviewed on the ‘Big Three’ airline alliances pointed out that alliances in
this industry are horizontal distribution alliances, each with a slightly different focus.
STAR alliance, the largest of the three, focuses on their size and number of connections.
The OneWorld alliance focus on their combination of ‘quality airlines,’ and SkyTeam
focuses on its level of integration.
The research findings point to a view held, that the ‘Big Three’ airline alliances differ
mainly on their distribution of power and the plug-in technologies available. The general
view put forward, was that STAR alliance has a highly centralised power structure,
OneWorld has a less centralised power structure, but has dominant partners, and
SkyTeam has the least centralised power structure. When it came to technological plug-in
capability, STAR was seen both to offer more than the other alliances and demand more
integration of systems, than the other alliances.
CodeSharing
The literature review looked at code-sharing as an important method of co-operation used
by airlines, with the aim of increasing sales and having better passenger loads. The
findings of this research were in agreement with the literature in that code-sharing was,
and still remains, a very popular and highly important form of co-operation, in the
industry.
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AerLingus and the OneWorld Alliance
AerLingus’s experience as a member of the OneWorld alliance was examined in the
literature, providing a case study analysis of an airline adopting a low cost strategy. The
findings of this research conclude that in their current form, airline alliances are neither
welcoming of, nor of benefit to LCC’s. There was also agreement that when an airline
changes its strategy in this way, they are unlikely to continue to benefit from the alliance
grouping, as their goals and the goals of the alliance become inconsistent.
The unwillingness of LCC’s to interline is the main factor which puts such an airline at
odds with the alliance. Alliances are designed to provide connectivity for passengers,
however LCC’s do not wish to provide this connectivity. The second issue related to
LCC’s frequent use of secondary routes, which again reduces their ability to transfer
passengers to alliances partners. With lower rates of transferring passengers brought
about by these actions, LCC’s are unlikely to be able to justify the costs of remaining
within an alliance.
The findings also suggest that the sales and purchasing aspects of alliance membership
lose their appeal, as an airline becomes a LCC. This is because LCC’s want to make their
own direct sales through their website, in order to increase the sales of the additional
products and services they offer. In some cases, the LCC may not make profit on the
ticket, and relies on revenues from the sale of other goods to make profit. In this instance,
tickets sold by third parties would be seen as a disadvantage. The purchasing aspect
becomes less attractive due to the fact that LCC’s want less on board goods in general,
than flag carriers. As fewer goods are required, the advantages of being able to purchase
these goods cheaply will then diminish.
Overall, it was found that AerLingus has decided to leave the OneWorld alliance as their
business model no longer suited the aims and goals followed by the alliance. Despite this,
the research did however suggest that as the other airlines in the OneWorld alliance are
84
beginning to follow the example provided by AerLingus, the aims and goals of the
alliance are beginning to change.
7.5 Evolution of the Airline Industry
Chapter four looked at some of the major changes that have taken place in the airline
industry in the past twenty years. The role played by the EU in liberalising routes,
blocking state aid and its attempts to bring about an ‘Open Skies’ agreement with the US
were all examined. The literature also demonstrated that these steps to promote
competition resulted in the emergence of LCC’s in Europe.
European Competition Policy – Liberalisation of Routes

The literature reviewed found that the liberalisation of routes in Europe resulted in greatly
increased competition and lower fares. The literature reviewed also suggested that the
increased competition internally, within the European market, was one of the reasons
behind the establishment of the airline alliances.
The research findings did suggested that financial instability and increasing competition
at the time led to the desire of airlines to seek ways to reduce costs, however the opening
up of the internal European market, was not highlighted as being instrumental in the
establishment of the alliances. On the contrary, the research findings did suggest that as
markets open up, and barriers of entry are removed, the value of airline alliances may
diminish. This research found that global reach and gaining market access was one of the
important factors behind the establishment of the alliances. These aspects would no
longer be of benefit if market access was no longer restricted.
85
European Competition Policy – State Aid
In order to promote the growth of fair competition, the EU restricted the provision of aid
to state owned carriers. The findings emerging from this research suggest that increased
competition, coupled with a realisation that government bail-outs were no longer
possible, had a positive effect in promoting reform. The example of Sabena was
highlighted as being the deciding factor for many airlines, who had previously believed
that flag carrier failure would not be allowed to happen.
The Emergence of LCC’s

This research found two distinct perspectives, when it came to the impact of the
emergence of LCC’s. Whilst the general view was that LCC’s had revolutionised the
industry, by providing new routes at much reduced cost, there was also a sizable minority
who maintained that LCC’s have not impacted upon the position of traditional flag
carriers, particularly on long haul routes. These views clearly mirror the direction that
their respective companies are taking and are both, to some extent, accurate. While
LCC’s have revolutionised the industry in the areas where they operate, it could also be
said that in many ways, they have not had a large impact upon either long haul routes, or
the segment of the market which demands the traditional full service offering.
By not offering connectivity, and only flying within a certain range, so as to allow crews
to return in one shift, LCC’s have not yet competed directly with the traditional carriers
in come arenas.
Pending EU/US Open Skies Agreement

The literature looked the EU’s desire to bring about an Open Skies agreement with the
US, in order to end the disadvantage facing European airlines and further promote
competition and hence development. The findings from this research suggest that, whilst
there is some pessimism as to the willingness of the US to agree to such an arrangement,
if implemented, it would result in considerable change in the industry. European carriers
are particularly interested in the potential for the agreement to bring about US market
86
access. The other benefit would be that cross border mergers and acquisitions would be
made possible, where airlines had to be content with alliance co-operation in the past.
Anti-trust immunity will no longer be an issue.
There was a broad consensus that the initial reaction to such an agreement, would result
in the rapid opening of new routes by European carriers, which would calm down
somewhat after the first six months. The real question, which surrounds such an
agreement, is whether alliances offer airlines more than just market access.
The results from this research, suggest that a number of airlines will re-assess their
membership on these grounds. Those most likely to do this will be airlines with low
number of passengers transferring to other alliance partners at hubs. The agreement
should also remove the need for nationality association of airlines. In Europe, Ryanair are
an Irish airline, who are broadly believed to be English, and fly routes between Germany
and Morocco. Without nationality association, airlines will be more easily able to grow
organically, and compete on a broader range of routes within the enlarged market. In the
longer term, mergers could also be considered, allowing the formation of truly global
businesses, like those which exist in most other industries not subject to such regulation.
Despite some respondents suggesting that this spells the end of airline alliances, what is
much more likely is that alliance will need to greatly reform and cut the cost associated
with their co-operation. Without the benefits of market entry, and mergers and
acquisitions no longer an issue, alliances will need to focus their attention on alternative
ways of generating advantage.
These findings were in line with the literature reviewed, particularly that of Vyas et al.
(1995). Vyas et al. pointed out that the basis upon which alliance are formed, is likely to
change over time, resulting in members finding that they no longer needs the skills or
knowledge provided by their partners. The results of this study strongly support this
view, suggesting that this is the case with alliances in the airline industry.
87
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8.1 Introduction
This final chapter, will firstly summarise the conclusions drawn from the research
undertaken. Based on these conclusions, a model will then be proposed whereby LCC’s
could co-operate for mutual benefit. This model will be outlined and the advantages and
disadvantages will be discussed. Finally, recommendations for further study will be put
forward and the thesis will end with a concluding comment.
8.2 Conclusion
The International Airline Industry is one of the most dramatic and dynamic industries in
the world in which to operate. It is prone to sustained financial failure because of high
fixed costs, vulnerability to political shocks and high capital intensity.
In the nineteen eighties, airlines decided to pool their resources and form Strategic
Airline Alliances. These alliances were based around;
1- Global Reach
2- Joint Procurement
3- Smoother Interline Transfers
4- Simplified Ticketing and
5- Better Frequent Flyer Program Benefits
Since their establishment, alliances have become increasingly popular as carriers seeking
access to new technologies, transferring passengers, better global brand awareness, have
joined. Despite their continued popularity however, there have been a number of
89
significant changes in the business environment in which airlines operate. The most
significant of these changes were:
1- The Introduction of Internet Sales

2- The Emergence of the Low Cost Business Model
3- The Increased use of Secondary Airports on Point-To-Point Flights
4- Deregulation and EU Competition Policy
The “Big Three” strategic alliances operate somewhat differently, with different power
distribution and system implementation requirements. Their different offerings are found
attractive to carriers with specific needs and goals.
Low Cost Carriers are not interested in alliance co-operation, as they are generally costly,
involve the connection of systems, and require the acceptance of additional liability for
connections and baggage transfers. Other benefits of alliance membership such as
common procurement, joint marketing and joint sales, are not attractive to LCC’s who
want direct sales through their websites and don’t require much on board goods. When an
airline decides to become a LCC, and their alliance counterparts do not, or indeed do so
at a slower rate, the benefits of alliance membership diminish. This is especially true
where point-to-point routes are established, as the proportion of passengers transferring to
other alliance carriers falls, as a percentage of total passenger numbers.
The potential for alliance co-operation between LCC’s is discussed in 8.3, below.
Alliances stand to play a continued role into the future, offering strong linkages through
major hubs. These linkages may be particularly important to long haul passengers,
especially those who demand rapid, seamless transfers through hubs and more ticketing
flexibility than that offered by LCC’s. Their continued dominance however, remains
vulnerable to the increasing global role played by budget carriers and the increased
90
willingness of passengers to self-interline. Changes in how the existing strategic alliances
operate will be necessary to ensure that they remain economic and hence worthwhile.
8.3 Model by which LCC’s could co-operate
As part of this research, the potential for co-operation amongst LCC’s was discussed with
the respondents. Resulting from those discussions, the following model was developed.
The findings of this research suggest that LCC’s would not be willing to become
involved in any form of co-operation, which would involve financial cost or any
additional risk. With this in mind, the author proposes that LCC’s could co-operate
through loose arrangements involving co-location, joint internet sales and joint marketing
initiatives. Such initiatives could be organised on a loose, or even informal basis,
eliminating cost and risk to operational flexibility.
The model suggests that LCC’s ;
1. Co-Locate, creating “Low Cost Hubs”

2. Process Joint Internet Sales by linking websites and providing a simple system
allowing passengers to book and pay for two separate tickets, on two different
carriers, in the one session.
3. Promote End Destinations
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Figure 6, A Model By Which LCC’s could Co-operate
Co-location of LCC’s is already emerging in a number of airports which are primarily

served by budget carriers, most notably in Standstead airport in London, Singapore and
Kuala Lumpur in Malaysia. Co-location facilitates passengers to self interline. By
promoting self interlining, budget carriers stand to expand the reach of their point-to-
point routes, without accepting the risks and costs associated with carrier arranged
interlining. With self interlining, the passenger accepts the risks associated with missing
their connecting flights and issues relating to checked baggage.
By providing a simpler method for finding and booking two separate tickets, LCC’s can
promote self interlining and boost sales, accessing beyond just the point-to-point market.
Linking websites, where competing routes are not in operation, will help LCC’s with low
92
brand awareness gain sales, whilst allowing more prominent LCC’s access to additional
website viewings. This system could include a pay-per-click agreement, where the flow
of sales in one direction is stronger than the other. This connectivity should allow the
customer to view seat availability and price on both legs of the journey, within the one
internet ‘session,’ before committing to buy either. The payment process should take
place in one transparent transaction, with the correct sum sent directly to both airlines
instantaneously.
Air carriers should continue to promote end destinations served by them. This would
ensure that no potential disputes over marketing would emerge. The existence of the LCC
hub would also need to be initially marketed, either by the airport in question or by the
airlines involved.
There are a number of benefits to this model of co-operation:
- It will allow passengers to use LCC’s, or combinations of LCC’s, to travel to a

broader selection of destinations and for the first time, across longer distances.
- It will help promote self–interlining as a cheaper alternative to carrier
arranged interlining.
- As low cost hubs become more common, they will become “self-interlining
friendly” in design. “Self-interlining friendly” airports would locate additional
check-in desks at baggage claim, and provide direct access to gates for re-
checked passengers.
- It will bring increased sales of passenger goods at the airports, as passengers,
unwilling to miss connecting flights, arrive a number of hours prior to the
departure of their connecting flight.
93
There are also a number of weaknesses to the model:
- LCC’s undergoing rapid growth may not be willing to facilitate the sales of
rival’s tickets, even at a cost. However, the connectivity on certain routes
could be removed at any stage.
- LCC Hubs, by definition are low cost operations. With increased traffic
through these airports, this may impact on the efficiency of their operation.
- Despite increasing evidence to the contrary, it may become difficult to attract
passengers, willing to take the risks of self interlining without the security of a
seat on the following flight.
8.4 Recommendations
From this study, a number of recommendations in relation to the summary and

conclusions suggested in this chapter, are compiled by the author as follows:
i. Airlines involved in the strategic alliances should focus on co-

location, where they serve the same airports.
ii. Fundamental questions need to be addressed in relation to the costs

and benefits of membership of the OneWorld and SkyTeam airline
alliances, particularly where carriers have low numbers of
passengers transferring across the alliance. The alliances need to be
re-designed to reduce the cost involved.
iii. LCC’s need to promote self interlining, allowing passengers to

travel further distances on a budget. Strategic low cost hubs could
94
present the key to tackling the traditional carriers’ dominance on
long haul routes.
iv. LCC’s should consider increasing flexibility (perhaps at an

additional cost) on their tickets sold through low cost hubs, allowing
passengers the ability to catch the next available flight, (with empty
seats) in the event of missing a connection.
8.5 Concluding Comment
At this concluding point, it is interesting to note, that many of the respondents, who came
from LCC’s, saw a continued role for alliances, in providing connectivity for long haul
travel, whilst at the same time, many of the respondents from flag carriers, saw the future
of alliances as dependant on LCC’s future moves, as regards alliance co-operation.
The role played by alliances in five years time, all depends on what role, if any,
LCC’s have in formal or loose alliances. Otherwise (they’ll remain) pretty much
the way they look now. (R6)
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96
Glossary / Abbreviations
97
Glossary / Abbreviations
Cabotage The right to carry paying traffic within a foreign country

Code Sharing – Two or more carriers using their flight designator
codes on the same flight.
CRS Computerised Reservation System
FAA Federal Aviation Authority - The main US aviation regulatory

body.
Grandfather-right A term from slot allocation which indicates that an air carrier has
the right to be given the same slot as it was operating in the
preceding season.
Ground-handling Services to ensure the proper flow of passengers, baggage and

freight (i.e. check-in, baggage and freight handling) and ancillary
services such as catering, cleaning of aircraft, fuelling and ordinary
maintenance of aircraft.
Hub Traffic centre for an airline where traffic scheduled is waves so

that connections are facilitated.
Indirect air carrier A company that sells air transport to the public and issues tickets in
its own name and with its own designator code but uses another air
carrier to operate the air services being sold. Also called a virtual
air carrier.
Interlining The possibility with the same ticket to use other air carriers.
ICAO International Civil Aviation Organization
IPO Initial Public Offering
LCC Low Cost Carrier
PSO Public Service Obligation. - In cases where air transport is vital for
a region the state may specify certain levels of quality of service
for any airline on a route and it necessary the state may pay
compensation it no airline is willing to operate without.
Traffic Rights The right to carry passengers, freight and mail for remuneration.
See Appendix.
98
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99
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Appendices
108
Appendix A – Alliance Member Carriers
109
Appendix A –Alliance Member Carriers
STAR Alliance OneWorld Alliance SkyTeam Alliance
Air Canada Aer Lingus Aeroflot

Air NewZeeland American Airlines AeroMexico
ANA British Airways Air France KLM
Asiana Airlines Cathay Pacific Allitalia
Austrian Airlines Finnair Continental
BMI Iberia Czech Airlines
LOT Polish Airlines Lan Chile Delta
Lufthansa Qantas Korean Air
SAS NWA
Singapore Airlines
South African Airways
Spanair
Swiss
TAP Portugal
Thai
United
US Airways
Varigo
Adria*
Blue 1*
Croatia Airlines*
August, 2006.
* Regional Member Status
110
Appendix B – International Traffic Rights
111
Appendix B – International Traffic Rights
The right to carry passengers, freight and mail for remuneration. These rights are set out
in a systematic way as follows;
- 1 st freedom is the right to overfly a country.

- 2 nd freedom is the right to overfly a country and make a technical stop for
fueling or repair.
- 3rd freedom is the right to carry passengers etc form the carrier’s home state to
another state.
- 4th freedom is the right to carry passengers etc from another state back to the
home state.
- 5th freedom is the right to carry passengers etc between two foreign states on a
service which is an extension of a service from the home state.
- 6th freedom is the right to carry passengers etc between two foreign states via
a connection point in the home state. I.e. a combination of 4th and 3rd freedom
- 7th freedom is the right to carry passengers etc between two foreign points on
a free-standing service.
- 8th freedom is the right to carry passengers etc on a service within a foreign
country which is an extension of a service from the home state. This is a form
or cabotage.
- 9th freedom is the right to carry passengers etc on a free-standing service
within a foreign country. This is pure cabotage.
(Soerensen and Dukes, 2004)
112
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Institiúid Teicneolaíochta Phort Láirge

The Changing Role of Strategic Alliances in the

Air Transport Industry

Seosamh Aodán Ó Murchadha

Dissertation submitted in partial fulfilment of the requirement for the MBSI in

Waterford Institute of Technology.

Air Transport Industry

Seosamh Aodán Ó Murchadha

Institiúid Teicneolaíochta Phort Láirge

Supervisor : Gerard Arthurs

The research methodology included semi-structured interviews with a number of airline

1.2 Objectives of Thesis 3

1.2.1 Value and significance of this research 3

1.3 Structure of Thesis 4

1.3.1 Literature Review 4

1.3.2 Method of Research 5

1.3.3 Findings Chapter 6

1.3.4 Discussion Chapter 6

1.3.5 Conclusions and Recommendations Chapter 6

Chapter 2 – Strategic Alliances and Airline Co-Operation

2.4 Types of Strategic Alliance 14

2.5 Alliance Challenges and Failure 16

Chapter 3 – Alliances in the Commercial Airline Industry

3.2 The “Big Three” 19

3.4 Aer Lingus and the OneWorld Alliance 24

Chapter 4 – Evolution of the Airline Industry

4.2 European Competition Policy - Liberalisation of Routes 28

4.3 European Competition Policy – State Aid 30

4.4 The Emergence of LCC’s 30

4.5 Pending EU/US Open Skies Agreement 34

Chapter 5 – Research Design and Methodology

5.2 The Research Process 38

5.4 Outline of Research Problem 40

5.5 Research Objectives 41

5.6 Research Question 42

5.7 Research Philosophies 42

5.8 Ontology, Epistemology and Methodology 43

5.9 Secondary sources of information, Data Collection 44

5.10 Primary sources of information, Data Collection 44

5.11 Qualitative research justification 46

5.12 Primary research design 47

5.13 Sample selection 48

5.14 Analysis of Data 50

Chapter 6 – Research Findings

6.2 Profile of Interviewees 53

6.3 Interview Findings 54

6.3.1 Interview Findings - Alliances when they were formed 54

6.3.2 Interview Findings - Change of Business Environment 57

6.3.3 Interview Findings - Alliances Now 63

6.3.4 Interview Findings - Airlines that become LCC’s 65

Chapter 7 – Analysis and Discussion

7.3 Strategic Alliances and Airline Co-operation 79

7.4 Alliances in the Commercial Airline Industry 83

7.5 Evolution of the Airline Industry 85

Chapter 8 – Conclusions and Recommendations

8.3 Model by which LCC’s could co-operate 91

8.4 Recommendations for future research 94

8.5 Concluding Comment 95

The commercial airline industry is a highly challenging industry in which to operate. It is

1.2 Objectives of the Thesis

1.2.1 Value and significance of this research

Although membership of the dominant global airline alliances is growing, a number of