UNIVERSITY OF DHAKA

CASE STUDY ON GETTING AIRLINES ALLIANCES OFF THE GROUND

Course ID: EMIS 516 Group 7, summer’17

Course Title: International Business

SUBMITTED TO

FARJANA PARVIN CHOWDHURY

ASSISTANT PROFESSOR

DEPARTMENT OF MIS

UNIVERSITY OF DHAKA

SUBMITTED BY

Name ID
MD. Mostafizur Rahman 6173629023
Zafrul Hasan 6173629069
Romana Sultana 6173629015
MD. Arifur Rahman 6173629057
Rahul Chanda 6173629034

Submission Date: 8/13/2017

 Case Summary
Airlines alliances involve combining of routes, sales, terminal services and frequent flier
programs. Most of the leading airlines of the world such as Air Canada, Air New Zealand,
Spaniar, Swissair, United Airlines, and U.S Airways etc. have such alliances. Again many
airlines own stakes in other airlines too. There have been mergers too even though original
identities have been retained in certain cases.

Alliances between airlines on international markets have become a dominant feature of the
airline industry. Many customers today, particularly those travelling on business, demand a
seamless service on international markets „from anywhere to anywhere‟. However, no airline
is able to efficiently provide such a service on its own aircraft, and few city pairs can generate
sufficient traffic to justify a daily non-stop service. In order to meet customer demands at an
efficient cost, airlines have had to seek commercial partners to help them provide the network
and service coverage required. Passengers have always been able to arrange an itinerary on
two or more airlines, through the interlining mechanism managed by IATA. However, this
arms-length cooperation did not allow the integration and efficiencies that were possible.
Cross border mergers, which would be typical in other industries, are prohibited for airlines
by restrictions on foreign ownership. Nevertheless, since the early 1990s, the need for
network cooperation led to a rapid expansion of alliance relationships, as a close substitute
for mergers. Alliance formation is typically associated with high-tech firms and R&D
intensive manufacturing industries but the airline industry is an example of a service-oriented
sector where various kinds of alliances have also proliferated. One of the most important
developments in the international airline industry in recent years has been the rapid expansion
of global airline alliances among airline competitors. Large airlines are spreading their wings
by including airlines of various sizes from all parts of the world into their alliances. These
have involved cooperation between two or more airlines in a wide range of commercial and
operational areas, for example, scheduling, purchasing, marketing, and frequent flyer
programs.

Historically, air transport has always been seen to have an inherently strategic role. It has
obvious direct military applications, but it is also highly visible and, for a period, and in some
countries still, was seen as a “flag carrier”, a symbol of international commercial presence.
The modern air transport industry is one that increasingly operates within a liberal market
context. There is a further aspect to liberalizing international services stemming from the
interaction of domestic air transport with international markets. Globalization inevitably
means higher demands for the movement of people and goods between countries which,
given the largely commercial orientation of modern air transport, will bring forth additional
supply.

Forces in the global marketplace increasingly require companies to collaborate with local and
overseas partners for market efficiency and responsiveness. This trend is echoed in the
development of alliance activities within the airline industry. Nowadays most airlines
participate in some form of strategic alliance.

An airline alliance is an agreement between multiple independent partners to collaborate in

various activities to streamline costs (e.g., by sharing sales offices, maintenance facilities,
ground handling personnel, check-in and boarding staff etc.) while expanding global reach
and market penetration.
 Question 1
Discuss a question raised by the manager of route strategy at American Airlines: Why
should an airline not be able to establish service anywhere in the world simply by
demonstrating that it can and will comply with the local labor and business laws of the
host country?

Answer: Our Considered View Yes, it should; reasons are given below:

 Competition forces carriers to become efficient or else go out of business, instead of

being subsidized by regulated route and fare structures.
 Survival of mega-carriers leads to economies of scale in the handling of passengers
and cargo.
 No, it should not; reasons are given below.
 Local interests are often ill- served by deregulation since airlines are free to
discontinue service and to wage predatory price wars that put competitors out of
business.
 There may eventually be too few survivors to allow for the competition.
 Politics, national security and consumer welfare.

A major consideration is whether economic interests in the airline industry are better served
through such an arrangement or not. But other issues related to political relations, cross
culture issues etc. have over-riding implications. Management may find it increasingly hard
to be cooperative, say, in joint maintenance agreements while trying to compete directly on
some routes.

Government restrictions to prevent full mergers among airlines from different countries may
be a blessing in some ways because corporate and national cultures may be difficult to mesh.
For example, pilots at one airline may be unionized, but those at a foreign carrier may not.
Analysis concludes that the problems of combining unions after PanAm‟s acquisition of
national were a major contribution to PanAm‟s eventual demise.
 Question 2
The president of Japan Air Lines has claimed that U.S. airlines are dumping air services
on routes between the United States and Europe, meaning they are selling below their
costs because of the money they are losing. Should governments set prices so that
carriers make money on routes?

Answer: The development of strategic alliances within the airline industry creates sustained
competitive advantage, improving the profitability of the alliance members and affecting the
residual category of companies operating outside of these partnerships. In order to overcome
extensive loses governments shouldn‟t set prices for carriers to make money on routes.
The reasons are discussed below:
 Firstly, to separate profits and losses on a route-by-route basis is very difficult. If fares
and loads on certain routes may seem to be low, they may in fact be generating
marginal revenues that make major routes profitable.
 A second issue is that of price elasticity. If governments were to set prices above the
equilibrium point, traffic and revenues, and hence profitability, would all fall.
 A third issue is that of ownership. If privately owned carriers abandon routes to
government-owned airlines, they could well give advantages to those airlines that
could then be used against them on other routes.
 Finally, the issue of profitability raises the question of subsidies. It is nearly
impossible to determine whether dumping is taking place when competitors receive so
many direct and indirect subsidies.
 Question 3
What will be the consequences if a few large airlines or networks come to dominate
global air service?

Answer: The consequences would be both positive and negative.

 On the positive side, passengers should be able to travel almost anywhere in the world
on a single airline (or network).
 That in turn should minimize the risk of missed connections and lost baggage.
 Operating economies should be realized as a result of the higher utilization of airport
gates and ground equipment.
 Consequent savings may or may not be passed along to passengers through lower
prices.
 On the negative side, it is quite possible that
 Minimal competition would lead to poor service and/or high prices.
 In addition, competition among the destinations associated with particular airlines
may decline, as would the social services offered by the niche airlines.
 Question 4
Some airlines, such as Southwest and Alaska Air, have survived as niche players
without going international or developing alliances with international airlines. Can they
continue this strategy?

Answer: Yes, they can continue. Here are the possible things to consider this-

 Niche operators can survive in an operational mode that does not attempt to expand
and/or modify their operations too much. As we know, when there is sufficient traffic
on a route, there is little need to have feeder or connecting routes for an airline to be
profitable. So, Southwest and Alaska air can operate their businesses from isolated or
smaller airports without the need for hubs to make connections.
 They can avoid the costs associated with the transfer of bags to connecting flights and
the payment of overnight expenses to passengers who miss connections on bigger
hubs. And these airlines can overcome disadvantages from small-scale operations by
targeting their promotion to regional and niche groups and by running low-cost
operations that charge low fares.