developed by Robin Roberts
Department of International Business and Asian Studies
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Susan Smith
Research Officer
Dept of International Business & Asian Studies
Griffith University
170 Kessels Road
Nathan QLD 4111
1 April 2011
Robyn Black
Operations Manager
Airline Alliance Consortium
Star Alliance
500 George Street
Brisbane QLD 4000
Dear Ms Black
As requested, the Research Unit has prepared a report examining the strategic alliances with the global airline industry. The purpose of this report is to present the findings of the research and provide recommendations for future opportunities.
The findings of the report show that despite the current global challenges it is reasonable to propose that, after reformulating current strategies your organisation can expand its horizons beyond current market share into more lucrative sectors that provide sustainable growth.
Yours sincerely
Susan Smith
Research Manager
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The purpose of this report is to provide a strategic analysis of the global airlines industry in terms of the prescribed analytical framework and to provide recommendations. The report overviews the global airlines industry and defines the notion of strategic airline alliances as the principal operating environment and succinctly reviews the Star Alliance network as a leading exemplar.
A literature review was used to gain an understanding of the airlines industry through the structure of strategic airline alliances and to examine key industry characteristics. Porter's Five Forces analysis explores the operating environment to provide an understanding of the industry context. The dynamics of technology, cooperation and chance all play additional roles in shaping the characteristics of the industry. In order to analyse the opportunities that impact on the industry the Value Net framework has been reviewed and applied to industry examples.
The report reveals that competition within the airline industry stems from the drive to gain a greater advantage over competitors by offering consumers superior value or by providing increased benefits and services in order to ultimately deliver economic profitability for the airline and its shareholders.
Five key action recommendations illustrate how the airlines industry and major alliances should aim to sustain and advance its competitive position by changing to a customer-centric approach which will be necessary to meet the challenges of the 21st century. In summary these are:
Despite a recent history of financial losses the industry is currently experiencing an upturn which is predicted to continue. It is reasonable to propose that, after reformulating its strategies and adjusting its organisational structure, Star Alliance should expand its horizons beyond current market share into more lucrative sectors of growth.
Executive Summary i
Table of Contents ii
List of Tables and Figures iii
1.0 Introduction 1
1.1 Background 1
1.2 Aim 1
1.3 Scope 1
1.4 Assumptions and Delimitations 2
2.0 Industry Overview 3
3.0 Industry Analysis 4
3.1 Rivalry among Existing Competitors 4
3.2 Barriers to Entry in the Industry 4
3.3 5
3.4 5
3.5 6
4.0 Industry Dynamics 7
4.1 Technology 7
4.2 8
4.3 8
5.0 9
5.1 9
5.2 10
5.3 10
6.0 Conclusion 11
7.0 Recommendations 12
References 13
Appendices 14
Appendix A - ESL Questionnaire14
Appendix B - Alternative Listening Activities15
3.1 2006 Global Airline trends 3
4.1 2005 Global Strategic Airline Alliances 7
3.1 Airline Alliance Operating Revenue Shares 2005 4
4.1 Global Passenger Shares 2005 7
5.1 Airline Alliance Interdependencies 9
5.2 Boeing 767 Aircraft Seating Configuration 10
The end of the 20th century saw the emergence of a movement from well defined and individual national markets to a single immense market place; this movement is known as globalisation. Positive support for globalisation argues that it provides connectivity, interdependence and integration into the world economy (Hill, 2005).The motivating forces behind globalisation in the airline industry provide the catalyst for strategic airline alliances (Agusdinata and de Klein 2002; Ali 2001). Dynamic factors impacting the airline industry have moved companies away from the informal loose co-operation of the past towards formal contractual strategic alliances specifically designed to maximise their competitive position (Agusdinata and de Klein 2002; Gudmundsson, de Boer and Lechner 2002; Tarry 2003). It has become increasingly evident that the long-term survivability of international airlines with global ambitions will be determined by their affiliation to alliance groups (Agusdinata and de Klein 2002; Delios et al. 2004).
Increased consumer demand for airline travel means strategic alliances represent significant market opportunity for companies to achieve economies of scale and increase their market share as a consequence of operating within an alliance (Delios et al. 2004; Gudmundsson et al. 2002; Tarry 2003; Vowles 2000). Therefore this strategic analysis of the global airline industry is based on alliances which are the standard for the industry. Moreover, the analysis will further highlight the challenges and opportunities facing the industry which may constrain or limit growth whilst seeking to deliver value to customers, investors and the world economy.
The purpose of this report is to provide a strategic analysis of the global airlines industry ('the industry') in terms of the prescribed analytical framework. The report is structured in five key parts. Firstly the report overviews and describes the airline industry in terms of globalization effects and principal operating characteristics. The next section applies Porter's Five Forces to provide an understanding of the industry context and highlights the role of government. The third section reviews key remaining dynamics that impact on the industry. The fourth section examines the aspects of the industry through the Value Net framework. The report concludes with five key recommendations identified for the airlines industry and major alliances should aim to sustain and advance its competitive position.
To deliver a strategic analysis of the global airlines industry through its major operating environment of strategic alliances, utilising the Star Alliance network as an exemplar owing to its dominant position in the industry and its subsequent need to focus on a global solutions for its customers and shareholders.
This report highlights the strategies and business platforms employed by strategic airline alliances in a generalised global environment. The analysis is undertaken by reviewing academic journals and texts, websites and other secondary sources. The amount of information was limited and consequently restricted the explanation and analysis contained within this report. Based on the information available the writer has concluded that International Air Transport Association (IATA) is the peak industry body and that Star Alliance is the leading strategic airline alliance at the time of writing this report. The writer assumes that the Porter's Five Forces and the Value Net frameworks are the appropriate models to analyse the global airlines industry and that the available information relating to Star Alliance's achievement of dominance in the industry reflects valid business practices.
4
From the academic and industry literature reviewed, it is broadly accepted that is better to collaborate than compete in today's dynamic, global business environment. In a highly competitive industry, such as the airline industry, competitive advantage stems from an advantage over competitors gained by offering customers greater value, either by means of lower prices, increased number of destinations or by providing greater benefits and service whilst attempting to improve the carriers' bottom line.
However, strategic alliances are not all plain sailing. Alliances should be entered into when the capabilities and probabilities of the partners are similar, when the power and management expertise are comparable and when the fusion of these elements produces a mutually beneficial synergy.
The range of identified problems, particularly jet fuel expenditure and non-fuel costs, faced by the industry can be better addressed from within the framework of an alliance structure. The network formed by Star Alliance has given members the ability to gain economies of scale and to increase their market share but they must continue to re-evaluate their strategic plans, amend their organisational structure and maintain the trust and confidence of existing customers whilst expanding their customer base.
Future success for the Star Alliance network will depend on the group's ability to better understand and manage factors within the alliance, foresee new opportunities and influence consumer preferences. Superior customer service, optimal flight schedules, quality control and product consistency will continue to afford Star Alliance advantages over its competitors.
The analysis has revealed the industry and major airlines alliances have a product-centric approach to the way business has been conducted over the last years. The recommendation to change to a customer-centric approach is necessary to meet the challenges of the 21st century. The following recommendations target a customer-centric approach: (Framework adapted from Shah, Rust, Parasuraman, Staelin and Day, 2006):
Agusdinata, B & de Klein, W 2002, 'Dynamics of airline alliances', Journal of Air Transport Management, vol. 8, pp. 201 – 211.
Ali, A 2001, 'Globalization: The great transformation', Advances in Competitiveness Research, vol. 9, no. 1, p 1-10.
Beamish, P 2000, Asia-Pacific Cases in Strategic Management, McGraw-Hill, Boston.
Besanko, D, Dranove, D, Shanley, M, and Schaefer, S 2003, Economics of Strategy, Wiley, New York.
Boehmer, J 2006, 'Airlines Finally Post Profits in Q2', Business Travel News, vol. 23, no. 14, p 3.
Brandenburger, A & Nalebuff, B 1995, 'The Right Game: Use Game Theory to Shape Strategy', Harvard Business Review, Jul/Aug
British Airways 2005, Harmondsworth, viewed 2 October 2006, www.britishairways.org
Collins, J 2001, Good to Great: Why some companies make the leap... and other don't, Random House, London.
Cote, M 2002, 'The future of Air Canada', CA Magazine, vol. 135, no. 3, p 60.
Cravens, D, Merrilees, B & Walker, R 2000, Strategic Marketing Management, McGraw Hill, Sydney.
Culpin, R 2002, Global Business Alliances: Theory and Practice, Quorum , West point.
Delios, A, Inkpen, A & Ross, J 2004, 'Escalation in International Strategic Alliances', Management International Review, vol.44, no.4, pp 457-479.
Gudmundsson, S, de Boer, E & Lechner, C 2002, 'Integrating frequent flyer programs in multilateral airline alliances', Journal of Air Transport Management, vol. 8, pp. 409-417.
Hill, C 2005, International Business, Competing in a global marketplace, 5th edn, McGraw- Hill/Irwin, New York.
IATA, 2005, Economic Results and Prospects Report, viewed 3rd October, 2006, <http://www.iata.org>.
IATA, 2006, 'New Financial Forecast, September 2006, viewed 3rd October, 2006.
International Air Transport Association 2004, Montreal, viewed 2nd October 2006, <http://www.iata.org>.
Porter, M 1990, The Competitive Advantage of Nations, MacMillan, London
Appendix A: Global Airlines Industry – Reporting Institutions
List of organisations and national statisticians that participate, prepare and supply statistical information to form global airlines industry reports:
Source: www.iata.org
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