Presentation Outline Strategic Alliances in the Airline Industry Samantha Feinblum Ravit Koriat Overview Factors that influence Strategic Alliances Industry Factors Types of Alliances Simple Carrier Strong Carrier Potential Barrier to Entry: Vertical Integration Case Study: Star Alliance Overview Companies form strategic alliances not because they get on well but because each party can gain something that they could not get on their own. If an airline that wants to pursue a market strategy of being a full service broadly based carrier, joining an alliance is a necessary condition for success. Motivation for Strategic Alliances Globalization Liberalization Privatization Industry Factors Bilateral and Regulatory Restrictions Demand Aspect Supply Aspect Globalization: Advances and liberalization in both transportation services and technology has driven the globalization of the Airline Industry Due to globalization of world economies there has been an increased emphasis on the demand side of the market. i.e.consumers prefer to fly with large airlines that have an extensive international network, especially after the events of Sept. 11. Liberalization: Airlines are competing in a more liberalized competitive environment Liberalization leads to growing markets and the incentive to offer services to those markets. 1
Privatization: As governments divest control of their national carriers, the new private corporations face many challenges in the restructuring phase that comes with privatization. Partners are needed to achieve traffic feed and to complement a route network. Bilateral and Regulatory Restrictions: One of the greatest inducements to form alliances come from regulatory restrictions. These include restrictions to fly to particular destinations and access of airport infrastructure i.e. landing and take-off. Alliances can overcome these restrictions because the domestic carrier has admittance to the domestic markets and does not have the restrictions that are placed on foreign carriers. Demand Aspect: Passengers prefer large networks because: Higher quality of service; coordinated scheduling, baggage handling, ticketing and check-ins. Larger frequent flyer programs wide choice of destinations and large network on which to accumulate points. Alliances allow airlines to achieve the marketing advantages of greater networks without incurring substantial additional costs. Supply Aspect: Cost Savings: alliances can reduce variable and fixed station costs through code sharing, which allows airlines to become and extension of another carriers routes as well as sharing a code on the same route. Carriers can establish a presence without actually operating the route. Operation savings also come from joint operation of various service activities Typology of Alliances Simple Carrier Alliances Interlining Code sharing Strong Carrier Alliances Simple Carrier Alliances Involve marketing agreements between carriers of different countries for preferential exchange of traffic. Interlining Flight segments are clearly labeled as to which carrier is providing the service. Carriers may establish a joint fare agreement or attempt to coordinate their schedules. Agreements are very transient and easily cancelled. Code sharing Consumer will perceive that one carrier is provided the entire service, even though two separate carriers may be involved. A more committed and stable agreement. 2
Strong Carrier Alliances Typology of Airline Alliances Involves Equity swaps. Carriers of different countries maintain their own corporate identity, but they are affiliated in order to provide a global service network. Much coordination of marketing efforts: routing decisions, schedule timing, establishment of joint fares, code sharing in CRS databases, frequent flyer programs, catering services and possibly aircraft. Carriers will need to make substantial investments, or give up some previous functions such as routes to other carriers. HIGH Resource MODERATE Commitment LOW Computer Reservation Systems (CRS) Blocked Space Agreement Codesharing LOW Management Contracts Joint Services Insurance & Part Pooling MODERATE Complexity of Arrangement Equity Governance Joint Marketing Baggage Handling Ground Maintenance Facilities Sharing HIGH Barrier to Entry:Vertical Integration By controlling up and downstream markets, a carrier could: Exclude a rival from a market Raise its costs by setting up high prices for wholly owned suppliers, a carrier can raise costs of a rival who must use that supplier. Indirectly control actions a carrier that owns a monopoly ground handling services firm can cause a rival to reschedule flights. Case Study: Star Alliance Star Alliance brings together 14 airlines e-market place Case looks at How The Star Alliance soared to new levels of purchasing efficiency Group decided that it needed to examine new ways to enhance collaboration efforts. Concluded that a dedicated global e-market place for the airline industry was needed. The initiative, called Aeroxchange, was led by Air Canada and to date includes 27 participating airlines. Issue In need of an electronic marketplace that could facilitate 3 types of purchasing: Products (e.g., aircraft parts) and services for plane maintenance Products and services (e.g., food, cabin supplies, ground equipment) to support air travel Products and services (e.g., office supplies) to support the airlines' core businesses 3
Requirements Allow the alliance members to share inventory levels Facilitate joint planning and forecasting for material requirements Provide a link between all participating vendors and airlines through a central hub Present an opportunity to re-engineer the alliance s supply chain and inventory management systems Enable airlines and vendors to collaborate when buying common products and services. Solution Star Alliance chose Oracle Corporation for its e-marketplace exchange technology and back-office financial applications Based on previous work in the auto industry, the alliance concluded that Oracle offered a full-integration platform for all the different types of applications. Exchange Marketplace Oracle s Exchange Marketplace allows Aeroxchange participants to source and purchase products and services using an array of e-commerce transactions, including: electronic catalogue-based orders auctions reverse auctions spot purchasing and more Exchange Marketplace It enables: Airline technical purchasing (associated parts and services used in the manufacture of aircraft) Airline specific purchasing (non-technical commodities such as food, cabin supplies and ground equipment) Order Management Application Oracle s Order Management Application permits a great deal of procurement activity to be conducted by the end-users themselves. No longer have to call the purchasing department for everything they need; rather, they can log on to the exchange and order the items themselves. Order Management Application All users need to do is specify the product they require and the system will then execute a search and display the names of suppliers or airlines that have the item, along with the list price which can save airlines a great deal of cash and effort. 4
Advanced Planning and Scheduling Oracle's Advanced Planning and Scheduling facilitates the real-time exchange of demand information, forecasts, manufacturing schedules, availability, capacity and other data between Aeroxchange participants. This enables airlines to cut the cost of maintaining inventory; before approaching suppliers, they have the option of selling excess stock to one another. Advanced Planning and Scheduling Aeroxchange provides airlines not just with inventory visibility, but also joint demand planning and forecasting capabilities, in order to avoid the airline s tendency to keep far more stock then needed. If a company has 125 vendors that it deals with, then it will need to write as many programs. Aeroxchange resolves this issue too, by acting as the central hub that links all participants - airlines and suppliers - to itself and to one another. The overall aim of an alliance is to enhance the competitive position of a firm by increasing efficiency, thus, enabling higher profits for the member firms of the alliance. In the future, an airline s success will be determined by its ability within an alliance to obtain the benefits arising from both the demand and supply side, while managing and minimizing the costs of alliance formation and execution. Airlines must identify appropriate strategic planning, operations and technology partners that can help them navigate this process of identifying and implementing effective and innovative solutions solutions that may make the difference between short-term survival and long-term success. 5