Strategic Alliances in the World

Airline Industry
Marion M. Bennett*
Department of Management Studies, University of Surrey, Guildford, Surrey GU2
5XH, UK
ABSTRACT
In recent years the airline industry has been in
turmoil. Declining loads, overcapacity and a
reduction in prices in real terms has resulted
in massive nancial losses. At the same time,
the industry has been undergoing change
engendered by, among others, deregulation
and privatisation. Combined, such pressures
have led to airlines forming alliances. This
paper addresses the benets and pitfalls. To
illustrate these points a case study of British
Airways is introduced. The paper concludes
by speculating on the impact such alliances are
having on the airline industry. 1997 by John
Wiley & Sons, Ltd.
Received 12 March 1996; Accepted 2 August 1996
Progr. Tourism Hospit. Res. 3, 213223 (1997)
No. of Figures: 1 No. of Tables: 3 No. of Refs: 29
Keywords: strategic alliances; airlines;
partnerships.
INTRODUCTION
I
n the 3 years leading up to the end of 1992 the
worlds scheduled airlines made losses of
$11.5 billion which is greater than all net
prots since services began 74 years ago (Harkes,
1993). Such losses have resulted from a combina-
tion of factors, namely overcapacity, declining
load factors, a world-wide recession and a move
away from rst and business class travel. During
this period, airlines have been forming partner-
ships with other airlines fostering the process of
globalisation. It is estimated that there are more
than 280 link-ups across the globe involving 136
airlines which vary in form from simple interline
agreements to substantial equity stakes (Gal-
lacher and Odell, 1994). Signi-
cantly, 60% of these alliances have been formed
since 1992. The emergence of partnerships on a
global scale requires research into their impact
on the airline industry. The aim of this paper is to
provide an overview of the development of
strategic alliances in the airline industry includ-
ing an analysis of reasons for their emergence
and speculative assessment of their potential
impact.
THE ESSENCE OF PARTNERSHIPS
A partnership, it can be argued, is akin to a
marriage in that its success depends upon
compatibility, trust and understanding. By
denition a partnership involves at least two
separate entities. It falls short of a merger
although the success of a partnership may lead
to a more committed form of collaboration.
Partnerships vary in the form that they take
and as such they have been variously dened as
networks, joint ventures and strategic alliances
(Porter and Fuller, 1986; Lorange and Roos, * Correspondence to: M. M. Bennett.
PROGRESS IN TOURISM AND HOSPITALITY RESEARCH, VOL. 3, 213223 (1997)
CCC 10773509/97/03021311 $17.50 1997 by John Wiley & Sons, Ltd.
1992). They range from the formal to the infor-
mal and the tactical to the strategic. At the
crudest level, the airline industry has embraced
two types of partnership which can be cate-
gorised as tactical (informal) and strategic
(formal).
Tactical partnerships are loose forms of collab-
oration which exist to gain marketing benets.
They do not usually involve major resource
commitments and nor, as a result, are they high
risk in nature. Such partnerships are encapsu-
lated in code-sharing and feed agreements that
commonly occur between major and minor
airlines. This is best exemplied in the United
States where the hub and spoke networks have
facilitated alliances between commuter/regional
airlines which feed passengers into major air-
lines operating on dense trafc routes.
Consequently, virtually every major US airline is
now tied in with at least one regional airline.
Indeed, by 1986 all 12 major and four national
carriers had formed code-sharing alliances with
commuter airlines (Williams, 1993). Table 1 lists
the major alliances in 1986.
Strategic partnerships tend to be longer where
commitment is sometimes demonstrated by way
of equity stakes either on an exchange or single
carrier basis. A strategic alliance has been vari-
ously dened as
a particular mode of inter-organisational
relationship in which the partners make
substantial investments in developing a
long-term collaborative effort and common
orientation. (Mattsson, 1995)
organisational arrangements and operating
policies through which separate organisa-
tions share administrative authority and
form social links through more open-ended
contractual arrangements as opposed to
very specic arms length contracts. (Go and
Hedge, 1994)
a partnership or long-term, non-equity rela-
tionship that permits partners to meet
strategic goals. (Lau, 1994)
Lau (1994) differentiates a strategic alliance from
an equity investment joint venture on the basis
that a strategic alliance does not require large
capital resources. In the airline industry many
strategic alliances revolve around the need for
such resources making this particular denition
invalid.
With no universally agreed denition of a
strategic alliance, it is appropriate, for the pur-
poses of this paper, to devise a workable
denition. A strategic alliance then can be
dened as a relationship between two or more
organisations which is based on a foundation of
common goals and objectives and entered into to
full strategic ambitions which may or may not
be mutual. Such a broad denition encompasses
the many specic motivations which facilitate
alliance formation and which are considered in
this paper.
Within the airline industry the strategic alli-
ance incorporates shared airport facilities
(check-in, lounges), improved connections (syn-
Table 1. Code-sharing alliances in 1986
Regional carrier Major partner(s)
Air Wisconsin United
Metro American/Eastern
Mid-Pacic Continental
Atlantic Southeast Delta
Henson Piedmont
Horizon Air Alaska
Simmons American/Northwest
Britt Continental/Eastern
Air Midwest American/Eastern/TWA
PBA Continental
Skywest Delta
Express Airlines 1 Northwest
Aspen United
Comair Delta
Pan Am Express Pan Am
West Air United
Pennsylvania A/l US Air
Business Express Delta
Bar Harbor Eastern
Brockway Piedmont
Wings West American
Suburban US Air
Royale Continental
CC Air Piedmont
Rocky Mountain Continental
Chautauqua US Air
Gull Air Continental
Command American
Metro Express 11 American
Crown Airways US Air
Source: Williams, G. (1993) The Airline Industry and the
Impact of Deregulation, Ashgate Publishing Ltd.,
Aldershot.
M. M. Bennett 214
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chronised schedules), reciprocity on frequent
yer programmes, freight coordination and mar-
keting agreements (code-sharing and block
selling). To a large extent, the strategic alliance
incorporates the main features of tactical/mar-
keting alliances, although within the airline
industry there are a great many examples of free-
standing tactical alliances which exist to obtain
the benets of loose collaboration. While such
marketing alliances have existed for many years,
the emergence of the straetgic alliance is a
considerably newer phenomenon in the airline
industry. As a competitive strategy, the strategic
alliance has gained increasing prominence in
recent years across all sectors of industry. Signi-
cantly though, the failure rate of such alliances
is high, with research indicating that up to half of
all audiences fail (Sanker et al., 1995).
MOTIVATIONS
The body of opinion (Porter and Fuller, 1986;
Pfeffer and Nowak, 1976; Faulkner, 1995) sug-
gests that there are ve generic reasons for
entering into a strategic alliance:
(1) To achieve economies of scale and learning.
Thayer (1994) contends that the concept of the
strategic alliance is rooted in the notion that
complementary partners can achieve economies
of scale. Unquestionably, a prime motive for
collaboration amongst airlines is to improve
protability. This is achieved through shared
airport facilities, combined sales operations, etc.,
in combination with an extended network. Econ-
omies are gained through elimination of
duplication and a reduced workforce. There are
also economies to be derived from marketing in
terms of both advertising and code-sharing.
Acquiring new skills and learning from the
operations of another more successful company
are also recognised motivators (Hamel et al.,
1989). Arguably, this generic reason could be
extended to include economies of scope on the
basis that airlines are extending their marketable
networks through franchising, code-sharing,
block spacing and equity stakes in other airlines
(Hanlon, 1996).
(2) To gain access to the benets of the other rms
assets. Due to the regulatory framework of
bilaterals and capacity restrictions combined
with the start-up costs of operating on a new
route, an alliance can offer relatively easy access
to a route. Congestion is a particular problem
both in the sky and on the ground in that slots
and gates at many airports are at maximum
capacity. With the additional obstacle of grand-
father rights, access to the market can be dif-
cult. Allying with another airline also reduces
costs in terms of the supply of aircraft to operate
on a route. Access to products is therefore as
signicant in many respects as access to market.
Linked to both is the human resource issue in
that an alliance surmounts the hurdle of restruc-
turing or mobilising the workforce, an
acknowledged concomitant of expansion. Access
to the market is also important. Harrigan (1992)
states that lower regulatory barriers are opening
up the door for a variety of rms to enter
formerly protected markets through joint ven-
tures. This factor helps explain the strategic
alliances between European and US airlines,
which to date form the majority of partnerships,
in that a US partner provides access to the
worlds biggest domestic market (accounting for
approximatley 40% of the world aviation mar-
ket) while a European partner provides a link
into the newly liberalised aviation market. The
latter is signicant due to heavy congestion at
major European airports such as Heathrow.
(3) To reduce risk by sharing it. There can be little
doubt that setting up an operation on a route is a
high-risk strategy, particularly if such an opera-
tion adds capacity. Such additional competition
can lead to efforts by incumbent airlines to
protect their market, resulting in price wars and
predatory pricing. An alliance with an airline
already operating a route reduces the risk. It also
means that the incumbent airline is exposed to
less competition. Given the small size of many
markets together with the costs involved in
operating a route, collaboration can assist air-
lines in lowering costs and encouraging
protability. Given the lack of prots of the
airline industry in recent years, there can be little
doubt about the high risk nature of this sector.
Indeed, perhaps the best example of collabora-
tion in this sector due to such risks is the
collaborative venture between Boeing and Air-
bus to develop a superjumbo which can carry up
to 1000 passengers.
(4) To help shape the market, e.g. withdrawal of
capacity in a mature market. This is crucial to
understanding airline alliances. Overcapacity is
an acknowledged problem, one solution being to
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reduce the number of airlines. By collaborating
through alliances, airlines are, in effect, reducing
the competition. Sabena, for example, actively
views its blocked space agreements as a means of
reducing express capacity (CAA, 1994). Equally,
in the alliance between KLM and Northwest
only one service is offered on each Amsterdam
US route even though two services are shown in
the timetable. In the alliances between major and
regional airlines in the United States, a signi-
cant outcome has been a decline in competition
(Williams, 1993).
(5) Speed in reaching the market. There are two
major structural changes which are affecting the
airline industry. The rst is deregulation. The
protection afforded by regulations which have
been endorsed by governments (usually with a
vested interest in ag carriers) is gradually
giving way to free competition. Such deregula-
tion has already occurred in the aviation markets
of the United States, New Zealand, Australia and
Canada. Within the US, which accounts for 40%
of the aviation market, the situation has been
reached whereby ve carriers hold 95% market
share between them. Within the European Union
liberalisation is not due to be completed until
April 1997, at which time member states will be
permitted to y freely within the EU. Recent
alliance formation with and between EU airlines
is directly attributable to the fact that in 1997 the
skies of the EU will be open.
A twin engine of deregulation is privatisation.
Governments of developed nations are under
increasing nancial and political pressure to
relinquish control of their ag carriers with the
result that collaboration between airlines of
different nations becomes not only possible but
inevitable. The airlines of southern Europe
which are heavily loss-making have been kept
aloft by hefty and highly controversial payments
of state aid authorised by the Union. With the EU
policy on state aid of one time, last time, such
troubled carriers as Olympic, Alitalia and Iberia
will look for partners, preferably stronger ones,
to ensure their future existence. For example,
while Iberia is a loss-maker, it does have access
to slots at Madrids congested airport; similarly
Alitalia is an attractive partner in that it is a
major shareholder in Aeroporti de Roma, Romes
primary airport, which monopolises ground
services.
Underpinning this need to reach the market is
globalisation. The changes taking place in the
airline industry are fostering global competition
which poses difculties for airlines wanting to
expand or go it alone. To secure a place in the
aviation market of the future, a presence is
needed in the six major markets: North America,
Pacic, Europe and the markets between them.
This globalisation of the marketplace is a major
force driving alliances (Faulkner, 1995; Roberts,
1992; Ohmae, 1989) in that strategic alliances
enable airlines to compete on a global scale by
offering extensive route networks. Certainly, it is
a commonly held belief that by the turn of the
century only a handful of mega-carriers will
exist. The pressure therefore exists for airlines to
consolidate their positions if they are to survive
into the next century.
(6) Survival. In addition to the ve traditional
reasons for alliance formation, a sixth can be
added, that of survival. This is particularly
pertinent to the airline industry where losses
have become commonplace and where in Europe
liberalisation unfolds fully in 1997. Conse-
quently, attention is largely focused on Europe
where alliances are increasing in number. For
example, in 1994 Swissair conrmed its intention
to acquire a sizeable stake in Sabena. The
rationale for this alliance is Swissairs isolation
from the EU which has caused problems in
acquiring slot and route permits at European
airports. For Sabena, which is heavily loss-
making, the Swiss carrier can provide much
needed nancial resources. Signicantly, Air
France relinquished its 25% stake in Sabena
while Swissair maintained its equity links with
Delta and SIA. As alliances proliferate, so com-
plexity intensivies and nationalism weakens.
ALTERNATIVES TO ALLIANCES
The importance of size within the airline indus-
try is well recognised, but if size is so important
are there not alternatives to alliances to achieve
growth? Strategic growth can be undertaken
either organically or via mergers and acquisi-
tions, but there are problems associated with
both. The former, for example, is hampered by
market access, in particular that of congestion
and slot allocation. The latter is complicated by
legal and political considerations apropos for-
eign ownership and anti-trust rules and is
compounded by national pride. Pertinent to both
M. M. Bennett 216
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is the lead time involved which highlights the
point made earlier about reaching the market
quickly. It is perhaps for this reason that alliances
are currently in vogue. It must be acknowledged,
however, that there are successful examples of
organic growth (American Airlines) and mergers
and acquisitions (British AirwaysBritish Cale-
donian), although examples of the latter tend to
involve airlines of the same nationality. Given
the desire of airlines to establish themselves
quickly in the global marketplace, alliances are
the most obvious option.
Yet size in itself does not guarantee success as
the fate of Pan Am testies. There are examples
in the industry of airlines which have chosen to
go down the route of becoming a niche player.
The most notable and successful example is
Southwest airlines which in 1993 became the
most protable US airline. However, examples of
niche airlines that have not become tied to major
airlines are in the minority.
As evidence of a further alternative route to
growth, some airlines have turned to franchising
as a means of achieving a presence on a route
which would not be economically viable to
operate alone. British Airways (BA) is an exam-
ple of an airline which has adopted this method;
this practice is reviewed in the case study on
BA.
CRITERIA FOR SUCCESS
Stafford (1994) argues that the key factors
responsible for a successful partnership are:
(1) the cooperative strategy;
(2) the relationship; and
(3) the partner.
The pivotal component is the partner (Dev and
Kelin, 1993). Having selected the alliance
approach as the route forward, airlines then need
to decide upon a partner. As observed above, an
alliance has been compared to a marriage (Faulk-
ner, 1995) and like a marriage, a partnership
must be compatible (Walters et al., 1994). To
achieve compatibility, Ohmae (1989) proposes
the following criteria:
(1) trust and understanding;
(2) exibility during the alliance;
(3) cultural compatibility;
(4) mutual benets.
In airline terms, all four are important. Trust
and understanding are often demonstrated by
way of commitment via equity stakes. In the
SwissairDeltaSIA alliance, each airline has a
5% stake in the others. According to a 1994
survey by Airline Business (CAA, 1994), of the
280 alliances in existence 40% involved an equity
holding by one or both airlines. Linked to trust is
exibility. An example of a failure to be exible
occurred in 1987 in a short-lived alliance
between BA and United Airlines in which the
two airlines code-shared over Chicago. How-
ever, United Airliness introduction of services to
the UK in 1991 brought them into direct competi-
tion with BA and the alliance was terminated.
Cultural compatibility is perhaps best demon-
strated by the case of Air France which has
formed alliances with six African airlines moti-
vated by Frances ex-colonial ties (CAA, 1994).
Mutual benets is a prime motivator for entering
into an alliance. An airline might benet from
increased passenger feed while the other may
gain from the marketing benets of being asso-
ciated with a major airline. Certainly this has
been the case in the US where major and minor
airlines enter partnerships. In this situation both
benet from a higher screen display on the CRS.
The overall aim must be to have a winwin
situation, although it is inevitable that the
balance of benets will be skewed. For example
in the BAUS Air tie-up BA reportedly derives
$100m benet from the alliance compared to US
Airs $20m. Yet given that US Air has teetered on
the brink of bankruptcy, nancial gures alone
do not provide the whole picture in terms of
benets. Another example is the alliance
between KLM and Northwest where reciprocity
of frequent yer programmes (FFP) has resulted
in more miles being earned on KLM, but higher
redemption rates on Northwest ights.
PITFALLS
While there are unquestionable benets to be
gained from an alliance, the success rate is poor.
This is because there are a whole host of
challenges of both a practical and political nature
that need to be faced. First there are practical
issues of how to organise the alliance such that it
generates benets for both parties. Specically
this might include coordinating route schedules,
managing FFP exchange and reorganising
human resources. Invariably this will involve
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rationalisation of one sort or another. With the
elimination of duplication in routes served and
check-ins, fewer staff will be required.
Undertaking these tasks can be highly prob-
lematic and intensies as the number of partners
increases. This was borne out in the ill-fated
attempt to form Alcazar in 19921993, an alliance
of four airlines. The objectives of unifying four
separate airlines and forming a single multi-
national management structure and ight
network were tantamount to merger and were
problematic from the outset. In an effort to seek
solutions 17 committees were formed compris-
ing representatives from each airline.
Of equal importance to practical problems are
those of a political nature. Generally these centre
on the issue of control. For example in the case of
Alcazar, it was alleged that its ultimate failure
was due to choice of the US partner. This was
due to existing partnerships between KLM with
Northwest and Swissair with Delta. A further
example concerns a proposed merger in 1991
between BA and KLM which failed over the
equity issue with BA wanting more than KLM
was willing to concede. The real issue at stake
was national pride in that KLM was 38% Dutch
government owned and they did not want to be
seen to be selling the national airline to a foreign
country.
The degree of the problems encountered and
the ability to nd solutions relates to the motives
for the alliance and the potential benets to be
gained. This in turn emphasizes the importance
of choice of partner. In the case of BA, an airline
which has embarked upon building a global
alliance, numerous alliances have been formed
which vary in both problems encountered and
benets to be gained.
CASE STUDY: BRITISH AIRWAYS

To demonstrate the strategy of alliance forma-

tion, there is no better example in the mid-1990s
than British Airways (BA). As well as being the
worlds largest international passenger airline
carrying 24 million passengers on international
scheduled services in 1994 (see Fig. 1), it is also
one of the worlds most successful airlines
achieving pre-tax prots of 452 million (before
provision of 125 million against investment in
US Air) in 19941995 and achieving prots in the
early part of the decade when the worlds
airlines were making unprecedented losses (see
Table 2).
Sir Colin Marshall as Chairman and former
Chief Executive of BA has been a key proponent
of the view that by the turn of the century only a
handful of megacarriers will exist, a proposition
facilitated by deregulation and privatisation. BA
has also recognised that to remain a key player in
the marketplace, it will be necessary to have a
presence in the six major markets outlined earlier
which by the year 2000 will be responsible for
80% of the worlds air travel market (BA Web
site, 1996).
In its quest to remain a lead player by
becoming a global airline, BA has followed the
route of strategic alliances to achieve growth.
The approach adopted has been to forge alli-
ances to gain access to various route networks. A
particular feature of the alliance programme has
been to acquire equity to ensure commitment,
although in the proposed alliance between BA
and American Airlines there are no plans to hold
or exchange an equity stake. Throughout 1992
and 1993 BA entered into a series of alliances
which are set out in Table 3.
The two most important alliances to BA are with
Qantas and US Air in that they:
(1) provide BA with a presence in the two

Since writing this paper, BA and American Airlines [the

worlds third largest and largest airlines (BA Fact Book,
1995)] have announced plans to form an alliance based on
code-sharing and no equity sharing. This alliance is subject to
both UK and US government approval. Together BA and AA
control 60% of ights between US and UK and 70% of trafc
between London and New York. Allegedly the two airlines
are seeking anti-trust immunity in return for an open skies
agreement to replace Bermuda II. If such an alliance is
granted, a question mark must be raised over the future of
BAs alliance with troubled carrier US Air.
Figure 1. The worlds largest international airlines
passengers carried.
M. M. Bennett 218
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major markets of the Pacic and North America;
and
(2) they represent a considerable investment.
The risks are high for BA as not only have they
invested in strategic alliances nancially, but
they have also declared their commitment to
strategic alliances as a corporate strategy.
The alliance with troubled carrier US Air has
served to expose the many risks and weak-
nesses associated with this strategy.
In addition to alliance formation, BA has also
embarked upon a series of franchise agreements
as an alternative tool for growth. Since the
franchise operation began in 1993, the number of
partners has reached six: Cityyer Express,
Maersk Air, Logan Air, Manx Airlines (Europe),
GB Airways and Brymon Airways. These part-
ners provide BA with a presence on routes not
served by BA and which would not be protable
for BA to operate alone. A key benet of the
franchise arrangement for BA is the feed trafc
generated. For example, in 19951996 BA expects
to earn in excess of 30 million own revenue
from 188,000 passengers transferring to and from
franchised partners (BA Web site, 1996).
A principal motivation for BA entering into
strategic alliances is that of access to other rms
assets in that the alliances with TAT and US Air
and to an extent Deutsche BA provide access to
the domestic markets. This is particularly impor-
tant in the case of US Air in that the American
market accounts for 40% of the total world
market. Not surprisingly this was a source of
contention among the other US airlines who
complained bitterly to the US government claim-
ing that BA was achieving through the back door
in the US what US airlines were unable to
achieve in the UK on a bilateral, reciprocal basis
and that as a consequence BA would acquire a
virtual stranglehold on the domestic market. On
the basis that US Air is 6th largest airline in the
US with 55 million passengers, there was some
merit in the complaint.
A second motive of shaping the market by
withdrawing capacity can be seen in the incidence
of the Qantas alliance. In 1994 the two airlines
agreed to increase cooperation between the UK
and Australia such that the services offered were
Table 2. Prot and loss makers in 1992.
The most protable airlines
Airline Net prot, ($M)
(1) Singapore Airlines 518.5
(2) Cathay Pacic 385
(3) British Airways 297.7
(4) Thai Airways 171.8
(5) China Airlines 143.6
(6) Qantas 105.7
(7) Southwest Airlines 103.5
(8) China Southern 100.7
(9) Air China 83.4
(10) Swissair 80.7
Largest loss makers
Net loss,
Airline ($M)
(1) Japan Airlines 350.8
(2) Air Canada 375.5
(3) Varig 380.3
(4) Canadian (PWA) 448.4
(5) Delta 564.8
(6) Air France 617.0
(7) American Airlines 935.0
(8) United Airlines 956.8
(9) Northwest 1063.7
(10) US Air 1229.0
Source: Harkes (1993)
Table 3. British Airways: major alliances
Date Airline Detail
March 1992 Deutsche BA BA acquires 49.9%
September 1992 TAT BA buys 49.9%
DecemberMarch 1993 Qantas BA buys 25%
March 1993 US Air BA acquires 24.6%
June 1996

American Airlines No equity

Approval of alliance is subject to US and UK government

approval.
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not in competition with each other. For example
BA operates from London to Perth and Sydney
while Qantas operates from Melbourne to Lon-
don.
A third motivation in evidence is that of
economies of scale to be achieved through alli-
ances. Shared terminals, check-in facilities, joint
purchasing, aircraft maintenance, coordinated
schedules, combined sales force and lower mar-
keting costs are all potential, if yet to be realised,
benets. For example, it is estimated that a
merger of sales operations of US Air and BA in
New York could save $1m a year. Furthermore,
while code-sharing is not exactly an economy of
scale, it is nevertheless a recognised marketing
tool that yields economic gains through the CRS.
Code-sharing extends to 65 US Air destinations
in the US and Mexico which feed into BAs
transatlantic gateways. Combined with savings
in purchasing, cargo, catering and engineering
together with accrued benets from FFP arrange-
ments, the alliance is estimated to generate 70m
in benets to BA in 1995 (BA, 1994a; BA Web site,
1996).
A further motivation, that of reduced risk, is
best exemplied in the franchise agreements
with UK airlines. British Airways does not
operate these routes for the following reasons:
(1) the cost structure would make it unprotable
for BA; (2) the aircraft operated by the franchise
partners is better tailored to the level of demand;
and (3) the franchise partners have a high level of
local knowledge. In recognition of such reasons
BA has favoured collaboration over direct com-
petition.
Speed in reaching the market is a motivator
common to all airlines seeking to become a
global player in that changes in the form of
deregulation, privatisation and globalisation are
evidence of the dynamic environment in which
airlines operate and compete. Consequently, as
BA aspires to become a global player so it has
become involved in the search for suitable
partners to full such an aim.
The nal motivator listed earlier in the paper
is that of survival. While collectively the worlds
airlines have been sustaining huge losses in the
1990s, BA has managed to generate prots. In
this context then, survival is less pertinent to BA.
Rather more appropriate is consolidation, in that
BA is actively seeking to strengthen its position
such that it is well placed to meet the challenges
of a more open and competitive marketplace.
While motivations for such alliances are intrin-
sically linked to the benets they can yield,
problems exist. Undoubtedly the biggest problem
pertains to the weaker nances of the partners.
US Air, for example, made a loss of $349m in
1993 leaving it teetering on the brink of Chapter
11. In March 1994 BA announced the suspension
of further investment in US Air until there was
evidence of an improvement in nancial per-
formance and in May 1994 BA announced that it
would write-off 50% ($200 million) of its initial
investment. While BAs negotiating power with
the US government may be strengthened, this
could be outweighed by a public relations
disaster. It could call into question BAs entire
alliance strategy. However, having an exit strat-
egy is an intrinsic feature of any strategic alliance
(Mason, 1993). The problem with the US Air
Alliance is that the benets are not seen to
outweigh the costs or the negative publicity
received almost since its inception.
Problems also exist on a practical footing. The
case of US Air illustrates the point. While it is
benecial that US Air is prominent along the
North Eastern seaboard, the actual strategic t is
not ideal in that at both Washington and New
York BA serves the international airport and US
Air the domestic hub. Hence in New York BA
operates in and out of JFK airport while US Air
uses La Guardia airport. Furthermore, while
check-in only occurs once with luggage being
tagged to the nal destination, it is still neces-
sary to clear customs on arrival in the US.
Problems also exist on a much bigger scale and
pertain to all alliances across the Atlantic. Differ-
ing interpretations of open skies between the
US and UK has resulted in bitter disagreements
and a bilateral stalemate. It has also meant that
trans-Atlantic alliances have become pawns in
the negotiations. Consequently, until agreement
is reached, the future of such alliances remains
uncertain.
In each of the alliances (with the exception of
the proposed alliance between BA and American
Airlines) BA is the dominant partner and as such
exercises greater control. Whether such an alli-
ance can be judged a success remains to be seen.
Certainly the motivations for such alliances are
sound; whether the choice of partners is so
sound is open to debate. Indeed, poor choice of
partner can have disastrous consequences
M. M. Bennett 220
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(Brouthers et al., 1995). The test for BA will be to
turn the potential benets into tangible gains
and to nurture the environment to enable the
alliances to develop.
BA concedes that there have been difculties
in forming strategic alliances. Sir Colin Marshall
states,
Our globalisation programme is moving
ahead and we are consolidating the invest-
ments made. We always said that there
would be a negative effect in the rst year in
developing synergy benets. Next year will
see benets and an acceleration thereafter.
(Fagan, 1993)
Problems, however, have continued to persist,
particularly in relation to US Air which has
brought into question BAs alliance strategy. A
new alliance with American Airlines serves not
only to enforce BAs commitment to strategic
alliances, but also potentially strengthens BAs
strategic position in the global airline industry.
BA does, however, acknowledge that a gap
exists in its alliance network. The Pacic rim, and
in particular travel within it, is an expanding and
lucrative market, but it is also highly regulated.
BA has formed several links: Korean Air (joint
freight operation), Malaysia (FFP participation),
Qantas (equity, joint operation, FFP participa-
tion), Cathay and SIA (FFP involvement).
Despite such links, BAs presence in the Far East
remains weak.
In measuring the success of BAs alliance
building global strategy, the key criterion, as set
out earlier, is choice of partner. Certainly there
are question marks over whether BAs partners
are the right ones. This is best demonstrated in
the case of US Air which although providing BA
with access to the important North American
market, has also brought into question BAs
entire alliance strategy. In addition, US Air is
weak on the Pacic routes where BA is also
weak. Furthermore, US Air is nancially a weak
US carrier which has led BA to write-off $200m
of its initial investment in the carrier. Arguably
the proposed alliance with American Airlines
would suggest that US Air was a poor choice of
partner given that BA has actively pursued a
new alliance with another transatlantic carrier.
The Asian link with Qantas exposes a further
weakness in the North Pacic and intra-Asia
routes where it is recognised that the major
growth in aviation terms will occur, thus bring-
ing into question the suitability of Qantas as a
partner. There is a concern that in allying with
Qantas, BA may miss out on these growth
markets. Choice of partner then can have serious
implications for the success or failure of an
alliance strategy.
In terms of compatability, the problems out-
lined suggest that BAs partners are not wholly
compatible. Yet on the basis of criteria determin-
ing compatibility trust, exibility, culture and
mutual benets there is little evidence to
either deny or conrm the existence of such
attributes in any of BAs alliances. Indeed, the
fact that these alliances continue to exist suggest
a degree of compatibiility exists. Part of the
reason for this is BAs apparent strength over its
other partners. However, in comparing the mar-
kets of the United States and Europe, it must be
recognised that there are cultural differences
between them. In the US transportation is a
commodity driven by price, rendering service
much less of an issue, unlike in Europe where
there is increasing emphasis on service quality.
BA is very much at the forefront in differ-
entiating its airline on the basis of quality and
has invested heavily in this strategy. Such cul-
tural disparities need to be considered carefully
if alliances are to be long-lasting. Although BA is
particularly service-driven, cultural differences
of this nature will affect most, if not all, transat-
lantic alliances.
British Airways strategy to become a global
player is undoubtedly a gamble and mistakes, as
the company acknowledges, are inevitable. Yet it
is BAs rm belief that in the longer term, the
risks of not becoming a global player are much
higher. In this context, BAs alliances must be
viewed in a positive light.
EFFECTS
Although alliances are not a new phenomenon,
their emergence within the airline industry on a
global scale is relatively recent. Consequently,
the effects of strategic alliances are not yet fully
developed or indeed apparent. However, on the
basis of what has occurred so far, it is possible to
speculate on the potential impact.
The economic imperative is without doubt the
greatest force underpinning alliances. Increased
collaboration and reduced competition can gen-
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erate economies of operation and higher prices.
As a result airlines are able to improve their
balance sheets such that losses are reduced and
prots encouraged. For example, in the alliance
between BA and Qantas, both airlines wanted to
jointly set fares and freight rates on all routes
between Australia and Europe such that sig-
nicant cost savings were achieved. However,
the Australian Trade Practices Commission
blocked the proposal on the basis that it was
tantamount to price-xing (Tait, 1994).
A further effect may arise out of a reduction in
competition effecting an oligopoly. Burgeoning
alliances which are global in nature are potential
facilitators of a cartel or collusion which under-
mine the spirit of free competition which the
industry professes to espouse. This is a polemic
and current issue with airlines being accused by
the CAA of fare-xing through their club IATA.
For example, if Alcazar had succeeded the top
six airline groups in Europe would have con-
trolled 85% of airline trafc. If predictions that
the airline industry of the future will be domi-
nated by only a handful of mega-carriers comes
to fruition, a cartel may well be the ultimate
outcome.
What will this mean for the consumer? Less
competition equates with less choice, while
improved economic circumstances for airlines is
tantamount to higher prices. No-one can argue
with the fact that in real terms, air fares have
been falling not rising and as such an increase in
prices is long overdue. However, should com-
petition be severely restricted then the
pendulum could swing to the other extreme, a
situation made more likely with deregulation.
The consequences, however, are not all nega-
tive. Better coordination of schedules and serv-
ices, single check-ins, minimal transit times,
through fares, baggage transfer are tangible
benets of increased collaboration. BA, for exam-
ple, believe that they can offer a superior
streamlined service to the 140,000 passengers
transferring between airlines on a daily basis (BA
Fact Book, 1994b). Yet given the choice, consum-
ers are more likely to opt for lower prices over
and above other benets.
An increasing number of alliances founded on
equity stakes will precipitate the demise of the
ag carrier and the rise of the transnational
airline. BA, since privatisation, has 3545% of its
shares in the hands of foreign nationals spread
across 100 countries (Hanlon, 1996). A loss of
airline nationality could undermine the bilateral
system which is based on negotiations between
individual countries unless nationality is re-
dened as the original country base or country of
carrier holding a major equity share (Hanlon,
1996).
A nal point concerns the impact on deregula-
tion. As the world airline industry takes another
step towards economic disengagement, competi-
tion should proliferate. However, if the
cumulative effect of alliances leads to an olipo-
listic situation then less competition is inevitable.
In such circumstances one of the principal
objectives of deregulation would be defeated.
Certainly the emergence of an oligopoly in the
US has opened such a debate.
CONCLUSION
Alliances of both a strategic and tactical nature
are becoming an increasingly important feature
of the global airline industry. Precipitated pri-
marily by nancial pressures and assisted by
deregulation, privatisation and globalisation,
alliances have become a universal trend. While it
is apparent that there are tangible benets to be
gained, the process of alliance formation can be
less than smooth with problems of both a
political and pragmatic nature to be overcome.
Even once the alliance has been formed, prob-
lems can persist as demonstrated by the case of
BAUS Air. Yet it has to be acknowledged that
alliances can offer considerable benets. Access
to the market, less competition and lower risk
are all evident, but unquestionably the major
benet is lower costs. Driven by the economic
imperative and assisted by deregulation, airlines
are forming alliances to improve protability
and thereby secure their future in a dynamic
industry. Alliances are therefore a reaction by
airlines, arguably long overdue, to reduce over-
capacity and improve economic performance.
For the consumer, the consequences are more
mixed. While there are practical gains to be
yielded from minimum transit times and syn-
chronised schedules, passengers are also more
likely to experience higher prices, particularly on
routes where there is little effective competition.
The case of British Airways, an airline which has
embarked upon a global strategy, demonstrates
the varied problems associated with alliance
M. M. Bennett 222
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formation. Actual delivery of the promised ben-
ets remains largely unfullled as yet, with the
result that tangible benets are difcult to assess.
If the trend towards strategic alliances continues,
then the airline industry will evolve into one
dominated by a handful of mega-carriers and
globalisation will have emerged.
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