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The impact of alliances on airline operations By Dr Kostas Iatrou

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Air transport has been the industry that has acted more than any other as the driving force, or more correctly the motor, behind globalization and the abolition of national borders. It is however, at the same time an industry traditionally unstable, susceptible to economic and political crises and a highly capital-intensive sector. The combination of these two statements may explain why each time a cooperation initiative between airlines, the so-called airline alliances, is announced, the stock market price of these airlines shoot up. What has above all led to the formation of alliances is both the desire from the part of the airlines to provide their passenger-clients with a truly global network and their effort to circumvent the various rigid national legislations that prevented foreign airlines from acquiring a controlling interest in airlines in countries outside those in which an airline is owned and operated. Alliances are by now the rule in the air transport sector: Wings, Star Alliance, oneworld, SkyTeam now control as allied partners 56% of world Revenue Passenger Kilometers.

Beyond this seemingly unanimous adoption of alliances by airlines, it would be of interest to examine the views of the airlines themselves, so as to better understand the reasons that have pushed airlines towards alliances and the benefits these partnerships entail for the allied partners.

Within the framework of my doctoral thesis entitled “The Impact of Airline Alliances on Partners’ Traffic” I conducted a questionnaire survey from November 2002 to February 2003. The totality of the airlines that were members of alliances – that is 28 at the time of the survey – participated in the survey. This survey aimed at evaluating:

  • How do airlines perceive the impact of alliances on their operation in general and on passenger traffic in particular? Traffic was chosen because it is a basic parameter that airlines use to measure their performance.

  • How different types of partnership agreements and different types of routes have affected the results?

  • Have airlines of different size, operating from different region and belonging to different alliance grouping been affected differently.


Almost all airlines, with the exception of a number of European regional carriers, have stated that they are satisfied from their cooperation with the other airlines, as the alliance has positively impacted on their performance, increasing firstly their passenger traffic, and secondly their income and their load factors, which in combination contribute to a small reduction in cost. But in relation to the issue of fares, the respondents have given ambiguous answers as some have declared that fares have increased while others that they have reduced.

90% of the respondents have stated that they have experienced an increase in passenger traffic within one and two years from the inception of their partnerships. The respondent airlines attribute this upsurge to the provision of joint frequent flyer programmes (FFPs).

When analyzing the passenger traffic increase by route type, it was established that the greatest increase in passenger traffic was observed primarily on hub-hub routes: 45% of the respondents experience an increase of more than 16% on these routes. As for hub-non hub routes the corresponding increase ranged from 6 to 15% according to 45% of the respondents. Finally, all respondents have assessed the traffic increase as moderate, with the percentage increase not exceeding 10% in most cases. These findings seem absolutely reasonable considering that all global carriers, especially the major ones, operate on the hub-and-spoke system and the whole alliance organization aims at increasing the hub-hub traffic. These findings are corroborated by a further analysis of the responses that indicates that it is the airlines that operate international – transatlantic and transpacific – flights the ones that declare that alliances have positively impacted on their hub-hub routes.

The answers to the question which kind of cooperation – code share, frequent flyer programmes, strategic alliances with antitrust immunity and strategic alliances without antitrust immunity- has produced the best results, the majority of the respondents agrees that it is code share and strategic alliances with antitrust immunity are the most efficient forms of cooperation. Even though the kind of cooperation provided for within the framework of a strategic alliance with antitrust immunity is a quite recent phenomenon in the air industry, it constitutes and will increasingly constitute in the future a very important factor as it enables the allies to coordinate and their scheduling and ticketing activities.

The by airline alliance grouping collation of the respondent data indicates that SkyTeam is the alliance whose members have experienced the most positive results from the alliance, with Star Alliance being ranked second. Quite the reverse happens with oneworld alliance as none of its member seems to be absolutely satisfied by the alliance, which may be due to the lack of close cooperation among the cooperating airlines. Such cooperation cannot be established among these partners, because they have not been granted antitrust immunity between the core members so as to deepen and integrate their cooperation. This by alliance comparison confirms once more the finding that the establishment of a strategic alliance with antitrust immunity represents a basic parameter for the success of an alliance and in particular, in relation to the increase in passenger traffic and the reduction in costs.

Almost all the members of SkyTeam and Wings have declared that the greatest increase in the passenger traffic has been registered on the hub-hub routes, while 80% of oneworld members and 50% of Star alliance have affirmed that they have experienced increase on their hub-hub routes. SkyTeam is also the alliance that has declared the greatest rates of increase in all of the parameters measured in this survey that is passenger traffic, income, load factors, cost reduction. This is most probably due to the fact that this alliance has proceeded more than the other alliances towards a deeper cooperation and the integration of the activities of its members.

The analysis of the answers on the basis of the size of the airlines indicates that the larger airlines seem quite satisfied by the alliances as 2/3 of them characterize their alliance experience as “excellent” and 1/3 as “good”. On the contrary, the medium and smaller airlines state their satisfaction but at the same time they have expressed some reservations, perhaps because they feel that they have limited influence on the decision-making mechanism within the alliance groupings.

The larger airlines have experienced an increase in traffic amounting to about 5% increase, mostly on their hub-hub routes within the first year of launching their partnership and they believe that it is code sharing and antitrust immunity that are the forms of cooperation that have the most positive impact on passenger traffic. Small and medium airlines have also experienced some increase in traffic but it has taken them longer – up to two years – to experience the rise in traffic. These airlines attribute the rise in traffic to the adoption of coordinated frequent flyer programmes and to the use of code share.

From the by geographic region analysis it results that it is Central and South America is the region that has recorded the greatest increase both in terms of passenger traffic and in terms of income and load factors since all the respondents from this area declare that the increase they have experienced an increase greater than 15%. The majority of the airlines from this region had a limited international network before joining the alliances and it is through the alliances that they acquire access to more international destinations. Accordingly, 75% of the airlines from this region characterize their alliance experience as “excellent”. On the contrary, European airlines had an extensive international network before the establishment of alliances and as expected they have declared smaller increase in passenger traffic. European airlines have been focusing on reduction of costs since intense competition makes them feel more pressingly the need to reduce costs. Asia and Oceania is the region that has stated the second greatest increase in traffic, with the majority of carriers stating an increase in traffic ranging from 6 to 15%. This geographic region has certainly benefited significantly from the organization of many important athletic events. Finally, the areas that have experienced the most significant positive impact from antitrust immunity are the ones operating in North America and Europe since it is they that have the majority of these exemptions.

Conclusion

The overall conclusion arising from the questionnaire analysis is that alliances, despite the form of cooperation among the partners, entail numerous benefits for the airlines: they contribute significantly to the increase in passenger traffic, which in its turn contributes to the increase in income and load factors. At the same time they contribute to the reduction of costs, even though this reduction remains comparatively limited. The greatest increase of passenger traffic has been observed on hub-hub routes. The type of cooperation that has brought about the most positive results for the allies is the strategic alliance with antitrust immunity, which is the most advanced and integrated form of cooperation. Most alliances however, remain “strategic” only in name basing their cooperation on Code Share and FFP coordination and have not proceeded to deeper integration. The next stage in alliance development will be the integration of their different activities so as to be in position to reap all the benefits of alliances.
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