The Determinants of Airline Alliance Essay

Introduction

Since the 1990s, airline companies have considered the possibility of forming alliances. In the last five to ten years, the formations of the alliances have greatly attracted the world attention. Currently, there exist three main alliances all over the world, namely; sky team, one world, and the star alliance (Alderighi, M., & Gaggero, A. A. 2014). These alliances account for more than two third of the industry capacity. Furthermore, of the world leading twenty airlines only two carriers. The southwest airlines, as well as the Ryanair, are not affiliated with any existing alliance. For example, one world, star and sky team alliance consists of several minor airlines among their members and other minor carriers are set to join these alliances very soon. Airline alliance represents an important aspect of the airline company, which hinders the market competition as well as the quality and the costs of the service offered.

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The perspective of the airline companies allying can be of benefit for various reasons. First, an alliance establishes a close link between member companies. The link is such an instrumental to more knitted forms of corporations, such as franchising, mergers and also the joint ventures (Bartolini, D., & Gaggero, A. 2012). Secondly, alliances result in additional network coverage, which enables the exploitation of the economy of scope as well as the density. The airline alliances often correspond to an engagement session before the merger of the two alliance members.

Many economists have so far discussed the cost and benefits of the airline alliances. They have provided theoretical explanations of the incentives to start an alliance. However, the estimation of a discrete choice model indicates the incentives to form an alliance increases with the alliances total market share thus well-established airlines are likely to participate in an alliance. These results indicates the importance of the economies of scope and density in the formation of the alliance.

Airline alliance

An alliance is defined as the form of a corporation between two or many airline companies with the core aim of promoting competition as well as enhancing the performance of its members (Alderighi, M., & Gaggero, A. A. 2014). Certain airline corporations may involve sharing operational facilities like ground handling personnel at check in and also at the boarding desk as well as share airport facilities like aircraft parking and airport lounges. The first established form of cooperation between the airline companies was in the year 1989, at the time when the KLM and the Northwest established a partnership to coordinate their operations over the transatlantic routes. However, a decade later, Alitalia and the continental joined the partnership. These four companies were considering formalizing their cooperation in an alliance known as wings. By 2004, the wings alliance had joined the sky team which was a bigger alliance as compared to the former alliance group. Moreover, in 1992 the Swissair and the Austrian airline allied by the name qualifier. The alliance rapidly expanded, with the introduction of TAP Portugal, Sabena, LOT, and Turkish airlines. The Qualiflyer alliance lasted until when the main founding carrier, Swissair went bankrupt hence the remaining members preferred to join star alliance (Gayle, P. G., & Brown, D. 2014).

The major airline alliance which is still active are sky team, one world and also the star alliance. The star alliance is considered the largest regarding members while on the other hand, the sky team and one world are smaller in size. One world was founded by the British Airways, American Airways, Canadian Airways, and Cathay Pacific in the year 1999. Additionally, sky team airlines were founded by Air France, Aeromexico, Delta airlines and Korea air in the year 2000. Finally, star alliance was founded by the SAS, Thai Airways, Air Canada and the united airlines in 1997.

Moreover, apart from the case of Qualiflyers alliance demise, the airline companies have since remained in the same alliance. However, there minimal cases of airline switching alliance, for instance, continental moved away from sky team to join star alliance in 2009. Also, Canadian left one world to join star alliance in 2000. After becoming a subsidiary China eastern airline, shanghai airlines left star alliance to join sky team in 2001 (Gayle, P. G., & Brown, D. 2014). On the other hand, Mexicana airline joined Oneworld in 2009 after quitting star alliance to pursue an effective codesharing relationship with other airlines. Hence, there was no real decision to abandon such alliances.

Additionally, the founding members of these alliances appear to be well-established companies majorly on the opposite side of the Atlantic. Thus, hinting at the possibility that the immediate aim of the unions was to coordinate the transatlantic flights. Moreover, the recent cases of mergers and acquisition have happened between airlines affiliated to the specific alliance. Thus, indicating that airline alliances often represents a perfect performance of the mergers and acquisitions.

On the other hand, the more firm coordinate their strategies, the more competition is affected, and hence the risk that the average falling costs are not lifted to the consumers. When the airline companies own similar network of routes, the probability that their business strategies result into an increased fare is higher than in a case where two companies with a complementary routes (Bilotkach, V., & Huschelrath, K. 2011). As a result of these reasons, the alliance company needs to apply for antitrust immunity to coordinate their business strategies.

Conclusion

In summary, from the article "determinant of the airline alliance," there exist three main alliances all over the world. These include one world, sky team, and star alliance. These alliances majorly account for two-thirds of the industry capacity. The main benefit of establishing an alliance is related to the possibility of enlarging the network as well as exploiting cost synergies. However, of the world leading twenty airlines only two carriers. The southwest airlines and Ryanair, are not affiliated with any existing alliance. For instance, one world, star and sky team alliance consists of several minor airlines among their members and other minor carriers are set to join these alliances very soon.

References

Alderighi, M., & Gaggero, A. A. (2014). The effects of global alliances on international flight frequencies: Some evidence from Italy. Journal of Air Transport Management, 39, 30-33.

Bartolini, D., & Gaggero, A. (2012). Coalitions in the airline industry: an empirical approach (No. 165). Quaderni di Dipartimento.

Bilotkach, V., & Huschelrath, K. (2011). Antitrust immunity for airline alliances. Journal of Competition Law and Economics, 7(2), 335-380.

Gayle, P. G., & Brown, D. (2014). Airline strategic alliances in overlapping markets: Should policymakers be concerned?. Economics of Transportation, 3(4), 243-256.