Status of Airline Partnerships and Viability of Strategic Alliances

In any type of industry, formation of strategic alliances is a common phenomenon. The airline industry is no different. Since the US deregulated its airline industry in 1978, tremendous changes have occurred. Air transport is a major contributor of the national Gross Domestic Product (GDP) to many countries. Besides, it is an important for globalizations, and helps fuel tourism and world trade. Additionally, with its safe and airborne transport of goods and people, it facilitates changes in many aspects, including social, economic, as well as political. However, the commercial airlines, which can be considered as the chief operators of transporting passengers from one location to another, is challenging which is characterized by highly volatile returns and low profitability, both in the US and the rest of the world. However, the airline business has a distinct characteristic, and is the fact that most of the careers are enrolled in a strategic alliance.

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The three common alliances are the SkyTeam, oneworld, and the Star Alliance, and they are commonly referred to as the global airline alliances (Forsyth, Niemeier & Wolf, 2011). The network of these alliances provide the members with rich global route portfolios, in most instances at a marginal cost that is difficult to reach via normal organic growth. However, it is still important to acknowledge the fact that smooth cross-border air services are still inhibited by global regulations as the Chicago Convention that was established in 1944 clearly stipulates that the bilateral air service agreements govern global air transport markets between national governments. For this reason, the countrys airline registrations and its bilateral agreements with other countries is the sole determiner of the airlines possible service routes, as well as the frequency and capacity conditions offered. Even so, it is important to note that the two largest markets in the airline transport industry are the European Union (EU) and the United States (US), which when combined, accounts for 60% of the global traffic, with each having a domestic market that is primarily liberalized. With the US first in deregulating its market in 1978, it sought to provide carriers with a freedom to exit and enter routes, as well as pricing them as it deemed fit. In consequence, many countries followed suit, for example, the EU liberalized its cabotage services in 1997, which is basically the authorization of any EU member state airline to transport inland traffic within the other member states.

The regulatory frameworks adopted have been handy in removing market access barriers, and consequently has led to the creation of an Open Aviation Area, between the two regions, US and EU. However since liberalization, many new competitors have emerged, and most of them have adopted a low-cost strategy, a business model characterized by low-frills, and thus contrasts with traditional as has higher labor productivity and lower cost of operation, and thus, it has led to lower travel fares. On the other hand, the network legacy carriers have adopted a strategy where they provide broader network coverages via hub-and-spike model of network that works to meet the demands of the consumers via seamless connections with both global and local destinations. However, global alliances are very important in developing the airline industry business models. Also, it is important to note that airline success is mainly not in control of their operators or owners, rather, it is affected majorly by external prices, including governmental policies, world conflicts, competitors, as well as oil prices.

Current Status of Airline Partnerships

a. Increasing number of Joint Ventures

Even though strategic alliances account for two-thirds of all air travel, a new trend is emerging where there is an increasing number of joint ventures, and some of them are formed with the strategic alliances and some outside. The joint ventures are usually described as revenue-sharing partnerships, mainly between international route carriers. They ensure that the partners the revenues generated from passengers do not on the airline that was involved in service provision. Therefore, each partner in the joint venture usually gets revenues regardless of which partner operated the aircraft on a route-to-route basis. However, the implementation of the joint venture strategy requires that the two parties be granted anti-trust immunity through the regulatory bodies, thereby allowing for joint setting of prices and schedules, which improves mutual benefit. As mentioned before, the success of airlines is largely affected by external factors, such as governmental control, conflicts, oil prices, and competitors; they make alliances or partnerships, and Joint Ventures (JVs). In JVs, the airlines align their service share costs, their offerings, as well as their risks and profits in the operation of their airliners. The JVs have transformed international market in air transportation, and have contributed to quick consolidation within the industry. According to Dunst (2015), JVs reduce competition in the airline industry, and in consequence, both consumers and airlines combined benefit from JVs partnerships.

In essence, traditional Flag Carrier airlines have experienced increasing pressure and competition from Low Cost Carriers, primarily due to their low-cost strategy in offering fares to consumers. In consequence, national airlines, including Air France, Lufthansa, and Delta Air Lines, have been forced to do the same. They have cut their airfare prices on domestic flights, which are mostly shot haul, to remain competitive. Joint Ventures have been instrumental in accomplishing the decreased airfare prices. The strategy enable two or more airlines to share resources, and in turn, split their profits and revenues over a specified and defined route the airlines have agreed on. The main goal is to optimize their profits. According to Durnst (2015), the overriding feature of JVs compared to traditional alliances, such as Star Alliance, OneWorld, and SkyTeam is the notion of Metal Neutrality. The concept means that the revenue Each JV member is remunerated on a specific route is mainly independent of which air carrier conducts the actual operation of flying the passengers from one location to another. For instance, Delta Air Lines and Air France, who entered a transatlantic Joint Venture partnership, fly multiple flights in the Paris-New York route on an everyday basis. After the business operations, they split equally the total profits or losses amongst themselves, even in instances when either Delta Air Line or Air France planes are full or empty of passengers upon leaving. As such, it can be derived that the JV can be considered as a merger between two airlines over a defined route.

Various factors have contributed to the growth of JVs in the airline industry since the signing of the first agreement between KLM and Northwest Airlines in 1997. However, the most important development was the Open Skies Agreement between the EU and US in 2008 that made it probable for EU airlines to fly to US cities without any restrictions. In consequence, US carriers also benefited via increased access in European airports. Other JV partnerships include Delta, Alitalia, Air France, and KLM; United, Lufthansa, and Air Canada; American, Iberia, and British Airways; as well as Virgin Atlantic and Delta. The JVs scope and depth is massive, for example, the JV between Alitalia, KLM, Air France, and Delta allows the airlines to promote over 250 nonstop flights in the transatlantic on an everyday basis and has connections to over 500 destinations globally. In addition, this JV accounts for over 25% of the total capacity of airlines in Europe and North America.

In addition, since mergers between airlines to in different nations and cabotage for domestic routes are forbidden, airlines can only do so via JVs or alliances. However, the only place where JVs are not growing is the Middle East, where Etihad, Qatar Airways, as well as Emirates, commonly referred to as the Middle East Three offer direct flights to almost every global region. The growth of JVs is not slowing down, and as Durnst (2015) predicts, within the next ten years, 45% of all long haul flights will be part of a JV. The partnership is very advantageous both for clients and the airlines. For instance, Durnst (2015) asserts that Delta Air Lines made savings since 2013 from the JV of at least USD. 150 million. In addition, they enable airlines to operate larger and efficient aircrafts, which results in decreased cost for every passenger served. For example, in the KLM and Delta route between Amsterdam and Detroit, the hubs in the cities have allowed the airlines to serve hundreds of destination and origin combinations by just a single transatlantic flight.

b. Equity Alliances

Another trend in the airline industry partnerships is the resurgence of the equity model, which are commonly referred to as the equity alliances. The strategy has been associated with the Middle East Airline, Etihad, but is also leveraged by other airlines, such as Delta. In essence, this model allows the carriers to buy stakes, and thus, have a substantial control over its investee allies, and this includes utilizing them to nourish into its connecting hubs, and also enabling them to avoid national restrictions on foreign airline ownerships, specifically in Europe. As opposed to the traditional partnerships which used coed sharing, the partnerships using the equity model enjoy efficiency and cost benefits that are mainly extracted via a closer coordination in operational areas, such as maintenance and procurement. As such, the alliance partnerships allow for deeper cooperation between airlines by allowing one to buy equity stakes in another carrier, which range from buying small tickets to acquisitions. For instance, Delta bought a small stake of 3.5 percent in China Eastern, and an acquisition of 49 percent stake in Virgin Atlantic. As such, the small equity stakes are adopted to secure partnerships, specifically critical airline markets. For example, Qatar Airways purchased a stake in IAG. However, for the larger stakes, which lead to acquisitions, and thus, exert a substantial control in the acquired airline. However, from the Delta equity alliance, both these paradigms have been exercised.

In the example of Etihad Airways, the equity stakes function more attractively. The airline, in the last five to six years has purchased large stakes from troubled airlines, including Air Berlin, Air Seychelles, Virgin Atlantic, Alitalia, Indias Jet Airways, as well as Etihad Regional which was in the past known as Darwin Airline. As such, the equity alliance have enabled a deepened partnership and cooperation among the airlines by providing a strategic flexibility in reshaping the airline networks in the best way the carriers deem fit. The Etihad case, however, has come close to securing cross-border mergers, except on the legal aspect. The trend, however, is set to increase significantly with IAG looking forward to investing worldwide once it makes several EU acquisitions. Besides, with Delta slowly slipping away from the SkyTeam alliance, it may adopt the strategic equity alliance with its set of equity.

c. Partnerships for Specific Markets and Dissatisfaction of Strategic Alliances

In addition to the aviation partnership trends, there has been an increase in new groupings for specific markets and partnerships formed as a result of dissatisfaction with the current strategic alliances. Before the Emirates and Qantas partnership in 2012, Emirates had partnerships that were confined in quantity and scope. However, the 2012 partnership was broad...