Empirical Studies on Strategic Alliances in the Airline Industry
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EMPIRICAL STUDIES ON STRATEGIC ALLIANCES IN THE AIRLINE INDUSTRY by VARATTAYA JANGKRAJARNG Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics Graduate School of Economics Hitotsubashi University 2011 Preface Major institutional, regulatory, and structural changes have occurred in the international air transport during the past decades. Many countries have deregulated their domestic airline industries and many open skies continental blocs have been formed in Europe, North America, and most recently, in Asia. International air transport has been substantially liberalized due to the diminishing role of IATA (The Air Transport Association) as an industry cartel, and via a series of liberalized bilateral agreements signed between many countries; including the U.S. and U.K. Increased liberalization and continentalization have induced major airlines to create global service networks through inter-carrier alliances. All these changes are intensifying competition between major carriers in both domestic and international markets. Fierce competitions, together with economic recession in the early 1990s, led many airlines to massive financial losses and economic crisis, forcing them to undertake major restructuring to improve efficiency and reduce costs. Although it is important for an airline to map out proper strategies in the globalizing airline industry, the ultimate ability of a carrier to survive and prosper in increasingly competitive markets greatly depends on its productivity and cost competitiveness. There are many researches available on the airline industry. Most of the research deals with deregulation, public policy issues, airline strategies and cost performance. However, there are very few studies which provide a systematic analysis of airline alliance competitiveness toward both of demand and supply side. Yet, strategic alliance is perhaps the most important strategy for each airline to survive in today and future worldwide competition. This is an important reason why this topic is chosen for my thesis. The study focuses first on an overview of airline industry including the history development, marketing, economics point of view and recent strategic trend, and then ends chapter one with research overview and planning. Chapter two elaborates on the history of airline alliances, the definition of airline alliance, and the type of each alliance such as marketing alliance and strategic alliance. These chapters also introduce a draft survey on regulations - especially on alliance - A commenting the airline’s industry from the alliance strategic point of view. Then discuss about past researches in both managerial and economics point of views toward alliance. Chapter three presents the effect of alliance from the supply (airlines) point of views, which includes fundamental issues related to airline productivity and profitability. It also shows the effect of strategic alliance toward each airline’s productivity and profitability. Chapter four and five are mainly from the demand (travelers) point of view. In chapter four, travelers’ perspective, their carrier choice, and their willingness to pay are examined, as well as the benefit of alliance to travelers and how they notice and rate them as their airline choice factor. Chapter five is regarding the service quality of code sharing flights. This chapter shows us more idea on how passengers rate the service of each airline in different categories and what their satisfaction is on code sharing flights, which is one of the most important alliance benefits. This chapter is very important because it shows the linkage between the supply side and the demand side; as the code sharing is intended to reduce cost and/or gain more passengers. The final chapter, chapter six, concludes the overall strategic alliance effects from both airline and passenger sides and, further on, suggests airlines for valuable strategies they need to consider in response to the recent and upcoming trends. The target of this thesis is to airline managers, government policy makers and regulators, academics, industry researchers and also to everyone who are interested in airlines or airline industry. Particularly, it can be guidance to both airline companies and to travelers on how to achieve utmost benefits from strategic alliances. Although this thesis limits its investigation to the issues facing the airline industry, it should be noted that the issues addressed and methodologies used in this study could be producing many useful results applicable to another industries or firms engaged in international business or any other service industry. B Acknowledgements In writing this Thesis I have been fortunate in two respects. First, from little my family has brought me oversea several times on many airlines. I do felt myself about differences between airlines. Second, nowadays the competition between airlines has become incredibly strong. A lot of airlines join Alliance and also I have a difficult time of judging which airline I will choose and what will give me the best profit opportunities. And at the same time, what gives the best output to each airline. So those are my inspirations on how to find out whether airlines’ performance. I have been fortunate to have received support and assistance from many individuals during the course of this work. I would especially like to thank my advisor Professor Kyoji Fukao for his invaluable guidance, inspiring discussions, continuous support and encouragement throughout this work. I am grateful to Professor Hirokata Yamauchi and Professor Toshinori Nemoto for thier very helpful advice on the matter of Airline transportation Economics as my sub seminar. Lastly I am very thankful to get very good comments from Professor Hidenobu Okuda and Assistant professor Masatoshi Kato for reviewing my paper and giving a very good comments for my thesis. All professors have guided me constantly throughout the program. I have learned so much from this experience and it helps me grow academically and especially mentally. I also thank you for my senior, junior and friends both at Fukao seminar, Yamauchi seminar, Nemoto seminar and Okamuro seminar. I’ve been supported and gave helpful advices from them both individual and through seminar. Parts of this dissertation were presented at Japan Society of Transportation Economics and Conference of The International Association For Tourism Economics (IATE), I would like to thank Associate Professor Hideki Murakami, Professor Katsumi Tanabe and Professor Andreas Papatheodorou for their time and valuable comments. And also thanks to many participants at several international conferences for their comments and help to improve the paper. C Next, to Arai’s family and to all of my friends both at Hitotsubashi University and in Thailand who give invaluable supports and continuous encouragements. They all have been with me through my ups and downs with no hesitate. I cherished the memorable time we spent together. They resembled my family here in Japan while I was away from home. Lastly and most importantly, I am very grateful for my beloved family – my father, mother, grandmother, brother, and all other family members. They endlessly provide support, love, and believe in me all the way, which give me strength when I need it most. I am very blessed to have them as part of my life. However none is responsible for my mistakes that remain in this work. D Abstract Nowadays, airline alliances dominate the air transport industry with the largest carriers belonging to one of the alliances. The corporate strategic trend has changed from bilateral agreement to strategic alliance. Even though researches had been done to evaluate the benefits of alliance formation, little was done on the effects of forming alliance on airline’s performance, and little attention was paid on the consumer’s perception of it. The objective of this study is to assess and describe to what extent airlines have reconfigured their alliance strategy, how these strategy changes have affected the airlines’ performance, and how passengers cope up with the changing context of airline marketing-related strategic behavior. This research is structured into three parts with each individual research question being evaluated by its own methodological and theoretical elaboration. The first part is based on the overview of airline alliances and past researches. The second part is based on the effects of airline alliances towards airlines’ management, or the supply side. The last part is based on effects of airline alliances on passengers, or the demand side. Regarding the supply side, this paper gathered data from 20 airlines between 1990 and 2004 and analyzed the effects of participating in alliances on an airline’s performance through fixed effect modeling. The study reveals that strategic alliances have contributed significantly to productivity gains. Furthermore, strategic alliances left a positive impact on profitability. On the contrary, this paper seeks to find the benefits of the alliance perceived by Thai travelers and what has driven their choices of airline via survey conduction. The results show that most leisure travelers have misconceptions towards the purposes of airline strategic alliance while only a small number have in business travelers. Moreover, business travelers significantly put emphasis on benefits when considering their choices of airline. Besides the offered benefits, service quality is also considered very important among