Pre-Meeting Pro Eedings*
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Pre-Meeting Pro eedings* I t i -.. _ Editor: October 21-23, 1992 Russell B. Capelle, Jr. St. Louis, Missouri *"The St. Louie Book" STRATEGIC ALLIANCES IN THE AIRLINE INDUSTRY Presented To DR. RUSSELL CAPELLE, JR. AMERICAN TRUCKING ASSOCIATION 2200 MILL ROAD ALEXANDRIA, VA 22314 FOR PRESENTATION AND PUBLICATION 1992 ANNUAL CONFERENCE OF THE TRANSPORTATION RESEARCH FORUM ST. LOUIS, MO OCTOBER 21 -23, 1992 L. Milton Glisson, Ph.D. Associate Professor North Carolina A&T State University School of Business and Economics Greensboro, NC 27411 Janet DiLorenzo-Aiss, Ph.D. Associate Professor College of Business Fordham University, Rose Hill Campus Bronx, N.Y. 10458 MAY, 1992 TABLE OF CONTENTS I. Introduction • • • •. • • • • •. • •. • •. • • • • • • • • • • • • •. • • •. • • • • • • • 1 II. Strategic Alliances .........•••.•••••..•••.••......... 3 Marketing Alliances .............. ......••.0 110 A. ...• 4 B. Equity Alliances ................................. 6 C. Frequent Flyer Programs .......................... 9 1. Domestic••••••••.••••.•••••.••••••••••••••.• 2. International • • • • • • •. • •. • . • • •. • •••••••••••• 11 IV. Strategic Alternatives ......•••••••••••••••••••••...• 14 V. Domestic Example: USAir.............................. 16 IV. Conclusion ........................................... 17 STRATEGIC ALLIANCES IN THE AIRLINE INDUSTRY GLOBALIZATION Most American travelers are really excited by their ability to hop a domestic airline flight, make a connection with an international foreign air carrier and arrive at some distant destination and have all the mileage count toward their frequent flier program mileage. While relaxing in some distant vacation spot, the traveler can earn additional frequent flier mileage by seeking hotel accommodations at any one of several establishments with which, for example, Northwest has an agreement - - - Radisson, Marriott, Hyatt, Western and Holiday Inn. If an automobile is necessary, still more frequent flier mileage can be earned from Northwest by restricting your selection to autos rented by Budget, National or Hertz rental agencies. On the other hand, a shipper of goods would probably become excited about tendering a shipment to United Airlines and be assured that it would make a connecting flight with British Airways which, in turn, would interline the shipment with Australian Airlines to its final destination. Strategic air alliances can mean a lot for passengers and shippers. Strategic marketing alliances for airline passengers have been in the process of forming for the last several years. The air alliances are relatively new for shippers. The latest buzzwords to be found in the air industry are such terms as marketing agreements, market-specific agreements, route-specific agreements, management STRATEGIC ALLIANCES IN THE AIRLINE INDUSTRY L. Milton Glisson, Ph.D. North Carolina A&T State University Janet Dilorenzo-Aiss, Ph.D. Fordham University GLOBALIZATION Travelers are generally excited by their ability to hop a domestic flight, make a connection with an international carrier and arrive at some distant destination and have all the mileage count toward their frequent flier program mileage. The traveler can earn additional frequent flier mileage by seeking hotel accommodations at any one of several establishments with which, for example, Northwest has an agreement - Radisson, Marriott, Hyatt, Western and Holiday Inn. If an automobile is necessary, still more frequent flier mileage can be earned from Northwest by restricting your selection to autos from Budget, National or Hertz rental agencies. A shipper of goods could become excited about tendering a shipment to United Airlines and be assured that it would make a connecting flight with British Airways which, in turn, would interline the shipment with Australian Airlines to its final destination. While the strategic marketing alliances for airline passengers have been in the process of forming for the last several years, the air alliances are relatively new for shippers. The latest buzzwords to be found in the air industry include such terms as marketing agreements, market-specific agreements, route-specific agreements, management Strategic Alliances in the Airline Industry agreements and, of course, equity alliances or equity swaps. Equity swaps? Most consumers probably do not know that Northwest Airlines and KLM Royal Dutch Airlines each own 14.9% of the other. Nor do they know that Delta and Swissair own 5% of each other; or that Continental Airlines and Air Micronesia own 30% of each other. To understand this latest phenomenon of marketing alliances, equity alliances and frequent flier alliances, we need to examine a term called "globalization." Globalization of the U. S. Airline industry began in 1977 and 1978 with the deregulation of the cargo and passenger segments respectively. Eventually, Canada, the United Kingdom, Japan, Australia, and other countries experimented with deregulation, liberalization and even privatization of their airline industries. It should be remembered that deregulation of the airline industry, domestically and internationally, has erupted upon the scene as a result of forces outside of the control of the airline industry. Globalization is the airship flying toward tomorrow; (domestic and international) deregulation is the current state-of-the-art fuel being used to power the ship; North America and Europe probably were the first two passengers on that ship to buy - but not pay for - their tickets. Many other passengers (i.e., countries/airline companies) are scrambling for tickets by jockeying for a position in the line that is forming. The European Common Market added fuel to the fire of regulatory liberalization with the Treaty of Rome test of airline competition and pricing in the 1986 Nouvelles Frontieres case which held that the rules of competition which exist under the Treaty of Rome do, indeed, apply to aviation. At that point, the FUTURE was developing around an attempt to foster overall economic airline integration in Europe which 2 Strategic Alliances in the Airline Industry would set up a chain reaction around the world.' As a result, North America and Europe, two of the three major developed regions of the world, are moving rapidly to structurally change air transportation into an arena of open competition by initiating strategic alternatives available to them in the deregulated world of the airline industry. Airline companies in the rest of the world, including the less developed regions, are SEARCHING FOR AND SIGNING UP PARTNERS WITH WHOM TO DANCE TO THE NEW TUNE THE WORLD IS NOW PLAYING. As a result of domestic and international deregulation, mergers, consolidations, and bankruptcies, these relationships between the airline companies are developing into an important THREE-STEP set of Strategic Marketing Alternatives Identified as: (1) MARKETING ALLIANCES, (2) EQUITY ALLIANCES, and the (3) FREQUENT FLIER ALLIANCES - - - a hybrid or specialized variation of the marketing alliance. STRATEGIC ALLIANCES Of the many types of alliances available to enterprising airline companies, the three most important are MARKETING, EQUITY and FREQUENT FLIER PROGRAMS. The last few years has seen a dramatic increase in all three types. Out of one-hundred, seventy-two alliances identified by Mead Jennings in the August, 1990 issue of AIRLINE BUSINESS, eighty-two of the agreements (47.67%) involved equity investments. More specifically, fifty-six per cent of these 82 agreements were made in the last five years (see TABLE 3, APPENDIX). An example is the first truly "global" alliance between Delta, Singapore and Swissair which includes the coordination of international fares and flight schedules, 3 Strategic Alliances in the Airline Industry the loaning of flight attendants and the possibility of joint buying opportunities.2 MARKETING ALLIANCES In the category of MARKETING ALLIANCES, we find the British Airways and United agreement to coordinate schedules and to share codes of international flights; but no equity swaps. Carried to an extreme, one would find a route-specific agreement which refers to an agreement between two airlines regarding the contribution of each airline to a cooperative effort over a specific route (e.g. New York to Sidney, Australia). The EQUITY SWAP - - another name for alliance partners buying into each other - - is a relatively new variation on the much older marketing alliance theme. It is interesting to note that American Airlines serves as a partner to seven other major airlines; Aer Lingus, Air New Zealand, Cathay Pacific, Finnair, Maley, Qantas, and Singapore Airlines. American has picked up an equity position (7.5%) in only one of these airlines; Air New Zealand. Conversely, these same seven airlines serve as partners for American with Air New Zealand holding a 7.5% equity position in American Airlines. Among these seven partners, American has only one wide-ranging marketing alliance with Qantas. The other six alliances are route-or market-specific agreements. TABLE 1 provides some insight into the relationships that have been established among the airline companies of the world and U.S. airline companies. The last column indicates what kind of relationship exists between any two carriers; "M" means there is a wide-ranging marketing alliance agreement between the two carriers; "R" means the agreement covers only a specific route or specific market; "J" means 4 Strategic Alliances in the Airline Industry there is a joint venture between the two firms, "C" means the