C) Cran field LIBRARY I UNIVERSITY J CRANFIELD UNIVERSITY COLLEGE OF AERONAUTICS DEPARTMENT OF AIR TRANSPORT Ph.D. Thesis Abhimanyu Bissessur THE IDENTIFICATION AND ANALYSIS OF THE CRITICAL SUCCESS FACTORS OF STRATEGIC AIRLINE ALLIANCES Supervisors: Dr. Fariba Alamdari Prof Rigas Doganis October 1996 U LIE. AR 97 'eaaiA and Jaawtz/ ABSTRACT Since the beginning of the decade, the structure of the industry has been changing rapidly as airlines from various parts of the world have been forming alliances. These alliances transcend the traditional types of co-operation which have always existed in the industry and constitute a strategy designed to give the partners a competitive edge. However, many of these alliances are failing. This can be attributed to a poor understanding of the managerial and operational characteristics of airline alliances. This research attempts to correct this deficiency by identifying and analysing the factors which are important to airline alliance success. In order to set the background of the research, the various ways in which firms have traditionally been linked are reviewed. The evolution of co-operation in the airline industry in the US, Europe and Asia is traced and the forces which have driven airlines to adopt the alliance strategy are identified. The various collaborative strategies of airlines are described. The definition of alliance success is critical to this research. Various definitions are explored and the ones considered most appropriate for this study are taken as alliance stability and alliance operational performance. The issues to be considered in ensuring airline alliance stability are qualitatively analysed. Among the most important ones are a pragmatic and careful approach in the formation process of the alliance, an understanding of the relationship between the partners with particular importance given to commitment and the generation of trust, and recognition of the evolutionary process of alliances as the priorities of the partners change over time. The operational objectives of airline alliances are identified and classified as either market-related or production-related. Market-related objectives include economies of scope and density, and market power. Alliance performance is mathematically modelled using linear and logit regression techniques. The results of the analyses point to the following: network size and network complementarity, network integration, 0 Department of Air Transport, Cranfield University Abstract connection quality, the type of flight (on-line, code-shared or interline) and alliance frequency of service as important alliance success factors. The reaction of competitors is also found to determine the benefits of airline collaboration. On the production side, the objective of allying is to decrease unit costs and increase efficiency by combining certain operational areas. A case study of Austrian Airlines is performed to identify the cost and productivity areas which have benefited from alliance formation. Graphical analysis shows that benefits were reaped mostly in the areas of labour productivity and aircraft utilisation. This implies that these are the areas which should be targeted when making use of the alliance strategy. Unit costs were not found to be greatly affected by alliance formation. 0 Department of Air Transport, Cranfield University Acknowledgements ACKNOWLEDGEMENTS I wish to thank my supervisors Dr. Fariba Alamdari and Prof. Rigas Doganis who have guided and encouraged me throughout these three years and who have always come up with very constructive ideas whenever I was experiencing difficulty. I am also grateful to Mr. Ian Stockman, and to the secretaries of the Department, Frances Creckendon, Rosa Bardwell and Marilyn Bryson who have been of great help at all times. My gratitude extends to the whole staff of the Department of Air Transport whose clear and articulate presentations have always been an inspiration. Finally, I want to thank the Overseas Research Students Awards Scheme and the Cranfield University, College of Aeronautics for having provided the financial support for the completion of this degree. 0 Department of Air Transport, Cranfield University III Contents CONTENTS Section Page Abstract ..................................................................................................................................................... Acknowledgements .................................................................................................................................. iii Listof contents ........................................................................................................................................iv Listoffigures......................................................................................................................................... xiii Listof tables ..........................................................................................................................................xvii Notation.................................................................................................................................................. xix PartI: Background........................................................................................................ 1 1. INTRODUCTION .............................................................................................................................. 2 1 .1 AIRUNE CO-OPERATION ..................................................................................................................... 2 1.2 THE NEED FOR THE RESEARCH .......................................................................................................... 4 1.3 THE AIMS OF THE RESEARCH............................................................................................................. 5 1 .4 THESIS STRUCTURE............................................................................................................................. 6 1.5 CONCLUSION....................................................................................................................................... 9 2. TYPES OF INTERFIRM AGREEMENTS ................................................................................... 10 2.1 THE NEED FORA DEFINITION .......................................................................................................... 10 2.2 TYPES OF ALLIANCES ....................................................................................................................... 10 2.2.1 Acquisitions and mergers .........................................................................................................11 2.2.2 Joint ventures ...........................................................................................................................12 2.2.3 Strategic alliances ....................................................................................................................13 2.2.4 Vertical alliances......................................................................................................................13 2.3 ALLIANCE CLASSIFICATIONS ............................................................................................................ 14 2.3.1 Linear class/Ications ................................................................................................................14 2.3.2 Matrix class fIcations ...............................................................................................................16 2.3.3 Alternative class/Ication ..........................................................................................................18 2 .4 CLASSIFICATION OF AIRLINE ALLIANCES ......................................................................................... 19 2.5 CONCLUSION..................................................................................................................................... 20 3. PAST CO-OPERATION IN THE AIRLINE INDUSTRY .......................................................... 21 3 .1 TOTAL INTEGRATION ........................................................................................................................ 21 3.1.1 The USpre-deregulation period...............................................................................................22 0 Department of Air Transport, Cranfield University Contents Section Page 3.1.2 The US post-deregulation period ............................................................................................. 22 3.1.3 The European experience ......................................................................................................... 26 3.1.4 The Asian/Pacjfic experience ................................................................................................... 27 3.2 PARTIAL INTEGRATION .....................................................................................................................28 3.2.1 The interline system .................................................................................................................. 28 3.2.2 Pooling ..................................................................................................................................... 29 3.2.3 Technical collaboration............................................................................................................ 30 3.2.3.1 The ATLAS consortium ....................................................................................................................