RE: Alliances
I have just done my undergraduate honours degree dissertation on the future of airline alliances.
I interviewed the Director of Strategy at BA and British European and the Managing Director of Birmingham Airport to find out more.
Alliance are essential in the current industry climate. Falling passenger yields, lower profitability, high fuel prices and more importantly, the deregulation of many of the world’s air markets, has increased the need for airlines to consolidate their operations with other airlines in order to achieve greater benefits of scale and scope.
At present, government restrictions on foreign ownership prevent many cross-border mergers/acquisitions from occuring. Also, the acquisition of one airline of a foreign competitor, would jepadise an airline’s international air service agreements, and may mean the loss of rights to fly certain routes.
Until restrictions on ownership are removed, mergers/acquisitions will remain virtually impossible to achieve.
Alliances enable airlines to achieve the economies of scope which mergers/acquisitions offer. However, mergers offer double the economies of scope than alliances, which means that mergers are more favourable to airlines. The main benefit of alliances to airlines is the need to achieve greater market spread through complimentary route networks. Alliances enable airlines to increase brand penetration in markets, enter new markets which may have been previously out of reach to them, and to cut down substantially on route development costs.
Anti-trust immunity will enable alliance members to share revenue and profits and jointly set prices, although an open skies deal must be in place between their countries.
Alliance offer economies of scope through joint procurement costs, aircraft purchasing and the elimination of duplicated operations and routes.
Alliances increase route networking presence via alliance hubs i.e. Star’s Frankfurt – BA’s Heathrow and Skyteam’s Paris CDG.
Airline competition is likely to occur more between alliance networks and their hubs in the future, rather than between indidivual airlines.
Alliances are merely a pre-cursor to mergers. Alliance group members are likely to merge in the future, when restrictions on ownership are finally removed. The result will be mega-carriers.
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