Coalition dynamics in service industries – the case of airline industry alliances


Birgit Kleymann, Hannu Seristö
Helsinki School of Economics and Business Administration

Address for Correspondence:

Prof. H. Seristö
Dept of International Business
Helsinki School of Economics and Business Administration
P.O. Box 1210
00101 Helsinki
Finland

Tel. (+358) 9 4313 8667
Fax (+358) 9 4313 8880

E-mail: seristo@hkkk.fi

 

 

Coalition dynamics in service industries – the case of airline industry alliances


ABSTRACT

While the number of coalitions in the service sector is growing significantly, it seems that alliances have been studied mostly in the manufacturing sector. Within the service sector it is the airline industry that is currently the main theatre for coalitions. This paper will address the dynamics of coalitions in the service sector through looking into the case of international alliances in the airline industry. The airline industry is a fruitful object of study as it very often combines the international dimension with other complicating factors such as regulation of operations, and government ownership in firms, as well as regulatory impediments which preclude firms from merging.

Based on a longitudinal study of alliance activities and events in the airline industry between 1988 and 1999, this paper proposes to present a tool for the understanding of the dynamics behind alliancing in the airline industry. It contains an analysis of the objectives behind strategic alliancing between airlines and presents a framework for the assessment of different positions which an airline can take in an alliance. It is proposed that the positions an airline can assume within an alliance network are defined by the type of services (i.e., routes) it operates, as well as by the degree to which it intends to be integrated into the alliance. At each position, there appears to be a certain trade-off between alliance benefits reaped and risk levels inherent in tightness of integration. Lastly, a generic framework for positioning within an alliance network is presented, which can also be used in the context of other service industries.

Coalition dynamics in service industries – the case of airline industry alliances

Introduction

While the number of coalitions in the service sector is growing significantly, it seems that alliances have been studied mostly in the manufacturing sector. Within the service sector it is the airline industry that is currently the main theatre for coalitions. Therefore this paper will address the dynamics of coalitions in the service sector through looking into the case of international alliances in the airline industry. The airline industry is a fruitful object of study as it very often combines the international dimension with other complicating factors such as regulation of operations, and government ownership in firms. In contrast to many industries in the manufacturing sector, factors such as government ownership, regulations in the provision of infrastructure, and the requirement for multiple outlets in targeted markets (Service Firms’ products cannot be physically shipped to customers) do exercise a large influence on the strategic environment of many Service industries in that they prevent firms from merging fully, and just force them to seek other forms of co-operation.

Gulati (1998, 294-295) has noted that alliance research has been done mainly on a dyadic level, and has focused primarily on the attributes of firms that influence their proclivity to enter alliances, the formation of alliances, the performance of alliances and the firm- and industry-level factors that impel firms to enter alliances. Recognising that limitation or gap this paper focuses on an industry where alliances are or are developing into multi-partner coalitions. In this paper we consider alliances as one form of coalitions and – following Gulati (1998) - define strategic alliances as voluntary arrangements between firms involving exchange, sharing or co-development of products, technologies or services.

The growth of alliances in the 1990’s has been rather phenomenal; studies suggest annual growth rates above 100 per cent in the number of business alliances (see e.g. Pekar & Allio 1994, Luo 1996). Strategic alliances have been found to be unstable and they generally speaking have a poor record of success (see e.g. Gant 1995, Brouthers et al. 1995); for example, it has been suggested that fewer than 30 per cent of international alliances in the airline industry have been successful (Lindqvist 1996). Doz and Hamel (1998, xi) have presented the features that differentiate alliances from mergers. Following partly these features we present those factors which are most relevant to the case of the airline industry. These points also serve as the basic assumptions for our study:

The research problem in this study is that assessing the alliance dynamics in a very turbulent industry such as the airline industry is very challenging and there are as of yet no appropriate tools for that assessment. This study draws together findings from several pieces of research and approaches the phenomenon more on a conceptual level, complemented by an analysis on how major airlines of the world see the evolution of alliances. The objective of the study is to propose airline strategy frameworks which can be used in such an assessment, and also suggests some views on how alliances in the service sector might evolve in the future, and on how firms could approach the alliance evolution from their particular premises. A basis of the study is a longitudinal analysis of the alliances reported in the industry, using firms’ own and third party material as sources of information. An important source of information has been annual reports between 1988 to 1997/98 from the thirteen major airlines (listed in Appendix 1).

International coalitions in the airline industry

The airline industry is in many ways one of the most international of service industries. International traffic forms a major portion of all air traffic, and even domestic traffic is often dependent on international services. There are no dominant, truly global players in this very much international business, but nevertheless there are airlines that correspond to the trans-national corporation definition by Bartlett and Ghoshal (1995). The industry has experienced major changes in the operational environment during the last two decades; deregulation has changed the rules of competition drastically in most major markets of the world. The industry experienced a severe recession in the early 1990’s but with the recovery of major economies and the very strong growth in air transport demand it has improved performance significantly towards the end of the decade. There appears to be a strong need to consolidate the industry, but much due to government control airlines can go only halfway the consolidation path. The number of mergers and acquisitions in this industry is very small – however, there are numerous co-operative agreements. A great majority of the existing alliances in the airline industry have been formed in the 1990’s, which corresponds to the increased liberalisation of the marketplace during that decade, but there are alliances the origins of which can be traced as far back as to the 1940’s. There was quite little alliance activity until the late-1980’s when a number of equity-based arrangements took place. In the 1990’s the number of alliances has steadily grown each year, and the scene has become very unstable. In 1990 the industry sources listed 172 alliances, but the survey by Air Transport Intelligence in 1999 reported that there were a total of 513 airline alliances among 204 airlines in mid-1999, with more than 50% of actual alliance agreements having been concluded during the past three years.

Most airline alliances are between two partners, but recently arrangements of more than two participants have emerged. It appears that world airlines are in the process of forming groups in their preparation for stiffer global competition - the largest groups Star Alliance and OneWorld now have each about 20 per cent of the world international passenger markets. In 1999 there are four major alliance groups in the global airline industry. They all are constantly evolving, and some of them have not even been given a clearance by the competition authorities to proceed with concerted operations. Only the Star Alliance can be considered truly a multilateral alliance, where each partner has alliances with each and every other partner. In terms of revenues and the number of passengers the biggest alliance in 1999 was the Star Alliance, built around the partnership between United Airlines and Lufthansa.

Typically, alliances are between airlines from different countries, but there are alliances between carriers of the same nationality, too. Most airlines have several alliances, including domestic and international alliances - the largest number of alliances in 1999 was by Air France with 33 arrangements, out of which all but one were with foreign partners. As the number of alliance arrangements in a particular airline grows, conflicts of interests may well emerge and the justification for a certain alliance becomes less straight-forward. Consequently the alliance scenario is in a flux - alliances are broken and new ones formed frequently. The alliance rush in the late 1990’s has developed into a situation where it sometimes is difficult to categorise another airline either as a competitor or a co-operator.

A key role in the airline business is played by authorities. On the one hand authorities press for more competition through less regulation, but on the other hand, when stronger airlines try to rationalise operations in the name of better competitiveness, authorities are likely to intervene and set limits on such efforts. The fact that governments still are notable owners in many internationally operating airlines makes acquisitions of and mergers with airlines somewhat problematic in general - namely, national flag carriers are still considered in many countries part of national property and country image. Also, governments have often set specific limitations on the share of foreign ownership in the airlines of their nationality, and thirdly, antitrust legislation in many countries makes mergers and acquisitions problematic.

Past research on alliances

Strategic alliances have been studied from various perspectives, e.g. that of alliance characteristics, rationale of alliances, value creation through alliances, performance measurement of alliances, learning from alliances, and so on. In the following the most relevant existing research to this study is presented. The purpose is not to cover all the research concerning alliances, but only the relevant research to provide context for this study.

The rationale of alliances has been examined by Contractor and Lorange (1988). The motives of international alliance formation have been studied e.g. by Glaister and Buckley (1996). Their study highlighted the market and geographical expansion aspects as motives. Burgers et al. (1993) conclude in their study on the global auto industry that alliances are mainly a device to reduce both demand and competitive uncertainty. Alliances between competitors has been addressed by Hamel, Doz and Prahalad (1989). The developmental processes in alliances have been studied e.g. by Ring and Van de Ven (1994) and Doz (1996). There the question setting has focused on the factors and processes – formal or informal - that influence the development of typically dyadic alliances, and the evolution of alliances has often been linked to the success or performance of alliances. Brouthers et al. (1995) studied partner selection and presented a framework to help firms in assessing the likelihood of success of an international alliance and the suitability of partners. Of much relevance from the airline industry perspective is the research undertaken by Madhavan et al. (1998), which has focused on the network perspective of alliances development. Singh and Mitchell (1996) contributed to the evolutionary theory of business strategy in the alliance framework suggesting that the dual nature of interfirm relationships both helps a firm to survive and inhibits its ability to adapt to changes in the environment. Khanna et al. (1998) have provided perspectives on the dynamics of learning alliances, weighing the roles of co-operation and competition in affecting the dynamics in alliances. Particularly in international alliances there are many factors that have a bearing on the way the alliance is structured. In broad terms the alliance structuring varies from very loose, non-equity co-operative agreements such as code-sharing between airlines, to the formation of joint ventures involving equity and formal hierarchical structures. The complexity of alliances as organisational structures has been studied e.g. by Killing (1988). The organisational properties of alliances have been studied e.g. by Sheth and Parvatiyar (1992) on a general level, and by Osborn and Baughn (1990) particularly in an international setting. Parkhe (1993a) has looked into the relationship between specific elements in alliance structures and the performance of alliances. He has also taken a game theoretic approach to study the relationship of structure and performance in alliances (Parkhe 1993b). Contractor and Kundu (1998) have studied the organisational forms of international alliances particularly in the service sector. They have presented a new syncretic theory on alliance organisational mode, where they argue that a robust theory on alliance organisational mode needs to include country, transaction and firm strategy specific factors, thus combining concepts from the transaction costs theory, agency theory, corporate knowledge and organisational capability theories. Very relevantly from this study’s point of view, Segil (1998) concluded - based on a study of successful alliances - that tiering is an effective method of organising large volumes of alliances. Alliance performance research has focused mainly on joint venture success (e.g. Harrigan 1986, Kogut 1988) while the recent research has taken a slightly broader look on alliance performance (e.g. Dussauge and Garrette 1995; Gleister and Buckley 1998). Part of earlier research has looked at the performance of alliances as such, while another part of research has looked at the performance implications of an alliance to its members on a more general level (Chan et al. 1997; Das et al. 1998; Doz and Hamel 1998; Koh and Venkatraman 1991). Saxton (1997) suggested that there is a positive relationship between partner firms’ benefits from alliance participation and partner reputation, shared decision-making, and strategic similarity between partners. Finally and again very much relevantly from this study’s point of view Gulati et al. (1994) concluded that the success of an alliance depends much on how the partners see their roles in the alliance.

Earlier studies particularly on airline alliances have been done from various specific perspectives, such as causes and effects of equity alliances (Youssef 1992), benefits (Park and Zhang 1997), performance enhancement (Park and Cho 1997), corporate value (Park and Zhang 1998), safety implications (Button 1997), the policy implications of establishing a national carrier as an attractive senior partner in a global airline alliance network (Oum, Taylor and Zhang 1993), the effect of codesharing on international fare levels (Oum, Park and Zhang 1996), and partner choice (Nyathi 1996). Bissessur (1996) undertook research into the critical success factors of airline alliances. He suggests that crucial to alliance success are compatibility between partners, the minimisation of power imbalances, and the implementation of mechanisms to periodically monitor alliance success. He does recognise, however, that the alliances he examined constitute partnerships between airlines of roughly equal size and market power and that the situation should be quite different for a partnership where a large airline co-operates with a smaller one. The differences in roles which can be assumed by various types of airlines had been mentioned in an early classification of airline types with respect to their positioning within an alliance network, developed by Gialloreto (1986). Importantly for the background of the present study, Brewer and Hooper (1998) clearly distinguish between pure exchange relationships between alliances (for example, a single codeshare on a given route), which are responses to the regulatory environment, and true ‘network’ exchanges, where the alliance comes close to being an organisation in its own right with the airlines as integrated actors. They point out the importance of considering the dynamics of the alliance phenomenon between airlines, and suggest further investigations into the organisational implications of that dynamics.

A framework for Strategic Alliances

Alliancing has been one of the most salient phenomena of airline strategy for at least the past decade, and while some research has been undertaken into the question of drivers and motivators for alliances, there still appears to be a need for understanding the dynamics of alliancing, taking into account the different types of airlines which exist, each driven by different motivators and contributing a different type of expertise to the alliance.

Why do firms and particularly airlines form alliances? On a very general level, past research suggests that through alliances firms can circumvent the mobility barriers and isolating mechanisms that make the imitation of strategic capabilities of other organisations very difficult (Nohria and García-Pont 1991), or circumvent the limitations by corporate administrative heritage and organisational inertia to the internal development (Burgers, et al. 1993). Also, alliances have been seen as more flexible and less expensive means to develop capabilities than internal development. Eisenhardt and Schoonhoven (1996) presented a resource-based view of strategic alliance formation, combining social and strategic explanations. Osborn and Hagedoorn (1997) have provided a valuable summary of different views on alliances: economics-based, corporate strategy - based and inter-organisational views. In short, earlier research has categorised the reasons for alliances as:

As to the drivers of international airline alliances, the starting point is that quite evidently there are drivers of different level. Some alliances are driven by mere cost savings in operations, like through rationalising ground handling at airports operated by both or all partners. The maintenance pools between large European airlines during the 1980’s were of this type. Other alliances aim at gaining market access, for example through code-sharing and pooled frequent flyer programs. Yet others may be more of a strategic nature, aiming at the mere survival of the airline. Alamdari and Morrell (1997) have suggested that there are two main drivers of alliances in the airline industry: first, search for more market power, and secondly, search for lower operating costs. These broad categories cover the reasons for airlines’ alliance arrangements, but it appears that there is room to elaborate further. International airlines are facing a business environment which has recently undergone significant changes, and which leaves airlines which three basic strategic choices (Seristö, 1999): Growth, Focus, or Lowest-Cost Strategy.

The first choice would be growth. This can be sought either internally (organic growth), or externally. As internal growth is often slow, difficult to implement structurally, and likely to be a high cost / high risk option, the avenue of seeking external growth is an attractive one. Whereas in many industries external growth can be accomplished by mergers and acquisitions, this is seldom a possibility in the airline industry, due to the regulatory environment. The least complicated means would be an alliance, where airlines link their networks. An alliance implies less sunk costs (and therefore less risk), while providing for maximum flexibility. The second basic strategic choice would be seeking a focus, in other words, the pursuit of a niche strategy. The airline can focus either on a certain geographic market, or on a customer base. In case of focusing on a geographic market, an alliance with other carriers is a feasible option in that it provides the niche carrier with feed for its market, by having the partner airlines connect the specialist to the world. The other niche strategy, one which appears to be impervious to at least the current alliance movement, is that of functional differentiation, for example, that of low-fare, no frills services, and we currently see no low-fare carrier participating in the big alliance game. One straightforward reason for this is the need for a more or less homogeneous fare structure as well as a requirement for similar service levels across alliance partners. There appears to be what we can call a ‘minimum required structural compatibility level’ for an alliance to take place, and sharp differences in service concepts or fares seem to be factors which move the strategic group of low-fare / no-frills carriers below this minimum threshold level. There is, however, some scope for co-operation with other airlines in the field of joint resource utilisation. Lastly, there is the lowest-cost choice, which means a focus on high load factors, minimum operating and overhead costs, and a standardised fleet. This in practice refers to non-scheduled carriers serving tourist destinations under contract for Tour Operators. These airlines do not carry connecting traffic, which implies that allying with other airlines will carry very limited benefits. Some benefits might, however, arise in the field of cost reduction, and we can currently observe a tentative alliance formation between several European charter carriers. It can be seen from the above that an alliance agreement represents an attractive option for most of the strategic avenues an airline can take. The alliance offers a possibility to reap benefits of co-operation while evading regulatory impediments.

The benefits of an alliance can be classified as to whether they are efficiency- seeking, or market-oriented. In the latter category, one can distinguish between market-offensive and market-defensive objectives. Efficiency-seeking objectives can be achieved through joint resource utilisation. There are also economies of density to be reaped, for example, in being able to increase the loadfactor of a given flight with passenger feed from partners. An important market- defensive objective can be called ‘Competitor taming’; vulnerability is one reason for firms to enter coalitions (Eisenhardt & Schoonhoven 1996); entering an alliance dampens or completely eliminates competition with partner airlines. Another defensive objective is related to ‘entrenchment’, i.e., the strengthening of one’s position in the home market through being able to link the home market to the world, and thus being more attractive than potential newcomers in the region. Offensive objectives include Value Enhancement through offering better connections, a wide network, and, in some cases, being linked to a ‘prestigious’ brand (either that of a partner, or of the alliance itself), or learning new skills, especially in the fields of Yield Management and Marketing. Another clearly offensive objective is the dominance of a central Hub by an airline and its partners, the possibility to enlarge one’s network without the need for physical growth. Lastly, there is the objective of gaining environmental control. This refers to the fact that a single airline often does not have much control over environmental factors, which range from prices charged by suppliers to the regulatory authorities. A group of airlines is likely to have more negotiating might with airport authorities, ground handling companies, and maybe to some extent even lobbying power at government level. Nothing in this terminology, of course, is absolutely clear-cut. Another key objective of airlines in joining an alliance is undoubtedly the strengthening of its customer loyalty programme, i.e. the so-called Frequent Flyer Programme. Whether this should be categorised as a market-offensive, market-defensive or even efficiency-seeking objective varies from airline to airline. It is therefore to be expected that different airlines will weigh objectives differently according to their operational profile, size, etc. There have been numerous suggestions how airlines have been classified, for example by Gialloreto (1986), Kling and Smith (1995), Ter Kuile (1997), Staniland (1997), Berardino and Frankel (1998). Since the purpose of this paper is to examine the alliance context, it will be tried here to classify them according to a feature which is highly relevant to their membership in a strategic alliance, namely the nature and scope of services provided by a carrier. In the following classification, airlines are grouped according to the relative importance they put on serving their home markets versus intercontinental flights to feed that home market, or transcontinental flights which do not primarily concern the home market . Airlines do differ in how much weight services within their home market have relative to all of their flight operations and revenues. The notion of "home market" is feasible because all of the current actors in the alliance game are airlines which have traditionally served a medium- to short-haul market around their hub(s), an area where they enjoy a strong market presence and possibly even dominance; an airline’s home market is thus the set of routes on which it has the highest operating density. For example, Finnair’s home market is within Northeastern Europe, and connecting this region through its hubs at Stockholm and Helsinki to European capitals, Lufthansa’s home market is Central Europe. We can distinguish between three types of internationally operating airlines, namely the Local Champion, the Long - haul Operator, and the Transcontinental Connector (Kleymann 1999): The Local Champions are typically short- to medium haul airlines. They do operate limited long-haul services, and some of these intercontinental operations - for example, Finnair’s routes to Asia - are high-yield and generate significant revenue, but these often constitute a relatively small part of overall operations. Often, Local Champions are true niche carriers in that they serve markets where they enjoy a high presence and relatively little competition. Some of these markets can be quite attractive due to their wealth (for example, Northern Europe). Examples of Local Champions include Austrian Airlines, Finnair, Scandinavian Airlines, and TAP Air Portugal. The Long - haul Operators are similar to Local Champions in that they concentrate on feeding a home market, but intercontinental flights constitute a fairly high proportion of their total flight operations and revenues. Some of these airlines are in this category due to the geopolitically "remote" location of their home, such as Australia/ New Zealand or South America. As Flag carriers, their mission was to link their country to the "Rest of the World". They typically connect their home market, where they enjoy a dominant or close to dominant position, with the respective important business centres on other continents. Examples of this type are Air New Zealand, Qantas, South African Airways and Varig Brasilian Airlines. Lastly, there are the Transcontinental Connectors. These airlines truly aim to serve the whole world; they operate to several continents and have the capability to link two continents through their home hub on a third. They often also operate dense local networks, but these do not necessarily constitute their primary ‘raison d’être’. The role of Transcontinental Connector requires a centrally located homebase, such as in Europe, North America or a central location in Asia. Examples for airlines which operate transcontinentally are Lufthansa (linking North America to Africa or the Middle East via their Frankfurt Hub), American Airlines (linking Europe to South America via Miami or Dallas), or Singapore Airlines (linking Europe to Australia).

In sum, the Local Champions are oriented towards a specific market level, the Transcontinental Connectors operate on a global level (cf. Seristö 1999), with the Long - haul Operators constituting a special case of Local Champion. There can be, and in fact are, some cases of overlap of roles, for example where a Transcontinental Connector also has a Local Champion function (such as Air France). But the classification is still useful in the sense that these airlines’ primary strategic interest in alliancing is driven by their ambitions as Transcontinental Connectors. All three types differ to some degree in their expectations from, and contributions to, an alliance, and it is suggested here that because of these differences in contributions and expectations, airlines can assume different position within an alliance network. If alliance objectives and airline types are matched, the following profile can be suggested (Figure 2).

When the objectives of alliance membership are classified according to whether they are market-defensive, efficiency-seeking, or market-offensive, the difference between alliancing objectives of the three airline types becomes evident. Local Champions aim mainly at a consolidation of their position; they are not interested in network expansion, and their size and geographical focus makes it unrealistic for them to aspire for any kind of power position within an alliance group. Transcontinental Connectors do, on the other hand, have a much greater need for control (i.e., power), over the operating environment. This is due to their operating in a large number of markets, which exposes them to more competition. In short, the "specialist" Local Champions and Long - haul Operators seek to be connected to the world, while the Transcontinental Connectors seek to control it. These differences in objectives lead to the variety of positions available within an alliance network.

An alliance group is in many cases more than a simple arrangement of codeshare agreements between partners. As co-operation between partners exceeds simple exchange agreements, the need for tighter co-ordination –and therefore, integration of efforts- increases. In a fully multilateral alliance network (i.e. where each member co-operates with every other member) a single member’s decisions will affect the network. These alliances are said to be based on integration (Brewer and Hooper 1998), and they feature increased interdependence between members. The degree of integration between members will also define organisational boundaries (For a discussion of boundaries in hybrid organisations, see Borys and Jemison 1989). At high levels of member integration and permissive boundaries of the firm, airlines will move towards constituting organisational units of an alliance. The increased mutual interdependence will imply a need for stability, and it is at this stage that we are likely to witness a slowing down of the rapidity with which alliances are tied and dissolved. Another interesting aspect of the morphology of alliances is its exclusiveness (Easton 1992) or the degree to which an alliance is insulated from other alliances. This constitutes the outside boundary of the alliance. High integration between airlines often precludes them from seeking co-operation with carriers from outside the network. Examining airline alliances from the perspective of tightness of integration, it is suggested here that an airline alliance network is likely to involve at least three membership levels, namely those of ‘Core Members’, ‘Second Tiers’, and ‘Contributors’. An alliance’s structure can then be depicted as follows:

At the core of the alliance, a small number of airlines co-operate tightly, possibly relinquishing some authority to a joint steering board. The agreements between core members are likely to be fully multilateral and exclusive to the alliance. Core membership yields the benefits of maximum power and control over the alliance. The Core Members are supported by the ‘Second Tiers’. These are typically carriers which co-operate more tightly with one core member than with the others. They co-operate closely with the alliance without seeking full submission to its authority, or a say in matters concerning alliance governance. Lastly, there is the Sphere of Contributors. These carriers co-operate on a route-by-route basis, without being exclusively bound to one alliance. If the list of alliance objectives discussed above is examined as to which objectives are met at what level of integration, we obtain the following pattern:

This evaluation shows that there are benefits to be gained from alliance for any type of airline, and at any level of integration, with loosely – tied contributors reaping at least the benefits of value enhancement (that is, their passengers have a greater choice of convenient onwards flights at connecting hubs), and economies of density (where partners channel passengers onto the contributor’s flights). In a last step, and to verify our assessment, we depict the current situation in the airline’s alliancing positions, using the developed typology and the degrees of link integration. Thus, we can draw the following pattern:

The observed behaviour of international airlines which are currently participating in alliance networks matches with the requirements depicted in Figures 2 and 4: every type of airline can expect value enhancement from an alliance. Figure 5 suggests that Transcontinental Connectors strive to be in the core of an alliance group in order to maximise power over their environment and enlarge their network. On the other extreme, Local Champions cluster in the Second-Tier category; they are mainly aiming at value enhancement and a strengthening of their home position, which this position can provide. Long - haul Operators seem to seek looser ties with an alliance, this might be chiefly due to their remote locations, which imply that a large part of operations happens away from main alliance theatres; these carriers seek to enhance brand value and obtain higher loadfactors through selective links with carriers from other regions.

Lastly, it must be mentioned that it is only recently that airlines have taken up networking with each other to the point where they even might come to concede some authority to a joint management body. Alliances are still tied and dissolved at a considerable speed, and there is, for any airline which considers tight linkages, the inherent danger of giving up too much independence too soon. Tight linkages imply compromises (for example, ceding operations on certain routes to one of the partners, or expenses in marketing and establishing of an ‘alliance brand’ identity), which might leave an airline somewhat ‘crippled’ in case the alliance dissolves. This is especially dangerous for Transcontinental Connectors, whose competitive advantage is their serving a multitude of markets. If, say, a European Transcontinental Connector cedes a set of routes to Asia to one of its Asian alliance partners and the alliance dissolves, that airline will need to painfully and costly re-establish itself on that market. Thus, while the role of a Transcontinental Connector appears to require tight integration with partners, the level of sunk costs and inherent risk increases with the degree of linkage tightness.

Conclusions and implications for other service sectors

In addition to the discussed case of the airline industry, the concept of tightness of integration and different alliance objectives can be applied to other industries in the Service sector where alliance networks are developing. Stopping short of full integration (i.e., a merger) where this option is excluded, for example, due to regulatory limitations, there are different levels of tightness of integration into an alliance network. At each of these levels, different objectives of co-operation are met to a varying extent. Broadly speaking, tight integration with partners yields optimal access to the benefits of an alliance, whereas less tight integration might offer some defensive benefits but more limited benefits for a more market-offensive strategy. On the other hand, tight integration carries a relatively high inherent risk for the firm: Members of an alliance core are likely to relinquish some amount of authority to a joint governing entity, and they might also carve up markets between themselves, implying that a firm might have to cease being directly present in one market for the sake of a partner. In case the alliance dissolves, the firms will be weakened at those points where they were formerly linked to partners. In an extreme case, the core members might operate to a large extent under a joint brand name, thereby sacrificing their own identity; in case of alliance dissolution, they will need to rebuild brands. Tight links also imply limited freedom of movement; in the event the alliance fails, a firm might find it has developed structurally too much as an ‘alliance member’, and might have lost a certain ‘standalone capability’. These risks are less present at lower levels of integration. The trade-off between tightness of integration and risk levels and the degree to which certain objectives are met at different levels can be depicted, and we propose the following generic framework for the assessment of roles in alliance networks:

 

In this study we have proposed frameworks and tools for assessing the dynamics of alliancing in the airline industry, along with some views on what kind of roles different airlines might find tempting to adopt in the developing of alliances. These frameworks acknowledge the different histories and characteristics of airlines, and we believe that future studies should address the application of these frameworks to other service industry sectors. Tentatively it would appear that the frameworks might prove applicable in the analysis of coalition dynamics, for instance, in the insurance, financial, accommodation and perhaps telecommunication services sectors.

 

 

 

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APPENDIX 1

List of airlines analysed in the study

Air Canada

American Airlines

British Airways

Canadian Airlines (PWA Corp.)

Delta Air Lines

Finnair

KLM

Lufthansa

Qantas Airways

SAS

Swissair

Thai Airways International

United Airlines