Why do airlines choose to join an Strategic alliance?

Answer 1

Since airline deregulation in 1978, airlines have trended towards forming alliances. There is no definitive answer as to why this may be the case, however, many argue that the main trunk carriers who had initial monopolies in the airline industry due to the government regulation of new entrants into the market, wanted to maintain their monopoly status in their particular regions. For example, American Airlines in the North American region.

By expanding output they were further able to benefit from the economies of scale present within the industry, thus strengthening their monopoly hold on the market, and preventing new entrants into the long haul flights sector the incumbents currently dominated. However, it can be more complicated than this, aviation is a network industry, and although an alliance carrier may have a monopoly on a route, it may not have any significant monopoly advantage. This is because competition can come from a variety of indirect alternatives or the service may be a non core part of a large network. For example, an alliance carrier may operate on a particular route between London and Calais, yet there are indirect services via Brussels and so demand is conditional on what happens on these routes. Passengers may even change mode of transport altogether, thus acting at the extensive margin.

Many airlines currently use a system of code sharing. This is when the operating and marketing carrier for a particular flight differs. For example, Alaska Airlines operates non-stop flights between Seattle and Chicago O'Hare. These flights are listed in the CRS's and flight schedules of both Alaska and American. Thus because seats on these Alaska flights can be marketed and sold by American, the flight is said to be code shared. The operating carrier usually pays the marketing carrier a small fee for selling a seat. Nearly all the revenue goes to the operating carrier so partners exchange operating and marketing roles to balance it out.

This increase in joint marketing, code sharing and coordinated scheduling has naturally led to the integration of flight companies.

Prior to US air deregulation, network carriers had a linear route structure with no focal point. There were a lot of direct services but frequency was often low and fares were high because of the inefficiency of the route structure. The move to wide bodied planes caused services to fall further as operators intended to utilise all spare capacity due to the economies of aircraft size.

Post deregulation, hub and spoke networks began to form, with many flights from outlying airports converging at a main hub, such as Heathrow Airport. The flights are funnelled in banks with coordinated arrival of a large number of flights in a short space of time and coordinated departures in a narrow time window. As a result of the increased capacity utilization facilitated by the hub and spoke network system, fares have fallen and there has been a marked increase in flight combinations to a particular destination.

Although the hub and spoke system has consolidated the market share of many of the pre deregulated operators, these systems are becoming less stable because of competition from low cost carriers, thus destabilising the strategic alliances held by many of the major trunk carriers.