Dec 12, 2018 in Business

International Business Essay

Analysis of the Strategic and Environmental Factors Responsible for the Formation of the Global Airline Networks 

The formation of alliances and networks of various large airlines are affected by several strategic and environmental factors. These factors can be understood through the PESTEL analysis. Under the said analytical tool, the first consideration is the political environment. For that matter, it would be noticeable that the alliances and networks formed in the airline industry were politically motivated. This would imply that the large airline companies have gathered together mainly because they are protected by international organizations, such as the European Union (EU). Specifically, airline companies such as Lufthansa, Air Canada, United Airlines, American Airlines, British Airways, Cathay Pacific, Canadian Airlines and Qantas operate within the western boundaries, which are protected by the EU. It is necessary for these airlines to have an alliance for their own benefits, since EU is there to back up them in case of conflicts with other airlines. 

EU has the authority to overturn any case submitted to the Dispute Settlement Body (DSB) that handles complaints and grievances of member nations covered by WTO and GATT. In that manner, if a country is in alliance to any member nation of EU, then it may also benefit from the settlement issues to be brought to the DSB. A good example of this nature was when United States encountered conflicts against the European Union (EU) regarding the importation of beef with growth hormones. The EU tried to ban the US importation of such products into their region because of the legal restrictions. In order to settle it, both parties brought the case to the DSB. Subsequently, the DSB’s decision favored US because of the vague policy in the importation of such products in the European region. However, EU was able to force DSB to reexamine the issue before allowing US to sell beef with growth hormones in the Europe. This is how influential EU is in various international bodies (Pinder 2001).

The next factor is the economic environment. Airline industry is quite competitive because of the new strategies and technologies that makes airlines more efficient and safe. This is why companies would have to upgrade and cope up with the stiff competition, in order to survive in the industry. In this sense, airline companies would have to comply with principles of World Trade Organization (WTO) and the General Agreement on Tariffs and Trade (GATT). The WTO was mainly established to set ground rules for international trades, while GATT oversees the barriers for the international trade, particularly in terms of tariffs (Narlikar 2005).

In connection, the formation of large alliances and networks, such as the KLM and Northwest Airlines, the ‘Star Alliance’ network, and the ‘One World’ network are pre-requite for success due to economic cooperation. Various airline companies involved in such strategy needed the support of others, in order to survive the stiff competition. They would be able to acquire assistance financially and technologically from one another. They would give each other the necessary support in every aspect of the operation in order to raise the level of competition against those that are not members of the networks or alliances. GATT and WTO are the primary movers of these alliances in the name of free trade and fair competition. 

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The social aspect is also a factor in the networks’ development since there is a significant increase in the tourism industry in most European and Asian countries. Airline companies are expecting to have a lucrative operation with this development. Specifically, tourists are traveling from Asia to western countries and vice versa because of the economic growth in many Asian countries. On the contrary, Europeans have become attracted to the Asian countries like China, Korea, Singapore, and others for tourism purposes. This greatly contributes to the airlines to make alliances, in order to share clients with one another through advertisements and promotions (Cento 2008).

In terms of technology, the developments of facilities and equipment in top airlines in the Middle East and western countries are transported or sold to airlines that have insufficient infrastructures. This can only be done through alliances and networks because it is easier to deal with member companies than non-members. For that matter, trades are easier implemented through agreement among companies.

The natural environment is another major factor in the said strategic decision to make alliances. It is a known fact that the degradation of the natural environment is an utmost concern of large businesses nowadays. Business operations would have to consider the environmental impacts, as imposed by the international organizations such as the UN. Today, profit is not the only concern of corporations, but also the environmental impacts of the business operations. In this manner, airline companies would have to consult with one another on how to reduce the negative effects of their operations to the environment. For instance, European nations are seriously complying with international agreements in protecting the environment. Countries like UK, Germany, Italy, and France are strict in their policies about environmental standards. Aside from that, consumers around the world have high level of awareness about the environment, which influences them in selecting services and products. Accordingly, alliances and networks would aid airlines to fulfill the requirements of the international standards about the environment (Hanhima¨ki 2008).

The last aspect is the legal one, which is affected by the democratic and capitalistic frameworks. The principles of democracy and capitalism have tremendous impacts on the decision to make alliances, since freedom and equality are promoted. Every company has the right to pursue their business interests in such frameworks. In relation, airlines would have to respect free market and the rights of every consumer according to the laws. The alliances could help the airline company to settle legal charges from clients due to rights’ violations. Unfortunately, the nature of free enterprise is being abused by some airlines through price fixing and other malpractices for their own advantage. Alliances would certainly protect airlines from lawsuits due to malpractices (Cento 2008).

There have been cases to prove that airlines tend to abuse the fair competition principles of the international trade that caused many expenditures and a damaged reputation. One of them was that of Cathay Pacific and three other airlines, which were accused of price-fixing. In fact, the said airline companies were plead guilty and paid almost a billion dollars as a criminal fine. The airlines involved admitted that it was already their practice to fix prices because of the lack of Asia-wide anti-trust provisions. It was already a culture among large airlines that seemed to have an alliance, when it comes to price fixing (Thomas 2011). 

Aside from the above mentioned, there were also four airlines that paid criminal fines amounting to US$504 million because of price fixing of air cargo prices, based on the records of the US Department of Justice. The four airlines included prominent corporations, particularly Air France-KLM and Hong Kong-based Cathay Pacific. The other airlines that also pleaded guilty were a subsidiary of Danish carrier SAS and Martinair Holland. Also, Air France-KLM paid the largest penalty that amounted to US$350 million (Thomas 2011). 

The culture of price fixing did not stop other prominent companies, such as British Airways and Korean Air. These two companies were pleaded guilty for price fixing of international passenger charges and air cargo rates. They were also penalized with an amount of US$300 million criminal fines. In addition, British Airways was also involved in the conspiracy of fuel charges, which was also illegal (Thomas 2011). All of these would illuminate the fact that price-fixing practices are widespread in the airline industry. It has been promulgated by the large airline corporations in order to eventually eliminate competition. It has been a system of conspiracy and cooperation among the mentioned airline industries, which seems not beneficial to the passengers and to some firms that do not engage in such practices.

The alliances have become their salvation against charges and stiff competition. Price fixing and other malpractices would certainly aid airlines to earn more profit but disregard the welfare of the clients. In this context, the alliances and networks are used for the purposes of gaining profit. 

Evaluation of the Strategic Benefits or Otherwise of Membership of These Alliances to Individual Airlines 

Alliances and networks in the airline industry have become the trend, since customers are demanding for seamless service and no airline industry can really provide it. Customers around the world are now looking for sophistication, in terms of services offered by the staffs, world-class facilities, and security features. Airlines would have to rapidly adjust to the changing tastes and preferences of the customers, particularly those who travel with business or tourism purposes. In other words, people in different countries want to travel to other parts of the globe for different reasons in a more efficient and faster means. Globalization has influenced this trend of people going around the world because of free market and democratic principles embedded in everyone’s right to travel.

Unfortunately, there is no airline capable of efficiently providing the passengers’ necessities. For an airline, however, it may be financially viable to require the support of other airlines. Passengers today tend to have more than itinerary because they need to explore more. This need of passengers forces airlines to cope up immediately but they cannot do it alone. They need alliances and networks. Thus, forming alliances and networks has become the trend to adjust to the competition and high demand for airline services.

It has to be clarified that alliances or networks are not merging. However, these groups operate on that level. The resources of airlines are merged to provide the high quality services that the passengers need. Usually, the bigger company tends to offer the other one any form of assistance, such as finances or technology. The smaller company would have to give in return some benefits to the larger company. In this sense, the intention of the bigger company is to strengthen its market share because of the additional value of the merged company. The alliances would eventually create a more competitive status in the market, as the resources and energy of the two are combined to generate positive financial results (Shaw 2012). 

This can be observed in the case of KLM and Northwest Airlines when they signed an extensive cooperation agreement in 1993. The main goal of the two airlines was to generate a unified global airline system. They needed to make an alliance, in order for them to provide high level of integration and coordination in terms of flights. The two companies had to share their codes and even combine their efforts in various marketing activities that included production of a joint frequent flyer program. The alliance has further required them to combine efforts on managing, catering, sales, maintenance, and information technology. Actually, the cooperation of the two encompassed a wide variety of services just for the attainment of the mentioned objectives. This was done since Northwest Airlines nearly went bankrupt in 1992, which was the reason for seeking the help of another airline.

So, it would be apparent that the main purpose of alliances is to earn economic benefits. The end result of seeking the assistance and resources of another airline is to eventually increase profitability. Airline companies nowadays cannot achieve such objective without conniving with another airline or group of airline companies. It is a consolidation of resources for attainment of the economic benefits or rewards, in order to survive in a dynamic and volatile global business environment (Vedder 2008). 

This was also the situation in the formation of the ‘Star Alliance’ network. Its 16 affiliated airlines have agreed to combine their resources and efforts to serve passengers in quite broad geographic areas. It was a successful alliance, since the airline companies came from different countries, particularly, Brazil, New Zealand, Australia, Singapore, and the UK. The specific airline companies were Varig Brazilian Airlines, ANA All Nippon Airways, Ansett Australia, Air New Zealand, Austrian Airlines Group, Singapore Airlines, British Midland, Mexicana, Asiana Airlines and Spanair. With such an alliance, every member would certainly gain advantage over other airline companies that are not included in the group. More importantly, the said alliance is affluent that they can carry a member that is not performing well in certain areas.

The alliance is more than a bilateral agreement, since the scope of assistance and support to every member airline is very wide. The alliance aids every member in providing high quality services to passengers from different countries with entailing amenities. This is why the ‘Star Alliance’ network is considered to be one of the biggest in the history of airline industry. It is not like the other alliances where in members are not earning well and the geographic scope is not that broad. 

Evaluation of the forms of Management That Are Used to Manage These Alliances in Relation to Achieving Their Corporate Objectives 

In critically evaluating the alliances and networks, it would be ascertained that the lack of clear management structure is a problem. This is so since airline companies would have to be clear about their boundaries in decision making in every aspect of the operation. As above mentioned, alliances are not the same as merging. The airline companies are not really merged into one corporation. These are merely networks of support that would alleviate the condition of each member. This is why it would be difficult for an airline company to dictate its own objectives to the members of the alliance, unless the members agree on the same objectives in their operations (Vedder 2008).

At hindsight, alliances and networks in the airline industry seem to be easy and unproblematic. They are usually viewed as more beneficial to the airline companies. However, if one would scrutinize the actual operation of the alliances and networks, there are certain issues that would have to be studied extensively by the stakeholders in relation to the management style. Alliances may encounter challenges because of their very broad objectives. They have to set specific and realizable objectives that can be implemented by members of the alliance. Moreover, the problem would arise when the member airline companies have incongruent objectives with the alliance or network. This would create a serious problem in the actual operation, since performance is dependent on the objectives; in this case, objectives of the airline company and the alliance.

The form of management would also be problematic if the partners are not of the same size or scale of operation. It would be hard for the alliance to manage the members if they have different scales of operation. In line with this, the alliance would also take care of the complaints of customers to one of its members. So, the problem of one is the problem of the whole alliance. This is why a member with numerous complaints from the passengers would be a burden to the group. 

How does the alliance discipline a member that does not comply with the group’s standards? This is another problem that needs serious attention from the alliance. The alliance is a group that has no concrete top management structure. It is a flat type of management model, wherein every member has equal footing with the others. It is not hierarchical, since no airline company has the power or authority to control its members. The alliance’s operations are based on the agreements in pursuit of the objectives.

This would lead to the next issue, which is the lack of exclusivity. The alliance is not owned by any airline company. It is merely a form of connection with other airline companies, but not an ownership. This is a serious issue for the alliance and the members, since any failure or problems encountered by any member would affect the whole operation and image of the alliance.

In that sense, it would be very important for the members to be familiar with their partners. Each member should have no hidden agenda or cultural barriers. They must also have the same management style for the smooth operation of the alliance. Trust and confidence of each member airline is highly necessary for success of the alliance. Consequently, the terms and conditions of the alliance should be divulged and ought to be clear for all members. This would ensure that everything is clear to all members. Terms and conditions should be written on the agreements signed by each member to avoid conflicts or clarify in case they occur (Williamson 2004).

The next problematic aspect is the equitable terms of sharing revenue gains. Of course, airline companies are businesses. They operate based on profitable services. In this context, a certain airline company joins an alliance, in order to increase its revenues. The problem with this is how the management would take care of sharing revenues among its members. As much as possible, every member has to obtain a piece of their share to avoid any conflicts with the alliance. 

To put it succinctly, it is not clear how the alliances manage its members in actual operation. In principle, it is like a merging but it is not. The only possible way to implement the objectives is through a network or flat type of organizational model, wherein policy is agreed upon by every member. There is no centralized figure that has the authority to dictate over the members. Apparently, the alliances mentioned in the case, seem to be successful, since they lasted for more 10 years. They have temporarily overcome the issues presented in this paper. At first, alliances seemed to be a good idea if only the concerns would be strategically addressed by the members.

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