The Impact Of Airline Alliances Tourism Essay

The Impact Of Airline Alliances Tourism Essay At this moment, there are three main airline alliances around the globe. First of all, Star Alliance, which was created in 1997 and currently consisting of 27 member airlines (Star Alliance, 2012). Second, OneWorld, established in 1999 and presently having 12 members. Last, the youngest airline alliance is SkyTeam, formed in 2000 and consists now of 18 member airlines (SkyTeam, 2012). In the first chapter of this paper, the impacts of airline alliances on their members will be discussed. Second, the effects of allied airlines on non-member airlines will be argued. And finally, the influences of airline alliances on the airports they fly at will be explained. In each chapter, both positive and negative influences will be discussed. 1. Impacts on member airlines Positive impacts on member airlines Airline alliances have several positive impacts on their member airlines. In this paragraph, three examples of positive impacts will be explained. A first positive impact can be found in saving the airlines costs on various areas. For instance, when buying aircraft materials for maintenance purposes, member airlines can reduce the total costs by purchasing these resources together and may receive bulk discounts. The same counts for the bulk purchase of aircraft. For example, in 2003, four members of Star Alliance intended to bulk purchase up to 200 standardised regional aircraft (Doganis, 2006, p. 93). According to Doganis (2006), it is estimated that joint purchasing can cut the prices paid by up to seven per cent and eventually reducing the total invoice by up to a billion dollars every year (p. 93). Furthermore, the joint use of other services, for example ground handling or catering facilities, can also help in reducing airline costs (Bissessur Alamdari, 1998, p. 335). A second positive impact on member airlines can be retrieved in the increased passenger traffic. The cause of this increase is generally caused by the extension of the airlines network by using code-sharing (Bissessur Alamdari, 1998). Code sharing is beneficial for both the selling airline and the operating airline. On the one hand, it is advantageous for the selling airline as it is selling a ticket of the operating airline under its own designator code. This means that the selling airline gained access to new markets without having to operate their own aircraft there. On the other hand, the operating airline is likely to carry more passengers on board as the tickets are sold through more distribution channels than rather its own. A third positive impact can be found in the area of labour costs. Nowadays, labour costs represent quite a considerable part of an airlines operating cost. As can be seen in table 1.1, wages and associated costs of labour mostly account for 20 to 35 per cent of the airlines total operating cost Doganis (2006, p. 119). According to Doganis (2001), labour costs differ more between airlines in the same markets, unlike other costs as ground handling, fuel and airport fees. Iatrou (2004) gives two reasons how an airline alliance could help in reducing labour costs. First, the number of sales and ground personnel could be reduced by sharing offices at bases of another member airline, instead of maintaining its own offices across the globe. Second, it is argued that alliances facilitate member airlines to resort to the low-wage structure of its partners, for example cabin and cockpit crew, without saving on employee quality. Table 1 Wages and associated costs of labour as a percentage of total operating cost, 2002 North American European East Asian/Pacific SAS 34.4 Air France 33.5 Iberia 31.6 Delta 31.0 American 30.4 United 29.0 Northwest 28.1 KLM 26.4 Continental 26.1 Cathay Pacific US Airways 25.4 Air Canada 24.7 British Airways 24.3 Lufthansa* 23.4 SIA Japan Airlines Thai All Nippon Korean *Note: Lufthansa excludes maintenance staff Source: Doganis (2006, p. 119) Negative impacts on member airlines Although alliances have several positive effects on member airlines, being in an alliance could also have some negative impact on member airlines. First, it is argued that participating in an alliance could affect an airlines brand image (Kleymann Seristà ¶, 2004). This problem may be triggered by the variety of images within the alliance. The authors suggest that it could be possible that an image for an alliance is created that is unlike the image of any of the affiliated airlines. However, a concession between the images of the most dominant member airlines is considered to be more likely. Especially for smaller airlines it could be considered to be hard to adapt to the created image of the alliance (p. 120). A second negative effect could be conflicting agreements. Iatrou (2004) explains that it is likely that all alliances members use the same supplier. Before an airline accesses to an alliance, it usually has long-standing relationship with different suppliers, such as catering, Central Reservation System (CRS) and so on. The airline may find it difficult to rescind these contracts because of possible penalties as a consequence. Moreover, when an airline agrees on a new supplier, it will very likely have to invest time and money in getting familiarised with the new suppliers and their systems (p. 114). This brings us to a third possible negative effect. Increased costs for an airline could be considered as another probable negative impact on member airlines. Next to the regular subscription fee that a member airline has to pay, Iatrou (2004) mentions the so-called sunk-costs for the airline. These tangible expenses cover all adjustments that have to be made in order to meet the alliances requirements, like the aircraft interior. These investments are to be made to ensure effective alliance operations and to have consistent commitment of the member airlines to the alliance. Especially for relatively small airlines, these costs can be seen as a considerable investment, which might make them more dependent on the alliance (p. 115-116). 2. Impacts on non-member airlines 2.1. Positive impacts on non-member airlines During the last decades, several so called alliances have been formed in the airline industry. According to Stanford-Smith, Chiozza Edin (2002), a strategic alliance can be explained as any form of long-term cooperation between. 2.2. Negative impacts on non-member airlines As for the negative effects on non-member airlines, the tough competition can be considered as the main one. Bjà ¶rk (2002) explains the consequences of competition between allied airlines and non-partner airlines. The author argues that airlines that dominate a hub are likely to receive a greater number of slot allowances at their main hubs, which will probably lead to some anti-competitive concerns. Bjà ¶rk continues by giving the example of a measure initiated by the US Department of Transport (DOT) to reduce this anti-competitive situation. First of all, the US DOT has recognised that where service in the market is constrained by slot availability, a hub carrier with access to a large pool of slots has even greater availability to respond in entry in an anti-competitive way because the entrant will be unable to add capacity on its own. As a consequence, in order to stimulate competition in some markets, the US DOT has granted a restricted number of slot freedoms to new airlines that wish to compete in that particular market. Regrettably, the approach of the US DOT did not increase the competition in these markets. The reason given for this was that new players do not find it economically justified to enter into a market which is dominated by a single hub airline in order to participate (Young, 1999). Bjà ¶rk (2002) argues that this reasoning can be easily relied on the market shares of hub airlines. Figure 1 shows the airline market share at Amsterdam Schiphol Airport over 2011. It can be clearly seen that KLM Royal Dutch Airlines (KL) is by far the largest operator at Schiphol Airport with a market share of nearly 50 per cent. A hub carrier as KLM has created over the years a constant increase share of available slots at their hub airports, which according to the author are called fortress hubs (p. 29). However, congested hubs are not the only causes of anxiety on anti-competition. Figure 1 Airline market share at Amsterdam Schiphol Airport over 2011 based on air transport movements Source: compiled by the author; data source Schiphol (2011, p. 25) As airlines join together in alliances the aviation market will become more concentrated. This will increase the risk of collusion between the remaining market participants. At many of these airports governments have found it necessary to divide runway utilisation into time-defined segments known as slots and allocate them to airlines that wish to operate from the airport. 3. Impacts on airports 3.1. Positive impacts on airports The presence of airline alliances has various positive impacts on airports. As all members in an alliance have an extended destination network, because of the connectivity possibilities of their alliance partners, it can be argued that the number of transfer passengers at airports increases. Figure 2 shows that the number of transfer passengers at Amsterdam Schiphol Airport in the Netherlands has rose steadily from 18 million in 2004 up to 20.3 million in 2008 (Schiphol, 2011). It can be believed that the presence of the SkyTeam alliance, which uses Amsterdam Schiphol as a hub, has contributed to the growth of transfer passengers. As a consequence, this increasing number of transfer passengers has also a positive effect on the purchase of duty-free products in the airport shops. In order to increase the sales at airport shops, an airport can decide on opening speciality stores which may interest international transfer passengers. To come back on the example of Amsterdam Schiphol, in the past years it has opened more luxury duty-free stores as a reply to the increasing demand by especially Russian and Asian transfer passengers. This includes a Finest Spirits Cigars store and a store that focusses on the sale of various chocolate products. (Schiphol, 2011, p. 58). Figure 2 The number of transfer passengers (in millions) at Amsterdam Schiphol Airport (2004-2011) Source: compiled by the author data source: Schiphol (2012) 3.2. Negative impacts on airports In contrast with the various positive effects of airline alliances on airports, there are also some downsides. As airline alliances bring an increased number of additional traffic, congestion at an airport can be considered as a negative effect, particularly at peak times. Especially when there is an ineffective use of the airport infrastructure, it can be hard to harmonise the flights in a short timeframe (Dennis, 2001). At many of this type of airport it has been considered unavoidable to split the use of the runway into time-defined segments commonly known as slots (Bjà ¶rk, 2002, p. 28). According to IATA (2011), slots can be defined as a permission given by a coordinator for a planned operation to use the full range of airport infrastructure necessary to arrive or depart at an [à ¢Ã¢â€š ¬Ã‚ ¦] airport on a specific date and time (p. 11). Besides, most flights at hubs are scheduled in so called waves. In each wave, a large number of arriving flights in a short timeframe is followed by more or less the same number of departures, after allowing some time for reallocation of passengers and luggage. For example, figure 3 shows the wave system of Germanys flag carrier Lufthansa at Munich Airport, which consists of four waves during a regular weekday. Figure 3 Wave-system analysis, Lufthansa, Munich Source: Burghouwt (2007), p. 69 As airports do not have an unrestricted peak capacity, especially during such a wave, airlines are ought to adapt their schedules. Dennis (2001) discusses two main options for rescheduling. First, flights can be added to the borders of the present waves. Second, new waves can be developed to accommodate these additional flights. With regard to the number of connections, the first option is more likely to be chosen. However, while extending the current wave, the connection time will also increase. Figure 4 implies that a wave with approximately 50 aircraft is likely to be the best option. Passing this number could involve extra waiting time for passengers, which could result in an increased peak load on the terminal building (p. 2). A second negative impact on airports is the investment that airports have to make for alliances in order to accommodate seamless transfer connectivity. In order to reduce the Minimum Connecting Time (MCT) for passengers, airports have done some adjustments to their infrastructure. An example is Brussels Airport in Belgium, which upgraded their customs and immigration facilities to create a better flow of passengers transferring from a Schengen origin to a Non-Schengen destination. Some airports are not designed to accommodate traffic from airline alliances. For example, when an airport has multiple terminals that are not located near each other. This might take a passenger a long time to transfer when alliance partners are spread over multiple terminals, affecting the MCT as well (Dennis, 2001). Figure 4 Increase in connections with wave size (based on 60 arrivals/departures per hour and 30 minute minimum connecting time) Source: Dennis (2001, p. 2). Conclusion During the last decades, several so called alliances have been formed in the airline industry. According to Stanford-Smith, Chiozza Edin (2002), a strategic alliance can be explained as any form of long-term cooperation between