This chapter contains the information about key words of the title. It defines words like alliance, marketing, opportunity share, connectivity, convince and other. Therefore it is explaining the company, Star Alliance, so that in further chapters the readers would have a clue what is the main point of this thesis.
1.1 Strategic Alliances
It is hard to integrate different airlines from completely different countries because of other cultures and own ways of managing marketing aspects. Countries often use opposite marketing tools between specific airlines. An alliance is also related to the creation of the brand and it is a very important task that can later be very beneficial for all members. The creation of a quality, good image and trust can affect advertising decisions. Thanks to an integrated marketing system for the alliance it can bring together airlines from all over the world.
Companies often enter the alliances to make better revenues, to reduce unit costs and to make a minimum of risk or even share it with other firms. This way they also are trying to make their companies better off on foreign market and expand in safer way so that they would not meet the upcoming problems of entering new market alone. As well they get tips from other members and have the strategic plan for expanding already prepared for them. The connectivity and convenience, opportunity share, cost reduction and improved services of those alliances are the most important goals for the companies to join such group. This kind of cooperation could be defined as tactical or strategic alliance.
Tactical alliance- it is more often consisted of bilateral agreements among companies, which by getting together efforts is able to get into other company’s network. This cooperation is based on marketing level of both firms through code sharing, interline agreements and joint ventures.
Code sharing is… Code sharing is a marketing arrangement in which an airline places its designator code on a flight operated by another airline, and sells tickets for that flight. Airlines throughout the world continue to form code-share arrangements to strengthen or expand their market presence and competitive ability. U.S. and foreign air carriers that want to operate code-shared services, must first obtain authorization from the Department in the form of a Statement of Authorization under Part 212 of the Department’s economic regulations, 14 CFR Part 212. The Department approves the application if it determines that it is in the public interest.
Interline is … s a voluntary commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple airlines Interlining agreements differ from codesharing agreements in that codesharing agreements usually refers to numbering a flight with the airline’s code (abbreviation) even though the flight is operated by another airline. However, codeshare relationships can affect whether an interline ticket (or e-ticket) can be issued. Both the codeshare marketing carrier and codeshare operating carrier must have interline agreements with all other carriers in the itinerary to allow a single ticket to be issued.
Joint ventures are… A joint venture is a legal organization that takes the form of a short term partnership in which the persons jointly undertake a transaction for mutual profit. Generally each person contributes assets and share risks. Like a partnership, joint ventures can involve any type of business transaction and the “persons” involved can be individuals, groups of individuals, companies, or corporations.
Joint ventures are also widely used by companies to gain entrance into foreign markets. Foreign companies form joint ventures with domestic companies already present in markets the foreign companies would like to enter. The foreign companies generally bring new technologies and business practices into the joint venture, while the domestic companies already have the relationships and requisite governmental documents within the country along with being entrenched in the domestic industry.
Strategic alliances- are agreements bilateral or multilateral in which the member companies share similar business objectives and they have common services to obtain the same goals.
Global airline alliances (GALs) on the market are competing. We can differentiate three different GALs which are: Star Alliance, oneworld and SkyTeam they all were launched between 1997 and 2001. is an agreement between two or more airlines to cooperate on a substantial level. The three largest passenger airline alliances are Star Alliance, SkyTeam, and Oneworld. Alliances also form between cargo airlines, such as that of WOW Alliance, SkyTeam Cargo, and ANA/UPS Alliance. Alliances provide a network of connectivity and convenience for international passengers and international packages. Alliances also provide convenient marketing branding to facilitate travelers making inter-airline codeshareconnections within countries. This branding goes as far as to even include unified aircraft liveries among member airlines
Figure 1.1 The expected development of partnership
Figure 1.2 Different levels of cooperation within Global Airline Alliance
1.2 Star Alliance
Star Alliance was created in 1997, at first it was a group consisting five world-class airlines which were as follows: Scandinavian Airlines, Thai Airways International, Air Canada, Lufthansa, and United Airlines. As the airline alliance claim themselves they were established to united and ‘[…] create something never seen before – an alliance that brings together networks, lounge access, check-in services, ticketing and dozens of other services to improve the travel experience for customers, wherever they are in the world.’
The mission of Star Alliance is to ‘Executing leadership in managing a portfolio of alliance products and services using an agreed process.’
Star Alliance is the biggest airline alliance and their member airlines fly to more destinations than other airline alliance in the world. Thanks to that it is easier to travel with them and to obtain quicker connections. The goal of the customer was to have smoother trip while traveling by plains. On the airports we can acknowledge that Star Alliance members are located in one section of the departure section on the airports it is to have faster transfers. Not only this is joint there is also coordination of schedules and airport facilities in one place so that no matter of what member airlines you travel there is one place specially reserved for you.
The brand itself is The Star Alliance brand ‘ including the familiar star-shaped logo ‘ represents the promise that wherever you are in the world, the Star Alliance network is there to guarantee a smooth travel experience.
‘ There are 26 full members of Star Alliance. Air India is now a pending member.
‘ The team
Star Alliance Services was created to manage the Star Alliance network on behalf of its members. It was the first alliance in the world to create this type of organization. The team is based in Frankfurt, Germany and is made up of around 70 employees from over 20 different countries.
Customer service… Star Alliance has two premium levels, Silver and Gold, based on a customer’s tier status in a member carrier’s frequent flyer program. Each of the member and regional airlines recognizes Star Silver/Gold status, with a few exceptions (mainly pertaining to airport lounge access). The statuses have no specific requirements of their own; membership is based solely on the frequent flyer programs of individual member airlines. Many member airlines also have an additional premium status beyond Gold which is not recognized across Star Alliance. Star Alliance Silver status is awarded to customers who have reached a premium level of a member carrier’s frequent flyer program. Star Alliance Gold status is awarded to customers who have reached a high level of a member airline’s frequent flyer program.
Some marketing goals of the alliance… The Star Alliance network is committed to reducing negative environmental impact.
‘ Star Alliance member airlines are environmentally aware and active with each carrier pursuing its own nationally based environmental program. Example:
‘ United’s environmental commitments include alternative fuels, recycling and carbon offsetting
‘ SWISS, Switzerland’s national carrier, has set itself four pillars to help reduce CO2 emissions.
‘ Singapore Airlines embraces new green technology on the ground and in the air.
1.3 The Airline Industry
The airline industry exists in an intensely competitive market. In recent years, there has been an industry-wide shakedown, which will have far-reaching effects on the industry’s trend towards expanding domestic and international services. In the past, the airline industry was at least partly government owned. This is still true in many countries, but in the U.S. all major airlines have come to be privately held.
Airport capacity, route structures, technology and costs to lease or buy the physical aircraft are significant in the airline industry. Other large issues are:
‘ Weather – Weather is variable and unpredictable. Extreme heat, cold, fog and snow can shut down airports and cancel flights, which costs an airline money.
‘ Fuel Cost – According to the Air Transportation Association (ATA), fuel is an airline’s second largest expense. Fuel makes up a significant portion of an airline’s total costs, although efficiency among different carriers can vary widely. Short haul airlines typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel.
‘ Labor – According to the ATA, labor is the an airline’s No.1 cost; airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others.
Available Seat Mile = (total # of seats available for transporting passengers) X (# of miles flown during period)
Revenue Passenger Mile = (# of revenue-paying passengers) X (# of mile flown during the period)
Revenue Per Available Seat Mile = (Revenue)
(# of seats available)
Air Traffic Liability (ATL): An estimate of the amount of money already received for passenger ticket sales and cargo transportation that is yet to be provided. It is important to find out this figure so you can remove it from quoted revenue figures (unless they specifically state that ATL was excluded).
Load Factor: This indicator, compiled monthly by the Air Transport Association (ATA), measures the percentage of available seating capacity that is filled with passengers. Analysts state that once the airline load factor exceeds its break-even point, then more and more revenue will trickle down to the bottom line. Keep in mind that during holidays and summer vacations load factor can be significantly higher, therefore, it is important to compare the figures against the same period from the previous year.
Airlines also earn revenue from transporting cargo, selling frequent flier miles to other companies and up-selling in flight services. But the largest proportion of revenue is derived from regular and business passengers. For this reason, it is important that you take consumer and business confidence into account on top of the regular factors that one should consider like earnings growth and debt load. (For more about the consumer confidence survey, see Economic Indicators: Consumer Confidence Index.)
Business travelers are important to airlines because they are more likely to travel several times throughout the year and they tend to purchase the upgraded services that have higher margins for the airline. On the other hand, leisure travelers are less likely to purchase these premium services and are typically very price sensitive. In times of economic uncertainty or sharp decline in consumer confidence, you can expect the number of leisure travelers to decline.
It is also important to look at the geographic areas that an airline targets. Obviously, moremarket share is better for a particular market, but it is also important to stay diversified. Try to find out the destination to which the majority of an airline’s flights are traveling. For example, an airline that sends a high number of flights to the Caribbean might see a dramatic drop in profits if the outlook for leisure travelers looks poor.
A final key area to keep a close eye on is costs. The airline industry is extremely sensitive to costs such as fuel, labor and borrowing costs. If you notice a trend of rising fuel costs, you should factor that into your analysis of a company. Fuel prices tend to fluctuate on a monthly basis, so paying close attention to these costs is crucial.
Porter’s 5 Forces Analysis
1. Threat of New Entrants. At first glance, you might think that the airline industry is pretty tough to break into, but don’t be fooled. You’ll need to look at whether there are substantial costs to access bank loans and credit. If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. Brand name recognition and frequent fliers point also play a role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher.
2. Power of Suppliers. The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isn’t a lot of cutthroat competition among suppliers. Also, the likelihood of a supplier integrating vertically isn’t very likely. In other words, you probably won’t see suppliers starting to offer flight service on top of building airlines.
3. Power of Buyers. The bargaining power of buyers in the airline industry is quite low. Obviously, there are high costs involved with switching airplanes, but also take a look at the ability to compete on service. Is the seat in one airline more comfortable than another? Probably not unless you are analyzing a luxury liner like the Concord Jet.
4. Availability of Substitutes. What is the likelihood that someone will drive or take a train to his or her destination? For regional airlines, the threat might be a little higher than international carriers. When determining this you should consider time, money, personal preference and convenience in the air travel industry.
5. Competitive Rivalry. Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy.
1.4 Motivation and Goals of this Thesis
There are many people traveling by airplanes. They are using many different discounts, some of them are collecting flight miles to get cheaper airplane ticket. They also have their favorite carrier which they preferably chose while traveling. Although many of them don’t know that their favorite airline is a member of specific alliance. That airlines’ membership entail the discounts that the customer gets. The purpose of this study is to determine how well the alliance is working and if it affects the customers.
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