The Star Alliance: Case Analysis
The following is a summation and analytical assessment on the “Star Alliance (A): A Global Network” case study that was published in the fourth edition of “Transnational Management” by Bartlett, Ghoshal and Birkinshaw (C) 2005. The article provides history of the airline industry which includes the emergence of strategic alliances, budget carriers, competition and collaboration, cultural assessment and finishes off with a SWOT Analysis and perspective of the future of the Star Alliance.
The airline industry has grown and evolved by leaps and bounds since the early days of the Wright Brothers. It’s now layered with comprehensive alliances, strategic business models, revolutionary information systems and much more.
The airline industry took flight and yielded its first signs of competition in the late 1970s with deregulation. The US Airline Deregulation Act was signed into law on October 24, 1978 . This act caused the slow reduction in the powers of the Civil Aeronautics Board, which up to that point had strong control over pricing, market entry and most other airline functions. Deregulation in Europe followed similar suit which essentially ended many of the existing constraints on European carriers. As deregulation broke down, many international carriers entered into arrangements with foreign partners to expand their network routes. This type of arrangement is one of key reasons why the Star Alliance was formed which I will expand on thoroughly later in this article. The 1944 Chicago Convention spawned some governance and control across the international marketplace. Air routes, frequency and fares were all governed by this bilateral agreement. The industry’s restrictions continued as a “protectionist framework” took precedent in governing international air transport.
In the mid-1980s a few airlines began practicing a new joint effort called “code sharing”. This allowed for airlines the ability to advertise other airlines as their own. The obvious benefit here is to create a larger presence and increase the chances of generating additional sales. This practice would also become common across the current alliances we see today in the airline industry.
Another noteworthy piece if airline history was that of the U.S Open Skies agreements of 1992. This key bilateral air treaty granted KLM and Northwest full anti trust immunity. Its main purpose was to bring about the liberalization of all global air routes. This allowed KLM and Northwest the ability to act as one company with regards to most aspects of their business functions. This key piece of legislation assisted in the growth and enhancement of business worldwide.
The Gulf War of in 91-92 had a detrimental effect on the airline industry as it increased the price of fuel and created a massive downturn in travel / tourism. Just as quickly the airline industry spiked between the years of 95 and 98 just after the Gulf War. Yet again another major downturn in the aviation industry was a result of the tragic events of September 11, 2001 .
Up to this point we’ve quickly traveled through the history of the airline industry which has now taken us up to the year 2001. I will be overlapping some years in the late 90s to discuss the formation of global alliances. This next section focuses on the emergence of the budget carrier and speaks to its relevance in today’s fiercely competitive aviation industry.
Emergence of Budget Carriers
One of the major faults that big airlines were faced with was that of overcapacity. Quite simply, empty seats translate into lost profits. During the late 90s there was a rather large boom in the procurement of new aircraft. Strong demand pushed this trend to extreme limits. It reached a point where there was just too many aircrafts out there with too few passengers to fulfill maximum capacity. The tail-end of the 90s exposed this critical capacity flaw and begun to negatively affect margins and hurt bottom line profits. A most critical time came after 9/11 when consumers dramatically limited their travel habits, which in turn adversely affected the entire aviation industry.
Given this trend, a new form of airline travel formed called “budget carriers”. These scaled downed planes focused primarily on low-cost point-to-point travel. This innovative adaptation to the market brought about profits even in the most tumultuous times. These budget carriers completely restructured the standard airline business model by providing a simple, no bells and whistle service, increased fare rates, dispensing travel agents and selling directly over the internet. The 2 main factors that have led to the budget carrier’s success were: “the internet, and the changing behavior and priorities of customers”.
As a consumer I personally flocked to these new point-to-point services when they first hit the market. I recall the year after 9/11 taking my first time budget carrier flight and felt it was a sensational service. It was cheap, fast and simple. In my opinion this adaptation to the market from the airline perspective was inevitable. I also feel it is foolhardy to bestow such praise or adulation upon airline executives for such a maneuver. Airlines really didn’t have many viable alternatives to remedy those turbulent times immediately after 9/11. They knew they needed to bring costs down and in effect reduce the size and scope of nearly all their offerings. They created smaller planes, smaller crews, smaller snack servings, shorter routes, etc. It was a cost cutting scheme that needed to be done in order to have a remote chance of survival. I don’t mean to sound cynical but I’ve read too many articles that have painted airline executives as geniuses when in essence they could only do one thing.
Emergence of strategic alliances
The mid-90s spawned a new level of competitive awareness in the airline arena as a made dash into strategic alliances ensued. This paradigm shift was driven by the necessity to gain those much desired competitive advantages. Code-sharing, as mentioned earlier, expanded within these newly developed alliances. This practice allowed for an immediate virtual growth in market share and thus brought about the rise of super-alliances around the world. More than 500 alliances were formed in the late 1990s. All of which were ultimately consolidated into five multi carrier alliances that currently exist today. The 5 carriers were: The KLM.Northwest alliance, Oneworld, the Qualiflyer Alliance, SkyTeam and the Star Alliance.
The Star Alliance was formed on May 14 1997 . It launched with a total of five members under its belt. Air Canada , Lufthansa, Thai, United and SAS made up the alliance. Even though the alliance housed all the airlines under one entity or network, the airlines still retained their individual identities. As it stands today there are a total of 16 airlines in the star alliance.
It was clear that all airlines had different reasons for joining the alliance but the common thread that linked them all was the desire to expand their geographic network in the most efficient way. Star Alliance members agreed on this commonality and virtually overnight increased the scope of their services. One of the reasons that the scope of services or the ability to cover every corner of the world was so important was best summarized in the following quote by bmi airlines: “So that a customer can fly to any major city worldwide without ever flying any other airline outside of the ‘brand’. A single ticket, one major frequent flyer plan, clubrooms at every major airport, coordinated schedules and a product of consistent quality-these are the aims of the alliance network,”.
Code-share arrangements also allowed for flexibility and rationalization in terms of route decision making. By having such a close arrangement and understanding of partner schedules, airlines were able to lean on partner airlines to cover various routes that were a more logical fit both logistically and financially.
Alliances were also a great way to leverage carriers’ local strengths to build up the entire network’s market presence. The structure also presented invaluable flexibility to alliance members. Such flexibility could be seen in their opportunities to negotiate a broad range of agreements with non-alliance members. An example of one of these agreements was the ability to share mileage points across both frequent flyer programs. This of course yielded a powerful consumer benefit which widened their scope of travel destinations across multiple airlines.
The concept of alliances logically sounds like a great idea. It essentially creates many more options and opportunities from the customer perspective. From the business perspective, it allows a more seamless integration of offerings across alliance partners and increases the overall scope of services. Alliances seem to be so firmly entrenched in this industries culture that it would almost be a fruitless effort for new comers to venture out on their own. There is such an allure to the potential overhead reductions and the ability to rapidly increase service offerings. It’s hard not to see the overwhelming opportunities an alliance may yield. I personally think it’s a great structure and tool for airlines to run in a more efficient/effective manor. However, I do foresee the further collapse of the current number of alliances in the future. If I were to venture a guess, I’d say it would reduce from the current number of five down to two or three. My reasoning or logic behind this statement is really not rooted in any factual evidence. It’s more or less based on my general observations of the alliance concept from a bird’s eye perspective. I think some of the smaller alliances such as Qualiflyer or KLM will one day succumb to the other alliance’s shear scope and attempt to merge with the hopes of further increasing market share. I get the feeling that there are a few too many alliances out there. I feel as the industry further evolves and sheds its struggling airlines that it’s just a matter of time before a few of these alliances fizzle out. There’s also the possibility that the Star Alliance itself could collapse if one of their major airline members decides to venture off on their own. This might alter the entire dynamic of the alliance for the worse and perhaps cause its entire existence to be called into question.
Mission and Vision
At a high level, the Start Alliance vision or mission is to facilitate the growth of long term results well beyond the means of individual airline’s capabilities. A very interesting item in this section of the case study was the research conducted by United. The driving questioning they posed to customers was what customers would want from a global airline network. The results were relatively logical and really spoke to relevance of why an alliance structure is necessary. The first guiding principle was: “customers want global access”. The second: “They want their status to travel with them”. Lastly: “They want a seamless travel experience”.
Global access speaks to the efficiency that affiliates can be leveraged. The alliance facilitates this need by opening access to affiliate lounges, streamlining luggage transfers, etc. Travel status is another important requirement that would allow frequent flyers the ability to utilize their miles however they wish. This benefit is arguably one of the most valued from the customer perspective. The last item of seamless integration speaks to the main purpose of the alliance structure. Integration is the driving factor that allows for all of these other tangible and intangibles benefits to be realized.
I’m going to speak briefly on the governance section of the case as it does not require lengthy discussion. Essentially the Star Alliance started as a small group of 5 partners managed under one umbrella structure by a committee of participants. As the alliance grew, so did the layers of organizational complexity. A full time staff was eventually formed and each airline company became an equal shareholder in the alliance. The early years of the organization were quite painful ones as there were regular frustrations caused by the cultural requirement of unanimous buy-in for various objectives. As you could imagine the need for a unanimous buy-in created a much longer turn around time for just about any business adjustment. As time moved on, the quality of project management assisted in expediting various business routines. As the project management matured, processes were streamlined and became second natured. Processes are still being refined to this day but they have made substantial improvements since the alliances inception.
Just the mere idea of managing objectives and routines across 14 independent carriers gives me a splitting migraine. To state that project management was needed in the early stages was an understatement. I regularly see the frustrations that come from coordination across various business units when directives are handed down. I can’t imagine having to not only coordinate across these global enterprises but actually receiving unanimous buy in for all initiatives. The shear magnitude and frustration would drive even the most seasoned project manager mad. The flip side to this integration was the speed to which the adaptation ensued. This impressed me immensely as it was obvious that the overarching objective of unifying their airlines as one entity took precedence over all. In order to pull something like this off requires phenomenal leadership from the top down and a unifying vision which the Star Alliance has now clearly embraced.
Competing and Collaborating
The delicate blend of competition and collaboration was another aspect of the Star Alliance that I felt was quite impressive. From the outside looking in I would think alliance members would be scrambling for any and all routes to increase their own profits. There seemed to be some jockeying for position in the early stages of the alliance but as the integration matured each airline began to realize that they can be much more effective by leaning on affiliates for assistance.
To ensure fair play and an effective culture, all members within the alliance were prohibited from executing hostile takeovers on fellow members. This, I would imagine, was a pivotal piece of governance that really set the stage for a more collaborative environment.
It was clear from the onset that each airline had a different perspective in terms of enhancing internal processes. Each was united by the same sense of vision or benefits but just the same members still had their own thoughts on increasing value. Several examples that illustrate this are the following:
1.) The Canadian carrier felt that it would be of great value in centralizing sales units of the various Alliance members in the same cities.
2.) Singapore Airlines made London and Frankfurt its main European hubs where it could rely on alliance members to serve onward destinations around Europe .
Not all alliance members derived immediate enhancements to their operations. A key example to illustrate this point is that of Lufthansa and their lounge access services. Lufthansa found the early stages of collaboration quite frustrating when it came to the sharing of lounge access. They consider themselves as having the best lounge facilities in the industry. As they opened their lounge access to gold card members, they had hoped other members would follow suit. Apparently that has not been the case creating disappointment within the Lufthansa organization. Currently they continue to work on remedying this concern.
This just points out that not all alliance members realized immediate benefits on every business front. It simply speaks to the growing pains that many of the alliance members had to adapt to in order to realize their own alliance benefits. The benefits mentioned earlier in the article are still prevalent across the board but one thing is certain, there is clear room for improvement.
To speak further on the Lufthansa situation, this is exactly the type of head banging or issues I would expect to see from an alliance of this magnitude. Where the early stages proved to be truly painful on many levels, the upshot is that it could have only gotten better. I highly doubt it was expected to have a flawless integration from the very beginning. The pros clearly outweighed the cons as you can see in the tone of Lufthansa’s CEO, Thomas Sattelberger in some of his quotes. He was clearly frustrated with the lounge access issue but was quoted as saying “we are working on it”. This to me just speaks to the underlying power that the alliance itself has to offer. CEO’s don’t generally put up with major disappointments in partnerships, especially when it’s their end that’s being taken advantage of. Lufthansa was providing additional lounge services to alliance members and ultimately not being returned the same favor. For Mr. Sattelberger to simply state “We are working on it”, indicates to me that the alliance is just too valuable for any member to remove itself entirely when something goes wrong.
The Star Alliance was founded on the premise of a consensus driven business model. The culture presented both distinct benefits and deficiencies. The most obvious benefit being each member had a voice in establishing or altering overarching strategic visions for the alliance. The most obvious deficiency was the length of time it took to get total buy into a new idea. In theory, this seems like a great idea to get everyone’s buy-in before finalizing directives but the logistics behind this approach would make me skeptical from the start. A consensus driven model across 3 or 4 organizations might make sense in certain situations but a 14 member alliance seems as though it would a futile exercise. The alliance has greatly improved their buy-in process over the years but it was not without some pain and compromise along the way.
A great quote that caught my attention and spoke volumes about the cultural process was that of Doreen Riley, a marketing coordinator for Air Canada . “It felt like (the movie) Groundhog Day. For the launch, we wanted an ad that would be simple, easy but with strong impact. We’d get everyone’s approval one day, but it would all change the next. And then we’d start for scratch.”
This was only one of many similar quotes from alliance members. The process was a bit convoluted but necessary from a leadership perspective. Every member had their own initiatives whose feedback was vital in reaching one common resolution. Compromise and sensitivity were common themes that were vigorously developed in order to enhance the alliances member wide buy-in culture.
Coping with Crisis
It is said that the greatest challenge any organization can face is an inconceivable disaster that relates directly to ones industry. There’s no roadmap or guideline that would assist in coping or adjusting to such a disaster. There is, quite simply, only so much preparation that can be done to account for the endless number of disaster variables. One of our most catastrophic events of our time, 9/11, would test the Star Alliance business model and push its boundaries to the limit.
The alliance members regrouped shortly after 9/11 as they quickly realized those tragic events of September 11 would forever change the aviation industry. Immediately after 9/11, a taskforce was formed which was geared towards cutting costs across the entire alliance. Some initiatives included consolidation of projects, joint purchasing, and avoiding the duplication of processes at airports and call centers. The main objective was to identity immediate cost reductions and laid the foundation for long term cost savings.
A telling quote from the case that spoke to the alliances synergies during those tragic months was from Lufthansa. “A key issue with Star Alliance was, it’s a sunshine network but would it work in crisis too? The answer is YES. Star Alliance enabled us to abandon low-density routes but keep our global network healthy and intact,”
A tragedy of unprecedented devastation forced alliance members to lean heavily on one another. It allowed for most of its members to stay afloat during those difficult times which essentially impacted the entire airline industry. If ever there was a question of the alliances purpose, I think this event emphatically answered to those critics. There’s no telling how many airlines would have survived a post 9/11 era if they did not have an alliance to support consolidation efforts.
Throughout the course of the paper I have already spoken to many of the Star Alliance strengths. I have also touched on several weaknesses as well. However, I have not spoken to any Star Alliance opportunities or threats. The SWOT analysis below will simply highlight key elements in bulleted format. The most important items, from my perspective, for each section will be highlighted with an asterisk. I will only briefly expand on certain strengths and weaknesses whereas I will spend a bit more time discussing opportunities and threats.
* Large geographic network.
* Cost savings via joint purchasing, marketing, planning, etc.
* Higher number of flights offered. (increases potential # of sales)
* Relatively seamless travel experience.
* Code sharing. (Increased route rationalization.)
* Increased opportunity to reach economies of scale.
* Assist in elevating brand awareness (i.e. Thai airlines, much greater exposure)
* Increased sale synergies.
* Top marks in Merrill Lynch’s annual league table of airline industry alliances.
* Leadership is able to take control in home markets. (.i.e. bmi better understands business in the Ireland market and is able to pass along opportunities to fellow members.)
* Ability to leverage position via strong association with other carriers.
* Creates a higher quality network.
* Mileage accruals on frequent flyer programs.
* Low value frequent flyer mileage redemption with quick turnaround time.
* Expanded lounge access.
* Waitlist priority.
* Additional checked-in luggage allowances.
* Seamless travel experience is inconsistent.
* Non coordination in certain instances. (i.e. lounge access availability, baggage issues)
* IT systems (incompatibility of systems).
* Lack of innovation. Alliance is essentially a facilitator, not an innovator.
* Poor metrics in determining how effective the alliance really is.
* Inconsistent synergies in purchasing. (I.e. Canadians disappointed in failure of cost effective purchasing of cups and napkins.)
* Facilities in airports.
* Services in regions.
* Further integration of services (i.e. Facilities in airports, services in regions, IT systems, etc)
* Development of tools to measure effectiveness of alliance (metrics). i.e. Measure which passengers were brought in as a result of alliance. Also, measure the intangible benefits that the alliance exudes across the board.
* Expand on joint purchasing initiatives.
* Pursue activities that could bolster economies of scale.
* Consolidation of alliance members, where applicable, as current large number increases the complexity of operations.
* Airline industry is fragile which poses many uncertainties.
* Too many alliance members. Can lead to conflicts of interest, which in turn can lead to dwindling competitive advantage.
* Poor integration can lead to lose of consumer confidence in the alliance. (i.e. Ansett Australia went bankrupt in 2001 causes a huge disruption in baggage transportation resulting in negative publicity for the entire alliance.)
* An abrupt departure of a large alliance member that is weighed upon heavily may cause massive disruptions in the flow and effectiveness of the alliance. Such an event could bring about the quick collapse of such an alliance.
* Rise in popularity of low cost travel carriers.
I feel the most important area the Star Alliance must focus on moving forward is to further integrate their services. Their business model works as it clearly offers customers a much larger travel coverage area, frequent flyer miles, etc. It just needs to be refined a bit more. The most critical issue I see is the lack of consistent integration across the alliance. They claim to have it, in fact they probably do in small pockets, but it must be done consistently across the board to realize both tangible and intangible benefits.
The above can be achieved through a 2 prong approach. First, they should create a more robust centralized IT infrastructure that integrates all systems. This would ensure that both tacit and implicit knowledge would be disseminated to all alliance members in an efficient manor. The case contained far too many instances of a customer who felt defrauded by loosing their luggage or not having the lounge access, etc. These were just a few examples of services the alliance claimed offer and did not follow through on consistently. It’s those types of deficiencies that can make or break customer retention rates. It would behoove the Star Alliance to further streamline their operations and create that seamless travel environment they claim to have.
The second approach would be to develop the necessary tools to quantify the alliances absolute value. This of course would be done in concert with the enhancement of the IT infrastructure. By being able to quantify, with precision, the value added to each airline then there can be no question of the alliances net worth. Right now it’s clear that the alliance adds value but not in a definitive way. By having metrics in place, airlines could measures just how much they are getting out of the alliance and determine whether or not they’d be a better fit elsewhere. There’s no sense in keeping an airline on board just for the sake of having a larger network. There would be a much clearer focus of what is and is not working to benefit the alliance as a whole if all the data is on the table.
Merrill Lynch’s annual league table of airline industry alliances is a good stepping stone to meet such a goal. However, it is not enough to data. The metric development should be done internally in order to address all alliance strengths and weaknesses. This would provide a much more accurate picture of the alliances net worth across each airline. The search for efficiency and tangible results should be the driving factors behind these ambitious enhancements.