Haaga Institute Polytechnik, Helsinki

Why has alliance formation as a strategy become
so important to airline companies?

by 

Alexandra Kossowski

Table of Contents

1. Introduction

2. Global Airline Alliances
2.1. Historical background
2.2. Modern Alliances
2.3. Disadvantages with airline alliances

3. Conclusion

4. References

1. Introduction

Nowadays globalisation is affecting every sector of the modern business world. "The world is shrinking" and making business in a different country has become as normal as travelling to the next big city. Advances in technology have also contributed to this major change; computers work quicker and fulfil more tasks, travelling is easier and faster, the Internet is connecting the whole world and provides people with up-to-date information from the other side of the globe. Also, the demand in people to travel and learn about other cultures is growing as well as business tourism resulting from the newfound businesses abroad.

The airline industry has responded to this: Alliances are formed, in order to keep airlines alive, provide a bigger market or easier marketing strategies. It is also an opportunity to save costs and expand the airline companies.

The following parts are going to explain shortly the history of alliances, the advantages and disadvantages alliances can have and will finally conclude why alliance forming has become an important strategy in the airline industry.

2. Global Airline Alliances

2.1. Historical background

The increase in number of alliances happened after the deregulation activities in the USA in the late 1970s. By the middle of the 1980s only 15 carriers held 90% of the US market share, which decreased to eight carriers in 1989 (Hanlon, 1999). This led to some concern amongst governments, as acquisitions and mergers between two or more big airlines could have lead to the establishment of a monopoly. In small European countries acquisitions of small airlines by bigger ones have had to be granted in some cases, as there was no other big, domestic carrier present that could afford to acquire a new airline. In the USA this would not happen, because there are enough big leaders to compete for smaller airlines.
In Canada alliances where seen as financial problem solving, before the deregulation set foot on Canadian territory and also influenced a re-arranging of the airline industry (Hanlon, 1999).
Mainly Australia introduced the example of splitting airlines between serving domestic or international routes. Domestic airlines merged with international ones, but kept their own route network, which, under the new name, made the new merger even bigger.
Europe has had some problems with airline mergers in the past. Nearly every European country has a so-called flag carrier, of which some are state owned and receive subsidiaries from the supporting nation. Mergers would have made these flag carriers even more powerful and given no chance to smaller, maybe new airlines.

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