Loyalty management in the airline industry

Copyright © 2002 Ben Beiske

All rights reserved

Loyalty Management in the Airline Industry

Abstract

This report will demonstrate the importance of Loyalty Management in the competitive environment of the airline industry and will show that a successful approach to Loyalty Management consists of three different, interlinked aspects. These three ‘pillars’ are Customer Service, Frequent Flyer Programs, and Complaint Management; their interdependence will be analysed in depth, with special attention given to the perceived importance of Frequent Flyer Programs.

Findings from a detailed literature review and a survey show that customers do indeed perceive these issues as vital with regards to their loyalty towards a particular airline. It was found that Customer Service can be regarded as the foundation for Loyalty Management; it can help an airline to gain competitive advantage by setting it apart from its competitors. Frequent Flyer Programs, if implemented and run properly, can provide the customer with added value. As such, they compliment Customer Service and can help to increase overall loyalty. Additionally, Complaint Management was found to be gaining importance among airlines. The number of complaints was shown to be rising gradually, stressing the growing significance of efficient Complaint Management and its strong after-effect on customer loyalty.

Ben Beiske, April 2002

Loyalty Management in the Airline Industry

Acknowledgements

I would like to express my gratitude to Mr Hong Woo for tutoring and guiding me

throughout the preparation of this report. He was never out of reach and his help was invaluable and very much appreciated.

Additional thanks to countless friends and family members for revising and proof- reading my paper, participating in long discussions, and making helpful suggestions.

Library staff at Middlesex University Business School, London, deserve a great ‘Thank You’ for continuous support and their patience with many awkward requests.

Finally, a special thanks to Miss Nirmala Sukhu for emotional support and much needed motivation. As always.

Ben Beiske

London, April 2002

Ben Beiske, April 2002

Loyalty Management in the Airline Industry

One must have some sort of occupation nowadays.

If I hadn't my debts I shouldn't have anything to think about.

OSCAR WILDE

Ben Beiske, April 2002

  Loyalty Management in the Airline  Industry

Table Of Contents

1.  INTRODUCTION  6

1.1.  AIM AND OBJECTIVES OF THE REPORT  7

1.2.  TERMINOLOGY  9

1.3.  BACKGROUND INFORMATION: LOYALTY MANAGEMENT  9

1.3.1.  DEFINITIONS  9

1.3.2.  TRADITIONAL MARKETING AND LOYALTY MANAGEMENT  10

1.3.3.  IMPORTANCE OF LOYALTY MANAGEMENT  12

1.4.  CHARACTERISTICS OF THE AIRLINE MARKET  13

1.4.1.  AIRLINE INDUSTRY ANALYSIS - STEEPLE  13

1.4.1.1.  Social  13

1.4.1.2.  Technological  14

1.4.1.3.  Economical  14

1.4.1.4.  Environmental  14

1.4.1.5.  Political  15

1.4.1.6.  Legal  15

1.4.1.7.  Ethical  15

1.4.2.  CONSOLIDATION IN PRACTICE: BRITISH AIRWAYS  16

1.4.2.1.  British Airways and KLM  16

1.4.2.2.  British Airways and American Airlines  18

1.4.3.  THE CURRENT AIRLINE SITUATION  19

2.  LITERATURE REVIEW  22

2.1.  CUSTOMER SERVICE  22

2.1.1.  BACKGROUND INFORMATION  23

2.1.1.1.  Singapore Airlines  23

2.1.2.  REVELATION OF DISSATISFACTION  24

2.1.3.  EMPLOYEES  25

2.1.4.  COMMUNICATION  25

2.1.5.  THE CUSTOMER  26

2.1.5.1.  Customer Requirements  26

2.1.6.  SERVICE QUALITY  27

2.1.6.1.  Quality and Retaining Customers  28

2.1.7.  ORIENTATION OF COMPANY  29

2.1.8.  CONCLUSION CUSTOMER SERVICE  29

2.2.  FREQUENT FLYER PROGRAMS  31

2.2.1.  BACKGROUND INFORMATION  31

2.2.1.1.  Statistics Frequent Flyer Programs  32

2.2.2.  CRITICAL SUCCESS FACTORS FFPS  34

2.2.2.1.  General Considerations  34

2.2.2.2.  Whom to Target: Share of Customer  35

2.2.2.3.  Program Structure  37

2.2.3.  HARMONISATION BETWEEN FREQUENT FLYER PROGRAMS  39

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2.2.4.  CONCLUSION FREQUENT FLYER PROGRAMS  39

2.3.  COMPLAINT MANAGEMENT  41

2.3.1.  BACKGROUND INFORMATION  41

2.3.2.  COMPUTER-AIDED COMPLAINT MANAGEMENT  42

2.3.3.  HELP FROM THE INTERNET  43

2.3.4.  STATISTICS COMPLAINT HANDLING  43

2.3.5.  COMPENSATION  45

2.3.6.  CONCLUSION COMPLAINT MANAGEMENT  46

2.4.  CHAPTER CONCLUSION  46

3.  METHODOLOGY  47

3.1.  SECONDARY RESEARCH  47

3.1.1.  LIBRARIES  47

3.1.1.1.  Local Libraries  47

3.1.1.2.  Interlibrary Loan  47

3.1.1.3.  UK Libraries Plus  48

3.1.1.4.  British Library  48

3.1.1.5.  Online Catalogues  48

3.1.2.  ELECTRONIC DATABASES  49

3.1.3.  NEWSPAPERS AND PERIODICALS  50

3.1.4.  INTERNET  50

3.1.5.  SEARCH TERMS LITERATURE REVIEW  51

3.2.  METHODOLOGY - PRIMARY RESEARCH  52

3.2.1.  DIARIES AND OBSERVATIONS  52

3.2.2.  EXPERT INTERVIEWS  53

3.3.  QUESTIONNAIRE  53

3.3.1.  PURPOSE OF QUESTIONNAIRE  53

3.3.2.  QUESTIONNAIRE DESIGN  54

3.4.  CHAPTER CONCLUSION  57

4.  FINDINGS AND INTERPRETATION  58

4.1.  DISTRIBUTION AND RESPONSE RATE  58

4.2.  DEMOGRAPHICS OF RESPONDENTS  59

4.3.  QUESTION ONE - NUMBER OF FLIGHTS IN LAST TWELVE MONTHS  60

4.4.  QUESTION TWO - FACTORS INFLUENCING PURCHASE DECISIONS  61

4.5.  QUESTION THREE - LOYALTY TO FAVOURITE A IRLINE  62

4.6.  QUESTION FOUR - MAIN REASON FOR LOYALTY TO FAVOURITE A IRLINE  63

4.7.  QUESTION FIVE - FREQUENT FLYER PROGRAM PARTICIPATION  64

4.8.  QUESTION SIX - MAIN REASON FOR PARTICIPATION IN FFP  66

4.9.  QUESTION SEVEN - COMMUNICATION WITH FFP  67

4.10.  QUESTION EIGHT - MEASURE OF USEFULNESS OF FFP  68

4.11.  QUESTION NINE - INFLUENCE OF FFP ON AIRLINE CHOICE  69

4.12.  QUESTION TEN - PERCEPTION OF CUSTOMER SERVICE  70

4.13.  QUESTION ELEVEN - PERCEPTION OF OVERALL QUALITY  71

4.14.  QUESTION TWELVE - IMPORTANCE OF FLIGHT TIMES AND ROUTINGS  72

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4.15.  QUESTION THIRTEEN - ATTITUDE TOWARDS LODGING COMPLAINTS  73

4.16.  QUESTION FOURTEEN - SATISFACTION WITH R ESOLVED COMPLAINTS  74

4.17.  QUESTION FIFTEEN - COMPLAINT RESOLUTION AND INFLUENCE ON LOYALTY  75

4.18.  QUESTION SIXTEEN - COMPLAINT R ESOLUTION AND FUTURE BEHAVIOUR  76

4.19.  CHAPTER CONCLUSION  77

5.  CONCLUSION  79

5.1.  CONCLUSION OF CHAPTER FINDINGS  79

5.2.  CONCLUSION AIM AND OBJECTIVES  81

5.3.  OVERALL CONCLUSION  83

  GLOSSARY OF TERMS  85

LIST OF REFERENCES 87

  APPENDICES  92

APPENDIX I:  COMPARISON OF AIRLINE K EY FIGURES 2001  92

APPENDIX II:  FREQUENT FLYER DEVELOPMENT TIMELINE  93

APPENDIX III:  FREQUENT FLYER PROGRAMS IN NUMBERS  103

APPENDIX IV:  COPY OF QUESTIONNAIRE  106

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Table of Figures

  FIGURE 1-1 LOYALTY MANAGEMENT VISUALISED  8

  FIGURE 1-2 RELATIONSHIP MARKETING LADDER OF CUSTOMER LOYALTY  12

  FIGURE 1-3 REVENUE PASSENGER KILOMETRES 2001 TO 2002  20

  FIGURE 2-1 PORTER S GENERIC STRATEGIES  23

  FIGURE 2-2 DEVELOPMENT OF KLM S FLYING DUTCHMEN PROGRAM 1996-2001  33

  FIGURE 2-3 SHARE OF CUSTOMER I  35

  FIGURE 2-4 SHARE OF CUSTOMER II  36

  FIGURE 2-5 NUMBER OF PAID FLIGHTS NEEDED FOR FREE TICKET  38

  FIGURE 2-6 RISE IN FLIGHT DELAYS 1995 TO 2000  44

  FIGURE 2-7 RISE IN COMPLAINTS 1995 TO 2000  45

  FIGURE 4-1 RESPONDENTS BY GENDER  59

  FIGURE 4-2 REASONS FOR TRAVEL  59

  FIGURE 4-3 NUMBER OF FLIGHTS TAKEN IN ONE YEAR  60

  FIGURE 4-4 FACTORS INFLUENCING PURCHASE DECISIONS  62

  FIGURE 4-5 OVERALL LOYALTY TO FAVOURITE AIRLINE  63

  FIGURE 4-6 MAIN REASON FOR LOYALTY TO FAVOURITE AIRLINE  64

  FIGURE 4-7 NUMBER OF FFP S TAKEN PART IN  65

  FIGURE 4-8 MAIN REASON FOR PARTICIPATING IN FFP  66

  FIGURE 4-9 FFP COMMUNICATES WITH PARTICIPANT  67

  FIGURE 4-10 FEELING OF BENEFIT FROM FREQUENT FLYER PROGRAM  68

  FIGURE 4-11 WOULD CHOOSE AN AIRLINE MAINLY BECAUSE OF FFP  69

  FIGURE 4-12 SATISFACTION WITH CUSTOMER SERVICE  70

  FIGURE 4-13 QUALITY OF FAVOURITE AIRLINE  71

  FIGURE 4-14 IMPORTANCE OF FLIGHT TIMES AND ROUTINGS  73

  FIGURE 4-15 NUMBER OF COMPLAINTS MADE TO AIRLINES  74

  FIGURE 4-16 SATISFACTION WITH RESPONSE TO COMPLAINT  75

  FIGURE 4-17 INCREASE IN LOYALTY AFTER SATISFACTORY RESPONSE TO COMPLAINT  76

  FIGURE 4-18 REASON FOR FLYING WITH UNSATISFACTORY AIRLINE  77

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Table of Tables

TABLE 2-1,  SHARE OF CUSTOMER  37

TABLE 3-1,  EXTRACT OF SEARCH TERMS USED  52

TABLE A-1,  2001 FIGURES FOR SELECTED AIRLINES WORLDWIDE  92

TABLE A-2,  TIMELINE OF FFPS  102

TABLE A-3,  VALUE FOR MONEY IN FFP  103

TABLE A-4,  SELECTED FIGURES FFPS WORLDWIDE  104

TABLE A-5,  FFP MEMBERSHIP NUMBERS OF SELECTED PROGRAMS  105

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1. Introduction

The airline industry is a unique and thoroughly fascinating industry. Growing numbers of passengers, fuelled by increased mobility, reduced barriers to travel, and the entrance of new companies into the market, have increased the glamour, impact, and reach of this industry even further in recent years. British Airways’ Chief Executive Officer called the industry the ‘flywheel for the engine of the world’s industry’ (Chan 2000). In terms of numbers, the whole industry was worth US$1,000 billion in 1998, employed over 22 million people, and transports over 1,25 billion passengers each year (Chan 2000), with passenger numbers steadily increasing.

In this light, Loyalty Management is becoming an ever more important issue for most major companies, including commercial airlines. Customers often have often a free choice where their custom will go to, making it harder and more expensive for companies to attract new customers and to retain existing ones. This is especially true for the highly competitive f ield of internationally operating airlines. Airlines around the world are studying, evaluating, implementing, or improving different loyalty strategies aimed at cultivating strong relationships with their customers.

Airline customers are very much like customers of other industries. They make an initial purchase - for whatever reason - with a particular airline. The customer tries to validate his or her choice by judging the airline through certain criteria, possibly overall Service Quality. For subsequent purchases, the customer becomes more critical and reacts stronger to service failures. If performance proves satisfactory however, he or she might eventually move to a point where they become advocates for the airline.

The aspect of advocacy is described in more detail in a later part of this chapter; the crucial point is to ensure that a customer moves from being an irregular customer to the point where he acts as an advocate for the company. This is the test for airline marketers, to manage this ‘rocky period’ (Executive Summary and Implications for Managers and Executives 1998) between initial purchase and a solid relationship between the customer

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and the company. The management of the customer’s loyalty is a challenge to any commercial airline.

1.1. Aim and Objectives of the Report

The aim of this report is to demonstrate to the airline industry that a successful approach to Loyalty Management consists of variety of different aspects in regards to the customer. The basis for a prosperous airline is seen to be Service Quality. Service Quality itself consists of three pillars. These are seen as:

• Customer Service through optimum adjustment to customer needs;

• Frequent Flyer Programs; and

• Customer Dialogue through active Complaint Management.

The report’s objectives are to analyse these three issues in depths, to show the interdependence of these issues, and to illustrate that only a combination of all three can assist an airline in its pursuit to exercise true customer satisfaction and thus increased customer loyalty. Furthermore, the usefulness of Frequent Flyer Programs will be analysed with regards to loyalty; it will be argued that such programs are seen to be of value for customers in that they can help to increase loyalty. However, it will also be investigated if a Frequent Flyer Program (FFP) alone can be a reason for a customer to choose a particular carrier, or if it needs to be complemented by outstanding Customer Service and fast and efficient Complaint Management.

Figure 1-1 on the next page visualises the concept behind Loyalty Management as it is seen in this paper. The foundation of the concept, at the bottom of the figure, is seen as Service Quality. The three pillars that Loyalty Management comprises of, namely Customer Service, Frequent Flyer Programs and Complaint Management, are built on this base.

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Figure 1-1, Loyalty Management Visualised

The upper part of the diagram shows that the overall target, Customer Loyalty, can only be reached when these three columns are of ‘equal height’, when they are working together and thus support and compliment each other.

The focus of this report will lie on the three pillars described above in relation to their respective importance to an integral Loyalty Management approach by any major airline. It will be argued that the three areas Customer Service, Frequent Flyer Program and efficient Complaint Management act as the three pillars of long-term sustainable Loyalty Management in the airline industry.

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1.2. Terminology

The term Loyalty Manage ment is often described with a variety of names in the literature. One can find Loyalty Marketing, Customer Relationship Marketing, Frequency Marketing, One -to-One Marketing, and Customer Centric Marketing. For the purpose of this report, the term Loyalty Management is preferred, but will be used synonymously with Relationship Management. Different to other terms commonly used, these two describe a more holistic approach to the strategic management of customer loyalty and connected marketing efforts.

Addit ionally, the term Loyalty Management is often described as Customer Relationship Management, or CRM. CRM is often seen as computer-assisted management of the organisations customer-relations. While new technologies do without any doubt play an important part to this effect, for the purpose of this report any reference to CRM shall be considered as being non-technological.

1.3. Background Information: Loyalty Management

1.3.1. Definitions

Loyalty Management seems to have different meanings and various definitions in the literature examined. One of the most comprehensive ones was offered by Roberts-Phelps (2001):

In its simplest form it is an attitude, a mindset, a value that you place on your business and on its relationship with its customers. It is a methodology, a way of creating and

evolving your organization in the marketplace and at the same time in the mind of each individual customer.

Robert-Phelps goes on describing that an organisation must realise that each customer is an individual and has a choice. It follows that the organisation must treat each customer as such and try to influence the customer’s decision towards the organisation.

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A more conceptual definition of Brand Loyalty itself is offered by Jacoby and Chestnut

(1978):

The biased … response, expressed over time, by some decision -making unit, with respect

to one or more alternative brands out of a set of such brands …

This report will adopt the two definitions above for the purpose of relating to and identifying Loyalty Management and Brand Loyalty.

When considering the aim of Loyalty Management, the primary focus lies on customer markets. Other markets exist, ranging from internal, referral, supplier, employee to influence markets. With regards to passenger airlines however, this report will focus purely on customer markets, and Loyalty Management will be examined only in relation to these.

1.3.2. Traditional Marketing and Loyalty Management

Gokey and Coyles (2001) argue that companies are poised to enter a new era of Loyalty Management, in which c ompanies will move beyond simple measures of customer satisfaction and defection to broader approaches based on customer attitudes. The authors believe that successful companies can influence customer loyalty by as much as 20 to 30 percent by addressing is sues such as the understanding of customer migration and defection, the customer’s attitudes, values and satisfaction, and by focusing on the customer’s changing needs.

Mellens, Dekimpe & Steenkamp (1995) state that the success of a firm depends in large parts on its ability to attract consumers towards its brand. Nevertheless, it appears critical to the long-term survival of the company to retain its current customers, and to make them loyal to the company. It follows that firms with a high degree of customer loyalty have a competitive advantage over competitors. This can be ascribed to the fact that loyal customers reduce the company’s marketing costs by reducing the need to continuously

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attract new customers. In addition, loyal customers tend to be less price-sensitive (Reic hheld & Sasser 1990).

Traditionally, marketing has often focused on acquiring new customers. Loyalty Management on the other hand focuses on twin-concerns: Acquiring new customers and keeping existing customers. Relationship Manageme nt comprises of both external relationships (with customers or other businesses) and internal relationships (with staff crucial to the external marketing efforts) (Christopher, Payne & Ballantyne 1991). Loyalty Management is changing the traditional focus on transactions towards a stronger focus on relationships. Transaction marketing is characterised by a focus on a single sale; it is oriented towards product features, is short-term in scope, and requires limited commitment by the customer. Relationship Management, on the other hand, focuses on customer retention and product benefits; it is long-term in scale and requires a higher level of customer commitment.

Conventionally, the greatest part of marketing activity has often been directed on attracting n ew customers, whereas existing customers have not received the attention needed. As a result, companies often experience what Davidow (1986) describes as the ‘leaking bucket effect’:

It has always been incredible to me how insensitive companies can be to their customers.

Most of them don’t seem to understand that their future business depends on having the

same customers come back again and again.

This describes the phenomenon when companies, having won a new customer, then turn their attention to gaining yet new customers without understanding the need to maintain the relationship with this existing customer.

Things have changed since Davidow wrote this back in 1986, and today’s customers, especially in the airline business, are in many cases strongly encouraged to stay loyal to one or two airlines. Airlines seem to have realised the benefit of retaining a customer.

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Figure 1-2 shows the Relationship Marketing Ladder of Customer Loyalty: The potential customer (the ‘prospect’) turns into a customer, and as he climbs up the loyalty ladder he advances from simple customer to client with repeating purchases, on into a strong supporter of the company, and finally into advocate, where the customer plays an important part as a referral source for the company. Lo yalty Management with its different components essentially aims to move a customer up this loyalty ladder. Christopher, Payne & Ballantyne (1991) argue that in order to achieve this, a company needs to aim beyond mere customer satisfaction towards ‘custome r delight’ by exceeding the customer’s expectations. The ultimate success factor will then be increased customer loyalty.

Figure 1 -2, Relationship Marketing Ladder of Customer Loyalty, adapted and modified from

Christopher, Payne & Ballantyne (1991)

1.3.3. Importance of Loyalty Management

The proliferation and fragmentation of the media makes it harder for companies to reach their target audience. Busy lifestyles in modern society make it even more difficult for airlines to reach their target group; people are less able to receive and interpret the ever- increasing flood of advertisement.

Firstly, it costs substantially more to attract a new customer than to retain an existing one. While it is difficult to put a monetary figure to the cost of attracting one new customer as opposed to retaining one existing customer, it seems certain that the latter is by far the cheaper option (Duffy 1998).

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Secondly, the longer a business keeps a customer, the more he/ she becomes profitable to the company. This is a direct result of the customer’s continuing custom with the

organisation for the duration of their relationship.

Thirdly, the more the customer’s value for the organisation increases, the more the

customer grows dependent on the company. This in turn means that the customer will be

less likely to take his or her custom to another company; the barriers to leave are higher.

Even lower prices with competitors’ products might not stimulate the customer enough to

switch brands.

Finally, as mentioned earlier, as a customer stays with a company over time and becomes

more loyal, he/ she often become advocates for the business. As such, he/ she recommends the company to friends or family and encourages the latter to also fly with

that particular airline.

1.4. Characteristics of the Airline Market

1.4.1. Airline Industry Analysis - STEEPLE

There are different variables that operate within the environment of an industry; one tool that can help analyse the environment of an industry is the PEST analysis. This is a

simple examination of an industry’s Political, Economical Social and Technological

environment (Lynch 2001). This analysis can be extended to a STEEPLE analysis, which

covers additional dimensions like ethical, legal, and environmental. The following

section will offer a concise analysis of the market environment of the airline industry.

1.4.1.1. Social

• Reluctance to fly following the events of September 11 2001

• Fear of continuing terrorism

• Potential loss of consumer confidence in the industry due to security issues

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• Rise in health scares of ‘economy class syndrome’

• Generally poor labour relations

• Fear of loosing jobs for employees of affected airlines

• Many loyal and frequent flyers

1.4.1.2. Technological

• New electronic methods of ticket sales - reduction in overhead costs

• Costly investments in new airplanes, for example new Airbus A380

• Advances in aircraft safety, for example hijack prevention

1.4.1.3. Economical

• Very competitive and mostly global market

• Various airlines with very similar product offers

• High fixed costs combined with the perishable product ‘flight’, low variable costs

• Low operating margins compared to other industries

• High competition both regionally and internationally

• Market share of the major carriers began to drop following de-regulation

• Increased competition from low cost airlines, forces airlines to compete on price

on many routes

• Cost increases, for example higher insurance costs after September 11 2001

• Drastic job-losses announced by many airlines

• Cost reductions through increasing Internet booking and e-ticketing

• Ongoing economic weaknesses in many key markets like USA and Europe

1.4.1.4. Environmental

• Environmental laws will become more extensive and exacting in the future

• Public concern about environment has risen

• Depletion of natural resources à engine fuel

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1.4.1.5. Political

• Governmental conditions affecting airline regulation

• Complete deregulation years, if not decades, away

• Prevents airlines from operating purely within third countries outside their home

country

• Increasing consolidation in the industry

• Stringent rules governing safety and also pricing to some degree

• Repercussions following the events of September 11 2002

• Taxes (for example for landing and take-off) set by governments, differ from

country to country

• Often dominance of hubs in the airline’s home country

1.4.1.6. Legal

• European airline de-regulation on competition, pricing and service

• Privatisation

• Employment Protection Acts are stricter in some markets (Europe) than others

(USA), can lead to disadvantage for airlines operating in or from stricter markets

• Threat of lawsuits to airlines due to service failure increasing (extreme example:

plane crash)

1.4.1.7. Ethical

• Sustainable development

• Consumers more aware of ethical issues; Southwest Airlines in USA enjoys very

good reputation because of good ethical company behaviour

The above analysis shows that the airline market is characterised by high fixed costs and

rather low variable costs, combined with low profit margins and poor labour relations.

The industry operating margin averages less than five percent, well below the margins in

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other industries. Surprisingly though, domestic airline traffic is one of the best-protected industries in many developed countries. Foreign airlines are generally not allowed to operate flights purely within a third country; Singapore Airlines for example is under current regulation not allowed to fly from London to Glasgow (Evans 1999).

The product flight itself is highly perishable: If a plane takes off with an empty seat, the revenue for that seat is lost immediately and cannot be regained, as there is no longer the opportunity to sell this place to a potential customer.

Kuttner (2000) argues that ‘big airlines don't really want markets to work. They want to dominate hubs, in order to gain market power ove r fares’. According to Kuttner, the average air-route today has just over two carriers. It also appears that on routes where competition is fierce, average fares tend to be almost half than on comparable routes where there is little or no competition.

1.4.2. Co nsolidation in Practice: British Airways

The airline industry has seen consolidation in the past, and this trend seems to continue for the foreseeable future after the current market situation with declined passenger numbers and increased fuel prices is tense. One airline that has drawn attention to itself on numerous occasions in the past is British Airways (BA). The airline has repeatedly tried to merge its business with a strong international partner, but has failed on different occasions.

1.4.2.1. British Airways and KLM

In September 2000, KLM Royal Dutch Airlines and British Airways ended four months of merger negotiations without agreement. It was reported that the £5 billion merger

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halted as a result of difficulties involving competition concerns and stric t regulations over transatlantic flights. The draft merger proposal failed to secure approval from the competition authorities and KLM feared that it would lose its Dutch identity to a much larger British carrier. It was also to lose its rights to serve third countries from the Netherlands. This was not the first time a merger had been discussed, several years previously a similar deal collapsed when KLM demanded a near equal partnership (Elmuti & Kathawala 2001).

This recent merger proposal would have created the world’s third largest carrier after United Airlines and American Airlines, and would have cemented BA’s status as Europe’s largest carrier. Revenue for the combined company would have been around $20 billion in 2001 (Lobbenberg 2001).

The merger was an attractive option for British Airways as it had seen its profits slump because of increased competition on transatlantic routes from budget airlines and high fuel prices. It would have given BA access to KLM’s strategic Amsterdam hub, which had more spare capacity than London’s Heathrow. Analysts felt the two businesses would have complimented each other well: BA would have been able to focus high value business traffic on its main base at London’s congested Heathrow Airport and directed internationa l connecting traffic through KLM’s Amsterdam Schiphol Airport (Elmuti & Kathawala 2001 ).

In any case, analysts believe that KLM may offer too little value for it to become a take- over target for British Airways plc. “British Airways has got to get its own house in order, and I would argue that that implies some really tough decisions on cost,” said Analyst Dan Solon from consultancy Armark International. “KLM is under attack in its home base from low fare carriers”, which makes the Dutch carrier less attractive than it was back in 2000 (British Airways Cuts Capacity as Profits Slide 2001).

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1.4.2.2. British Airways and American Airlines

As a response to increasingly difficult market conditions after the terrorist attacks of September 11 2001, British Airways made another merger-attempt in December 2001, this time with the US carrier American Airlines (AA). British Airways and American Airlines, the world’s largest airline, envisioned a strategic alliance, which would have seen the two carriers combine its transatlantic flights. The two companies planned to merge their routes between North America and the United Kingdom, and proposed to sell each other’s tickets, effectively setting rates and routes together (American Airlines and British Airways Alliance Called Of f 2002).

The regulatory authorities in the UK and the US were prepared to give permission to proceed for the proposed merger in the form of anti-trust immunity for both airlines for a certain price by the airlines. This price had been set by the US Department for Transportation (DOT), and required the two airlines to give up 224 weekly takeoff and landing slots at British Airways’ home airport, London Heathrow. Consequently, competitors would have been able to operate sixteen extra daily round-trips out of London Heathrow, a price both BA and AA were not willing to pay. The current situation at London Heathrow is that only two American carriers, United Airlines and American Airlines, are allowed to serve the airport.

Giving up 224 weekly slots at London Heathrow would have cost British Airways roughly £400 million in lost revenue, while the failure of the alliance is said to generate losses of only around £200 million in future profits. In addition, BA relies much heavier on transatlantic routes, whereas AA focuses stronger on its domestic market and is thus less affected by the failed merger (Airline Alliances 2002).

After the deal was turned down jointly by the two airlines (the second time after a similar proposal in 1996) on January 25 2002, the US and UK government abandoned talks aimed at an open-sky agreement between the two countries. The issue was problematic from the outset: The UK government would not agree to a ‘Transatlantic Common Aviation Market’ unless the US government approved the merger, while the US would

Ben Beiske, April 2002 Page 18 of 108