Why Airline Alliances Work

I caught a flight not too long ago from Newark to DFW. We left four hours later than scheduled on a Friday night, and by the time we took off, 11 passengers were on board. As I was watching our estimated departure time getting later and later while sitting in the gate area that night, two flight numbers kept popping up on the screen: one American Airlines number and one for British Airways. The woman sitting next to me asked if we were going to be on a BA plane on our flight back home to Dallas. “No,” I told her. I contemplated telling her about airline alliances and code share flights, but decided not to.

Airline alliances seem to work. Alliances are so effective “because there are economies of scale and scope to operating across major markets, while foreign-owned airliners have restricted rights in each market” (Gomes-Casseres, 1993, p. 6). This saves airlines money by being able to have passengers share lounges, check-in counters and gate space. They can also share flight attendants, ticketing agents and marketing costs. The benefit for travelers is a more streamlined process from check-in to baggage claim and can minimize connection time.

Creating the alliance in the first place is not a decision that is made easily. “The first task…is defining precisely why their firm might want to collaborate with another firm” (Gomes-Casseres, 1993, p. 2). In the case of the OneWorld Alliance, which includes American Airlines, British Airways, Finnair, Iberia, Japan Airlines, and Royal Jordanian, the partnerships are so attractive because of the global expanse the alliance reaches. It creates a hub-and-spoke type of network that reaches across the globe. Airlines also need to have complementary needs and assets and compatible goals.

Another decision that needs to be made is if the firms will operate on a complementary or parallel alliance model (Park, 1997). A complimentary alliance would occur if two alliance airlines run flights to the same two cities. For example, American Airlines and British Airways both have nonstop flights from Dallas/Ft. Worth to London Heathrow several times each day. A parallel alliance would occur if one carrier in the alliance ceased operation to the second city to limit competition with the other airline in the alliance. For example, if the DFW/LHR flights on British Airways ceased to operate and American Airlines added two flights to its daily schedule to Heathrow, this would be a parallel alliance.

A problem in airline alliances arises when passenger expectation is not met (Gomes-Casseres, 1993). Delta and Swissair formed a partnership to create a route across the Atlantic. Upon first glance, the partnership worked. However, Swissair passengers started getting upset when they transferred to Delta on other legs of their journey because Delta did not hold up to the quality of service Swissair did. Even though the two airlines had complementary territories, “there was some question of whether their goals were compatible” (Gomes-Casseres, 1993, p. 6). This could lead to customer dissatisfaction and in the long run, might cost the airline money.

Forging an alliance isn’t a decision that can be taken lightly or made without weighing the pros and cons. As the readings suggest, an alliance is like a marriage: even though you’re committed to each other, you still have to work at keeping each other happy.

References:

Gomes-Casseres (1993). "Managing International Alliances: A Conceptual Framework." Harvard Business School.

Park, J (1997). “The effects of airline alliances on markets and economic welfare.” Logistics and Transportation Review.