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Monday, September 3, 2012

European Airline Industry

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INDEX


1. Introduction


. Macro Environment


a. Economy at Large


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b. Legislation and Regulation


c. External Shocks


d. Technology


. Immediate Competitive Environment (Five Forces Model)


a. Rivalry Among Competitors


b. Substitutes


c. Barriers to Potential New Entrants


d. Buyers


e. Suppliers


4. Strategy Recommendations


a. Low-Cost / Low-Price Strategy


b. Alliance Expansion Strategy


c. Balance ScoreCard Strategy - “If you can’t measure it, you can’t manage it”


d. Selected Strategy


5. Implementation


6. References


Appendix


Executive Summary


This case study attempts to understand the developments and strategic alliances that have occurred in the airline industry by using a series of tools for analysis commonly used in business. It identifies the alliance with the least favorable position in the industry in Europe and suggests a strategy and its implementation that would enable it to perform better.


1.0 Introduction


The traditional airline industry has experienced a transformation process in recent times due to the intense levels of competition and the global economic slowdown. To get around these problems, the traditional players have formed global alliances; by creating such alliances, the airlines attempt to offer additional destinations to their clients without costly investments and to decrease the unit cost per passenger.


The main European carriers have grouped into three different main alliances Sky Team (led by Air France), One World (led by British Airways) and Star Alliance (led by Lufthansa).


The airline industry deregulation in Europe has enable the entrance of new players, the so-called low-cost carriers, into the market. The tremendous success of these newcomers, such as EasyJet, Ryan Air, German Wings, etc, has put a lot of pressure on the traditional players.


External unpredicted events like September 11th and the SARS outbreak have also challenged the airline industry. The response of the alliances to all these challenges will be critical to determining their future competitive position within the airline industry.


.0 Macro Environment


.a Economy at Large


The airline industry all around the globe is heavily dependent on the overall economic situation that the world is experiencing. The more money people have to spend, the more likely they are going to spend it in leisure and travel.


.b Legislation and Regulation


Over the last decade, European aviation has moved from a highly regulated market, with little or no competition at all, to an open sky policy. At present, any airline with an Air Operations Certificate in the European Union may operate any route within the Union, including flights within other countries. But in practice, these airlines are often aligned to a single hub for operations (profit sanctuary).


.c External Shocks


The air travel industry in Europe is a very sensitive industry due to the dependency on people’s perception regarding safety. External shocks in the last few years have severely affected air travel industry around the world; September 11th and paranoia following up this event considerably lowered the demand for airline services, the SARS outbreak in Asia also represented a slump in sales for many airlines around the world (40 to 50% drop in Asian to & fro traffic ).


Direct effects of these events were also felt in the European air travel industry, i.e. it resulted in reduced revenues (appendix A-1).


.d Technology


The Internet era has revolutionized the way that airline tickets are booked. Now, buyers have first hand information about ticket prices, schedules, connections, updates, etc. at just click of the mouse sitting anywhere in the world. The airlines are using new technologies to reach new customers and to lower their overall operating costs. Internet provides an option for the airlines to sell their tickets online in addition to conventional distribution channels such as travel agencies.


.0 Immediate Competitive Environment (Five Forces Model)


.a Rivalry among competitors


Currently the most important European traditional airlines are grouped in three different alliances (see table A- in the annex). The Star Alliance was established in 17. It is the largest of the alliances with a global market share of . % (see chart A-4). It has access to 700 airports in 18 countries . The One World Alliance was launched in 18. It has a global market share of 17.8 %. With 16 different country destinations, it serves more countries than any other alliance. The Sky Team is the youngest alliance of the big three, formed in 1. It has a global market share of 11. %. The alliance flies to 51 airports in 114 countries worldwide. This year, Air France and KLM (ex-member of the Wings alliance) unveiled a merger deal that will create Europes largest carrier. The Italian airline Alitalia has expressed interest in joining this new company. The following table shows some relevant facts about each alliance


Alliance No. of Partners Countries Served Revenues(approx) Fleet PassengersServed


Star Alliance 16 18 $ 67.5 Bill. ,058 Mio.


One World 16 $ 51.0 Bill. 1,6 0 Mio.


Sky Team 7 114 $ 56.0 Bill. 1,44 48 Mio.


In order to achieve economies of scope, European carriers came up with three pronged approach 1) to have dominant market position in the domestic market. ) to gain foothold other European markets. ) to establish a global presence.


European airlines entered these strategic alliances though code sharing agreements, way of equity purchases, wet leases and franchising agreements, but now they are in phase two or three of the alliance formation (see appendix A-5 for further reference).


Alliances offer the following advantages to its members


1) Reach of seamless service networks Increase of numbers of routes and destinations. By means of alliances, airlines manage to overcome legal barriers for entering foreign markets.


) Enhance traffic fleet With linkage of airline networks the airlines can increase their load factor with the improved feed. Also, flight frequency can be increased without augmenting the size of the fleet.


) Cost reduction Partners of the alliances can have benefits of attaining the economies of scale (through joint operations of air and ground services) and scope.


4) Service quality improvement Ease of online connections, frequency and schedule convenience are enhanced by alliances. They also increase itinerary choices and reduce waiting time for passengers.


5) Marketing advantages Members of the alliances benefit from common marketing campaigns and frequent flyer programs.





Traditionally the European airline market has been controlled by the national airlines; however, the supremacy exerted by the main players has been challenged over the last decade by the emergence of low cost competitors in the market. The business strategy of the low cost group is centered on offering low-price tickets compared to traditional players. The great success of these new players is partially based on the efficient usage of the information technology, i.e. internet for selling tickets, resulting in reduced advertising and distribution cost. While the traditional players try to distinguish themselves from their competitors by offering differentiated service, the low cost carriers offer no frill service on board, e.g. no free food and drinks. Further cost reduction is achieved by operating a fleet of similar aircrafts, with catering space being used for more passenger seats and establishing a long-term relationship with suppliers, which positions them to bargain better. Since most of these new players use secondary airports and no-catering services, it enables them to reduce the turnaround time. According to Aviation Economics, a London consultancy, low-cost carries get 11 hours flying per day out of each aircraft, compared with about only hours for a traditional carrier . All the above factors result in considerable operating cost reduction. Despite the fact that the newcomers account only for approximately 5 % of the European market share, they are expected to gain up to 5 % of the market by 010 at expenses of the traditional and charter airlines (see chart A- in the annex). At the moment these newcomers do not offer overseas transportation services.


Another competing group of airlines consists of the charter operators. These airlines have lost market share in recent times to the new entrants and are supposed to loose even more (see appendix A-). Their strategy is to offer all-inclusive package to the clients, i.e. transport and


accommodation, and hence they depend on the development of the leisure travel industry. In Germany, tour operators are moving into the low-cost sector, e.g. TUI, Europe’s biggest holyday company, opened its low-cost carrier named Hapag-Lloyd Express.


.b Substitutes


Passenger transport by road in the 15 European Union countries increased by 7 % only in 000. Between 170 and 000 the railway’s share for passengers shrank from 10.% to 6.%. However, the European Commission plans to support environmental friendly transport systems such as railways and waterways . Therefore, the airlines will face some competition from state-run railway networks in the future, especially on the lucrative, heavily used long-distance routes (roughly 400 to 700 km). Hence, the threat coming form this sector is considered as medium.


.c Barriers


This industry’s main barrier is large capital needed to acquire airplanes. But this barrier can be easily overcome by leasing new aircrafts or purchasing second hand airplanes. Outsourcing of maintenance and facility services can help the airlines to compete at lower costs and consequently let new entrants lower these barriers. Another barrier was represented by airplane manufacturers, but right now they are willing to sell their products, spare parts and maintenance knowledge to any customer for a price. One of the most difficult obstructions for a new comer is characterized by charges the airports apply for the hub services.


The Open Sky policy in the European Union has substantially reduced the barriers for the airlines, unveiling an opportunity for new savvy entrants. Distribution centers such as travel agencies and airport counters were also a barrier to be considered, because they were traditionally





seen as distribution centers. But now, with the internet, airlines can move around these barriers by offering these services themselves.


Therefore, entry barriers in the air travel industry are not difficult to overcome.


.d Buyers


Buyers are differentiated in the airline industry as first class buyers, business class buyers, tourist / travelers class and economy class buyers (appendix A-7). Each buyer segment presents different needs and purchasing power. Buyers in the Internet era have better and more accurate information than ever before. Even though demand elasticity for the airline industry is growing as people have more choices of airlines delivering comparable services, many airlines still fix prices corresponding with the demand and the time of the year, and the customers still have to cope up with the prices the airlines arrange. Frequent flyers and corporate buyers enjoy special benefits from these airlines. Even though intense competition between airlines has brought prices down to attract customers, they do not have much of a bargaining power.


.e Suppliers


Major Airline Industry Suppliers


· Airplane Manufacturing and Leasing (mainly Airbus and Boeing)


· Fuel Suppliers (e.g. Royal Dutch Shell, Exxon Mobile, Chevron Texaco, etc)


· Caterers/Maintenance Crew (e.g. Lsg Sky Chefs, Gate Gourmet, Servair, Allied Pilot Association (APA), Association of Flight Attendants (AFA), etc)


· Airports and Airline Ticketing Software Providers (Amadeus, Galileo, etc.)





Bargaining Power of Suppliers Factors relating to bargaining power of the Suppliers


· Concentration of Suppliers in the industry. Suppliers are concentrated within the Airline Industry. Supplier concentration makes it very difficult for competitors to exercise leverage over the supplier and obtain lower price or play one supplier against other. Thus, suppliers command a substantial bargaining power in the airline industry.


· The threat of forward integration. The threat of forward integration is low. It is unlikely that Boeing, for instance, would staff flight attendants, commercial pilots and a maintenance crew and operate flights all over the continent.


The appendix A-6 represents the Five Forces Model by M. Porter.


The appendix A-1 shows a strategic group map displaying the different competitive positions that rival firms occupy in the industry.


A SWOT Analysis (see appendix A-) was performed to identify the Star Alliance’s Strengths and Weaknesses, and of examining the Opportunities and Threats they face. This SWOT analysis is limited to the European airline market.


None of the alliances has mentioned a clear vision and mission statement. For the strategy recommendation we formulate a vision and mission statement for the selected alliance.


4.0 Strategy Recommendations


As the situation analysis above suggests, the least favored alliance in Europe in terms of cost per passenger and geographical coverage is the Star Alliance (appendix A-10). The following strategic recommendations are focused on increasing the performance and presence of the Star Alliance in Europe. The strategy recommendation is based on the following mission and vision statement


Vision


To become the world market leader in terms of service, quality, cost and market share by 010.


Mission


Service is our vocation. We endeavor to offer our employees job security, good working conditions, career opportunities and convincing corporate ethics. Our staff honor that endeavor with customer friendly service and thereby underpin future growth. We are committed to creating sustainable value for our investors. We are fully committed to keeping a balance between sustainable development and care for the environment.


4.a Low Cost- Low Price Strategy


The Star Alliance players in Europe are facing extensive rivalry by the low cost carriers and at the moment are struggling in many of their routes to break even. The buyer focus has undergone a drastic change from being service sensitive to price sensitive.


The Star Alliance members have the financial resources, reputation and experience that would enable them to integrate one of the low cost carriers into the alliance. The members have to convince a company already in the market, with experience and an intricate network of destinations over Europe to join the alliance.


Integrating a low cost carriers in the market to the alliance would involve an overhaul in the service of the new member, as the customer experience has to be completely inclusive, and therefore increase slightly the costs. Primary key points for this would be unique baggage check in and coordination in the connections of the partners within the alliance.


These would also enable the partners of the alliance to increase their load factors, for the low cost carrier would bring the ability to access another customer segment and open new routes; while the full service carriers might as well increase the load of passengers in their aircrafts, increase the geographical reach of the alliance to small hubs that would otherwise be inaccessible due to high costs of the airlines and cut costs by divesting certain non profitable or low profit routes that can be operated by the low cost partner, and compete with other European full service carriers over some destinations (France, Ireland, England, Italy, etc.) and not competing with the members of the alliance on some special routes.


4.b Alliance Expansion Strategy


The entrance of 10 new members into the European Union from 1st. May 004 will increase the existing population of the common market by almost 80 million inhabitants (appendix A-8). The membership of these new comers in the Union will enable them to perform better economically, and as there is a strong relationship between well economical being and the demand for air travel, the European airline industry will also benefit from the enlargement.


The Star Alliance has the chance to take advantage of the new opportunities due to the Open Sky treaty allowing point to point connections within any country in the European Union. Star Alliance already went in this direction by accepting the Polish Airlines LOT as a member of the


Alliance. LOT covers more than 0 cities in Europe, 16 of them in Eastern Europe. Warsaw can be used as an important hub for the north-eastern European area.


4.c Balance ScoreCard Strategy - “If you can’t measure it, you can’t manage it”


1.- Financial Perspective. Star Alliance can start its Scorecard by defining its high level financial objective to increase return on capital employed (ROCE) from its current level within next five years. This could be difficult to achieve in mature, slow growth airline industry but not impossible. Star Alliance can start with using two financial themes productivity & growth.


Productivity theme consists of two components cost reduction and asset intensity. Cost reduction can be measured by operating cash expenses versus industry, with the goal of being the cost leader within the alliances. Asset productivity would enable the alliance to handle greater volumes from its growth strategy without expanding its asset base.


Growth theme also can consist of two components Volume growth in terms of passengers/ load factor and growth of niche business passengers. So it has two measures for these growth components volume growth rate versus industry growth rate and percentage of volume in premium sales.


.- Customer Perspective. Identify different customer segments. Measuring total market share would represent an undifferentiated strategy, perhaps no strategy at all, attempting to be all things to all customers. Star Alliance must define the value proposition it must deliver to attract, retain and deepen its relationship with customers in the three target segments. Market research is critical. The alliance must give its customer a great buying experience. The attributes should add on to become “fast and friendly service”. Also special focus should be paid on environment and


safety. It would contribute to the customer’s perception of Star Alliance being a good citizen in the community.


.- Internal Business Process Perspective. The important internal processes identified are


Develop new products & services Airline members can develop new products and services to enhance the buying experience of consumers. Share Process Optimization Since many of the airline suppliers are placed within the industry and specifically within the alliance, members can gain a lot by reducing cost by sharing their suppliers. As a whole the alliance would have more bargaining power to exercise to external suppliers.


4.- Learning and Growth Perspective. The strategic objectives for the learning and growth perspective are


a) Core competencies & skills Encourage and facilitate the employees of member airlines to gain a broader understanding of the services. Build the level of skills and competencies necessary to execute the vision/goal. Develop the leadership skills required to articulate the goal/vision and promote integrated thinking.


b) Access to strategic information Develop strategic information required to execute the strategy.


c) Organizational involvement Enable the achievement of the vision by promoting an understanding of the organizational strategy and by creating a climate in which member airline employees are motivated and empowered to strive toward the vision.


4.d Selected Strategy


The implementation of the strategy is based on the Balance ScoreCard Strategy which is an all-inclusive strategy, i.e. it increases shareholder value, customer value and takes the employees of the alliance into accountability for the implementation. The low cost-low price strategy was


rejected because, if implemented, it would result in restructuring of the business model of the alliance, this resulting in a conflict of core competences needed in each business model increasing the probability of failure. The expansion strategy is already being persuaded by the alliance by the inclusion of LOT; however, another feasible strategic move could be to include a second East European airline as a Star Alliance member. Malev Hungarian Airlines could be a good candidate for further expansion. It is not a member of any alliance yet, and it has a good potential in Central and South East Europe.


5.0 Implementation


Balance Scorecard is a proven strategy formulation model for Strategic Alliance of Phase and Phase types (see appendix A-5 for further reference). As mentioned before, the Balance Scorecard measures strategy with four perspectives in the given order.


The objectives while implementing the Balance Scorecard strategy are to ‘Align the Alliance to strategy’ (change the organizational structure if needed), to ‘Align the Strategy to Operational Terms’ (value chain and external linkages), and to ‘Make Strategy Everyone’s Everyday Job’ (link every employee by means of communication, delegation, cooperation and planning).


a) Financial Perspective


Star Alliance‘s ScoreCard might start with an important financial objective to increase return on capital employed (ROCE). This could be difficult to achieve in mature, slow growth airline industry but not impossible. Star Alliance should look at two key financial themes productivity & growth.


Productivity theme consists of cost reduction and asset intensity. To become an industry cost leader in terms of operating cash expenses per passenger, alliance should set a long-term target


for minimization of expenditure; this target should be broken into quarterly or yearly milestones for controlling the whole process. Asset productivity could be achieved by intensive utilization of huge fixed assets which alliance has. Training the human resource on Time Management and Service Management will enhance productivity. Both can go hand in hand if they apply “KISS” principle in delivering service i.e. Keep it short and simple. Some of the member carriers have fleet which exceeds the capacity, so at times many of these carriers fly at half or even less load. Proper utilization of these carriers can be achieved by doing away with overcapacity and flying to only profitable routes. Member airlines should giveaway the non-profitable routes, as they are not adding any value to the shareholders. This would also decrease the operational expenses and thus increase the return on capital employed.


Growth consists, as well of two components Volume growth in terms of passengers/ load factor and growth of niche business passengers. The financial perspective could be achieved by having defined customer perspective and internal business perspective having a differentiated strategy that focuses on resource efficiency maximization.


b) Customer Perspective


Identify different customer segments (see appendix A-7). The alliance ought to define the value proposition it must deliver to attract, retain and deepen its relationship with customers in the three target segments i.e. First Class, Executive Class, Tourists/Travelers Class. The customer of the Star Alliance should be delighted by the service received and maximize his/her bliss in every defining moment in the service delivery.


Factors identified that contribute to the service perception of the customer include the following


· Immediate and easy access to tickets.


· Good point-to-point connectivity (number of routes).


· Reduced waiting time.


· Satisfactory onboard service


· Less passenger baggage lost.


· Staff friendliness (consider all defining moments � greetings, service delivery, augmentation, etc.).


· Availability of add-on services like hotel bookings, car rentals etc.


· More frequent flyer flexibility.


These attributes should add on to become ‘fast and friendly service’. For achieving customer perspective, alliance should create a dedicated workforce or organization within itself which would then train the employees of all the member airlines so as to have a similar quality service being delivered to customers anywhere in Europe. Alliances should promote the differentiation in service by having regular marketing programs via sponsoring conferences, festivals, sporting events, fairs, exhibitions, etc. under star brand. To check the quality of the service Star Alliance can use the concept of Mystery Shopper. This Mystery Shopper would then use the service of all the member airlines and advice to improve the service in any airline wherever there is a bottleneck. Special focus should be paid on environment and safety, it would contribute to Star Alliance being a good citizen in the community.


Since many of these airlines have ticketing agents to sell and deliver the tickets to the end customer, they should be component of strategy formulation. Have an objective to increase the agent’s profitability as well. This would result in positive sum game, increasing the size of reward that could be shared between agents and airlines, so possible synergies would develop.


Star Alliance customer strategy involved a virtuous cycle, motivated and independent agents would deliver a great buying experience that would attract an increasing share of targeted customers. If possible, have an analyst to look at the ticket selling websites of the member airlines to check the friendliness and informativeness of these websites. The strategy would generate the quality revenue growth for alliance airlines’ financial strategy.


c) Internal Business Process Perspective


The important internal processes as identified are


· Develop new products & services.


· Share Process Optimization.


· Value Chain Integration.


This could be achieved by having a dedicated organization/employees to develop new products committed to create value to customer. The process would result in delivering a great buyer experience e.g. Star Alliance has already come out with Mobil Link, special fares for world tour, Asia-Pacific region, innovation in seat configuration, non-smoking air carriers, duty free sales, etc. They can also have regular brainstorming sessions by the employees of member airlines on a monthly or quarterly basis and also could come out with an innovative approach such as “War Room”. A key concept in the management of services is the “servicescape”, i.e. the environment in which consumers receive the service. Therefore, the alliance should collaborate with the airplane manufactures to provide more innovative cabin designs, within the limitations of cost and space available . All the employees of the member organization should take part in being innovative in order to reduce the cost and enhance productivity. This would also result in same


corporate culture throughout the alliance, which is a guiding force to similar thinking.


All the member airlines have to fine-tune connection process and enhancing schedule coordination in order to provide the customers with better connectivity and less waiting time. Punctuality of the flights is one of the major issue needed to be stressed upon. Alliance should also start building and improving facilities like waiting lounges, baggage claim offices, cafeteria/restaurants at key hubs to provide delight service to its customers; as well the alliance can benefit from sharing the technological advancements between members.


Alliance would also save lot of costs if it purchases from suppliers as one entity and not as individual airlines. Since many of the suppliers to the airline industry are situated in the alliance,


a special price for the member airlines would decrease the cost appreciably for these members. All the members of the alliance should evaluate their value chain components by doing cost-benefit analysis and try to reduce the former with respect to the best practices/benchmarks; with this, they can make objective decisions about outsourcing benefits and divesting opportunities.


d) Learning and growth perspective


The strategic objectives for this perspective are


Core competencies & skills Commit resources and time to build a level of skills and competencies necessary to execute the vision/goal. This could be achieved by having regular workshops, training sessions for the employees and can be measured for strategic competence availability and strategic systems availability or alliance should wait till it defines its measures.


Access to strategic information Development of knowledge management and sharing systems that are required to execute the strategy. This could be done by campaigning and spreading information about alliance and communicating its strategy to each employee and the usage of


knowledge across the organization for the successful implementation of the strategy. The means could be notice boards, brochures, yearbooks, fliers, pamphlets, IT, etc.


Organizational involvement During the formation of strategy, middle managers as well as functional managers should be involved and grant them the sense of ownership. Create a climate in which every employee of member airlines, is motivated and empowered to strive towards the vision. This could be achieved by implementing an employee survey designed to measure people’s awareness about the new strategy and their motivation to help the alliance achieve its targets.


The strategy map for the Star Alliance is shown in the appendix A-11.


The assumptions over which the above strategy was formulated are based on following factors


· Top management of every member airline should be committed for the same strategy in the alliance (no internal disputes and every member acts as a devoted “team player” to the goal and allocates resources )


· Certain regulatory environment in which the governments keep the trend of constant deregulation of the air travel industry in Europe.


· Economic stability in the world.


· No extreme appearance of terrorist acts or outbreaks.


· Stable oil prices (the Alliance is already hedged in fuel and may gain competitive advantage with higher oil prices).


· Continuing competition from the low cost carriers. i.e. low cost carriers are still in the business and consumers perceive them as safe to travel with.


· People’s culture is not an obstacle to the strategy’s implementation





6.0 References


· IATA. International Air Transport Association. · EASA. European Aviation Safety Authority.


· European Commission · www.klm.com


· www.britishairways.com · www.airfrance.com


· www.lufthansa.com · www.ryanair.com


· www.easyjet.com · www.iflyswa.com


· www.businessweek.com · www.cnn.com


· WestLB Panmuro � European Airline Review · www.arilinemonitor.com· www.skyteam.com


· Europa Online � http//europa.eu.int · Yahoo Finance


· Mercer Management Consulting Group. · Low-Cost Airlines gaining Momentum in Europe


· European Airlines Case Study.· Association of European Airlines - AEA · Strategic Management. Thompson and Strickland. McGraw Hill.


· The Strategy focused Organization � Kaplan and Norton · The Emerging Airline Industry By A. T. Kearney


· www.staralliance.com · www.oneworld.com


· SouthWest Airlines Case Study. HBR.· Managing Innovation in Services by Prof. K. Goffin · Competitive Strategy. Michael Porter.





Appendix A � Charts and Figures


Table A-1 � Revenue passenger kilometer � percentage change





Table A- � The three major alliances and its members


American Airlines, British Airways, Qantas, Cathay Pacific Airways, Iberia, LanChile, Finnair and Aer Lingus.


Aeromexico, Air France, Alitalia, CSA Czech Airlines, Delta, KLM and Korean Air.


Air Canada, Air New Zealand, ANA, Asiana Airlines, Austrian, bmi, LOT Polish Airlines, Lufthansa, Mexicana, Scandinavian Airlines, Singapore Airlines, Spanair, Thai Airways International, United and VARIG


Source www.oneworld.com / www.skyteam.com / www.staralliance.com


Chart A- � Projected Change in Inter-European Passenger Market Share





Source AEA, IATA, Mercer Analysis


Chart A-4 � Global Market Share of the main Airline Alliances





Chart A-5 � The Phases of Strategic Alliance





Chart A-6 � Five Forces Model of Competition





Chart A-7 � Buyer Segmentation


Chart A-8 � European Union Enlargement





Table A- � SWOT Analysis of the Star Alliance


SWOT � Star Alliance


Strengths· Innovation in services.· Strong capital structure.· Strong hedging discipline.· Strong financial planning strategy. Weaknesses· Limited cost reduction.· No strong overall presence in Europe.· Personal overcapacity· Structural problems (diversification).· Alliance partners are in trouble (United, Air Canada, SAS, etc.).· High cost per passenger.


Opportunities· High growth potential in the European market.· Potential for restructuring, particularly in passenger business. Threats· External shocks (economic growth, fuel prices, etc.)· Low Cost Carriers.· Weaker yields as compared to competitors.


SWOT analysis inspired by European Network Airlines - Playing the cycle � paper by Stephen Furlong, David Jennings, Mark Hannon and Barry Dixon


Table A-10 � Unit Cost per Passenger, Coverage and Growth rate


Players Unit Cost per Passenger[ € ] Coverage [ Destinations in Europe ] Capacity Growth rate in Europe in 001


Low Cost Carriers 4 15 to 85 -


Star Alliance 67 15 1.0


Sky Team 5 16 1.6


One World 16 176 .1


Source web pages of the involved members


Table A-11 � Strategy Map








Chart A-1 � Strategic Group Map of Alliances vs. Low-Cost & Charters


INDEX


1. Introduction


. Macro Environment


a. Economy at Large


b. Legislation and Regulation


c. External Shocks


d. Technology


. Immediate Competitive Environment (Five Forces Model)


a. Rivalry Among Competitors


b. Substitutes


c. Barriers to Potential New Entrants


d. Buyers


e. Suppliers


4. Strategy Recommendations


a. Low-Cost / Low-Price Strategy


b. Alliance Expansion Strategy


c. Balance ScoreCard Strategy - “If you can’t measure it, you can’t manage it”


d. Selected Strategy


5. Implementation


6. References


Appendix


Executive Summary


This case study attempts to understand the developments and strategic alliances that have occurred in the airline industry by using a series of tools for analysis commonly used in business. It identifies the alliance with the least favorable position in the industry in Europe and suggests a strategy and its implementation that would enable it to perform better.


1.0 Introduction


The traditional airline industry has experienced a transformation process in recent times due to the intense levels of competition and the global economic slowdown. To get around these problems, the traditional players have formed global alliances; by creating such alliances, the airlines attempt to offer additional destinations to their clients without costly investments and to decrease the unit cost per passenger.


The main European carriers have grouped into three different main alliances Sky Team (led by Air France), One World (led by British Airways) and Star Alliance (led by Lufthansa).


The airline industry deregulation in Europe has enable the entrance of new players, the so-called low-cost carriers, into the market. The tremendous success of these newcomers, such as EasyJet, Ryan Air, German Wings, etc, has put a lot of pressure on the traditional players.


External unpredicted events like September 11th and the SARS outbreak have also challenged the airline industry. The response of the alliances to all these challenges will be critical to determining their future competitive position within the airline industry.


.0 Macro Environment


.a Economy at Large


The airline industry all around the globe is heavily dependent on the overall economic situation that the world is experiencing. The more money people have to spend, the more likely they are going to spend it in leisure and travel.


.b Legislation and Regulation


Over the last decade, European aviation has moved from a highly regulated market, with little or no competition at all, to an open sky policy. At present, any airline with an Air Operations Certificate in the European Union may operate any route within the Union, including flights within other countries. But in practice, these airlines are often aligned to a single hub for operations (profit sanctuary).


.c External Shocks


The air travel industry in Europe is a very sensitive industry due to the dependency on people’s perception regarding safety. External shocks in the last few years have severely affected air travel industry around the world; September 11th and paranoia following up this event considerably lowered the demand for airline services, the SARS outbreak in Asia also represented a slump in sales for many airlines around the world (40 to 50% drop in Asian to & fro traffic ).


Direct effects of these events were also felt in the European air travel industry, i.e. it resulted in reduced revenues (appendix A-1).


.d Technology


The Internet era has revolutionized the way that airline tickets are booked. Now, buyers have first hand information about ticket prices, schedules, connections, updates, etc. at just click of the mouse sitting anywhere in the world. The airlines are using new technologies to reach new customers and to lower their overall operating costs. Internet provides an option for the airlines to sell their tickets online in addition to conventional distribution channels such as travel agencies.


.0 Immediate Competitive Environment (Five Forces Model)


.a Rivalry among competitors


Currently the most important European traditional airlines are grouped in three different alliances (see table A- in the annex). The Star Alliance was established in 17. It is the largest of the alliances with a global market share of . % (see chart A-4). It has access to 700 airports in 18 countries . The One World Alliance was launched in 18. It has a global market share of 17.8 %. With 16 different country destinations, it serves more countries than any other alliance. The Sky Team is the youngest alliance of the big three, formed in 1. It has a global market share of 11. %. The alliance flies to 51 airports in 114 countries worldwide. This year, Air France and KLM (ex-member of the Wings alliance) unveiled a merger deal that will create Europes largest carrier. The Italian airline Alitalia has expressed interest in joining this new company. The following table shows some relevant facts about each alliance


Alliance No. of Partners Countries Served Revenues(approx) Fleet PassengersServed


Star Alliance 16 18 $ 67.5 Bill. ,058 Mio.


One World 16 $ 51.0 Bill. 1,6 0 Mio.


Sky Team 7 114 $ 56.0 Bill. 1,44 48 Mio.


In order to achieve economies of scope, European carriers came up with three pronged approach 1) to have dominant market position in the domestic market. ) to gain foothold other European markets. ) to establish a global presence.


European airlines entered these strategic alliances though code sharing agreements, way of equity purchases, wet leases and franchising agreements, but now they are in phase two or three of the alliance formation (see appendix A-5 for further reference).


Alliances offer the following advantages to its members


1) Reach of seamless service networks Increase of numbers of routes and destinations. By means of alliances, airlines manage to overcome legal barriers for entering foreign markets.


) Enhance traffic fleet With linkage of airline networks the airlines can increase their load factor with the improved feed. Also, flight frequency can be increased without augmenting the size of the fleet.


) Cost reduction Partners of the alliances can have benefits of attaining the economies of scale (through joint operations of air and ground services) and scope.


4) Service quality improvement Ease of online connections, frequency and schedule convenience are enhanced by alliances. They also increase itinerary choices and reduce waiting time for passengers.


5) Marketing advantages Members of the alliances benefit from common marketing campaigns and frequent flyer programs.





Traditionally the European airline market has been controlled by the national airlines; however, the supremacy exerted by the main players has been challenged over the last decade by the emergence of low cost competitors in the market. The business strategy of the low cost group is centered on offering low-price tickets compared to traditional players. The great success of these new players is partially based on the efficient usage of the information technology, i.e. internet for selling tickets, resulting in reduced advertising and distribution cost. While the traditional players try to distinguish themselves from their competitors by offering differentiated service, the low cost carriers offer no frill service on board, e.g. no free food and drinks. Further cost reduction is achieved by operating a fleet of similar aircrafts, with catering space being used for more passenger seats and establishing a long-term relationship with suppliers, which positions them to bargain better. Since most of these new players use secondary airports and no-catering services, it enables them to reduce the turnaround time. According to Aviation Economics, a London consultancy, low-cost carries get 11 hours flying per day out of each aircraft, compared with about only hours for a traditional carrier . All the above factors result in considerable operating cost reduction. Despite the fact that the newcomers account only for approximately 5 % of the European market share, they are expected to gain up to 5 % of the market by 010 at expenses of the traditional and charter airlines (see chart A- in the annex). At the moment these newcomers do not offer overseas transportation services.


Another competing group of airlines consists of the charter operators. These airlines have lost market share in recent times to the new entrants and are supposed to loose even more (see appendix A-). Their strategy is to offer all-inclusive package to the clients, i.e. transport and


accommodation, and hence they depend on the development of the leisure travel industry. In Germany, tour operators are moving into the low-cost sector, e.g. TUI, Europe’s biggest holyday company, opened its low-cost carrier named Hapag-Lloyd Express.


.b Substitutes


Passenger transport by road in the 15 European Union countries increased by 7 % only in 000. Between 170 and 000 the railway’s share for passengers shrank from 10.% to 6.%. However, the European Commission plans to support environmental friendly transport systems such as railways and waterways . Therefore, the airlines will face some competition from state-run railway networks in the future, especially on the lucrative, heavily used long-distance routes (roughly 400 to 700 km). Hence, the threat coming form this sector is considered as medium.


.c Barriers


This industry’s main barrier is large capital needed to acquire airplanes. But this barrier can be easily overcome by leasing new aircrafts or purchasing second hand airplanes. Outsourcing of maintenance and facility services can help the airlines to compete at lower costs and consequently let new entrants lower these barriers. Another barrier was represented by airplane manufacturers, but right now they are willing to sell their products, spare parts and maintenance knowledge to any customer for a price. One of the most difficult obstructions for a new comer is characterized by charges the airports apply for the hub services.


The Open Sky policy in the European Union has substantially reduced the barriers for the airlines, unveiling an opportunity for new savvy entrants. Distribution centers such as travel agencies and airport counters were also a barrier to be considered, because they were traditionally





seen as distribution centers. But now, with the internet, airlines can move around these barriers by offering these services themselves.


Therefore, entry barriers in the air travel industry are not difficult to overcome.


.d Buyers


Buyers are differentiated in the airline industry as first class buyers, business class buyers, tourist / travelers class and economy class buyers (appendix A-7). Each buyer segment presents different needs and purchasing power. Buyers in the Internet era have better and more accurate information than ever before. Even though demand elasticity for the airline industry is growing as people have more choices of airlines delivering comparable services, many airlines still fix prices corresponding with the demand and the time of the year, and the customers still have to cope up with the prices the airlines arrange. Frequent flyers and corporate buyers enjoy special benefits from these airlines. Even though intense competition between airlines has brought prices down to attract customers, they do not have much of a bargaining power.


.e Suppliers


Major Airline Industry Suppliers


· Airplane Manufacturing and Leasing (mainly Airbus and Boeing)


· Fuel Suppliers (e.g. Royal Dutch Shell, Exxon Mobile, Chevron Texaco, etc)


· Caterers/Maintenance Crew (e.g. Lsg Sky Chefs, Gate Gourmet, Servair, Allied Pilot Association (APA), Association of Flight Attendants (AFA), etc)


· Airports and Airline Ticketing Software Providers (Amadeus, Galileo, etc.)





Bargaining Power of Suppliers Factors relating to bargaining power of the Suppliers


· Concentration of Suppliers in the industry. Suppliers are concentrated within the Airline Industry. Supplier concentration makes it very difficult for competitors to exercise leverage over the supplier and obtain lower price or play one supplier against other. Thus, suppliers command a substantial bargaining power in the airline industry.


· The threat of forward integration. The threat of forward integration is low. It is unlikely that Boeing, for instance, would staff flight attendants, commercial pilots and a maintenance crew and operate flights all over the continent.


The appendix A-6 represents the Five Forces Model by M. Porter.


The appendix A-1 shows a strategic group map displaying the different competitive positions that rival firms occupy in the industry.


A SWOT Analysis (see appendix A-) was performed to identify the Star Alliance’s Strengths and Weaknesses, and of examining the Opportunities and Threats they face. This SWOT analysis is limited to the European airline market.


None of the alliances has mentioned a clear vision and mission statement. For the strategy recommendation we formulate a vision and mission statement for the selected alliance.


4.0 Strategy Recommendations


As the situation analysis above suggests, the least favored alliance in Europe in terms of cost per passenger and geographical coverage is the Star Alliance (appendix A-10). The following strategic recommendations are focused on increasing the performance and presence of the Star Alliance in Europe. The strategy recommendation is based on the following mission and vision statement


Vision


To become the world market leader in terms of service, quality, cost and market share by 010.


Mission


Service is our vocation. We endeavor to offer our employees job security, good working conditions, career opportunities and convincing corporate ethics. Our staff honor that endeavor with customer friendly service and thereby underpin future growth. We are committed to creating sustainable value for our investors. We are fully committed to keeping a balance between sustainable development and care for the environment.


4.a Low Cost- Low Price Strategy


The Star Alliance players in Europe are facing extensive rivalry by the low cost carriers and at the moment are struggling in many of their routes to break even. The buyer focus has undergone a drastic change from being service sensitive to price sensitive.


The Star Alliance members have the financial resources, reputation and experience that would enable them to integrate one of the low cost carriers into the alliance. The members have to convince a company already in the market, with experience and an intricate network of destinations over Europe to join the alliance.


Integrating a low cost carriers in the market to the alliance would involve an overhaul in the service of the new member, as the customer experience has to be completely inclusive, and therefore increase slightly the costs. Primary key points for this would be unique baggage check in and coordination in the connections of the partners within the alliance.


These would also enable the partners of the alliance to increase their load factors, for the low cost carrier would bring the ability to access another customer segment and open new routes; while the full service carriers might as well increase the load of passengers in their aircrafts, increase the geographical reach of the alliance to small hubs that would otherwise be inaccessible due to high costs of the airlines and cut costs by divesting certain non profitable or low profit routes that can be operated by the low cost partner, and compete with other European full service carriers over some destinations (France, Ireland, England, Italy, etc.) and not competing with the members of the alliance on some special routes.


4.b Alliance Expansion Strategy


The entrance of 10 new members into the European Union from 1st. May 004 will increase the existing population of the common market by almost 80 million inhabitants (appendix A-8). The membership of these new comers in the Union will enable them to perform better economically, and as there is a strong relationship between well economical being and the demand for air travel, the European airline industry will also benefit from the enlargement.


The Star Alliance has the chance to take advantage of the new opportunities due to the Open Sky treaty allowing point to point connections within any country in the European Union. Star Alliance already went in this direction by accepting the Polish Airlines LOT as a member of the


Alliance. LOT covers more than 0 cities in Europe, 16 of them in Eastern Europe. Warsaw can be used as an important hub for the north-eastern European area.


4.c Balance ScoreCard Strategy - “If you can’t measure it, you can’t manage it”


1.- Financial Perspective. Star Alliance can start its Scorecard by defining its high level financial objective to increase return on capital employed (ROCE) from its current level within next five years. This could be difficult to achieve in mature, slow growth airline industry but not impossible. Star Alliance can start with using two financial themes productivity & growth.


Productivity theme consists of two components cost reduction and asset intensity. Cost reduction can be measured by operating cash expenses versus industry, with the goal of being the cost leader within the alliances. Asset productivity would enable the alliance to handle greater volumes from its growth strategy without expanding its asset base.


Growth theme also can consist of two components Volume growth in terms of passengers/ load factor and growth of niche business passengers. So it has two measures for these growth components volume growth rate versus industry growth rate and percentage of volume in premium sales.


.- Customer Perspective. Identify different customer segments. Measuring total market share would represent an undifferentiated strategy, perhaps no strategy at all, attempting to be all things to all customers. Star Alliance must define the value proposition it must deliver to attract, retain and deepen its relationship with customers in the three target segments. Market research is critical. The alliance must give its customer a great buying experience. The attributes should add on to become “fast and friendly service”. Also special focus should be paid on environment and


safety. It would contribute to the customer’s perception of Star Alliance being a good citizen in the community.


.- Internal Business Process Perspective. The important internal processes identified are


Develop new products & services Airline members can develop new products and services to enhance the buying experience of consumers. Share Process Optimization Since many of the airline suppliers are placed within the industry and specifically within the alliance, members can gain a lot by reducing cost by sharing their suppliers. As a whole the alliance would have more bargaining power to exercise to external suppliers.


4.- Learning and Growth Perspective. The strategic objectives for the learning and growth perspective are


a) Core competencies & skills Encourage and facilitate the employees of member airlines to gain a broader understanding of the services. Build the level of skills and competencies necessary to execute the vision/goal. Develop the leadership skills required to articulate the goal/vision and promote integrated thinking.


b) Access to strategic information Develop strategic information required to execute the strategy.


c) Organizational involvement Enable the achievement of the vision by promoting an understanding of the organizational strategy and by creating a climate in which member airline employees are motivated and empowered to strive toward the vision.


4.d Selected Strategy


The implementation of the strategy is based on the Balance ScoreCard Strategy which is an all-inclusive strategy, i.e. it increases shareholder value, customer value and takes the employees of the alliance into accountability for the implementation. The low cost-low price strategy was


rejected because, if implemented, it would result in restructuring of the business model of the alliance, this resulting in a conflict of core competences needed in each business model increasing the probability of failure. The expansion strategy is already being persuaded by the alliance by the inclusion of LOT; however, another feasible strategic move could be to include a second East European airline as a Star Alliance member. Malev Hungarian Airlines could be a good candidate for further expansion. It is not a member of any alliance yet, and it has a good potential in Central and South East Europe.


5.0 Implementation


Balance Scorecard is a proven strategy formulation model for Strategic Alliance of Phase and Phase types (see appendix A-5 for further reference). As mentioned before, the Balance Scorecard measures strategy with four perspectives in the given order.


The objectives while implementing the Balance Scorecard strategy are to ‘Align the Alliance to strategy’ (change the organizational structure if needed), to ‘Align the Strategy to Operational Terms’ (value chain and external linkages), and to ‘Make Strategy Everyone’s Everyday Job’ (link every employee by means of communication, delegation, cooperation and planning).


a) Financial Perspective


Star Alliance‘s ScoreCard might start with an important financial objective to increase return on capital employed (ROCE). This could be difficult to achieve in mature, slow growth airline industry but not impossible. Star Alliance should look at two key financial themes productivity & growth.


Productivity theme consists of cost reduction and asset intensity. To become an industry cost leader in terms of operating cash expenses per passenger, alliance should set a long-term target


for minimization of expenditure; this target should be broken into quarterly or yearly milestones for controlling the whole process. Asset productivity could be achieved by intensive utilization of huge fixed assets which alliance has. Training the human resource on Time Management and Service Management will enhance productivity. Both can go hand in hand if they apply “KISS” principle in delivering service i.e. Keep it short and simple. Some of the member carriers have fleet which exceeds the capacity, so at times many of these carriers fly at half or even less load. Proper utilization of these carriers can be achieved by doing away with overcapacity and flying to only profitable routes. Member airlines should giveaway the non-profitable routes, as they are not adding any value to the shareholders. This would also decrease the operational expenses and thus increase the return on capital employed.


Growth consists, as well of two components Volume growth in terms of passengers/ load factor and growth of niche business passengers. The financial perspective could be achieved by having defined customer perspective and internal business perspective having a differentiated strategy that focuses on resource efficiency maximization.


b) Customer Perspective


Identify different customer segments (see appendix A-7). The alliance ought to define the value proposition it must deliver to attract, retain and deepen its relationship with customers in the three target segments i.e. First Class, Executive Class, Tourists/Travelers Class. The customer of the Star Alliance should be delighted by the service received and maximize his/her bliss in every defining moment in the service delivery.


Factors identified that contribute to the service perception of the customer include the following


· Immediate and easy access to tickets.


· Good point-to-point connectivity (number of routes).


· Reduced waiting time.


· Satisfactory onboard service


· Less passenger baggage lost.


· Staff friendliness (consider all defining moments � greetings, service delivery, augmentation, etc.).


· Availability of add-on services like hotel bookings, car rentals etc.


· More frequent flyer flexibility.


These attributes should add on to become ‘fast and friendly service’. For achieving customer perspective, alliance should create a dedicated workforce or organization within itself which would then train the employees of all the member airlines so as to have a similar quality service being delivered to customers anywhere in Europe. Alliances should promote the differentiation in service by having regular marketing programs via sponsoring conferences, festivals, sporting events, fairs, exhibitions, etc. under star brand. To check the quality of the service Star Alliance can use the concept of Mystery Shopper. This Mystery Shopper would then use the service of all the member airlines and advice to improve the service in any airline wherever there is a bottleneck. Special focus should be paid on environment and safety, it would contribute to Star Alliance being a good citizen in the community.


Since many of these airlines have ticketing agents to sell and deliver the tickets to the end customer, they should be component of strategy formulation. Have an objective to increase the agent’s profitability as well. This would result in positive sum game, increasing the size of reward that could be shared between agents and airlines, so possible synergies would develop.


Star Alliance customer strategy involved a virtuous cycle, motivated and independent agents would deliver a great buying experience that would attract an increasing share of targeted customers. If possible, have an analyst to look at the ticket selling websites of the member airlines to check the friendliness and informativeness of these websites. The strategy would generate the quality revenue growth for alliance airlines’ financial strategy.


c) Internal Business Process Perspective


The important internal processes as identified are


· Develop new products & services.


· Share Process Optimization.


· Value Chain Integration.


This could be achieved by having a dedicated organization/employees to develop new products committed to create value to customer. The process would result in delivering a great buyer experience e.g. Star Alliance has already come out with Mobil Link, special fares for world tour, Asia-Pacific region, innovation in seat configuration, non-smoking air carriers, duty free sales, etc. They can also have regular brainstorming sessions by the employees of member airlines on a monthly or quarterly basis and also could come out with an innovative approach such as “War Room”. A key concept in the management of services is the “servicescape”, i.e. the environment in which consumers receive the service. Therefore, the alliance should collaborate with the airplane manufactures to provide more innovative cabin designs, within the limitations of cost and space available . All the employees of the member organization should take part in being innovative in order to reduce the cost and enhance productivity. This would also result in same


corporate culture throughout the alliance, which is a guiding force to similar thinking.


All the member airlines have to fine-tune connection process and enhancing schedule coordination in order to provide the customers with better connectivity and less waiting time. Punctuality of the flights is one of the major issue needed to be stressed upon. Alliance should also start building and improving facilities like waiting lounges, baggage claim offices, cafeteria/restaurants at key hubs to provide delight service to its customers; as well the alliance can benefit from sharing the technological advancements between members.


Alliance would also save lot of costs if it purchases from suppliers as one entity and not as individual airlines. Since many of the suppliers to the airline industry are situated in the alliance,


a special price for the member airlines would decrease the cost appreciably for these members. All the members of the alliance should evaluate their value chain components by doing cost-benefit analysis and try to reduce the former with respect to the best practices/benchmarks; with this, they can make objective decisions about outsourcing benefits and divesting opportunities.


d) Learning and growth perspective


The strategic objectives for this perspective are


Core competencies & skills Commit resources and time to build a level of skills and competencies necessary to execute the vision/goal. This could be achieved by having regular workshops, training sessions for the employees and can be measured for strategic competence availability and strategic systems availability or alliance should wait till it defines its measures.


Access to strategic information Development of knowledge management and sharing systems that are required to execute the strategy. This could be done by campaigning and spreading information about alliance and communicating its strategy to each employee and the usage of


knowledge across the organization for the successful implementation of the strategy. The means could be notice boards, brochures, yearbooks, fliers, pamphlets, IT, etc.


Organizational involvement During the formation of strategy, middle managers as well as functional managers should be involved and grant them the sense of ownership. Create a climate in which every employee of member airlines, is motivated and empowered to strive towards the vision. This could be achieved by implementing an employee survey designed to measure people’s awareness about the new strategy and their motivation to help the alliance achieve its targets.


The strategy map for the Star Alliance is shown in the appendix A-11.


The assumptions over which the above strategy was formulated are based on following factors


· Top management of every member airline should be committed for the same strategy in the alliance (no internal disputes and every member acts as a devoted “team player” to the goal and allocates resources )


· Certain regulatory environment in which the governments keep the trend of constant deregulation of the air travel industry in Europe.


· Economic stability in the world.


· No extreme appearance of terrorist acts or outbreaks.


· Stable oil prices (the Alliance is already hedged in fuel and may gain competitive advantage with higher oil prices).


· Continuing competition from the low cost carriers. i.e. low cost carriers are still in the business and consumers perceive them as safe to travel with.


· People’s culture is not an obstacle to the strategy’s implementation





6.0 References


· IATA. International Air Transport Association. · EASA. European Aviation Safety Authority.


· European Commission · www.klm.com


· www.britishairways.com · www.airfrance.com


· www.lufthansa.com · www.ryanair.com


· www.easyjet.com · www.iflyswa.com


· www.businessweek.com · www.cnn.com


· WestLB Panmuro � European Airline Review · www.arilinemonitor.com· www.skyteam.com


· Europa Online � http//europa.eu.int · Yahoo Finance


· Mercer Management Consulting Group. · Low-Cost Airlines gaining Momentum in Europe


· European Airlines Case Study.· Association of European Airlines - AEA · Strategic Management. Thompson and Strickland. McGraw Hill.


· The Strategy focused Organization � Kaplan and Norton · The Emerging Airline Industry By A. T. Kearney


· www.staralliance.com · www.oneworld.com


· SouthWest Airlines Case Study. HBR.· Managing Innovation in Services by Prof. K. Goffin · Competitive Strategy. Michael Porter.





Appendix A � Charts and Figures


Table A-1 � Revenue passenger kilometer � percentage change





Table A- � The three major alliances and its members


American Airlines, British Airways, Qantas, Cathay Pacific Airways, Iberia, LanChile, Finnair and Aer Lingus.


Aeromexico, Air France, Alitalia, CSA Czech Airlines, Delta, KLM and Korean Air.


Air Canada, Air New Zealand, ANA, Asiana Airlines, Austrian, bmi, LOT Polish Airlines, Lufthansa, Mexicana, Scandinavian Airlines, Singapore Airlines, Spanair, Thai Airways International, United and VARIG


Source www.oneworld.com / www.skyteam.com / www.staralliance.com


Chart A- � Projected Change in Inter-European Passenger Market Share





Source AEA, IATA, Mercer Analysis


Chart A-4 � Global Market Share of the main Airline Alliances





Chart A-5 � The Phases of Strategic Alliance





Chart A-6 � Five Forces Model of Competition





Chart A-7 � Buyer Segmentation


Chart A-8 � European Union Enlargement





Table A- � SWOT Analysis of the Star Alliance


SWOT � Star Alliance


Strengths· Innovation in services.· Strong capital structure.· Strong hedging discipline.· Strong financial planning strategy. Weaknesses· Limited cost reduction.· No strong overall presence in Europe.· Personal overcapacity· Structural problems (diversification).· Alliance partners are in trouble (United, Air Canada, SAS, etc.).· High cost per passenger.


Opportunities· High growth potential in the European market.· Potential for restructuring, particularly in passenger business. Threats· External shocks (economic growth, fuel prices, etc.)· Low Cost Carriers.· Weaker yields as compared to competitors.


SWOT analysis inspired by European Network Airlines - Playing the cycle � paper by Stephen Furlong, David Jennings, Mark Hannon and Barry Dixon


Table A-10 � Unit Cost per Passenger, Coverage and Growth rate


Players Unit Cost per Passenger[ € ] Coverage [ Destinations in Europe ] Capacity Growth rate in Europe in 001


Low Cost Carriers 4 15 to 85 -


Star Alliance 67 15 1.0


Sky Team 5 16 1.6


One World 16 176 .1


Source web pages of the involved members


Table A-11 � Strategy Map








Chart A-1 � Strategic Group Map of Alliances vs. Low-Cost & Charters








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