The second explanation for the formation of strategic alliances is their possible use to limit competition in the markets. As there exist several restrictions on market and route entry, capacity and pricing in domestic and international aviation markets, strategic alliances enable formation of virtual monopolies in markets between the hubs of alliance partners. This can limit the competition through monopolization in the hubs. In addition, there will be disincentive for any other airline to expand through internal expansion. Clearly, the biggest motivation for airlines to enter into alliances is to expand market feed. Some airlines that are dominant in their home markets have entered into an alliance with an international airline to provide feed to their airlines. The agreement between Jet Airways (an airline operating in the Indian domestic market) and KLM is one such example. Then, there are other reasons like the governments seeking better management practices in the airlines by improving performance and economic returns.
Oum et al. (2000) found that strategic alliances have significant effects on productivity, pricing and profitability of alliance partners. They also found that formation of alliances had a positive effect on the value of partner firms. In their study of 58 international alliances over 1989-98 period, they found that share value of firms participating in the alliance has increased and such increase was similar irrespective of the size of the firm. In addition, the alliances with a broad scope of strategic cooperation create more value than alliances with a narrow scope of tactical cooperation. Furthermore, when a strategic alliance with a broad scope of cooperation is combined with equity investment, the value creation effect of the alliance is further strengthened.
Then, Oum et al. (2001), focus on the airline industry and identify the following as the most common and most important reasons to form strategic alliances:
- Reach of Seamless Service Networks: A connection of networks gives the consumers a large choice of destinations to choose from and plan better, connections are eased out and there are increased benefits of Frequent Flyer Programs (they have a broader range of benefits to offer) and lesser possibilities of lost baggage. Also, the alliances’ network comes in handy when operations are to be made in highly competitive, unprofitable and price sensitive market conditions (e.g. pooling in of resources by two airlines to coordinate to overcome otherwise unprofitable routes). By connecting the networks, partners are able to expand their routes beyond their country territories. Also, there are several restrictions on foreign ownership and fifth, seventh and eighth freedom rights are generally not available. Even if some carriers manage to get the requisite legal permissions, the costs associated -of time, risk and capital-act as virtual barriers (potential facilitators) to direct entry by foreign airlines in other markets (for forming strategic alliances).(b) Enhanced Traffic Feed: With linkage of the airline networks the carriers can increase their load factors with the increased feed. Also, flight frequency can be increased without increasing the size of the fleet.(c) Cost Reduction: The partners in the alliance can have the benefits of attaining the economies of scale (through joint operations of air and ground services) and scope.
- Enhanced Traffic Feed: With linkage of the airline networks the carriers can increase their load factors with the increased feed. Also, flight frequency can be increased without increasing the size of the fleet.
- Cost Reduction: The partners in the alliance can have the benefits of attaining the economies of scale (through joint operations of air and ground services) and scope (through increased reach and efficient connections) and increased traffic density(through network expansion and additional traffic feed).
- Service Quality Improvement: Ease of online connections, frequency and schedule convenience has been marked as the dimensions of an airline’s service quality. By entering into alliances, the schedules can be better-coordinated and waiting time for passengers reduced. Further, the increase in itinerary choices is another benefit that an alliance can offer to passengers.(e) Marketing Advantages: The frequent flyer programs are pooled in an alliance and the passengers thus have a wider choice as well as more chances to accrue points to use later. Then there are many display benefits of Computerized Reservation System for airlines entering into strategic alliances. The visibility on the CRS is increased manifold as all the partners in the alliance show the flight to the same destination as their own. Consequently, the chances that a traveller will fly a particular airline are increased manifold.
Increased market share and cooperative pricing that is possible is another reason that airlines enter into strategic alliances. There have been concerns raised over time about the anti-competitive effects of the alliances, there have been exemptions like KLM-Northwest alliance, which received anti-trust immunity. This is reportedly one of the reasons that Netherlands became the first country to sign an Open Skies pact with the US.
Another reason to enter into alliance has been put forward by de Wit (1996), where he finds alliances a convenient way to form a multiple hub structure. This multiple hub structure will give the alliance an edge over any other airline that wishes to operate in Europe. A pan European alliance or an alliance dominant in Europe will be an attractive partner that will be sought to become one of the members of a global alliance. This is also one of the identified pre-requisites of a potential partner willing to join a global network (Oum, Taylor and Zhang, 1993).
