star alliance Flashcards
neexternal environment of star alliance
Economic
Sociocultural
Political → if theres a war, reduce travel
Regulations: anti trust laws , prevent cross boarder mergers and acquistions , encourage free competition
Covid 19
Sustainable factors→ invest in fuel efficient aircraft
what do airlines compete on
price, comfort, delays, avialbity of routes and destinations
what impacts profitability
Revenue related factors → load
Cost factors: fuel prices (price takers, fuel prices depend on the commodity market), higher costs= lower profits, having to pay workers
Competition
Passenger capacity
Load factor: % of the seats on the plane. Why is it important and affect profitability → we want to offset Fixed costs associated with the flight (maintenance, fuel, staff) need to ensure our planes are flying with full load capacity (ex of economies of scale)
Yield: higher during peak seasons , rivalry may reduce yield and impact profitability, can charge higher prices
Suppliers have a lot of power
Threat of Substitutes → (be careful with flights (other airlines) to competitors tjis is not substitutes, other products or services in another industry are what we are looking at that cna impact our profitability) → bullet train (and other trains) is a substitute and so are busses, cars could be substitutes , using zoom, boats
How does it impact the profitability of airlines (the substitutes)
May have to decrease costs
Presence of the wide range of subs puts pressure on our prices, so many options
Cannot over charge because customers have options
Bargaining power of buyers → consumers are price sensitive →puts a price ceiling on what they can charge customers
threat of new entrants
There are barriers to entry but we see that new airlines are being created all the time
Not impossible to enter this industry
Discount airlines enter sometimes
what is the industry like
Its a tough industry to compete in (cost wise, revenue side, competitor side)
Lots of external favor that limit what airlines can do
Even if companies form an alliance, alliances are also regulated. Cant collude on price
Creates a tough environment
Tough for airlines to generate profit
During unfavourable conditions, not uncommon for airlines to lose money (have a neg year)
star alliance has the fastest growth , highest revenues but the other alliances aren’t far behind
because of tough conditions
competing airlines decided to partner together in alliances
overtime alliances evolve into
constellations aka network alliances (what star alliance is)
how many airlines involved in star alliance
at first inly 5, not 25
why would an airline have to leave
If they get bought by another company not in the alliance
its a temporary alliance
who competes with star alliance
Star alliance was the first to be formed, then others were formed: one world and skyteam → group competition (No longer individual airlines competing but now its one alliance vs another alliance)
How do members within the alliance create synergies
Hub and spoke : network optimization → how does it benefit companies in the alliance? Tehre are hub airports and from there, the more local companies part of the alliance can distribute the passengers to other destinations
Ex: luthstania to denver→ lufthansa doesnt fly to denver but needs a partnering airline to carry the passenger further to denver
Due to the alliance→ Helps to limit other airlines in airports(competition) with the limited landing slots and take off times , gives a competitive advantage (creates barriers to entry for other airlines that dont belong to an alliance , also for new entrants bc if they want to fly out of frankfurt, will have limited choices)
On the revenue side: helps sell more seats, more variety of routes, deter any competitors outside the alliance (new entrants or other competition airlines bc home airlines occupies all the spots)
economies of scale: being able to buy fuel in bulks
They can share airport lounges, maintenance facilities, IT systems
Economies of scope: the sharing of airport lounges, maintenance facilities…
benefits of the hub and spoke system
Main benefits of hub and spoke: increase the load factor , fill our planes better as there are many routes and destination options gives passengers wider access , can capture passengers that they would of lost,
How do passengers benefit from alliance
Better coordination
Place gaits closer to one another so easier for passengers to be delayed
Loyalty programs→ more you travel with the alliance, more miles . reward loyal customers. Gold and silver status
deals are monitored
also access to better tech on the planes
Why introduce loyalty programs (passangers benefiting )
Might reduce competition →
Switching costs are high→ will lose the miles , it locks the customer in, they will want to book with the same alliance. Offsets the bargaining degree of buyers bc they will pay more to get those points
Reduce the threat of new entrants→ if switching costs are high
With the alliance: Passengers have access to tablets, internet tools, better services
passengers keep collecting these points and can gain more access to lounges and better treatment
How can help increase revenue with corporate clients (passengers benefitin)
Have ti fly to global conferences so offer incentives and heavily advertise to capture corporate client
offered discounts
they are key because they fly far
network optimization: how many Dif destinations can it reach and in how many countries
1300 destinations and 195 countries
Passengers also benefit through check ins→
don’t have to keep checking your bags
Helps on the revenue side (more happy customers so more money and less coordinaton )
other types of alliances mentioned in the case
Connecting partners→ if member airlines don’t fly certain destinations they would engage another partner as a temporary member just for a connection
Special joint venture and equity investment agreements
Joint venture: has to be special for this type of industry , sign a contract that is specific to this industry, they share routes , give airlines a loophole (can collude on prices if joint venture)–> antitrust authorities don’t like this
equity alliances: one airline buys a stake in another airline, as close to a merger as possible (if merger is not possible at least they can buy a stake in another airline, but risky due to potential bankruptcy)
Code sharing: one airline lists the connecting flight of another under its code so it can market the other airlines flight and they will share the revenue . final goal is to fill planes and mximize economies of scale
Interline agreements: don’t advertise under the same code but customer doesn’t need to check their bag every time on the way to their destination
If an airline wants to be part of an alliance, what are the rules
Star alliances rules: they all need to have a consistent quality of service
New members are voted in (depending on size of airline have larger weight in vote)
Each Company should have financial stability
Same branding→ keep their own brand name but also have umbrella brand of star alliance
Codesharing is a must → promote and sel each others flights
Share revenue
Does the individual performance of an airline impact star alliance as a whole?
Individual airlines have to keep their performances high bc can be bad to the image of the brand, has to remain consistent
More members= more risk that one of them will do something wrong
Common trends in teh airline industry
Consumers dont like the layovers
Effects of covid 19 on the airline industry
Covid 19 on airline industry → drastic drop in demand for flights, workers had to be laid off
Local government gave funding but wasn’t enough
Demand dropped by 54% globally (resulted in layoffs for cost cuts), 7.5 million flights cancelled
Many companies went through bankruptcy which made the alliance fragile
Load factor has decreased
safety and health compliance rules impose higher costs
It will not recover until 2025
was also gonna affect air craft manufactures like Boeing and airbus
How being in an alliance helps combating covid 19
Can alliance members help bail out other members?
Could exchange best practices for handling the pandemic → universal standard for health and safety
Economies of scale→ star alliance is reassuring customers through publicity and marketing, helps with the load factor (economies of scale → want to fill seats, increase load factor through marketing)
Can help reduce cost capacity
Takeaways
Very specific of alliance which is network alliance or constellation
Benefits of companies benefiting in an alliance in a tough industry → being a part of an alliance can help a company survive under difficult circumstances
Can be helpful under catastrophic events like covid 19
during the preceding decades, how was the global industry trandofmed
bc of new regulatory policies and company strategies
couldn’t face cross boarder mergers so they created a constellation (bilateral and multi partner alliance )
what was the original goal of the alliance
create synergies while maintaining their indepedent identities
structure of star alliance
multiple airlines collaring in certain activities
cant coordinate pricing or share profits
why was star alliance so different
used to be bilateral
etavalished common branding and standards
main revenue drivers of airline profits
passanger capacity, load factor and yield
load: percentage of seats occupied
costs
labour, fuel and advertising
why did members join the alliance
wanted access to destinations outside their home base
coordinate arrival and departure times allowed the group to operate an efficient network with high load and tight connections (codeshare sync)
better customer service c they should share lounges, mileage programs and costs
members could take avdnatgsr of common standards, combined training programs,d and the brands identity while being independent
hub and spoke *network optimization
main airports serve as hubs
passengers come from spokes and be connected to the hubs
like a bridge
key competitive advantage
connecting partners
wanted to augment its global network
partner carriers would be able to connect tp the star alliance network without becoming flll alliance members
passenger however would be offered connections only to the flights of connecting partners according to certain status privileges
joint purchases
alliances want to combine purchases and increase each members buyer power
could create economies of scale
Buying in larger quantities allows alliances to reduce the overall cost per unit, as suppliers are willing to offer better deals for bulk purchase
can also share costs
managing star alliance
star alliance was bound together by only four pages of governance with no formal ownership ties
no formal structure but this changed
five year bsunses plan was implemented
strategic decisions would be directed by a core group of exuectibes chosen by alliances embers
new management board reported to the chief executive board
also dif committees that had experts from the alliance and members carriers
become a corporation under German law with limited staff and offices
key success factor
provide customers with a constsiemt quality of service, regardless pf which airline
rigorous standards
brand management
creating a brand name but not submitting their own
establishing their own brand at the same time
iondivual performance of each brand still matters bc could affect alliance
star alliance costs
info tech and Human Resources
built good info systems
spent money on trying to have consistent services
Human Resources: had intense training programs
took a while and a lot of investments
main challenge of the alliance
making member reservations and inventor systems compatible with each other
market share
three major alliances had reached a comparable level of market share
they all have immense networks
58% of the industry total global capacity
issues with hub and spoke
LHF but still had issues bc of fuel prices and could be tiring for pilot and crew
before covid, what was the airline industry projected to do
have consistent growth
highest growth was between Middle East and usa
why should star alliance not add too many members
Alliances keep expanding so theres overlap in the routes, so start having incumbent members (saturation), industry consolidation
One benefit of being in an alliance is to offer wide variety of routes, but now it begins to overlap so they have to be tough with accepting new members reaching saturation point, as well antitrust authorities are getting worried and watching them
individual airline repossess to covid
had to have gvt funding but wasn’t enough so airlines had to layoff people
core competencies
many routes
harmonization
brand image
global network
seamless travel experience
