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TIACA - Juan Carlos Serna Velez TIACA Masters Scholarship Program Recipient 2006 Dissertation presented in partial fulfilment of the requirements for the International MBA Programme. Evolution in the air cargo side of the business came after the consolidation of major alliances in the passenger side.
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Analysis of Strategic Alliance as a Source of Competitive Ad.pdf
TIACA - Juan Carlos Serna Velez TIACA Masters Scholarship Program Recipient 2006 Dissertation presented in partial fulfilment of the requirements for the International MBA Programme. Evolution in the air cargo side of the business came after the consolidation of major alliances in the passenger side.
TIACA - Juan Carlos Serna Velez TIACA Masters Scholarship Program Recipient 2006 Dissertation presented in partial fulfilment of the requirements for the International MBA Programme. Evolution in the air cargo side of the business came after the consolidation of major alliances in the passenger side.
Analysis of Strategic Alliances as a Source of Competitive
Advantage in the Airline Cargo Business - Evaluation of SkyTeam Cargo and WOW Alliance.
Juan Carlos Serna Velez TIACA Masters Scholarship Program Recipient 2006
Dissertation presented in partial fulfilment of the requirements for the International MBA Programme
University of Greenwich Business School
July 2007 TIACA Juan Carlos Serna 2
Acknowledgements
To Soly, my love and unconditional support during this long year. Thanks to you, a dream has come true.
To my family, for their permanent support and love.
To my friends at University of Greenwich, thanks for everything I have learned from you.
To TIACA Education Committee for their support through the Masters Scholarship Program. TIACA Juan Carlos Serna 3
Abstract
Utilization of strategic alliances in the airline industry is not a new task. However, evolution in the air cargo side of the business came after the consolidation of major alliances in the passenger side. This document, intends to analyze the utilization of strategic alliances as a source of competitive advantage in the air cargo industry. Evaluation of specific cases, such as WOW Alliance and SkyTeam Cargo are included as examples of such type of partnership agreements in this sector.
As part of the evaluation, a disaggregated model of activities conforming the Value Chain for a Cargo Airline is presented, being an important tool when analyzing possible strategic cooperation between airlines. Additionally, adapted implementation practices for strategic alliances are included as a point of reference for future partnership studies.
This document suggests that strategic alliances have been a source of competitive advantage for the alliance members; however, recommends additional research on the perception and effects on customers of such type of cooperation.
TIACA Juan Carlos Serna 4
Table of Contents
INTRODUCTION .............................................................................................7 1. COMPANY & INDUSTRY OVERVIEW..................................................10 1.1. WOW ALLIANCE............................................................................10 1.2. SKYTEAM CARGO ALLIANCE......................................................11 1.3. STRUCTURAL ANALYSIS OF THE AIR CARGO INDUSTRY..........14 1.4. AIR CARGO INDUSTRY OVERVIEW................................................17 1.5. THE TOPIC, AIMS AND OBJECTIVES..............................................21 2. LITERATURE REVIEW STRATEGIC ALLIANCES IN AIR CARGO..23 2.1. Previous Academic Studies on Strategic Alliances .....................................23 2.2. Strategic Alliances: Definitions and challenges...........................................23 2.3. Types of Strategic Alliances ..........................................................................26 2.4. Experiences of Strategic Alliances in Airlines.............................................27 2.5. Why Strategic Alliances? Reasons behind the decision ..........................31 2.6. Critical Success Factors in Alliance Formation..........................................36 2.7. Are the current SAs in the industry being a source of competitive advantage?..................................................................................................................38 2.8. Are customers perceiving the benefits of the alliances?.............................40 2.9. Implementation Practices for Strategic Alliances.......................................41 3. METHODOLOGY AND LIMITATIONS OF THE PAPER .......................42 4. VALUE CHAIN ANALYSIS FOR A CARGO AIRLINE ..........................45 4.1.1. Inbound Logistics.......................................................................................46 4.1.2. Operations Activities .................................................................................49 4.1.3. Outbound Logistics....................................................................................51 TIACA Juan Carlos Serna 5 4.1.4. Marketing and Sales ..................................................................................51 4.1.5. Service Activities ........................................................................................52 4.1.6. Other Primary Activities...........................................................................53 4.1.7. Support Activity Human Resource Management................................54 4.1.8. Support Activity Quality Control...........................................................55 4.1.9. Support Activity Corporate Support ....................................................55 5. FRAMEWORKS FOR IMPLEMENTATION OF STRATEGIC ALLIANCES IN THE AIR CARGO................................................................57 6. CONCLUSIONS AND RECOMMENDATIONS......................................63 ANNEXES .....................................................................................................66 REFERENCE LIST........................................................................................78 TIACA Juan Carlos Serna 6 List of Figures & Tables
Figures
Figure 1 The Five Competitive Forces (Porter, 1980) Figure 2 Top 20 Freight markets in 2025 according to Airbus. Figure 3 World Air Cargo Traffic 2006 2025 Figure 4 The Generic Value Chain (Porter, 1985) Figure 5 Inbound Logistics Activities modified for a Cargo Airline. Figure 6 Operations Activities Cargo Airline Figure 7 Sales & Marketing Activities Figure 8 Post - Service Experience Activities Cargo Airline Figure 9 Primary Activities Cargo Airline Figure 10 Value Chain Model for a cargo airline Figure 11 Strategic Alliance Objectives
Tables
Table 1 Revenue & Tonnage SkyTeam Cargo Alliance Members Table 2 Growth Rates 2005 by Major Market Table 3 - Airline Alliances in the global airline industry 1994 1999
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Introduction
The greatest change in corporate culture, and the way business is being conducted, may be the accelerating growth of relationships based not on ownership, but on partnership (Drucker, 1996)
The concept of Strategic Alliance has become during the last decade a usual term within the business language all over the world. Its utilization is currently so wide, that when searching in Google for the term Strategic Alliances, it took only 0.28 seconds to show 11.000.000 (Eleven million) possible links related to that concept.
Despite the fact that academics and consultants see in strategic alliances a source of competitive advantage and supports with multiple benefits and reasons this type of partnership ventures, high levels of failure showed by statistics presented by different studies makes the development and implementation of strategic alliances a challenging task.
In the airline industry the utilization of strategic alliances is not new. During the 1990s, passenger airlines supported their growth and expansion to international markets in the creation of strategic alliances as a result of deregulation of the industry and the applicability of code-share agreements. In the cargo side of the business, this type of integration came late and only at the beginning of year 2000, major alliance initiatives were presented into the market with the launching of SkyTeam Cargo and WOW Alliance. These partnership initiatives were the response by alliances members to multiple challenges present in a highly- regulated, restricted, highly competed, low margin air cargo industry. The need for competitiveness as individual organizations and as a group of companies involved in a strategic alliance is a key element for their future success and survival.
The concept of competitive advantage was presented by Porter (1985) and it relates to the ability of an organization to discover and implement ways of competing that are unique and distinctive from those of their competitors and that can be sustained over time. The competitive position of an organization can be measured by their capacity of creating value, and therefore, the Value Chain model proposed by Porter is a useful tool to analyze such capability.
TIACA Juan Carlos Serna 8 In this document, I intend to evaluate three main issues related to the fact that strategic alliances are a source of competitive advantage in the air cargo business. The first one is to evaluate the extent in which strategic alliances are a source of competitive advantage for the companies engaged in these partnerships, understanding the reasons behind this decision and identifying the potential benefits of these agreements. Secondly, to identify how does a strategic alliance add value to customers, by presenting a disaggregated value chain model for airlines in the air cargo industry, and as a third point, to identify different implementation practices that could be used by companies in the air cargo business to develop strategic alliances.
In order to do what are the aims of my research and this document, I have structured it as follows:
In section 1, Company and Industry overview is presented. A brief profile of the WOW and SkyTeam Alliances is shown as well as an industry analysis made based on Porters Five Forces Model. Additionally, I include forecast of future trends for the air cargo industry based on Boeing, Airbus and IATA sources.
Section 2 contains the results of my secondary data research on strategic alliances. In here, I analyze different issues related to the topic, including types of strategic alliances, the reasons behind such decisions, key success factors, experiences of strategic alliances in the airline industry, competitiveness of such partnerships, how customers perceive these alliances and some references to academic works on implementation practices.
Section 3 includes information on the methodologies used for this research and the limitations of this paper.
Section 4 covers an analysis made to the different activities performed by an air cargo carrier in order to deliver their services and add value to their customers. Here, I base my results on Porters Value Chain Model and after disaggregating the different activities, at the end I present a Value Chain for an Air Cargo Carrier.
Section 5 presents an adapted framework to be used by air cargo carriers when evaluating the possibility of participating in strategic alliances.
At the end, I conclude that it seems to be a general agreement over the academics that strategic alliances are a source of competitive advantage. The reality faced by carriers in the air TIACA Juan Carlos Serna 9 cargo industry characterized by a protective regulatory framework in a global economy, low margins and the need to adjust their organizational structure to be more flexible and dynamic makes of strategic alliances an adequate and competitive way to respond to this strategic challenge.
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1. Company & Industry Overview
1.1. WOW Alliance
In April 2002, Lufthansa Cargo, Singapore Airlines Cargo - the second and third biggest international cargo airline according to IATA (International Air Transport Association)- and SAS, the Scandinavian giant, joint forces to form an exclusive cargo alliance named WOW Alliance. On July 5, 2002 Japan Airlines Cargo decided to join the WOW Alliance, complementing the network of destinations for the alliances customers and linking the worlds major trading centers. Through close cooperation, the alliance partners aim to offer customers a greatly expanded network and have harmonized their procedures in order to deliver in a seamless manner their three WOW offerings: General Cargo, Premium Express and Dangerous Goods. Although the three products have retained their established brand names, they now shares key features. No matter which of the partner airlines transports a shipment in the alliance's worldwide express network, the customer can count on the same product promises and service guarantees. Any of three products can be booked to the destinations within the common network. The WOW Alliance vision, according to their website (2006), is to have the world's leading airfreight and logistics system. Together, we have the knowledge, experience and motivation to make it happen. Its philosophy is based on three major cornerstones that are: Seamless, Safety and Control. The alliance ensures fully linked systems for Seamless delivery of goods across five continents. Customers can always be assured of the Safety of their cargo and with fixed delivery times and a common tracking system, the alliance offer complete Control - so customers will always know the status of their cargo. WOW offers optimal transport solutions with their large network, linking over 520 destinations in 103 countries. In Annex # 1 to this document, a brief overview of the characteristics of each of the three products offered by the WOW Alliance members is presented. Additionally, in Annex # 2, information on each of the alliance partners is included, where a TIACA Juan Carlos Serna 11 brief profile of each of the airlines is presented to offer better understanding of the structure of the WOW Alliance. 1.2. SkyTeam Cargo Alliance
On September 2000, four carriers, already partners in the SkyTeam passenger airline alliance, joined forces for the cargo market as well. Aeromxico Cargo, Air France Cargo, Delta Air Logistics and Korean Air Cargo announce the creation of SkyTeam Cargo. Later in 2001, CSA Cargo and Alitalia Cargo joined the Sky Team Cargo Alliance expanding the number of members and the alliances network. Then, between 2004 and 2005, two new members KLM Cargo and Northwest Airlines Cargo completed the current members participation.
According to the SkyTeam Cargo website (2006), SkyTeam Cargo has the largest global footprint of any alliance providing access to all major geographic regions, covering the globes key trade routes. Since 2000, the alliance has grown from 411 to 728 unduplicated destinations, from 100 to 149 countries served, and from 14 billion to 26.03 billion freight ton kilometers carried per year.
SkyTeam Cargo mission statement is We, SkyTeam Cargo, aim to be the most effective and customer-driven Air Cargo group in the global logistics industry (SkyTeam Cargo website, 2006).
SkyTeam Cargo's focus is to provide their customers with a truly global air network, a high quality portfolio of common products, and ease of access to sale & operations through the single point of contact & one roof concept. Together, these factors enable seamless cargo handling and movement throughout SkyTeam Cargos global network. (SkyTeam Cargo website, 2006).
The expertise of the SkyTeam alliance offers customers the following benefits:
Global Network: With 545 destinations, 127 countries, 1,200 aircraft and 8,900 daily flights, it provides access to almost every corner of the globe through an extensive hub system. Expert Solutions: SkyTeam Cargo partner airlines have adopted four common product categories under standardized branding - Equation, Variation, Cohesion, and Dimension - that have been available across all partners beginning in October 2002. TIACA Juan Carlos Serna 12 Seamless Processing: SkyTeam Cargo offers universal handling procedures, providing consistency among all partners and a smoother transaction for customers. These services enable SkyTeam Cargo to provide the simplest solutions for any needs of customers. One Roof Service: 59 percent of the freight that moves through common SkyTeam cities is processed through integrated warehouse operations or by ground handlers common for three or more, enhancing the convenience, reliability and benefits that SkyTeam Cargo customers already experience. Single Point of Contact: As a part of providing a centralized service for booking and sales, SkyTeam Cargo members Air France, Delta and Korean Air established the U.S. Export Sales Joint Venture in November of year 2001. Flexible Service: Flexible service that anticipates customers need for speedy, personalized solutions. Extensive Schedules: Extensive schedules ensure fast delivery night and day, worldwide. (Sky Team Cargo website, 2006)
In Table 1, information about capacity of cargo moved by the alliance members and its revenue figures for 2005 is presented:
Carrier
Revenue by Airline Carried ton kilometres
AeroMexico Cargo $136 million 271 million
Air France Cargo $1.714 billion 5.937 billion
Alitalia Cargo $595 million 1.361 billion
CSA Cargo $19.5 million 44.9 million
Delta Air Logistics $520 million 1.923 billion
KLM Cargo $1.178 billion 4.893 billion
Korean Air Cargo $2.1 billion 8.1 billion
Northwest Airlines Cargo $0.9 billion 3.5 billion
Table 1 Revenue & Tonnage SkyTeam Cargo Alliance Members TIACA Juan Carlos Serna 13 Source: SkyTeam Cargo Website 2006
In Annex # 3, information on each of the alliance partners is included, where a brief profile of each of the airlines is presented to offer better understanding of the structure of the SkyTeam Alliance. TIACA Juan Carlos Serna 14
1.3. Structural Analysis of the Air Cargo Industry
The first fundamental determinant of a firms profitability is industry attractiveness. (Porter, 1985, p. 4). The understanding of the industry and the forces that drives such profitability is of great importance when analyzing the competitive position of an organization. Porter (1980) has presented a model where he identifies five competitive forces that determines industry profitability, which are: the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors (see Figure 1).
Figure 1 The Five Competitive Forces (Porter, 1980)
Based on the model presented above, the following is a brief analysis of the Five Competitive Forces for the Air Cargo Industry:
Potential Entrants Industry Competitors
Rivalry among Existing Firms Substitutes
Buyers
Suppliers
Threats of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products or Services TIACA Juan Carlos Serna 15 Potential Entrants Threats of New Entrants
One of the main characteristics of the airline industry is the regulatory framework in which it develops. During the past years efforts of open skies policies have been made, in order to put the industry in line with the evolution of markets and economies all over the world, as discussed in the ICAO 5 th Worldwide Air Transport Conference in 2003 there is now broad acceptance of the need for regulatory change, although there are wide divergences between states and airlines as to how fast and how far this should go. Advances have been made, with new bilateral agreements between countries; however, the concept of national airlines is still around and barriers for new entrants from the regulatory perspective can be found.
Substitutes Threat of Substitute Products or Service
Main threat from substitute services for the air cargo business is reflected in the efficiency and competition of other means of transportation. For the international operation in which cargo airlines participate, main substitute competition is the maritime transportation.
However, there is no direct substitution of the service. Still, differences exist between these two types of services, such as time of delivery, cost and type of product to be transported. In the case of the perishable transportation market, efforts have been made by maritime companies to increase their capability of maintaining freshness and reducing times, but still there is significance utilization by companies to move their perishable cargo via air services.
The existence of other model of transportation and their efficiencies and increased capabilities to move diverse type of cargo, presents a challenge to the air cargo business to identify specific market segments or product niches where value can be added.
Suppliers Power of bargain of suppliers
Within the numerous suppliers cargo airlines use to fulfill their needs to run their operation, I would highlight the following suppliers that I consider play a strategic role:
o Aircraft Providers o Fuel Providers TIACA Juan Carlos Serna 16 o Insurance Companies o Ground Handling Companies o Cargo Handling Companies o Heavy Maintenance Providers
From those above, Fuel Providers currently represent the most critical supplier for the airline industry. Any gain obtainable from a negotiation in this area will have a direct impact on the financial results of their operations. While two years ago, Fuel Costs comprised 20% of the total costs of an airline, today, due to sky rocketing prices, we find that they are responsible for almost 40% of the total cost. Hedging strategies are needed to be in place in order to minimize uncertainty and assure some level of control over the operational costs.
On the other hand, negotiations with Aircraft Providers are of strategic importance as well. The decisions on the type of aircraft to operate, the financing of the fleet program (purchasing aircrafts or leasing them), adequate timing of negotiation and delivery of fleet are key issues that will impact the competitive position of the airline in its market.
Buyers Power of bargain of buyers
On this area, the role of the Top Multinational Freight Forwarding Companies is something to pay attention to. Major acquisitions between the Freight Forwarding industry have created very powerful organizations with global presence strengthening their position in front of the airlines.
Being part of their distribution channel, the Freight Forwarders have been able to assure control over the volumes of cargo, by offering logistic solutions for the different industries they serve. By working directly in the supply chain of the importers or exporters of the different products, they have been able in the majority of the cases and markets to negotiate and make the final decision over carrier utilization for their customers cargo. Therefore, high power of bargain of such organizations is suffered by the airlines when establishing corporate deals with the major freight forwarders.
Industry Competitors Rivalry among current players
There is an active competition between the different carriers that serve the different markets, however, due to regulatory issues the level of competition can vary according to the TIACA Juan Carlos Serna 17 countries in which the airline is operating. Open Skies policies, mainly with the United States, have opened the market for different airlines to participate actively in the business.
Competition within the air cargo industry can be segmented as follows:
- Passenger Carriers with Cargo Capacity: Most passenger airlines, in order to optimize the utilization of the capacity of their aircraft commercialize cargo services, offering transportation of goods in the bellies of their aircraft. Being that passenger revenue their key driver and financial source of their operation, these types of players are able to offer low rates in the market and high frequency of flights for the customer to choose. However, limitations in terms of dimensions of cargo and type of cargo to be transported apply to these types of airlines. Examples of airlines among this group are: American Airlines, British Airways, Continental Airlines, Delta Airlines, and others.
- Cargo Carriers: Under this group we identify those airlines that operate dedicated cargo aircrafts. Revenue generated by their cargo business is their key driver and, different to the passenger airlines, they compensate the limitation in number of frequencies with high capacity in each of their flights. Passenger airlines that run their cargo department operating cargo aircraft classify under this category. Examples are: Air France Cargo, Lufthansa Cargo, KLM Cargo, LAN Cargo, TAMPA Cargo, NCA, others.
- Integrators: Under this category we identify those airlines dedicated to the courier services and that commercialize available space in their aircraft for freight operation. Due to the high revenue generated by their courier services, freight can be a secondary priority in terms of utilization of space by these airlines. Examples are FedEx, UPS, TNT, others.
1.4. Air Cargo Industry Overview
In order to analyze the trends and perspectives for the future of Air Cargo, I will base my evaluation on results presented by reports published by Boeing Industries Boeing World Air Cargo Forecast 2006 2007, Airbus Industries - Airbus Global Market Forecast 2006 2025 and the International Air Travel TIACA Juan Carlos Serna 18 Association (IATA) IATA Passenger and Freight Forecast 2005 2009. These three studies are an important source of information for the industry and are taken as a point of reference by multiple industry publications.
Airbus forecasts that air freight expressed in terms of freight- tonne kilometres (FTK) will grow at a 6% average annual rate over the 2006-2025 period. The United States (US) domestic market, still the largest with a 11.9% share of world FTKs in 2006, is also the most mature. Over the next 20 years, fast growing Chinese exports, as well as its emerging express market, will radically change the hierarchy of the top freight markets. (Airbus, 2006)
The export of more time sensitive, high-value and high-tech goods, has grown fastest among globally traded commodities, largely contributing to the growth of air freight. As the value of the goods being exported increases, so does their time sensitivity and the likelihood they will be shipped by air. (Airbus, 2006)
In Figure 2, I present the Top 20 freight markets in 2025 according to Airbus Global Market Forecast 2006 2025.
Figure 2 Top 20 Freight markets in 2025 according to Airbus.
Boeing, in its World Air Cargo Forecast 2006 2007, makes an analysis of the performance of the Air Cargo market during TIACA Juan Carlos Serna 19 2005, year in which the industry grew 2.0%, following 12.0% growth in 2004. According to Boeing (2006), a major contributor to the slowdown in 2005 was the high cost of jet fuel. The spot jet fuel price increased 42% in 2005, ending at an average of $1.69 per gallon. During the first six months of 2006, the spot jet fuel price averaged $1.96 per gallon (Boeing, 2006, p.1). This fuel price increase diverted some traffic that in other conditions would have moved by air cargo channels to less expensive forms of transportation, such as maritime trade lanes.
Economic activity, as measured by world GDP, remains the primary driver for air cargo industry growth. World GDP grew 3.5% in 2005, following 4.0% growth in 2004. In the near term, the world economic outlook remains upbeat despite turmoil in the financial markets, rising oil prices, and increasing tensions in the Middle East. (Boeing, 2006)
In Table 2, the growth rates for Air Freight in 2005 by major market, based on Boeing calculations are presented:
2005 Air Freight Growth by Major Market Percentage % World 2.0 North America - 2.4 Europe North America 1.4 Asia North America 1.3 North America Latin America -2.6 Europe - Asia 9.0 Intra - Asia 6.3 Domestic China 12.2
Table 2 Growth Rates 2005 by Major Market Source: Boeing World Air Cargo Forecast 2006 2007
With regards to expected growth for the next twenty years, Boeing present similar results than the ones presented by Airbus, stating that world air cargo traffic will expand at an average annual rate of 6.1% for the next two decades, tripling current traffic levels increasing from 178.1 billion RTKs in 2005 to more than 582.8 RTKs in 2025. (Boeing, 2006, p.1). Additionally, Boeing evaluated the impact of the Asian market concluding that Asias air cargo markets will continue to lead the world air cargo industry in average annual growth rates, TIACA Juan Carlos Serna 20 with domestic China and intra-Asia markets expanding 10.8% and 8.6% per year, respectively. (Boeing, 2006)
Figure 3, presents a chart included in the Boeing World Air Cargo Forecast, which shows the growth trend for the World Air Cargo Traffic over the next 20 years.
Figure 3 World Air Cargo Traffic 2006 2025 Source: Boeing World Air Cargo Forecast 2006 2007
Air cargo is only one part of the global goods distribution network. Shippers demand that shipments arrive at their destination on time, undamaged, and at a reasonable price, regardless of transportation mode. Different transport modes (road, rail, maritime and air) often can move the same commodities, but for the intercontinental movement of freight, shippers usually have only two choices: air and maritime. (Boeing, 2006)
Maritime transport offers the primary benefit of lower cost; air transport offers the benefit of speed. The maritime industry, as measured in tonne-kilometers of goods transported, is much larger than the air cargo industry. In 2005, the world maritime industry generated a total of 53.4 trillion RTKs of traffic TIACA Juan Carlos Serna 21 compared to 178.1 billion RTKs of traffic for the air cargo industry. (Boeing, 2006)
Air cargo is an essential element in the globalization of sourcing, manufacturing, assembling, and distribution of goods, and this trend accounts for much of the growth in air cargo traffic. Other factors that affect the airborne freight growth rate include available capacity, cargo yields, jet fuel prices, relative currency strengths, regulations, and national industrial initiatives. (Boeing, 2006)
IATA, in its Passenger and Freight Forecast 2005 2009, forecast a similar growth than what Boeing and Airbus predicts, stating that international air freight is expected to grow at an average annual rate of 6.3% between 2005 and 2009 (IATA, 2005, p. 8). On the same line, when evaluating regional growth, IATA highlights the potential of Asian markets as key drivers for growth in the industry on the next five years, stating that routes linked with Asia Pacific, and China and India in particular, are forecast to show particular strength (IATA, 2005, p. 8).
1.5. The topic, aims and objectives
More than 5.000 joint ventures and many more contractual alliances, have been launched worldwide in the past five years. (Bamford et al., 2004, p. 91)
The utilization of strategic alliances as a source of competitive advantage in todays world is a reality. No matter the size of the organization or the industry in which it participates, most organizations see in a strategic alliance an interesting opportunity of growth, knowledge, efficiency and profitability.
The airline industry has not been aside of this reality, and initially during the 1990s a wave of alliances came in place in the passenger airlines industry, boosting their competitive position, expanding their networks and increasing levels of market share for members of the alliances. However, is not until the year 2000 when major initiatives of strategic alliances in the air cargo business took place, as it was presented in the introduction of this document, with the creation and launching of SkyTeam Cargo and WOW Alliance.
The discussion over the benefits and value created by such alliances in the Airline Cargo Industry has been presented by TIACA Juan Carlos Serna 22 different specialized publications. However, even though studies have been made on the passenger alliances (see Glisson et al, 1996; Flores Jr., 1998; Park & Zhang, 2000; Wang & Evans, 2002 among others), few academic studies have been made focused into the air cargo business alliances and the evaluation of such partnerships as a source of competitive advantage.
In this document, I intend to cover the following three objectives, focusing my analysis on the assessment of different issues involving the case study on SkyTeam Cargo and WOW Alliance:
- Evaluate the extent in which strategic alliances are a source of competitive advantage for the companies engaged in these partnerships, understanding the reasons behind this decision and identifying the potential benefits of these agreements.
- Identify how does a strategic alliance add value to customers, by disaggregating the different activities involved in the value chain of companies participating in these alliances.
- Identify different implementation practices that could be used by companies in the air cargo business to develop strategic alliances.
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2. Literature Review Strategic Alliances in Air Cargo
2.1. Previous Academic Studies on Strategic Alliances
Strategic alliances have been studied from numerous perspectives. These perspectives include those of alliance rationale (Ohmae, 1989; Burgers et al., 1993; Contractor and Lorange, 1988), the process of alliances (Ring and Van de Ven, 1994; Doz et al., 2000), the transaction costs involved (Parkhe, 1993a), their characteristics (Borys and Jemison, 1989) and complexity (Killing, 1988) partner selection and development (Hamel et al., 1989; Osborn and Baughn, 1990; Sheth and Parvatiyar, 1992; Ring and Van de Ven, 1994; Brouthers et al., 1995; Doz, 1996; Singh and Mitchell, 1996; Contractor and Kundu, 1998) or performance measurement and value creation of alliances (Harrigan, 1986; Kogut, 1988; Parkhe, 1993 a, b; Dussauge and Garrette, 1995; Chan et al., 1997; Glaister and Buckley, 1998; Das et al., 1998; Doz and Hamel, 1998; Baum et al., 2000). (Kleymann, and Seristo, 2001, p. 304)
The effects of airline alliance have been extensively investigated elsewhere, including emprirical studies by Gellman Research Associates (USDOT, 1994), Youssef and Hansen (1994), the US General Accounting Office (USGAO, 1995), Oum et al., (1996), Brueckner and Whalen (2000), and Park and Zhang (2000). All of these alliance studies have focused on international alliances on passenger services. (Zhang et al., 2004, p. 85)
In their article, Airline Alliances Who Benefits?, Morrish & Hamilton (2002) present a consolidation of major studies in alliances in the airline industry, which we attach in Annex 4 of this document.
2.2. Strategic Alliances: Definitions and challenges
The concept of Strategic Alliances has become widely used in the business language to refer to the different type of partnership agreements between two or more companies that pursue clear strategic collaboration objectives, with different levels of possible integration among the members. The definition presented by Elmuti & Kathawala (2001, p.205), in my opinion, presents a very clear idea of what a Strategic Alliance should be about;
TIACA Juan Carlos Serna 24 Strategic Alliances are partnerships of two or more corporations or business units that work together to achieve strategically significant objectives that are mutually beneficial.
From such definition, it is important to highlight the following three ideas. The first one is the concept of partnerships of two or more corporations; which opens the definition to the construction of network alliances, with more than two members seeking for the benefits of such alliance. In this sense, Elmuti & Kathawala state that much of the discussion regarding strategic alliances has typically focused on alliances between two companies; however, there is an increasing trend towards multi- company alliances (2001, p.205). Following with this idea, Gomes-Casseres introduces the concept of constellations, as a set of firms linked together through such alliances and that competes in a particular competitive domain; the constellation may compete against other constellations, or against single firms (2003, p. 328).
The second idea to evaluate from Elmuti & Kathawalas definition is the concept of achieving strategically significant objectives. Is in here, where I consider the main differentiation of Strategic Alliances over any other type of partnership can be identified. Companies throughout its business-life establish relationships with hundreds of companies, from suppliers to competitors, to customers; ones more deeply integrated or stronger than the others, however, it is important to clearly identify which of those partnerships evolve to real strategic partnerships and which ones are just simple business relationships for the organization.
Bennet, cited by Evans (2001), distinguishes between tactical alliances which are loose forms of collaboration which exist to gain marketing benefits and strategic alliances which are a longer term, and wider in their scope and level of commitment. Airline tactical alliances frequently focus on code-sharing agreement and feed arrangements at airport hubs. Strategic Alliances, whilst incorporating these arrangements, would also include such aspects as shared airport facilities, synchronised scheduling, reciprocity on frequent flyer programs, freight coordination and joint marketing activities. (Evans, 2001, p. 238)
T. Fan et al (2001, p. 350), identify three possible levels of cooperation: ordinary, tactical and strategic. Ordinary cooperation activities, in the airline industry, is present when carriers serving an airport infrequently may choose to ordinarily outsource the handling of general sales or airport functions to another carrier or handling agency. These agreements may be indicative of mutual trust, however, they are not necessarily TIACA Juan Carlos Serna 25 indicative of deeper forms of cooperation. At the next level, tactical cooperation usually takes the form of two carriers cross- selling each others capacity on selected routes, or one carrier marketing its code on anothers flight, limiting its cooperation to specific routes or regions and most of the times the carriers involved are still marketed as independent organizations. Strategic alliances, as a difference of the other two, are characterized by joint, dedicated marketing entities for network- wide cooperation, characterized by extensive code-sharing, coordinated schedule and fare planning, reciprocal loyalty programs with the ultimate goal of delivering seamless transportation experience across the entire alliance network.
And the last idea that is important to highlight from the definition of Elmuti & Kathawala is the concept of mutually beneficial. As in every business relationship, the idea of a win-lose situation is far from being accepted. Seeking for win-win opportunities for all the members of the alliance is a critical element for the success of such partnership in the future.
Other definitions of strategic alliances can be introduced to have a wider idea of how academics perceive this concept. Wheelen and Hungar (2000, p. 125) state that a strategic alliance is an agreement between firms to do business together in ways that go beyond normal company-to-company dealings, but fall short or a merger or a full partnership. Ernst & Bamford define an alliance as an agreement between two or more separate companies in which there is shared risk, returns, and control, as well as some operational integration and mutual dependence (2005, p. 134). Gomes-Casseres (2003, p.328) presents his definition of alliance as any governance structure to manage an incomplete contract between separate firms and in which each partner has limited control, and the same author complements his definition by stating that an alliance is a way of sharing control over future decisions and governing future negotiations between the firms it is a recognition that the initial agreement is in some sense incomplete (Gomes-Casseres, 1998(a)). Evans (2001, p. 230) states that the concept of strategic alliances is defined as a particular horizontal form of inter-organisational relationship in which two or more organizations collaborate, without the formation of a separate independent organization, in order to achieve one or more common strategic objectives. Porter and Fuller (1986) cited in the work of Evans (2001, p.236), define strategic alliances as an attractive mechanism for hedging risk because neither partner bears the full risk and cost of the alliance activity.
TIACA Juan Carlos Serna 26 More specifically into the airline industry and the alliances within that sector, Morrish & Hamilton (2002, p.401) present the idea that an airline alliance is any collaborative arrangement between two or more carriers involving joint operations with the declared intention of improving competitiveness and thereby enhancing overall performance.
Other new creative concepts have been introduced as well into the market, such as the concept of Co-opetition, presented by Rijamampianina et al. and that is defined as The concept of co- operation and competition with a competitor is known as co- opetition. (2005, p. 92)
Differentiating between alliances from mergers, Doz and Hamel (1998, p. xi) have presented for a set of features that are: In alliances there is much uncertainty and ambiguity; The manner in which value is created in alliances is not preordained. In alliances, the relationships between partners evolve in ways that are hard to predict. The playing field in alliances is very unstable or turbulent todays partner may be tomorrows rival Alliance relationship management in the long term is usually more important than the initial formal design Success in alliances is very much determined by adaptability to change.
2.3. Types of Strategic Alliances
When analyzing the types of strategic alliances that have been created and implemented by different companies, academics tend to classify them based on different criteria. On one hand, we find those academics that classify the type of strategic alliances based on the areas of collaboration. In this group, we find for example the work of a study of Coopers and Lybrand (1997) presented by Elmuti & Kathawala (2001, p. 207):
In a study by Coopers and Lybrand (1997), they identified the following types of alliances, and found their clients were engaged in them as follows: o Joint marketing/promotion, 54% o Joing selling/distribution, 42% o Production, 26% o Design collaboration, 23% o Technology licensing, 22% o Research and development contracts, 19% o Other outsourcing purposes, 19%
TIACA Juan Carlos Serna 27 Under the same idea, Technology Associates and Alliances (TAA) (1999), a strategic alliances consulting company, lists the following type of alliances: Marketing and sales alliances, Product and manufacturing alliances, Technology and know-how alliances (Elmuti & Kathawala, 2001, p. 207)
On the other hand, we have a group of academics that classify the type of strategic alliances depending on the level of integration in the collaboration process. In this group, we can find the work of Gomes-Casseres, who states that Alliances may be structured as complex equity joint ventures or they may be looser arrangements for cooperating (2003, p. 328). Johnson et al. presents that there are a variety of types of strategic alliance; some may be formalized inter-organizational relationships; at the other extreme, there can be loose arrangements of cooperation and informal networking between organizations with no shareholder or ownership involved. (2005, p.354)
Analyzing the airline industry, we find classifications on alliances such as the one presented by Park (1997, cited by Morrish & Hamilton, 2002, p. 401) who distinguished two major type of alliances as being either complementary or parallel. The main difference is that members of complementary alliances have non-overlapping routes on their network, whereas in parallel alliances members face problems of routes being overlapped.
Apart from routes, the most common forms of collaboration involve code sharing; block spacing; shareholdings; and franchising. Code sharing allows an airline to sell seats or cargo on a partners flight under its own designator code, while blocking spacing is an agreement under which one airline allocates a block of seats or cargo space on its flight to a partner. Shareholding (cross-equity holding) is usually subject to regulation if it involves an airline from another country, and does not require any type of strategic collaboration. Franchising, on the other hand, has the franchisee paying a royalty to the franchiser in exchange for the privilege of using the latters marketing package (Morrish and Hamilton, 2002, p.401). Also, Glison et al (1996, p. 27) define three types of alliances available in the airline business, which are marketing, equity and frequent flyer programs.
2.4. Experiences of Strategic Alliances in Airlines
The development and implementation of strategic alliances in the airline industry is not new. During the 1990s, passenger airlines TIACA Juan Carlos Serna 28 embraced a set of strategic alliances as a consequence of deregulation initiatives and the benefits of code-sharing agreements. As a result, multiple bilateral agreements of complementation of routes and services were signed between airlines of all over the world, increasing volumes, network coverage and market share opportunities. Strategic alliances have occurred in a broad spectrum of industries, among which the airline industry has the largest number of alliances (Oum et al., 2004).
In Table 3, I present the results of a survey conducted by the specialized publication Airline Business on the number of existing airline alliances on the period 1994 1999. From there, we can see an increase of 18.3% during the 5 year period and the increase on Non-Equity Alliances.
Table 3 - Airline Alliances in the global airline industry 1994 1999 1994 1995 1996 1997 1998 1999 % Change 1999/1994 Number of Alliances 280 324 389 363 502 513 + 18.3 With equity stakes 58 58 62 54 56 53 -8.6 Non-equity alliances 222 266 327 309 446 460 +207.2 New Alliances - 50 71 72 121 26 Number of Airlines 136 153 159 177 196 204 +150.0 Source: Airline Business (1999) Reproduced with permission from the Editor.
Some reason behind the growth on the number of alliances within the airline industry can be: the level of instability of the industry, the low levels of margin and profitability and the regulatory framework in which the industry works. In the airline industry, , it is only recently that there has been an increase in alliance stability, and it seems that the degree of integration is one of the main factors accounting for stability. (Lindquist and Deimler, 1999, cited by Kleymman and Seristo, 2001, p. 303)
On the other hand, the effect of profitability on the proliferation of strategic alliances is presented by Morrish and Hamilton (2002, p. 403), stating that one explanation for the prevalence of alliances in the airline industry is that although the industry has achieved high growth rates, it suffers from intrinsically low- profit margins. Additionally, same authors analyze the factor of a restrictive environment, proposing that with global expansion constrained by restrictive air services agreements, strategic alliances are seen as a strategy for growth.
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In the air cargo industry, the fever of strategic alliances have come a little bit behind the passenger industry, even though, the utilization of bilateral interline agreement among airlines is common commercial and operational practice over the last years. The cargo alliances have come in behind the more extensive passenger alliances that grew out of the rapid expansion of code- sharing and other cooperative arrangements the scheduled airlines undertook during the 1990s to add international markets with limited new investment (Wiebner, 2003, p. 39). Notice that one difference between a cargo alliance and a passenger alliance is that for the passenger alliance, the burden of moving passengers at the connecting airport is strictly the responsibility of those persons. With cargo alliances, freight must be moved by a finite number of crews working for both airlines and at the terminal. (Zhang et al., 2004, p. 88)
The initiatives to create clear airline alliances, such as the ones created in the passenger industry 1 , have been embraced only since year 2000 with the creation of SkyTeam Cargo and then creation of New Global Cargo Alliance, that later would be branded WOW.
SkyTeam Cargo was created in year 2000 by four carriers that were already members of the SkyTeam Alliance in the Passenger side of the business. These carriers were Aeromexico Cargo, Air France Cargo, Delta Air Logistics and Korean Air Cargo. Since then, four other carriers have joined the alliance (Alitalia Cargo, CSA Cargo, KLM Cargo and Northwest Airlines Cargo) complementing the network and the type of products offered to their customers. The dynamic that this alliance has had over the past years, has been reported by Conway (2004, p. 58) stating:
Sky Team Cargo members are all adopting a single product portfolio based originally in that of Air France and the alliance is committed to joint handling as far as possible. It also has a joint venture, which handles all outbound sales for Air France, Delta and Korean, with Alitalia and KLM expected to join too by the end of the year.
In 2004, it was reported by Air Cargo World that SkyTeam Cargos Network (before Northwest Cargo joining in) served more than 500 destinations in 110 countries.
1 In the passenger industry, three major group-alliances can be identified: One World, Star Alliance and Sky Team. TIACA Juan Carlos Serna 30 Being members of SkyTeam Cargo, Air France and KLM are also set as an example of the evolution of strategic alliances in the Air Cargo, as it is stated by Peter Conway (2004):
Air France and KLM also show what true integration of cargo operation can be like when uncomplicated by company egos. As part of their merger plan, they have moved to create one cargo organization, with a single management, harmonized sales force and common IT platform, and to align freighter networks.
On the other side we have WOW, the cargo alliance created in April 2000 by Lufthansa Cargo, the worlds biggest international airfreight carrier, Singapore Airlines Cargo, the world second biggest, and SAS Cargo, the Scandinavian giant (WOW website, 2006). It was initially known as New Global Cargo; however, in April 2002 it was re-branded as WOW and launched harmonized services for the customers of the airline members. In July 2002, Japan Airlines Cargo joined WOW as a new partner, extending the presence of the alliance in the Asian Market.
According to WOW website (2006), through close cooperation, the alliance partners aim to offer customers a greatly expanded network. They have also harmonized their air cargo services so that their individual products, such as express services, can be transported seamlessly throughout the alliance network. On the same line, Taverna (2002) reports: WOW executives are continuing efforts to harmonize their operations considered the key to ensuring a genuine joint product offering. One are of focus is sales and handling, where the aim is to move under a single roof whenever possible (2002, p. 52).
As it is presented in the description of both current alliances in the Air Cargo Industry, they characterize by the fact that in both of them exist a group of companies coming together to establish an alliance. As it was presented above, the idea of two-member alliances has evolved to have alliance groups. An alliance group, then, is a collection of separate companies linked through collaborative agreements (Gomes-Casseres, 1994, p. 65). The same author presents the idea that collaboration in business is no longer confined to conventional two-company alliances, such as joint ventures or marketing accords. Today, we see groups of companies linking themselves together for a common purpose (Gomes-Casseres, 1994, p. 62).
The fact that multiple organizations come together into an alliance to work towards a common strategic objective, with different management styles, resource capabilities and culture presents a great challenge for the executives of such alliances to TIACA Juan Carlos Serna 31 create a successful one. The challenges of integrating the operations of a series of companies with disparate corporate cultures include everything from integrating information technology systems to coordinating sales forces and product lines (Wiebner, 2003, p. 38). The need to coordinate and integrate all the efforts within the alliancing members are evident when multiple organizations establish a strategic alliance, as it is in the airline alliances, and as it is stated by Kleyman and Seristo (2001, p. 305) in a fully multilateral alliance network, where each member cooperates with every other member, a single members decision will affect a large part of the network.
Armbruster (2002) presents an interesting fact, related to the perception of the alliances and its future by the industry members:
In an electronic survey conducted by Cargo Network Services 2 at its annual conference in Las Vegas, 80% of the forwarders, carriers, vendors and other participants said they expect consolidation and alliances to continue. A similar percentage said they perceived alliances primarily as an opportunity, with only 20% viewing them as a threat.
2.5. Why Strategic Alliances? Reasons behind the decision
The importance of strategic alliances in todays business environment has been a common point of discussion from several academics. Different set of reasons can be found as to why a company should seek for strategic alliances in order to compete in todays open, aggressive markets. For some of them, strategic alliances are a must in todays business strategy and are a matter of survival; Alliances between companies, whether they are from different parts of the world or different ends of the supply chain, are a fact of life in business today (Moss, 1994, p. 96). Gomes-Casseres state, the reality of alliances is complex, but their impact on every facet of economic competition is profound. No firm can afford to ignore the use of alliances in competitive strategy. (Gomes-Casseres, 1998)
Rijamampianina et al., citing different authors, present the idea that alliances are growing as a response of rapid advances in the business environment. The basis for the growing number of competitive business alliances lies in the rapid advancement of technology, the management of knowledge, more aggressive
2 Cargo Network Services Corporation is a subsidiary of the International Air Transport Association, operating and offering services in the United States. TIACA Juan Carlos Serna 32 competition and the uncertainties and complexities of todays business environment (Escriba Esteve & Urra Urbieta, 2002; Zineldin, 2002; Tse et al, 2004) (2005, p. 93). The same authors, present as reasons to get involved in strategic alliances the different type of benefits that organizations can achieve from them, stating that by forming alliances with strategically chosen competitors, companies find that they can shorten development cycles, share financial risks, improve their organizational learning and increase their access to markets (Rijamampianina et al, 2005, p. 93).
According to Elmuti & Khatawala (2001, pp. 206 - 207) the reasons for creating strategic alliances can be classified into: Growth Strategies and entering new markets, Obtain new technology and/or best quality or cheapest cost and Achieve or ensure competitive advantage. They based their classification in a study of Coopers & Lybrand (1997) that shows that growth strategies and entering new markets are among the main reasons cited by organizations to form strategic alliances. At the same time, the same authors citing Quinn (1995), state that many companies are forming alliances looking for best quality or technology, or the cheapest labor or production costs (Elmuti & Khatawala, 2001, p. 206). In a similar line of thought we find Segil, who states: once seen primarily as a way to cut costs, alliances now play a strategic role in increasing revenue, fueling growth and improving efficiency (2004, p.31).
To some degree alliance formation can be viewed as an inevitable result of the regulatory framework within which the international airline industry operates. Regulatory and legal restrictions often prevents the full ownership of airlines by foreign companies and consequently alliances have been perceived as the only viable market entry mechanism at least in the short to medium term. (Evans, 2001, p. 239)
In a study presented by the Roland Berger consulting firm it was stated, The main aim in forming an alliance is to create a global logistics offering and hence increase market share disproportionately. When they form alliances, therefore, airlines focus mainly on optimizing their route networks and schedules(Wiebner, 2003, p. 39); Airlines have embraced alliances as a way to cut costs and expand sales by offering service to markets where the carriers themselves do not fly (Armbruster, 2002, p. 22).
TIACA Juan Carlos Serna 33 Kleymann and Seristo (2001, p. 305) present three categories in which benefits from alliances can be classified, being Market- presence related, Resource utilization related and Learning of practices. Learning of better practices is, in a way, an indirect source of benefits as it eventually leads to financial benefits either through better utilization of resources or through maximization of revenues. As to market-presence related benefits, alliances have an impact over its members revenues allowing them to be present in markets where they wouldnt participate as a single organization. Concerning resource utilisation benefits, we can differentiate, for instance, labour productivity, aircraft productivity, and benefits of accruing from lower costs of procured goods and services. Most of the cost reduction potential is in labour costs, whether that labour is in marketing, maintenance, ground handling or flight operations. Other sources of cost reduction are in equipment and property costs, capital costs mainly for aircraft, and expenses paid for third party services such as ground handling. Within marketing, the payment to the distribution channel offers a potential for cost reduction. (Kleymann and Seristo, 2001, p. 305)
Button et al. (1998), suggest a number of possible reasons for alliance formation cost savings, market penetration and retention, financial injection, infrastructure constraints, circumventing institutional constraints and market stability. More specifically, they identified four advantages of alliances: Access to new markets by tapping into a partners under- utilised route rights or slots; Traffic feed into established gateways to increase load factors and to improve yield; Defence of current markets through seat capacity management of the shared operations; and Costs and economies of scale through resource pooling across operational areas or costs centres, such as sales and marketing, station and ground facilities and purchasing.
In their work, Agusdinata and Klein (2002, pp. 203-204) present a very interesting approach on the factors that facilitate airline alliances. These two factors are: Restriction on foreign ownership and control and The nature of airline alliances.
Under the first factor, even though the airline industry is a vehicle to promote globalization all over the world it remains, ironically, nationalistic in nature. In order for an airline to expand operations into another countrys territory, the governments of TIACA Juan Carlos Serna 34 any two countries have to establish bilateral agreements 3 that will ultimately lead to an infinite chain of agreements on a world- wide scale. It is the limitation with regards to the carrier(s) included in such bilateral agreements the one that has become a main obstacle to true liberalization on the airline industry. If a designated airline company is to represent a country in a bilateral negotiation, then the nationals of the country in question must have majority ownership and dominant managerial control over the airline. Therefore, the only way to achieve international world-wide expansion would be by forming alliances with other carriers and integrating their networks. So far, some development has been made in this sense, being the most important one the deregulation in the US market followed by liberalization in Europe. However, as long as restrictions on ownership and control remain in place, alliances are likely to be the only way for airlines to globally expand their operations.
Now, with regards to the nature of airline alliances as a factor that facilitate them, it is presented that despite the possible future weakening of regulatory constraints thanks to liberalization efforts in major markets, it is presumed that alliances will still play an important part in the global market. Additionally, it is expected that these alliances will stay and will not necessarily evolve in mergers, mainly because the flexibility offered by the alliances compared to mergers is what is required within a turbulent and uncertain industry such it is the airline industry. Furthermore, the size of the financial resources needed for an airline to establish its own global network are enormous and bearing in mind the volatile nature of past financial results - the adequate return on such investment remains uncertain.
To respond to this highly competitive and volatile climate, airlines are forced to adopt organisational forms suited to cope with such environment. A primary requirement of such an organisational form should be the increased competitive ability to survive in an environment that is characterised by fierce competition so that the benefits of entering new markets may be reaped and changing customer demand may be fulfilled. The answer presented by the airlines is to form global alliances groups because such organisational form is flexible, has rapid growth potential and promises to provide a worldwide network within which member airlines can offer seamless global services. (Agusdinata & Klein, 2002, p. 204)
3 Typical bilateral agreements will include consensus on issues such as: i) the carrier(s), in other words, the designated airlines, (ii) the routes flown, (iii) the types of traffic rights granted for the designated airlines, (iv) the frequency of flights and capacities and (v) tariffs. TIACA Juan Carlos Serna 35
Despite the fact that strategic alliances are a must in todays business environment and the multiple reasons and benefits that organizations can expect from entering into strategic alliances, it seems it is not an easy task. The numbers with regards to the level of success of strategic alliances are not motivating at all, showing that 50% to 70% of this partnership efforts fail. Research suggests that 40% to 55% of alliances break down prematurely and inflict financial damage on both partners (Dyer et al., 2004, p.109); The failure rate of strategic alliances strategy is projected to be as high as 70 percent (Kalmbach and Roussel, 1999) (Elmuti & Khatawala, 2001, p. 206); The overall success rate of alliances hovers near 50%, and the average life span of a joint venture is just five to seven years (Ernst & Bamford, 2005, p. 133); It is widely accepted the fact that the majority (70 percent) of alliances either fail outright, fall captive to shifting priorities or achieve only initial goals, and 55 percent fall apart within three years after they are formed (Segil, 2004, p. 31). Although strategic alliances are increasingly perceived as strategic weapons even for competing within a firms core business (Harrigan, 1987), they are enormously complex to manage successfully and they are frequently subject to instability, poor performance and premature dissolution. (Parkhe, 1993). (Morrish and Hamilton, 2002, p. 402)
Existing alliances have already proven to be very rewarding, both to the airlines (increasing profits) and to the consumers (betters schedules and lower fares). Despite the proven success of alliances, results from the airline sector and particularly from other branches of industry, clearly show that alliances are rather unstable, though no less stable than mergers (Agusdinata & Klein, 2002, p. 210). Many alliances in the airline industry have emerged, alliances have failed and new alliances have been forged and the speed of change has sometimes been bewildering for observers. (Evans, N., 2001, p. 230)
In a commentary on alliance failures, Flight International (2000, p. 3) suggests that the prospect of alliance instability is greater now than ever. It identified a number of notable failures: The KLM/Alitalia collapse The Swissair break from Delta following Deltas tie-up with Air France; The Austrian Airlines split from its European Partners to join the Star Alliance The Termination of Canadian Airlines membership of One World after being taken over by Air Canada. TIACA Juan Carlos Serna 36
However, we find also authors such as Gomes-Casseres who criticizes the focus that some academics and consultants have had over the rate of failure on strategic alliances; This focus on termination rates misses the central point: alliances are a means to an end, not an end in themselves. Alliance longevity is irrelevant strategic success is what counts (Gomes-Casseres, 1998). In the same line of thought we can find Agusdinata and Klein (2002, p.204), who state:
It is not only the intrinsic flexibility of any airline alliance that makes it subject to change but also the rapidly changing environment in which it is situated as well as the changing perceived benefits and competitive pressures which force all alliances to rethink their objectives many times during their existence and which, in turn, may lead to a redesigning or a dissolution of the alliance in question.
2.6. Critical Success Factors in Alliance Formation
It is interesting to see how with the reinforced need for organizations to participate in strategic alliances to achieve competitive advantage, but with such levels of failure statistics, executives are in a position where they need to find the magic formula to apply in their strategic alliance ventures in order to make them successful. Therefore, multiple sets of models, frameworks, critical success factors, results from research, commandments and any other type of consultancy creations are available for executives to choose. Such critical success factors for strategic alliances vary from simple concepts of trust and communication, to complex models involving several steps and methodology. To make a strategic alliance succeed, its managers must be able to create an environment of trust, maintaining broad strategic vision and feel genuine empathy for others, even those who are still competitors in other areas (Ellis, 1996, p.8); Strategic and financial analyses contribute a level of confidence to the alliances, but, like all new business ventures, collaborative relationships draw energy largely from the optimistic ambition of their creators (Moss, 1994, p. 99); The effective management of relationships to build collaborative advantage requires managers to be sensitive to political, cultural, organizational and human issues (Moss, 1994, p. 108); The success or otherwise of the alliance, whatever its nature or purpose, depends largely on how the details are communicated to and implemented through people (Rijamampianina et al, 2005, p. 94).
According to Elmuti & Khatawala (2001, pp. 210 215) the success factors for strategic alliances can be classified as follows: - Senior management commitment TIACA Juan Carlos Serna 37 - Similarity of management philosophies - Effective and strong management team - Frequent performance feedback - Clearly defined, shared goals and objectives - Thorough planning - Clearly understood roles - International vision - Partner selection - Communication between partners: maintaining relationships
One important element to be analyzed as a critical success factor for alliance formation is the element of trust. As it is stated by Kleyman and Seristo (2001, p. 307), in addition to contractual stipulations, there are two prominent mechanisms in place which can to some extent mitigate the risk involved at high levels of integration, namely trust and alliance-specific investment. The tighter the cooperative integration between partners, the higher the need for trust between them.
Additional work can be found in The eight Is that create Succesful Wes (Moss, 1994) and the Alliance Success Factors presented by Gomes-Casseres (1998). Also, Segil (2004) state that the success on the alliances relies on the capacity to measure the benefits, and present in their work a set of metrics that can be applied to measure the advances and success of these partnerships. As stated by Segil, creating the alliance is the easy part; managing it and measuring its success is much more challenging (2004, p. 35).
Agusdinata and Klein (2002, p. 205) focus on those elements that provide stability to the alliance, and therefore can be taken as critical success factors. Such elements are based on the ability of the alliance to cope with economic downfall and to react in a chameleon-like way to changing competitive environments. An alliance has to be able to harvest and secure the benefits of increased economies of scale and scope during the upturn and peak periods of the economic cycle so that it is able to engage niche carriers in price battles during times of economic downfall. For the authors, the three most important categories of internal stability are: 1. Trust, mutual forbearance and multi-culturalism 2. The level of network overlap of the members networks and the number of partners in the alliance. 3. The learning situation created by an alliance.
TIACA Juan Carlos Serna 38 Now, another perspective could be to analyze the factors that could have an impact over the failure of the alliances. According to Elmuti & Kathawala (2001, pp. 208 209), the reasons of why strategic alliances fail can be explained by the following factors: - Clash of cultures and incompatible personal chemistry - Lack of trust - Lack of clear goals and objectives - Lack of coordination between management teams - Differences in operating procedures and attitudes among partners - Relational Risk - Performance Risk - Strategic alliances might create a future local or even global competitor.
As we can see from above, the need for organizations to embrace in the creation and implementation of strategic alliances that would allow them to achieve competitive advantage has been reinforced by work presented by different authors. However, the fact that there is a high percentage level of failure of such initiatives, create a challenge for executives today to find the appropriate combination of factors that will assure the success of their partnerships. Different results from research and concepts from academic and consultants can be found on critical success factors for strategic alliances, as well as different frameworks and methodologies; however it is clear that every alliance is different, every industry is different, every company is different, and therefore a best practice in the consolidation of alliances is difficult to be developed.
2.7. Are the current SAs in the industry being a source of competitive advantage?
Above the reasons that organizations might have to enter strategic alliances, and that have been presented above in this document, there is a concept that embraces them all, and it is to achieve competitive advantage. Michael Porter (1985) introduced the concept of Competitive Advantage and it relates to the ability of an organization to discover and implement ways of competing that are unique and distinctive from those of their competitors and that can be sustained over time.
It seems to be a general agreement over the academics that strategic alliances are a source of competitive advantage. In the TIACA Juan Carlos Serna 39 global economy, a well-developed ability to create and sustain fruitful collaborations gives companies a significant competitive leg up (Moss, 1994, p. 96); the ability to form and manage them [strategic alliances] more effectively than competitors can become an important source of competitive advantage (Dyer et al., 2001, p. 37); Strategic Alliances are giving companies a competitive advantage (Segil, 2004, p.31); Strategic alliances - a fast and flexible way to access complementary resources and skills that reside in other companies have become an important tool for achieving sustainable competitive advantage (Dyer et al., 2001, p. 37); Cooperating to compete in any form gives participants greater opportunity for growth and a stronger competitive edge (Amin, Hagen & Starret, 1995; Brandenburger & Nalebuff, 1996; Clarke-Hill et al., 2003) (Rijamampianina et al, 2005, p. 93).
Airline alliances have evolved from being a loose form of co- operation with each other to becoming one of the most important strategies to be competitive, especially in the medium and long- haul international market. (Agusdinata & Klein, 2002, p. 201).
Airlines have to find suitable organisational ways of coping with this highly competitive and volatile climate. A basic requirement of this organisational form should be to increase the competitive advantage of surviving in a highly competitive environment so that the benefits of entering new markets may be reaped. This can be achieved if the new organisational form is flexible and allows rapid growth potential. (Agusdinata & Klein, 2002, p. 210)
The competitive position of an organization can be measured by their capacity of creating value. In competitive terms, as stated by Porter (1985, p. 38), value is the amount buyers are willing to pay for what a firm provides them. A firm assures its profitability if has the capacity of generating sufficient value that it exceeds the costs involved in creating the product, and this creation of value shall be the goal of any generic strategy. The creation of value on the organizations can be explained through the Value Chain Model presented by Porter (1985).
As we have presented above, when analyzing the types of strategic alliances and the reasons behind them, we see that cooperation at different levels within the alliances members is present in various stages of its value chain impacting the capacity of such alliances to create value and enhance the competitive position of such organization. I consider that by understanding and disaggregating the different activities covered by a cargo airline, with the support of the Value Chain Model TIACA Juan Carlos Serna 40 developed by Porter (1985), the identification of opportunities of cooperation within an alliance formation process and focusing in engaging cooperation in value-adding activities can generate a higher impact in the results of the alliance and therefore secure the benefits behind its formation.
Below, in Section 4 of this document, I present a Value Chain Analysis for a Cargo Airline, which can be adapted to any airline participating of the WOW or SkyTeam Cargo Alliance.
2.8. Are customers perceiving the benefits of the alliances?
Despite the fact that Strategic Alliances have been in the business environment for a while, it has been an element of discussion and evaluation the impact and benefits that such alliances have brought to their members, but much more discussion has generated the fact that final customers are perceiving and getting benefits or not of such partnership ventures.
During the past couple of years, much has been written with regards to the new challenges that organization face in order to satisfy and create value for their customers. When analyzing the aims of the two group-alliances presented in this document, the focus on customers is clearly identified. For example, SkyTeam Cargos mission statement explicitly express the idea of being a customer driven alliance; We, SkyTeam Cargo, aim to be the most effective and customer-driven Air Cargo Group in the global logistics industry (SkyTeam Cargo Website, 2006).
So, how do customers benefit of such alliances? Different opinions have been presented and multiple benefits can be cited by the executives of the members of such alliances. How do clients benefit? By getting a better and expanded product for the same price. It also cuts their organizing costs, as all the alliances routes are now available in a coordinated fashion. This one-stop-shopping reduces labor costs and speeds up the organization of the transport (Wiebner, 2003, p. 39).
However, perception from the top executives of the major freight forwarding companies in the world in some cases leave out some questions with regards to the effectiveness and transferred value that these alliances have brought to their businesses. Presumably alliances are created to provide a global offering to TIACA Juan Carlos Serna 41 the major freight forwarders, the key customers of airlines accounting for over half of global air freight. But they remain distinctly lukewarm about them (Conway, 2004); Like many other forwarders, Tomasulo [EGLs Vice-president of airfreight and gateways] doesnt care whether a carrier is an alliance member he just wants good service at a reasonable price (Armbruster, 2002, p. 22); According to Thomas Mack, senior vice-president airfreight at freight forwarder Schenker, the big deficiency in the formal cargo alliances is that they do not have a shared bottom line (Conway, 2004).
And the perception of the major freight forwarders should be an important element to evaluate and to be addressed by the current Air Cargo Alliances, due to the fact that everyday, more and more, they are achieving a stronger dominant position in the Air Cargo Industry. The large multinational forwarders, it is said, are on an inexorable upward path toward dominance on the global air cargo stage while small and medium-sized companies are increasingly becoming bit-part players pushed to the outer margins (Hastings, 2004). Additionally, the Freight Forwarding Industry has suffered of a major transformation and consolidation of major players over the last couple of years, with billionaire mergers and acquisitions in place, creating very powerful organizations of which airlines need to be aware of. And these organizations are choosing with whom they want to work, based on complex negotiations and with the creation of their own Preferred Carrier Programmes. Instead, such forwarders seek global coverage through their own preferred carrier programmes, where they concentrate traffic with 10-12 partner airlines. Thus, in effect, they create their own a la carte alliances. (Conway, 2004)
So, how much are airline cargo alliances really worth? As stated by Air Cargo World (2004), It is a question not easily answered, and not one of the top cargo executives from the airlines constituting Sky Team Cargo is willing to cite figures that would demonstrate the value of their alliance.
2.9. Implementation Practices for Strategic Alliances
Strategic Alliances have been a subject of study during the past ten years, with academics presenting analysis over different issues concerning the definition, implementation and evaluation of such cooperation agreements. Different models to be applied have been developed by various authors, trying to establish a set TIACA Juan Carlos Serna 42 of parameters of guidelines that could help managers to get the true benefits of strategic alliances.
The development of an alliance can be divided into three main stages: formation of the alliance, management of the alliance and evolution of an alliance (Baharum, 2004, p. 65). These three stages can be seen in various models presented by different authors who have evaluated the development of international strategic alliances during the 1991 1998 period, such as El-Hajjar (1991), Pekar & Alio (1994), Bronder & Pritzl (1992), Lorange & Roos (1993), Faulkner (1995) and Whipple & Frankel (1998). From the above, Bronder & Pritzl (1992) and Pekar & Allio (1994) introduce a fourth stage: Partner Selection.
Strategic Alliances models developed from 1999 2004 focus more on alliance management, like the results we find in the studies of Koza & Lewin (1999, 2000), Pett & Dibrell (2001), Isabella (2002) and Draulans et al (2003). (Baharum, 2004).
In section 5 of this document, I will present an adapted practice and framework that could be used by cargo airlines to develop strategic alliances.
3. Methodology and Limitations of the Paper
In order to complete my research, a combination of different methodologies was used, based mainly on the utilization of the Case Study methodology, supporting my findings on a qualitative evaluation of secondary data. Despite the efforts made to obtain sources of primary data within the companies evaluated in this document, I was not able to obtain a positive response from them in order to gather some inside information and their internal perceptions over the evolution and management of the strategic alliances evaluated in my research.
Is in this first point, where the main limitation to my research exists. Focusing mainly on secondary data on the results and structure of the strategic alliances, does not allow to deliver conclusive results that can be generalized to other partnership experience at a strategic level in the Air Cargo Industry. However, extensive research from secondary sources, including academic journals, books, industry publications and others was made in order to obtain as much information as possible to minimize the effects of this limitation.
TIACA Juan Carlos Serna 43 Now, as it was mentioned before, my research was conducted based on the Case Study methodology. According to Yin (1994), the Case Study is a preferred approach when how or why questions are to be answered, when the researcher has little control over events and when the focus is on a current phenomenon in a real-life context. For my research, these three criteria were applicable, seeking to understand how strategic alliances can be a source of competitive advantage for airlines in the air cargo industry in todays business environment and reality.
Yin (1993) listed several examples along with the appropriate research design in each case. There were suggestions for a general approach to designing case studies, and also recommendations for exploratory, explanatory, and descriptive case studies.
In exploratory case studies, fieldwork, and data collection may be undertaken prior to definition of the research questions and hypotheses. This type of study has been considered as a prelude to some social research. However, the framework of the study must be created ahead of time.
Explanatory cases are suitable for doing causal studies. In very complex and multivariate cases, the analysis can make use of pattern-matching techniques.
Descriptive cases require that the investigator begin with a descriptive theory, or face the possibility that problems will occur during the project.
Critics of the case study method believe that the study of a small number of cases can offer no grounds for establishing reliability or generality of findings. Others feel that the intense exposure to study of the case biases the findings. Some dismiss case study research as useful only as an exploratory tool (Tellis, 1997). Stake (1995), and Yin (1994) identified at least six sources of evidence in case studies, being: Documents Archival records Interviews Direct observation Participant-observation Physical artifacts TIACA Juan Carlos Serna 44 For the specific case of my research, I worked with most of the sources presented above, except with interviews as it was explained above. Physical artifacts were not applicable to this research. Another important element to highlight during my research is the fact that most of the concept and analysis made on the topic was supported by my personal professional experience of over seven years in managerial positions in the Air Cargo Industry. My knowledge of the business environment, of the activities involved, of the key players and the dynamics of air cargo in todays world was of great help when analyzing data, evaluating theory and determining conclusions. The utilization of my knowledge and experience in the industry where the topic of strategic alliances was developed can be identified with the Grounded Theory methodology, which has been used to generate theory where little has been done or to give a fresh view on existing knowledge. Grounded theory is regarded by Glaser and Strauss (1967) as a general theory of scientific method concerned with the generation, elaboration, and validation of social science theory. For them, grounded theory research should meet the accepted canons for doing good science (consistency, reproducibility, generalizability, etc.), although these methodological notions are not to be understood in a positivist sense. The general goal of grounded theory research is to construct theories in order to understand phenomena. A good grounded theory is one that is: (1) inductively derived from data, (2) subjected to theoretical elaboration, and (3) judged adequate to its domain with respect to a number of evaluative criteria. Although it has been developed and principally used within the field of sociology, grounded theory can be, and has been, successfully employed by people in a variety of different disciplines (Haig, 1995).
While there are a number of similarities between phenomenology and grounded theory there are also some fundamental differences. These centre largely on sources of data and the use of literature to inform and locate the developed theory. With phenomenological studies, the words of the informants are considered the only valid source of data. Grounded theory, on the other hand, allows for multiple data sources which may include interviews, observation of behaviour, and published reports. With regard to the use of literature, phenomenological findings are generally contextualised within the existential framework of meaning and choice (Goulding, 1998). TIACA Juan Carlos Serna 45
4. Value Chain Analysis for a Cargo Airline
The concept of value chain introduced by Porter (1985) allows to evaluate an organization by disaggregating the firms strategically relevant activities to understand their behavior, their impact on cost and their potential source of differentiation, so it can generate value and gain competitive advantage. The fundamental notion in the value chain analysis is that a product gains value (and costs) as it passes through the vertical stream of production within the firm (design, production, marketing, delivery, service). When created value exceeds costs a profit is generated.(Hegert and Morris cited by Armisted et al, 1993, p. 221)
The Value Chain Model presented by Porter (1985) identifies nine generic categories of activities, which are linked together, divided between primary activities and support activities. Primary activities are the ones involved in the physical creation of the product and its sale and transfer to the buyer as well as after sale assistance. (Porter, 1985, p. 38). Support activities, on the other hand, support the primary activities and each other by providing purchased inputs, technology, human resources and various firm - wide functions. (Porter, 1985, p. 38).
In Figure 4, I present the Value Chain Model created by Porter and in which I will base our analysis. TIACA Juan Carlos Serna 46
Figure 4 The Generic Value Chain (Porter, 1985)
The model presented by Porter is more oriented to manufacturing companies in which each of the primary activities can be easily identified. For Service Organizations the model proposed by Porter has little meaning by not being able to relate to the descriptive terms of the primary activities (Armistead et al, 1993). However, I will base my analysis by relating to the concept of value chain as a whole, and therefore some of the primary activities shall be modified in order to present the set of activities needed to execute the service.
I will start my analysis by identifying those Primary Activities that a cargo airline performs, and linking them in each of the five generic primary activities presented by Porter in his model.
4.1.1. Inbound Logistics
Porter (1985, p. 39) defines the Inbound Logistics Activities as those associated with receiving, storing and disseminating inputs to the product, such as material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers. However, for the specific case of a cargo airline, being a service, none of these sub-activities are related to their value chain.
In order to define the sub-activities related to the Inbound Logistics for the airline, I try to answer the question of what
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
PROCUREMENT TECHNOLOGY DEVELOPMENT HUMAN RESOURCES MANAGEMENT FIRM INFRASTRUCTURE M A R G I N
M A R G I N
Support Activities Primary Activities TIACA Juan Carlos Serna 47 activities are needed to be fulfilled in order to be able to offer the service to the market? Also, are these activities generating additional value or are a possible source of competitive advantage for the organization? For the analysis, I have decided to replace the Inbound Logistics name of the primary activity with Operational Coordination, which refers more directly to the operation of the airline.
Therefore, the following sub-activities have been identified for the Operational Coordination activity:
Fleet Sourcing: This activity relates to the identification, evaluation, negotiation, financing and put into operation of the required fleet that the airline needs to operate. It can be divided into Long Term Fleet Sourcing, which include those aircraft to be part of the main fleet of the airline and with long-term contracts; and Short Term Fleet Sourcing, which is related to the negotiation of additional aircrafts to cover special high-demand seasons or shortage of aircraft of the main fleet due to maintenance requirements.
Fuel Purchasing: This activity relates to the negotiation and purchasing of the required fuel needed to cover the operation by the airline. Taking into account the high impact on the cost, any savings achieved due to a successful negotiation has a very significant impact on the financial results of the organization. Hedging negotiations with main fuel providers are important alternatives to minimize uncertainty over the variable prices of fuel in the market.
Insurance Coverage Negotiations: Due to the high risk involved in the operation of an airline, a very important component of their operation is their Insurance Coverage. This activity involves all the negotiation and contracting of the insurance policy to cover the airlines operation. The cost related to the Insurance is also a big component over the fixed costs of the organization; so any saving has a direct impact on the financial results.
Ground & Cargo Handling Agreements: This activity relates to the identification, negotiation and contracting of Ground & Cargo Handling activities with providers in the airports where the airline operates. In some airlines stations, the company has its own Ground & Cargo Handling staff, but in others these activities are outsourced. The cost related to this activity is an important component within the variable TIACA Juan Carlos Serna 48 costs of the airline and, additionally, the negotiation of quality standards and services related to the cool chain for perishable cargo is an important source of differentiation to achieve competitive advantage.
Aero - commercial Negotiations & Policy: The airline industry is highly regulated. Therefore, the flight permits that the airline possesses are one of their most important assets added to the possibility of acquiring additional flight permits due to new negotiations. The airline is able or not to operate to a specific market or route based on the status of their flight permits or the possibility to obtain one. Thus, this activity is of great strategic importance for the long term viability of the organization. Due to the impact of this activity in the capacity of the organization to generate value, I consider important to see it as a separate Main Primary Activity.
Scheduling Activities: This activity relates to the definition of routes that the aircrafts of the airline will operate within a specific period of time. This definition is affected by legal (flight permits), operational (airports, ground & cargo facilities, crew, aircraft capabilities to operate, fuel availability, etc.), commercial (fly where the customers need and where the cargo exist), financial (profitable operations) and security (of the aircraft, of the cargo, of the people) issues. A key factor in airlines profitability is how they operate their aircraft, and their ability to minimize the impacts of trade imbalance in routes, which is covered by the scheduling activities. As with the Aero commercial Negotiations & Policy, I consider important to see Scheduling as a separate Main Primary Activity.
In Figure 5, I present a graphic model of the activities described above. TIACA Juan Carlos Serna 49
Figure 5 Inbound Logistics Activities modified for a Cargo Airline.
4.1.2. Operations Activities
In his model, Porter (1985) defines the Operations Activities as the activities associated with transforming inputs into the final product form. In this case, we can divide the Operations Activities in two: Ground Operations and Air Operations
Within Ground Operations, we find the following sub activities:
Cargo Reception at Origin: Implementation of procedures to assure efficient, agile and secure cargo reception procedures.
Cargo Preparation at Origin: All activities related to preparing the cargo to be loaded and transported to destination, according to security and safety regulations, as well as optimizing the space & weight capabilities of the aircraft.
Documentation Preparation at Origin: All activities related to the preparation of all documentation needed to comply with customs and security regulations at origin and/or destination.
Aero Commercial Negotiation & Policy M A R G I N
Fleet Sourcing
Fuel Purchase
Insurance Coverage
Ground & Cargo Handling Agreemts.
Operational Coordination
Scheduling Activities
TIACA Juan Carlos Serna 50 Loading/Unloading & Attention of Aircraft at origin/destination: Includes all the activities related to the attention of the aircraft while is on the ramp.
Cargo Preparation at Destination: All activities related to preparing the cargo to be delivered to the final customer at destination.
Cargo Delivery at Destination: Implementation of processes to assure efficient, agile and secure cargo delivery procedures.
For Air Operations we find the following activities:
Crew Coordination: All activities related to the administration and assignment of the necessary crew to cover the operation.
Aircraft Dispatch: All activities related to the secure dispatch of the aircraft at origin. All these activities are regulated by international accepted procedures.
Aircraft Coordination: All activities related to the coordination of the aircrafts to cover the defined schedule.
There are other two important activities that interrelate directly with the Operations Activities, which are Flight Safety and Maintenance. In the case of Flight Safety, it has control and follows up over the procedures and processes to avoid any kind of incidents that could put in any type of risk the operation. Maintenance, in the other hand, is a critical and very important activity within the organization assuring the reliability and effectiveness of the aircraft and ground equipment when operating.
TIACA Juan Carlos Serna 51 In Figure 6, I present the graphic model for these activities.
Figure 6 Operations Activities Cargo Airline
4.1.3. Outbound Logistics
Porter (1985, p. 40) defines these activities as those associated with collecting, storing and physically distributing the product to the buyers.
In the case of a cargo airline, taking into account that the delivery of the service to the customers is given within the operations activities, we will not include these activities in the value chain of the airline.
4.1.4. Marketing and Sales
The activities associated with providing means by which buyers can purchase the product and induce them to do so, classify within this section of the Value Chain (Porter, 1985).
Sales and Marketing activities can be classified in the following main sub-activities:
Advertising: All activities oriented to position the airlines brand in the markets where it participates.
Sales Force Administration: All activities related to the planning and implementation of sales programs in each of
Aero Commercial Negotiation & Policy M A R G I N
Cargo Recepti on Origin
Cargo Prepara tion Origin
Docum ent Prepara tion Origin
Loading & Unloadi ng A/C Attentio n
Operation al Coordinati on
Scheduling Activities
Ground Operations Air Operations Cargo Prepara tion at Destina tion Cargo Deliver y at Destina tion Crew Coordin ation
Aircraft Dispatc h A/C Coordin ation
TIACA Juan Carlos Serna 52 the markets covered by the airlines direct or indirect sales force. For indirect sales force we relate to the General Sales Agents Network, which are sales representatives in markets where there is no direct presence of the airline.
Sales Force Operation: All activities related to the day-to- day activities of the sales force.
Business Development: Comprises all the activities that involve the identification, evaluation and implementation of new services or routes within the airline portfolio.
Yield Management: Includes all the activities related to pricing strategy in each of the markets where the airline participates, assuring competitiveness and profitability.
In Figure 7, I present the graphical view of these activities.
Figure 7 Sales & Marketing Activities
4.1.5. Service Activities
To use the concept of Service Activities in a service organization can lead to confusion. Porters (1985, p. 40) definition of these activities presents them as those providing service to enhance or maintain the value of the product.
Aero Commercial Negotiation & Policy M A R G I N
Operational Coordination
Scheduling Activities
Ground Operations Air Operations Sales Force Operat ion Business Develop ment
Yield Mana gemen t
Sales & Marketing Sales Force Admi nistrat ion Adver tising
TIACA Juan Carlos Serna 53 I can identify two main sub set of activities that I would classify among this category, which I will rename as Post Service Experience activities. These two sub-sets are:
Formal Claims Activities: Relate to all the activities involved in receiving, processing and settlement of formal claims from customers. These Formal Claims are regulated by International Convention Agreements, such as Warsaw and Montreal Conventions, and specific cases, times and settlement values apply.
Post Service Information: The need of on-time information over the status of every shipment is key and a major requirement from customers. This activity is supported mainly by an additional activity, to which I will refer later that is Information Systems & Technologies
In Figure 8, a graphic explanation of these activities in the Value Chain Model is presented.
Figure 8 Post - Service Experience Activities Cargo Airline
4.1.6. Other Primary Activities
Two additional Primary Activities can be identified when evaluating the business of a cargo airline. Those are Information Technology Activities and Security Activities.
Aero Commercial Negotiation & Policy M A R G I N
Operational Coordination
Scheduling Activities
Ground Operations Air Operations Formal Claims
Post Service Informa tion Sales & Marketing Post Service Experience TIACA Juan Carlos Serna 54
INFORMATION TECHNOLOGY ACTIVITIES
In a business such air cargo, where time definite services are everyday more demanding and speed and reliability is a must when delivering the service, providing information for customers, suppliers and authorities is a key strategic factor.
SECURITY ACTIVITIES
Strict and on-going security regulations require for airline to develop adequate and up to date security procedures that should be taken into account when evaluating the way the cargo airline is set up. Compliance with international regulation in this sense is a must for every operator.
Figure 9 Primary Activities Cargo Airline
In Figure 9, a complete model presenting the Primary Activities identified for a cargo airline is presented.
Now, I shall make a brief analysis of the Support Activities that reinforce the Primary activities of the organization, so we can complete the Value Chain. I can identify 3 major support activities for the airline which are: Human Resource Management, Quality Control Activities and Corporate Support Activities, that refers to a similar concept of Firms Infrastructure presented by Porter.
4.1.7. Support Activity Human Resource Management
As stated by Porter (1985), HRM consists of activities involved in recruiting, hiring, training, development and compensation of all
Aero Commercial Negotiation & Policy M A R G I N
Operational Coordination
Scheduling Activities
Ground Operations Air Operations Sales & Marketing Post Service Experience SECURITY INFORMATION TECHNOLOGY ACTIVITIES TIACA Juan Carlos Serna 55 types of personnel supporting both individual primary and support activities of the entire value chain.
Taking into account the specialization of the business and the industry, HRM plays a very important role in recruitment for operational processes such as pilots and technical personnel for maintenance.
4.1.8. Support Activity Quality Control
The interaction and implementation of quality control with all the Primary Activities in the organization has a strategic impact on cost reduction and also level of quality of the processes leading to differentiation; therefore, the importance of these activities to be in the Value Chain of the Organization.
4.1.9. Support Activity Corporate Support
In this set of activities, we include all the organizational activities related to general management, finance, legal and administrative departments. Support to the entire chain is given by these activities from the Corporate Office of the Organization. Different to what is presented in Porters model, we include the Purchasing Support Activities in this section. TIACA Juan Carlos Serna 56
After our complete analysis, in Figure 10, I present a proposed complete Value Chain for a cargo airline operation.
Figure 10 Value Chain Model for a cargo airline
Aero Commercial Negotiation & Policy M A R G I N
Operational Coordination
Scheduling Activities
Ground Operations Air Operations Sales & Marketing Post Service Experience SECURITY ACTIVITIES INFORMATION TECHNOLOGY & SYSTEMS MARGIN HUMAN RESOURCE MANAGEMENT ACTIVITIES QUALITY CONTROL ACTIVITIES CORPORATE SUPPORT ACTIVITIES Support Activities Primary Activities TIACA Juan Carlos Serna 57
5. Frameworks for implementation of Strategic Alliances in the Air Cargo
In this chapter, I intend to present an adapted framework to be implemented by air cargo carriers in the development of strategic alliances as a source of competitive advantage. In order to do that, I shall evaluate each of the stages covering the model, being: Strategic Evaluation, Alliance Definition, Partner Selection, Alliance Implementation, Alliance Evaluation and Alliance Management.
Strategic Evaluation
The implementation of a strategic alliance within a cargo airline should be driven by a strategic motivation. Therefore, any action related to the development of cooperation agreements at a strategic level should be the result of a thorough strategic evaluation made by top management in the organization.
Different models for strategic planning within organizations have been developed by academics and consultants, models that will not be analyzed in depth in this document. Johnson et al (2005), propose the following activities to evaluate the strategy of an organization :
Analysis of the environment: Using tools such as PESTEL Analysis and/or the Five Forces Model developed by Porter (1985). Definition of Market Segments and Critical Success Factors Internal Analysis: Using tools such as SWOT and Value Chain Analysis. Identification of Strategic Capabilities & Competitive Advantage Competitive Strategy Position Strategy Development Options The Companys Development Method, in which strategic alliances is one of them.
As we can see from the above model, presented by Johnson et al, only the identification of strategic alliances as a possibility for the organization comes after the complete strategic evaluation, and strategic alliances is one method for developing such strategy.
On the other hand, Bronder & Pritzl (1992) present a structured procedure for developing strategic alliances including four critical TIACA Juan Carlos Serna 58 phases: strategic decision, alliance configuration, partner selection criteria and alliance management. During the formation stage, the Strategic Decision phase includes the situation analysis, identification of strategic co-operation and evolution of shareholder value potential. According to Bronder & Pritzl (1992) the firm must assess the impact of environmental factors on its current position to evaluate available opportunities to them and threats that the organization must encounter in order to achieve their strategic objectives.
Alliance Definition
Once the strategic decision by the management of the organization is to develop its strategy through the implementation of a strategic alliance, the alliance definition stage is in place. Some of the authors presented above, combine the strategic evaluation and the alliance definition stage into one, however, I consider that the strategic evaluation phase is of great importance to determine the feasibility or not of a strategic alliance as a method to develop the strategy of the organization.
Lorange and Roos (1993) present two phases within the formation process of strategic alliances. Both phases deal with different types of political and analytical considerations, that will lead at the end to the creation of the alliance.
In the alliance definition stage, it is of great importance for the organization to define clearly the objectives that are being pursued by entering into such strategic cooperation. Kleymann and Seristo (2001, p. 304) state that it is possible to classify the objectives of alliancing as to whether they are efficiency-seeking or market-oriented; in the latter category, one can distinguish between market-offensive and market defensive objectives. (See Figure 11)
Efficiency-seeking objectives can be achieved through joint resource utilisation. There are also economies of density to be reaped. An important market defensive objective can be called competitor taming: vulnerability is one reason of firms to enter coalitions (Eisendhardt and Schoonhoven, 1996), and entering an alliance dampens or completely eliminates competition with partner airlines. Another defensive objective is related to entrenchment, i.e., the strengthening of ones position in the home market through being able to link the home market to the world. Offensive objectives include value-enhancementof the product through the offering of better connections, access to an TIACA Juan Carlos Serna 59 extensive route system, and, in some cases, being linked to a prestigious brand (either that of a partner or of the alliance itself), or learning new skills, especially in the fields of revenue management and marketing. Lastly, there is the objective of gaining environmental control. This refers to the fact that a single airline often does not have much control over environmental factors, which range from prices charged by suppliers to the regulatory authorities. A group of airlines is likely to have more negotiating might with airport authorities, ground handling companies and maybe to some extent even lobbying power at government level. (Kleymann and Seristo, 2001, pp. 304, 305)
Alliance 1 Alliance 2 Figure 11 Strategic Alliance Objectives (Kleymann and Seristo, 2001, p. 306)
Partner Selection
One critical success factor in the formation of an alliance is making sure to select the adequate partner to develop the strategy. It is evident that a right partner will determine the future of an alliance through good working relationships, developing right corporate culture, business harmonisation, suitable technology and others (Baharum, 2004, p. 92).
Bronder & Pritzl (1992) emphasize that a firm should be able to determine precisely what sort of partner it should be looking for. Analysis should be focused on fundamental, strategic and TIACA Juan Carlos Serna 60 cultural fit between the potential partners. The alliance achieve fundamental fit when activities and expertise complement in a way that increases value potential. Strategic fit includes the harmonisation of business plans, joint specification of appropriate configuration and common time frame for achieving goals. Cultural compatibility is another important issue to be addressed when selecting a partner.
Pekar & Allio (1994) perspective on this stage is to have a clear understanding on the partners motives for joining the alliance, creating strategies for accommodating all partners management styles and addressing resource capability gaps that may exist for a partner.
Isabella (2002) in her study in partner selection, emphasise the importance of ensuring the optimal partner match and not simply having the best partner. On the other hand, Faulkner (1995) divide its partner selection criteria into Strategic Fit and Cultural Fit. The main issue in evaluating strategic fit is whether the joint value chain seems likely to achieve sustainable competitive advantage for the partners, through aligning their skills and assets and potential synergies that can be projected. Cultural fit deals with an attitude of understanding the cultural differences, and willingness to compromise in the face of cultural problems.
With regards to partner selection in the airline industry, Evans (2001, p.238), citing the work of Medcof (1997), presents five criteria: The first of the four is that the partner has the capability to carry out its respective role within an alliance. The second criterion proposed by Medcof relates to the compatibility of partners both in cultural and operational terms. Thridly, partners should be able to demonstrate equal commitment to an alliance through having commensurate levels of risk. The fourth partner selection criteria cited by Medcof related to the control of an alliance and whether it is likely to contribute to alliance effectiveness. A fifth partner selection criterion, is geographical fit, where airlines that are forming alliances should be careful and avoid forming partnerships with airlines that have overlapping markets, except at the margins.
Alliance Implementation
This stage covers the action in the complete process. Here is where the different activities to be performed under the partnership agreement are defined and implemented. Great emphasis has to be made to this stage due to the importance of TIACA Juan Carlos Serna 61 executing the right actions in order to deliver the alliances objectives.
Bronder & Pritzl (1992) under the Configuration Stage presented in their model, state that aspects such as field of cooperation, intensity of cooperation and opportunities for multiplication should be decided upon deciding to form a strategic alliance. The field of cooperation is based on the direction of cooperation and value chain activities involved.
Evans (2001), presenting its conceptualization of the collaborative strategy process in international airlines, when defining the structure of the alliance present collaboration in activities covering different areas, such as marketing, the definition of the product or service, computer systems, logistics and others.
Another important tool to be used by airlines when defining the activities and coordinating the implementation of activities included in the strategic alliance is the Value Chain Model (Porter, 1980), and as a reference, the Value Chain Model for Air Cargo Alliances developed in Section 4 of this document can be a good guideline. Based on the different activities included in the value chain, airlines can standardize procedures, define common performance indicators, standardize reports and even integrate processes.
Alliance Evaluation
According to Evans (2001, p. 233), in this stage the strategic alliance is evaluated against selected criteria purporting to measure the success of the alliance. The evaluation of the alliance is fed back into the analytical phase so that any changes based upon experience can be incorporated.
Evaluating the performance of alliances is complex given the multifaceted objectives of many alliances and the difficulties involved in ascribing financial measures. (Evans, 2001, p. 239)
Partners in an alliance have both common and individual corporate goals. Studies of strategic alliances have measured and evaluated performance in different ways, such as alliance longevity (Beamish, 1987), in terms of meeting the objectives of individual partner firms (Dollinger and Golden, 1992; Thomas and Trevino, 1993) and by resource alignment among partner firms (Das and Teng, 2000). Other studies have used new product development (Deeds and Hill, 1996) and profitability TIACA Juan Carlos Serna 62 (Cullen et al., 1995; Reuer and Miller, 1997). These measures are a combination of financial and non-financial outcomes. (Morrish and Hamilton, 2002, p. 403)
Management of the Alliance
According to Bronder & Pritzl (1992) in order for the strategic alliance to be successfully managed, it is necessary for the partner to adapt to changing condition and to learn from one another. This phase can be divided into three stages, being: Contract Negotiation, Co-ordination interface and Learning, adaptation and review.
Lorange & Roos approach the management process of strategic alliances through four important aspects to considered under this stage: The setting of objectives for the strategic alliance network as a whole. Developing strategic program for implementing particular objectives. Delineating the near-term tactics in relevant budgets Monitoring of bottom line progress, longer-term strategic progress and protection of the firms core competences.
Faulkner (1995) states that the right attitude is needed in managing the alliances. Additionally, commitment and trust are other vital elements to develop close interpersonal relationships in making an alliance effective.
Pekar & Allio (1994) found that there are four stages in the strategic alliance process: effective alliance operation which required senior management commitment, appropriate caliber of resources devoted to the alliance, linking of budgets and resources with strategic priorities and measuring and rewarding alliance performance. TIACA Juan Carlos Serna 63
6. Conclusions and Recommendations
The utilization of strategic alliances as a source of competitive advantage in todays world is a reality. No matter the size of the organization or the industry in which it participates, most organizations see in a strategic alliance an interesting opportunity of growth, knowledge, efficiency and profitability.
The airline industry has not been aside of this reality, and initially during the 1990s a wave of alliances came in place in the passenger airlines industry, boosting their competitive position, expanding their networks and increasing levels of market share for members of the alliances. However, is not until the year 2000 when major initiatives of strategic alliances in the air cargo business took place, as it was presented in the introduction of this document, with the creation and launching of SkyTeam Cargo and WOW Alliance.
Multiple definitions on strategic alliances have been presented in this document, highlighting the importance in identifying those partnerships that are really strategic for an organization and others which are part of their tactical activities to conclude the organizations day to day functions. Are those strategic partnership, that are created as a response to a strategic objective or as a method of development of a strategy the focus of my research.
In the airline industry, different type of strategic alliances have been experienced. Apart from routes, the most common forms of collaboration involve code sharing; block spacing; shareholdings; and franchising. Results of a survey conducted by the specialized publication Airline Business on the number of existing airline alliances on a 5-year period, showed an increase of 18.3% on the total number of alliances, as an evidence of the importance of such forms of partnership in this industry.
Different reasons can be identified as the drivers for such expansion of airline alliances over time, being the following two the main issues to be highlighted: the regulatory framework and the nature of airline alliances.
The first one, relates to the regulatory framework in which the industry has been developing. Under the first factor, even though the airline industry is a vehicle to promote globalization all over the world it remains, ironically, nationalistic in nature. In order for an airline to expand operations into another countrys territory, the TIACA Juan Carlos Serna 64 governments of any two countries have to establish bilateral agreements that will ultimately lead to an infinite chain of agreements on a world-wide scale. It is the limitation with regards to the carrier(s) included in such bilateral agreements the one that has become a main obstacle to true liberalization on the airline industry and the main motivators for airlines to look for strategic alliance in order to expand their operations. Now the second issue, relates to the fact that despite the possible future weakening of regulatory constraints thanks to liberalization efforts in major markets, it is presumed that alliances will still play an important part in the global market. Additionally, it is expected that these alliances will stay and will not necessarily evolve in mergers, mainly because the flexibility offered by the alliances compared to mergers is what is required within a turbulent and uncertain industry such it is the airline industry. Furthermore, the size of the financial resources needed for an airline to establish its own global network are enormous and bearing in mind the volatile nature of past financial results - the adequate return on such investment remains uncertain.
Regardless of the fact that strategic alliances are a must in todays business environment and the multiple reasons and benefits that organizations can expect from entering into strategic alliances, it seems it is not an easy task. The numbers with regards to the level of success of strategic alliances are not motivating at all, showing that 50% to 70% of this partnership efforts fail. Multiple sets of models, frameworks, critical success factors, results from research, commandments and any other type of consultancy creations are available for executives to choose. Such critical success factors for strategic alliances vary from simple concepts of trust and communication, to complex models involving several steps and methodology.
It seems to be a general agreement over the academics that strategic alliances are a source of competitive advantage. When analyzing the types of strategic alliances and the reasons behind them, we see that cooperation at different levels within the alliances members is present in various stages of its value chain impacting the capacity of such alliances to create value and enhance the competitive position of such organization. Therefore, a disaggregated model of a Value Chain for a Cargo Airline has been presented in this document.
As a final point, different frameworks and practices for implementation of strategic alliances were evaluated, and an adapted model was presented as a reference for future partnership efforts. Such model cover different stages being: Strategic TIACA Juan Carlos Serna 65 Evaluation, Alliance Definition, Partner Selection, Alliance Implementation, Alliance Evaluation and Alliance Management.
With regards to future areas for research in this topic, I consider that there is still a lot of work and research to do in order to measure the impact that these alliances are having over their customers. Analyzing the perception of major players in the industry on a commercial level, mainly taking into account the consolidation and high bargaining power from major freight forwarders is going to be a key element in the consolidation and future success of such partnerships.
TIACA Juan Carlos Serna 66
Annexes TIACA Juan Carlos Serna 67 Annex # 1 Characteristics of Services WOW Alliance
Time Definite (Always using LAT/TOA)
Performance Guarantee* 100% refund of the paid net weight charge in case of delay Capacity Guarantee* (auto-confirmation) Up to 200 kg Auto KK (auto confirmation) Online Tracking
Seamless Transfer
Transportation Speed Fastest possible routing Same Quality Standards
Time Definite (Always using LAT/TOA)
Online Tracking
Seamless Transfer
Same Quality Standards
Transportation speed Use General Cargo speed TIACA Juan Carlos Serna 68
Time Definite (Always using LAT/TOA)
Online Tracking
Transportation speed Usual General Cargo speed Same Quality Standards
Seamless Transfer
Source: WOW Alliance Web Page www.wowtheworld.com TIACA Juan Carlos Serna 69 ANNEX # 2 WOW Alliance Members Profile
Lufthansa Cargo Lufthansa Cargo is the logistics & cargo division of Deutsche Lufthansa, which is an aviation group with a worldwide network of about 400 subsidiaries. According to Lufthansas Company Profile, presented by Datamonitor (2006) the group has operations in over 97 countries, focusing in seven business areas: passenger transportation; logistics; maintenance, repair and overhaul (MRO); airline catering; leisure travel; information technology; and financial and other services. As presented by Datamonitor (2006), the passenger transportation segment covers 185 cities in 97 countries with a fleet of 413 aircraft. Together with its partner airlines the group serves 409 destinations. The group is focusing on tapping passenger traffic in growth markets such as China, India and Eastern Europe. This division is directly operated by the Groups parent company, Deutsche Lufthansa. Lufthansa is a founding member of the Star Alliance, a multilateral airline grouping in the passenger services.
The logistics segment undertakes freight transport. It covers 510 destinations spread across the world. This segment is operated by the groups wholly owned subsidiary, Lufthansa Cargo. Lufthansa Cargo markets cargo space, and also transports cargo and mail. It augments its own air services with trucking services or flights operated jointly with partner carriers. The largest portion of freight is handled at the Lufthansa Cargo Centre at Frankfurt airport, Germany.
As it is stated in the Annual Report (2006), the core business of Lufthansa Cargo is airport-to-airport transportation, which is constantly strengthened through customer-oriented service improvements. The target customer is the forwarder. Their products and processes will in future be tailored more closely to forwarder needs. Premium products, bilateral cooperation and operational excellence will additionally continue to underpin the foundations for the lasting success of the Lufthansa Cargo business system. TIACA Juan Carlos Serna 70 Lufthansa Cargo results for the 2005 period were positive despite the multiple difficulties that the company and the industry faced during the period. Total Revenue for the year totaled 2,752 million Euros, with an operating profit of 108 million Euros. These results represented a growth of 11.5% in sales and over 300% in operational profit. However, margins are still low compared to the average in the industry. Singapore Airlines Cargo Singapore Airlines Cargo is the Cargo Division of Singapore Airlines. According to Datamonitors Company Profile (2005), Singapore Airlines (SIA) activities cover various aviation businesses, principally commercial passenger services, through SIA and its regional subsidiary Silk Air. The companys portfolio includes the freight division SIA Cargo, and the airport management division Singapore Airport Terminal Services (SATS). Unrelated business such as SIA Engineering, are also part of the SIA family. The Singapore government owns 57% of SIA through Temasek Holdings.
SIA has about 100 aircrafts in its fleet and flies to over 40 countries. The airline owns a 49% stake in the UKs Virgin Atlantic Airways and 25% of Air New Zealand. In addition, its subsidiary Silk Air is predominantly involved in transporting package holidaymakers to and from India. SIA and Silk Air belong to the Star Alliance marketing network, which includes United Airlines, Deutsche Lufthansa, and Scandinavian Airlines System, which broadens the range of destinations available on its network. The companys other businesses include SIA Cargo, the worlds third-largest air cargo carrier. In addition, SATS is responsible for the management of roughly 80% of airline services through Singapore International Airport. (Datamonitor, 2005)
Companys results for the 2005 financial year represented total revenue of S$ 10,302.8 millions, compared with S$9,260.1 millions on previous year. In terms of Operating Profit, the company decreased a 6.7% passing from S$697.9 millions in 2004 to S$651 millions in 2005.
SAS Cargo
SAS Cargo Group A/S was established in June 2001 as an independent subsidiary to Scandinavian Airlines System. SAS Cargo is owned 100% by the SAS Group, and about 70% of the TIACA Juan Carlos Serna 71 cargo capacity that the airline offers comes from the SAS fleet. The remaining 30% is placed on either passenger or freighter aircraft from various other airlines. SAS Cargo has its own airfreight handling facilities in Copenhagen, Gothenburg, Oslo, Stockholm and Newark. At other destinations the handling services are bought from professional handling agents.
SAS Cargo Group A/S is an international airfreight company specialized in transportation of airfreight and airmail from airport to airport. Via their hubs in Scandinavia the airline fulfills their customers need for fast and reliable transportation of airfreight between the continents. Their core business is to serve customers who have a demand for airfreight to, from and within Scandinavia. Thanks to a well-developed route network customers can reach destinations around the world.(SAS Cargo Annual Report, 2005)
Their customers are primarily freight forwarders who organize shipments and logistics for the shippers. In general, the shippers are manufacturing companies with products that either need fast access to the market or semi manufactured products that need fast transport to the next production facility.
SAS Cargos vision is to be a part of the worlds leading air transportation and logistics business. As a natural consequence of this SAS Cargo was a founding member when the WOW air cargo alliance was formed in 2002. Four airlines with focus on cargo have integrated their systems and processes in order to have easy access to each others route network. (SAS Cargo Annual Report, 2005)
Since the company was separated from SAS Group and established as an independent legal entity in 2001, SAS Cargo has been successful both in terms of revenue and profit. 2005 was its best year ever, where revenue exceeded 3 billion (3.306) SEK (356 Million EUR) for the first time ever. Profit was also bigger than ever amounting to 68 million SEK. (SAS Cargo Annual Report, 2005)
Japan Airlines Cargo
Japan Airlines Cargo is the Cargo division of Japan Airlines. According to Datamonitor Company Profile (2005), Japan Airlines Corporation, also known as the JAL Group, is a Japanese company engaged mainly the air transportation business. The JAL Group is composed of 295 subsidiaries and 98 affiliates.
TIACA Juan Carlos Serna 72 JAL Groups business is classified into four main divisions including: air transportation; airline-related business; travel services; and other businesses.
In air transportation, JAL Groups operations include air passenger services and baggage handling; air cargo services; maintenance of aircraft and parts; painting of aircraft exteriors; seat reservations and information on passenger services; supplying electricity and compressed air to stationary aircraft; in- flight catering service; sale of fuel for aircraft; and management of aviation fuel supply facilities. Air transportation business is conducted through 10 subsidiaries including: JAL International, JAL Domestic, Japan Asia Airways, Japan Trans Ocean Air, JALways, JAL Express, Japan Air Commuter, J Air, Harlequin Air, and Hokkaido Air System. (Datamonitor, 2005)
Airline-related business includes passenger services and cargo handling, in-flight catering businesses, the maintenance of aircraft and ground equipment, and the supply of aviation fuel. These activities are conducted by a total of 97 subsidiaries, including 58 consolidated companies and 68 affiliated companies. (Datamonitor, 2005)
As presented in their Annual Report (2005), Operating Revenues for their Cargo Division totaled U$2,051 million dollars, of which over 80% is represented by revenue generated in their international operations. Total Revenue for the Cargo Division grew 7.1% compared to previous year. On their consolidated results, in terms of profitability, a recovery was made from the losses presented in 2004, generating a Net Profit of over U$281 million. TIACA Juan Carlos Serna 73 ANNEX # 3 SkyTeam Alliance Members Profile
Aeromexico
Formed in 1991, Aeromxico Cargo is the Cargo & Logistics Division of Aeromxico Airlines and an active member of the SkyTeam Cargo Alliance since 2000. It is headquartered in Mexico City and operates 98 offices throughout the Americas, Europe and Asia. (SkyTeam Cargo website, 2006)
Aeromxico Cargo offers cargo capacity in the cargo hold of Aeromxico flights and on third party carriers, providing extended services as the Cargo Airline of the Americas. Its principal hub is located in Mexico City, Mexico.
Aeromxico Cargo provides service on 350 daily flights, reaching 76 destinations in 15 countries, operating a fleet of 77 aircraft. For year 2005, their Cargo Operation Revenue was of U$136 million.
Air France Cargo
Dedicated exclusively to airfreight since 1974, Air France Cargo ranks fifth worldwide in its sector. Air France Cargo operates over 1,700 flights daily to over 200 destinations, providing its customers with identical levels of skill and expertise all over the world. (SkyTeam Cargo website, 2006)
It owns one of the worlds biggest specialized fleets, with 258 aircraft, including twelve dedicated freighters and offers some of the most regular and frequent services. Air France Cargo operates out of dedicated infrastructure following the construction of the G1XL cargo terminal, the perishable goods station, the Express Hub and the Hahn (Germany) Hub.
On 5 May 2004, the merger between Air France and KLM was signed. In the fiscal year 2005/06 Air France and KLM carried 70 million passengers and 1,4 million tons of freight and mail. Cooperation between Air France Cargo and KLM Cargo then increased to begin the commercial operations synchronization phase, before starting to integrate selected activities as of mid- 2005. By joining forces in the cargo arena, Air France and KLM are set to become the worlds biggest non-integrator operator, generating combined turnover of 2.7 billion euros. (SkyTeam TIACA Juan Carlos Serna 74 Cargo website, 2006)
From the past both Air France Cargo and KLM Cargo have been on the forefront of transporting and handling general and special cargo. Building on this experience, AF-KL Cargo offers a wide range of air transport services in the market, providing seamless connections throughout the world. The services we offer, are developed in close cooperation with our customers, taking a close look at their transportation needs in the entire logistic process.
To respond to these needs, AF-KL Cargo offers a high quality range of airport-to-airport services and specialized teams with extended knowledge of the logistic needs of specific markets. The professional staff is dedicated to deliver what they promise. AF-KL Cargo believes that people make the difference. Responsiveness, commitment, professional capabilities and drive to perform is the real value of AF - KL Cargo. (SkyTeam Cargo website, 2006)
Alitalia Cargo
Since 1947, Alitalia has been an important point of reference in the history of the development of Italy. The values, which during these years have been expressed through Company initiatives, have reinforced the image of Alitalia as an ambassador for Made in Italy products and Italian culture. (SkyTeam Cargo website, 2006)
For more than 50 years of activity in the air logistics field, Alitalia Cargo, Alitalias cargo division, has been searching for the best solutions to suit his Customers needs.
It has deleveloped a dynamic and extensive product portfolio suitable for every kind of goods. It provides highly specialized and competitive air transportation and logistic services through an extensive network covered by both all cargo and passenger capacity. It serves around 103 cities in 52 countries, working through it hubs of Milan - Malpensa and Rome Fiumicino. (SkyTeam Cargo website, 2006)
It is currently the sixth ranked AEA carrier, holding around four percent of the European market and it is the leader on Italian market, the third largest export market in Europe. Alitalia Cargos renewed fleet is composed of five MD11 freighters, plus the entire belly-hold capacity of 172 passenger aircraft. TIACA Juan Carlos Serna 75
For year 2005, total revenue on their cargo division was of U$595 million, movilizing around 1.361 billion tonne kilometres. (SkyTeam Cargo website, 2006)
CSA Cargo
CSA Czech Airlines was founded as Czechoslovak State Airlines in October 1923 and performed its first transport flight from Prague to Bratislava on the 29th of that month. Currently, Czech Airlines Cargo offers exceptional coverage of Central and Eastern European destinations with connections to the Middle East and North America. (SkyTeam Cargo website, 2006)
At the beginning of the 1990s, CSA embarked on a radical modernization of its fleet. As of 1990, CSAs fleet consisted solely of Russian-produced aircraft. Since the first A310 - 300 from the Western European consortium of Airbus Industries was added in 1991, CSA has modernized its fleet to include ATR 72s, Boeing 737-500s and Boeing 737-400s. CSA currently operates 49 only Western European and American aircraft on its flights. CSA will also be upgrading its fleet with the addition of three new Airbus A320 200 aircraft. (SkyTeam Cargo website, 2006)
CSA Cargo network of operation covers 120 cities in 51 countries, with over 200 daily departures. CSA Cargo handling is performed in one of the most modern cargo terminal in Europe Prague Ruzine. Together with the Road Feeder Service and courier centre, equipped with advanced technology it represents an effective logistic base for Central and Eastern Europe.
Delta Air Logistics
Delta Air Lines traces its roots back to 1924, when Huff Daland Dusters was founded as the worlds first aerial crop dusting organization. In 1928 the company became Delta Air Service. In 1941, the company moved its headquarters from Monroe, Louisiana to Atlanta, Georgia. (SkyTeam Cargo website, 2006)
Delta Air Logistics, Deltas cargo division, began during World War II when it operated cargo flights for the U.S. Army Air Force. In 1944, the airline established an air cargo department using a DC-3 passenger aircraft with cargo bins to transport three commodities: newspapers, shrimp and tomato plants. Delta introduced DEPS (Delta Expedited Package Service), a service for small packages, in 1970. The next year, Delta expanded the TIACA Juan Carlos Serna 76 DEPS shipment options and renamed the service Delta Air Lines Special Handling (DASH). DASH grew rapidly, as five shipments produced nearly as much revenue as three passengers. In 1975, Delta offered a high-priority cargo service termed Delta Air Express for shipments of any size and weight. In December, 1995, Delta formed a separate cargo organization, today known as Delta Air Logistics, which brought cargo marketing, sales, service and administration functions into a single unit. (SkyTeam Cargo website, 2006)
Delta Air Logistics is well-positioned to provide superior customer service and innovative solutions well into the new millennium with its membership in the SkyTeam Cargo worldwide alliance and the U.S. Sales Joint Venture, its new domestic pricing structure and the incorporation of several technological initiatives including GF-X. Delta Air Logistics carries cargo on 7,800 daily flights to 494 destinations in 86 countries. (SkyTeam Cargo website, 2006)
For year 2005, its total revenue for the Cargo Division was of U$520 million, mobilizing a total of 1.923 billion tonne- kilometers in their operation.
KLM Cargo
KLM Royal Dutch Airlines was founded on October 7, 1919. The carriers first scheduled flight started on May 17, 1920 between Amsterdam and London. By the end of that year the company had carried 345 passengers, 22 tons of cargo and 3 tons of mail. (SkyTeam Cargo website, 2006)
KLM Cargo operated around 700 flights to almost 200 destinations.
On 5 May 2004, the merger between Air France and KLM was signed. In the fiscal year 2005/06 Air France and KLM carried 70 million passengers and 1,4 million tons of freight and mail. (SkyTeam Cargo website, 2006)
Korean Air Cargo
Korean Air Cargo was launched in 1969 and, in 1971, became the first airline to offer full freighter service on transpacific routes.
TIACA Juan Carlos Serna 77 It currently has worlds largest freight capacity on transpacific routes and is the largest freighter carrier on intra-Asian routes. In 2004, Korean Air Cargo was ranked number one cargo carrier in the world in terms of international FTK. (SkyTeam Cargo website, 2006)
Currently, it provides 51 freighter services weekly to the Americas, 29 to Europe and 47 within Asian-Pacific region.
Korean Air Cargo operates state-of-the-art facilities in major cities across the world ensuring its shipments are processed efficiently on the ground. It has recently opened state-of-the-art facilities at JFK and Incheon.
With one of the worlds largest fleets of B747F series, including eight of the cutting-edge B747-400ERFs, Korean Air Cargo continues to invest in modernization of its freighter fleet and improvement of facilities including cargo terminals and IT systems while optimising the existing infrastructure and resources to provide more reliable services to customers. (SkyTeam Cargo website, 2006)
North West Airlines Cargo
NWA Cargo, the cargo subsidiary of Northwest Airlines. NWA Cargos freighter fleet 14 Boeing 747 freighter aircraft fly from key cities throughout the United States and Asia and connect at the carriers cargo hub in Anchorage, Alaska, facilitating the quick transfer of cargo between large cities on both sides of the Pacific. NWA Cargo also transports freight aboard the passenger fleet of Northwest Airlines.(SkyTeam Cargo website, 2006)
Northwest Airlines began in 1926 carrying air mail from the Twin Cities of Minneapolis/St. Paul to Chicago with a "fleet" of two rented, open-cockpit biplanes-a Thomas Morse Scout and a Curtiss Oriole. For the first nine months of operation, cargo was the only revenue onboard.
Through acquisitions and organic growth, Northwest has grown to be the worlds fifth largest passenger airline and the largest cargo carrier among U.S. combination passenger and cargo airlines. For year 2005, total revenues for cargo were of U$0.9 billion. (SkyTeam Cargo website, 2006)
TIACA Juan Carlos Serna 78 ANNEX # 4 Major Studies of Airline Alliances
Study Analyses Sample Period Findings Oster and Pickerell (1986) Conceptual Nearly all the 50 largest carriers had formed code- sharing alliances with a major airline by 1985 Pustay (1992) Conceptual Identified the following impediments to true globalisation: infrastructure limitations, traffic rights, foreign ownership of flag carriers,antitrust, threat of government intervention to prevent emergence of global carriers. Gellman Research Associates (1994) Counterfactual study: 2 trasatlantic alliances BA/USAir, KLM/NW, 1st. Qtr. 1994, 1 qtr. Profitability increases for all parties with BA and KLM gaining more that their partners in terms of net profit. Youseff and Hansen (1994) Case Study: simple linear regression. Swissair and SAS 1989-1991, 2 years Increases in flight frequency; variation in fare levels; the strongest service levels had the lowest fare increases. Point to the redistributive nature of alliance impacts. US General Accounting Office (1995) Intensive interviews with key people KLM/NW, USAir/BA, UAL/Lufthansa, UAL/Ansett, UAL/Bmidland 1994, 1year All carriers in the 5 alliances enjoyed increased revenues and traffic gained at competitor's expense not industry growth. Dresner et al. (1995) Empirical: categorical variables Continental/SAS, Delta/Swissair, KLM/NW 1987-1991, 4 years Mixed successes with traffic volumes. Comment:restricted to equity alliances between the US and Europe. In general, alliances did not benefit partners. Park (1997) Estimated econometric models panel data KLM/NW Delta/Swissair/Sabena 1990-1994 4 years Traffic increases at the expense of rival airlines. Complementary alliances - lowered airfares. Parallel alliances - increased airfares. Oum et al. (2000) Empirical: econometric models; regressions 2 airlines 1986-1995 9 years Increased profitability, increased productivity, decrease in pricing levels. Oum et al. (2000) Event Study Database of 58 alliances 1989 - 1998, 9 years Positive abnormal return of 0.40% on event day 0 Oum et al. (2000) Empirical Regression Panel data of 4 major alliances 1992-1994, 2 years Increased traffic on alliance routes Bueckner and Whalen (2000) Empirical 3rd qtr fare data US Dpt of Transportation 1999, 1 qtr Alliance partner charge approximately 25% lower interline fares compared to those charges by non- allied carriers. Source: Morrish & Hamilton, 2002. TIACA Juan Carlos Serna 79
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