Star Alliance

Background to formation of Airline alliances

The airline industry has experienced its first signs of competition in the late 1970s with deregulation. The
US Airline Deregulation Act was signed into law on October 24, 1978 and which caused the slow reduction
in the powers of the Civil Aeronautics Board, which up to that point have been enjoying strong control over
pricing, entry barrier in market entry as well as numerous privileges functions. Deregulation in Europe
followed similar suit which essentially ended many of the existing constraints on European carriers. As a
result of the deregulation Act overdrawn many international carriers entered into arrangements with foreign
partners to expand their network routes. This event was one of key reasons behind the formation of the Star
Alliance. The 1944 Chicago Convention produced some governance and control through the international
marketplace such as Air routes, frequency and fares were all governed by this bilateral agreement. In the
mid-1980s a few airlines began practicing a new joint effort called code sharing. The basic idea behind
this was to advertise other airlines as their own and this could only be possible through a strong alliance
agreement between the existing Airlines. The observable benefit here is to create a larger presence and
increase the chances of producing additional sales. This practice would also become common across the
current alliances till date.
Another noteworthy reason for formation of alliances between airlines was that of the U.S Open Skies
agreements of 1992. This key bilateral air treaty granted KLM and Northwest full anti-trust protection and
the objective was to bring about the liberalization of all global air routes. This allowed KLM and Northwest
to act as one company to most aspects of their business functions. This key piece of legislation assisted in
the growth and enhancement of collaboration of Airlines businesses worldwide. Another reason for
formation of Alliances was The Gulf War of in 91-92 which had a detrimental effect on the airline industry
in form of increased fuel prices as well as decreasing flying customers which affected the Just as quickly
the airline industry during the years of 95s and 98s.Same situation reverted after 9/11 when consumers
dramatically limited their travel habits, which in turn adversely affected the entire aviation industry , thus a
new form of airline travel formed called budget carriers focused primarily on low-cost point-to-point
travel and business interdependency was became paramount importance thus fueled forming of Alliances .
The mid-90s has experienced the Emergence of strategic alliances which started a new level of competitive
awareness in the airline industry,This paradigm shift was to ensure much desired competitive advantages
including Code-sharing, as mentioned earlier, also remained within these newly developed alliances. This
practice facilitated an immediate growth in market share and super-alliances around the world came in to
the frame. More than 500 alliances were formed in the late 1990s. All of which were ultimately
consolidated into five multi carrier alliances that currently exist today. The 5 carriers were: The
KLM.Northwest alliance, Oneworld, the Qualiflyer Alliance, SkyTeam and the Star Alliance.
1. Emergence of Star Alliance
The Star Alliance was formed on May 14 1997 . It started with a total of five members under one alliance.
Air Canada , Lufthansa, Thai, United and SAS made up the alliance. Even though the alliance housed all the
airlines under one entity or network, the airlines still retained their individual identities. As it stands today
there are a total of 16 airlines in the star alliance.

Objectives
Although all airlines had different reasons for joining the alliance but the common reason was the desire to
expand their geographic network in the most efficient way. Star Alliance members agreed on this
commonality and virtually overnight increased the scope of their services. One of the reasons that the scope
of services or the ability to cover every corner of the world .Code-share arrangements also allowed for
flexibility and rationalization in terms of route decision making. By having such a close arrangement and
understanding of partner schedules, airlines were able to lean on partner airlines to cover various routes that
were a more logical fit both logistically and financially.
I.

From the customer perspective:

Alliances were also a great way to leverage the airlines local strengths to build up the entire networks
market presence. The structure also presented invaluable flexibility to alliance members. Such flexibility
could be seen in their opportunities to negotiate a broad range of agreements with non-alliance members.
An example of one of these agreements was the ability to share mileage points across both frequent flyer
programs. This of course yielded a powerful consumer benefit which widened their scope of travel
destinations across multiple airlines.
From the business perspective ,

II.

it allows a more seamless integration of offerings across alliance partners and increases the overall scope of
services. Alliances created trade barriors so that new comers couldnt venture out on their own. There is
such an allure to the potential overhead reductions and the ability to rapidly increase service offerings.
The Start Alliance vision or mission is to facilitate the growth of long term results well beyond the means of
individual airlines capabilities. The relevance of star alliance structure can be relate to two guiding
principles .The first was: customers want global access. The second: They want their status to travel
with them. Lastly: They want a seamless travel experience.
2. What

factors affect the sustainability of the alliance and how can they be managed?

The five criteria of a strategic alliance

Many alliances default to some form of revenue generationwhich is certainly important but revenue
alone may not be truly strategic to the objectives of the business. There are five general criteria that
differentiate strategic alliances from conventional alliances. An alliance meeting any one of these criteria is
strategic and should be managed accordingly.
1. Critical to the success of a core business goal or objective.
2. Critical to the development or maintenance of a core competency or other source of competitive
advantage.
3. Blocks a competitive threat.
4. Creates or maintains strategic choices for the firm.
5. Mitigates a significant risk to the business.

Factors affect the sustainability of the alliance and how can they be managed
1.

Governance
Essentially the Star Alliance started as a small group of 5 partners managed under one umbrella structure by a committee of

participants. As the alliance grew, so did the layers of organizational complexity. A full time staff was eventually formed and each
airline company became an equal shareholder in the alliance. The early years of the organization were quite painful ones as there
were regular frustrations caused by the cultural requirement of unanimous buy-in for various objectives.. As the project
management matured, processes were streamlined and became second natured. Processes are still being refined to this day but they
have made substantial improvements since the alliances inception.
2.

Competing and Collaborating

The delicate blend of competition and collaboration was another aspect of the Star Alliance that I felt was quite impressive. From
the outside looking in I would think alliance members would be scrambling for any and all routes to increase their own profits.
There seemed to be some jockeying for position in the early stages of the alliance but as the integration matured each airline began
to realize that they can be much more effective by leaning on affiliates for assistance.To ensure fair play and an effective culture, all
members within the alliance were prohibited from executing hostile takeovers on fellow members. This, I would imagine, was a
pivotal piece of governance that really set the stage for a more collaborative environment.It was clear from the onset that each
airline had a different perspective in terms of enhancing internal processes. Each was united by the same sense of vision or benefits
but just the same members still had their own thoughts on increasing value.

3.

Culture
The Star Alliance was founded on the premise of a consensus driven business model. The culture presented both distinct benefits
and deficiencies. The most obvious benefit being each member had a voice in establishing or altering overarching strategic visions
for the alliance. The most obvious deficiency was the length of time it took to get total buy into a new idea. In theory, this seems
like a great idea to get everyones buy-in before finalizing directives but the logistics behind this approach would make me skeptical
from the start. A consensus driven model across 3 or 4 organizations might make sense in certain situations but a 14 member
alliance seems as though it would a futile exercise. The alliance has greatly improved their buy-in process over the years but it was
not without some pain and compromise along the way.Every member had their own initiatives whose feedback was vital in reaching
one common resolution. Compromise and sensitivity were common themes that were vigorously developed in order to enhance the
alliances member wide buy-in culture.

4.

Coping with Crisis

It is said that the greatest challenge any organization can face is an inconceivable disaster that relates directly to ones industry.
Theres no roadmap or guideline that would assist in coping or adjusting to such a disaster. There is, quite simply, only so much
preparation that can be done to account for the endless number of disaster variables. One of our most catastrophic events of our
time, 9/11, would test the Star Alliance business model and push its boundaries to the limit.
The alliance members regrouped shortly after 9/11 as they quickly realized those tragic events of September 11 would forever
change the aviation industry. Immediately after 9/11, a taskforce was formed which was geared towards cutting costs across the
entire alliance. Some initiatives included consolidation of projects, joint purchasing, and avoiding the duplication of processes at
airports and call centers. The main objective was to identity immediate cost reductions and laid the foundation for long term cost
savings.A tragedy of unprecedented devastation forced alliance members to lean heavily on one another. It allowed for most of its
members to stay afloat during those difficult times which essentially impacted the entire airline industry. If ever there was a
question of the alliances purpose, I think this event emphatically answered to those critics. Theres no telling how many airlines
would have survived a post 9/11 era if they did not have an alliance to support consolidation efforts.
SWOT Analysis of Star Alliance

Strengths:

Weaknesses

Large geographic network.

Seamless travel experience is inconsistent.

* Cost savings via joint purchasing, marketing, planning, etc.

* Non coordination in certain instances. (i.e. lounge access

* Higher number of flights offered. (increases potential # of

availability, baggage issues)

sales)

* IT systems (incompatibility of systems).

* Relatively seamless travel experience.

* Lack of innovation. Alliance is essentially a facilitator, not

* Code sharing. (Increased route rationalization.)

an innovator.

* Increased opportunity to reach economies of scale.

* Poor metrics in determining how effective the alliance

* Assist in elevating brand awareness (i.e. Thai airlines,

really is.

much greater exposure)

* Inconsistent synergies in purchasing. (I.e. Canadians

* Increased sale synergies.

disappointed in failure of cost effective purchasing of cups

* Top marks in Merrill Lynchs annual league table of airline

and napkins.)

industry alliances.
* Leadership is able to take control in home markets. (.i.e.
bmi better understands business in the Ireland market and is
able to pass along opportunities to fellow members.)
* Ability to leverage position via strong association with
other carriers.
* Creates a higher quality network.
* Mileage accruals on frequent flyer programs.
* Low value frequent flyer mileage redemption with quick
turnaround time.
* Expanded lounge access.
* Waitlist priority.
* Additional checked-in luggage allowances.
Opportunities

Threats

* Further integration of services (i.e. Facilities in airports,

Airline industry is fragile which poses many uncertainties.

services in regions, IT systems, etc)

* Too many alliance members. Can lead to conflicts of

* Development of tools to measure effectiveness of alliance

interest, which in turn can lead to dwindling competitive

(metrics). i.e. Measure which passengers were brought in as a

advantage.

result of alliance. Also, measure the intangible benefits that

* Poor integration can lead to lose of consumer confidence in

the alliance exudes across the board.

the alliance. (i.e. Ansett Australia went bankrupt in 2001

* Expand on joint purchasing initiatives.

causes a huge disruption in baggage transportation resulting

* Pursue activities that could bolster economies of scale.

in negative publicity for the entire alliance.)

* Consolidation of alliance members, where applicable, as

* An abrupt departure of a large alliance member that is

current large number increases the complexity of operations

weighed upon heavily may cause massive disruptions in the

flow and effectiveness of the alliance. Such an event could
bring about the quick collapse of such an alliance.

* Rise in popularity of low cost travel carriers

Recommendations
The most important area the Star Alliance must focus on moving forward is to further integrate their services. Their business model
works as it clearly offers customers a much larger travel coverage area, frequent flyer miles, etc. It just needs to be refined a bit
more. The most critical issue is the lack of consistent integration across the alliance which can be achieved through a 2 prong
approach.
First, they should create a more robust centralized IT infrastructure that integrates all systems. This would ensure that both tacit and
implicit knowledge would be disseminated to all alliance members in an efficient manor. There are many instances of a customer
who felt defrauded by loosing their luggage or not having the lounge access, etc. though the services the alliance claimed offer and
did not follow through on consistently. As a result t this type of deficiencies that can make or break customer retention rates. The
Star Alliance to further streamline their operations and create that seamless travel environment they claim to have.
The second approach would be to develop the necessary tools to quantify the alliances absolute value. This of course would be done
in concert with the enhancement of the IT infrastructure. worth. Right now its clear that the alliance adds value but not in a
definitive way. By having metrics in place, airlines could measures just how much they are getting out of the alliance and determine
whether or not theyd be a better fit elsewhere. Theres no sense in keeping an airline on board just for the sake of having a larger
network. There would be a much clearer focus of what is and is not working to benefit the alliance as a whole if all the data is on the
table.