Global Airline Alliances
Although collaborative alliances among airlines are not a new develop-ment, the extent to which truly ‘global’ alliances have emerged clearly is.
Prominent among these is Star, One World, and Sky Team, which include carriers such as Lufthansa, British Airways, and Air France, respectively.
By the end of the 1990s global alliances accounted for 63.6 percent of passenger traffic, 55.8 percent of passenger numbers, and 58.4 percent of group revenues (Morrish and Hamilton, 2002). Market factors have been instrumental in driving the development of such alliances, insofar as collaboration represented a suitable means by which airlines were able to combat market turbulence and shift relatively effortlessly between weakening and emerging markets. With a variety of interorganisational arrangements, such as code-sharing arrangements, block space agree-ments, franchising, and reciprocity between frequent-flyer programmes, alliances continue to present airlines with means of securing access to new markets. In many instances, alliances have in fact helped airlines to extend their reach into areas in which their influence has been limited by gov-ernment regulation at the national level.
Market factors are not alone, however, in providing the catalyst for change; technological motivations have also been important in some instances. For example, the need to develop common technology so as to achieve efficiencies in aircraft maintenance has served as a primary moti-vation for collaboration in some cases. Hanlon (1999) identifies a lone instance in which both technological and market motivations have been important in the airline industry: the development of computerised reser-vation systems (CRSs). In the case of CRSs, few airlines would have been able to muster the financial resources necessary to develop such highly complex systems on their own. However, airlines have been able to cluster together and share the cost of developing them. In doing so, they have developed highly sophisticated CRS systems, which have not only led to efficiencies in booking and the reduction of operational costs, but have also enabled valuable marketing links to be developed between organisations.
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In summarising the rationale for the growth in global airline alliances, Oum and Park (1997) identify the following six forces:
1. Consumers tend to prefer airlines serving a large number of cities, so to attract more customers in a more competitive environment airlines need to be able to offer flights to an extensive range of destinations worldwide. As alliance partners link up their networks they can provide a ‘seamless’ service, thereby expanding their network into new territories.
2. Traffic feed between partners helps increase load factors and achieve economies of density. Partners may also be able to increase flight frequency without actually increasing the number of flights they themselves operate.
3. Alliance members can reduce unit costs by taking advantage of economies of scale, increased traffic density, and economies of scope.
4. Frequency, schedule convenience, and convenience of connections are seen as major features of quality. By coordinating their activities, alliance partners can improve the quality of their services.
5. An alliance can offer far more variety of itinerary and routing choices than a single carrier of a similar size.
6. Members can take advantage of alliance-wide CRSs through the prac-tice of code sharing. Flights sharing the same code are listed more than once on a CRS search. This has the effect of pushing competitor flights off the first booking screen, from which many travel agents prefer to book.
With regard to coverage, alliances now have a much wider remit than was previously the case. For example, collaboration now takes place on a wide range of issues including purchasing, aircraft maintenance, booking and sales, customer incentives, marketing and advertising, and staff training.
Hanlon (1999) also points out that although airline alliances are predom-inantly horizontal and market motivated, vertical and technology-based alliances are not unheard of. British Airways, for example, has extensive vertical linkages with companies in its supply chain, including hotel groups such as Marriott, Hertz for car hire, and Diners Club for charge cards. Meanwhile, a good example of a technology-based alliance in the airline industry is the KLM, SAS, and Swissair (KSS) consortium, wherein through coordinated purchasing decisions, member airlines (KLM, SAS, and Swissair) are able to specialise in different aspects of aircraft mainte-nance: one in airframes, another in landing gear, another in engines, and so on.
One of the key features of global airline alliances is that they are pre-dominantly of a nonequity form. On the one hand, this arrangement pro-tects individual airlines from the negative consequences of a partner that From competition to collaboration in the tourism industry 67
encounters serious difficulty, such as bankruptcy. On the other hand, alliances are only as strong as their weakest member. Thus, the failure of one member to participate fully may seriously compromise the degree of collaborative advantage an alliance is able to achieve relative to competi-tor alliances. The current financial problems being encountered by United Airlines, Air Canada, and American Airlines suggest that the current form of interorganisational collaboration among airlines is going to be put to the test in years to come. Much will depend on the extent to which there exists a truly relational exchange ‘mode’ of collaboration among partici-pating airlines. The influence of individuals and personalities and diver-sity of cultural characteristics among the three predominant global airline alliances are such that in truth there is a mix of both resource dependence and relational exchange dynamics in each. What is clear is that the future effectiveness and longevity of such interorganisational forms is uncertain in that the degree to which individual airlines have fully been able to reconcile their naturally competitive and emerging collaborative ten-dencies has yet to be tested fully.
In conclusion, two future scenarios can be envisaged. In the first, further consolidation and concentration of the industry takes place, either through greater merger and acquisition activity or the development and/or creation of further alliance structures. In the second there is an explosion of individual competitive activity in response to the emerging threat from discount airlines and the greater price sensitivity of passen-gers. In view of the considerable weight of forces driving collaboration that were mentioned at the beginning of this chapter, further collabora-tive relational marketing alliance activities are viewed as the least destruc-tive choice for the airline industry.
Hotel Consortia
The hotel industry is complex, fragmented, and highly competitive, and over recent decades has witnessed unparalleled growth driven principally by globalisation. Through a combination of mergers and acquisitions, and various forms of collaboration, considerable consolidation and concen-tration have taken place across the industry, to the extent that the ten largest chains of hotels now account for well over three million rooms.
This, however, represents less than one-fifth of the total world supply, with only 26 percent of all hotel rooms being marketed under the brand names of the top 50 global companies (World Tourism Organization, 2002). The vast majority of the hotel industry remains under independent ownership, although the scale and reach of independents varies enor-mously. Among independent hotel operators, it is widely acknowledged that it is becoming ever more difficult to survive alone.
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For independent hotels, three principal options exist to counter the growth among hotel chains and the accompanying threat to their market segment: affiliation with a major hotel group, the exploitation of specific niche markets, and membership of a consortium. The benefits of the first option, affiliation with a major hotel group, can be considerable in that the independent hotel is able to draw from the group’s brand image and reputation, and benefit from their increased marketing power, manager-ial expertise, and ease of financing. However, lack of overall control and strategic inflexibility, a long-term contract, and payment of royalties can represent substantial drawbacks to affiliation with one of the major groups. The second option is to enter and exploit niche markets. Indeed, in spite of the growth of the large hotel chains there remains space in the marketplace for niche operators, as recently evidenced in the United Kingdom by the growth of ‘boutique hotels’ such as Malmaison. The third option is to join one of the growing number of consortia that currently exist in the marketplace and so pursue a collaborative marketing approach. Consortia represent collaborative arrangements between hotels designed to improve their competencies, advance their market and competitive position while retaining independence of ownership. Such arrangements usually vary in terms of the degree of commitment, control, cooperation, and organisational formality, but they are more often than not referred to as marketing consortia and represent a collaborative survival route for many independently managed hotels around the world.
Slattery, Roper, and Boer (1985) identified five distinct categories of hotel consortia, namely:
1. Marketing and Purchasing Consortia. These evolved from the marketing consortia that were committed to increasing membership numbers.
With larger numbers they are able to negotiate reduced prices for bulk purchases and generate considerable savings for members. The prospect of such savings and reduction in purchasing costs are a con-siderable attraction for prospective members. Best Western Hotels and Consort Hotels are representative of this type of consortium.
2. Referral Consortia. In this type of consortium, hotels demonstrate a collaborative relationship with airlines whereby the hotels receive bookings through the airlines’ reservation systems. This ‘diagonal’
collaborative form provides international exposure for hotels in travel markets; often these have proved difficult for hotels to penetrate on their own.
3. Personnel and Training Consortia. Rather than being driven by revenue generation or cost reduction, such consortia are driven by individual hotels pooling their resources with regard to personnel, training, and the development of skills.
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4. Reservation Systems. These consortia provide a reservation system network for hotels throughout the range of the market. They provide a wide choice of size, location, and prices for the potential hotel customer. These consortia also provide comprehensive marketing services for its members. The largest of these reservation systems is REZsolutions, with its coverage of approximately 25,000 hotels, 80 brands, and 3 million rooms.
5. The benefits of consortia membership are many and varied. For example, benefits can be of a financial, operational, or marketing nature. Financial benefits include increased income through greater bookings, reduced administrative costs, and reduced investment exposure and risk. Operational benefits include the strengthening of operations through innovative and enhanced processes, managerial control over a horizontally integrated value-added chain, and increased bargaining leverage over suppliers and intermediaries.
Marketing benefits typically include the geographic strengthening and widening of market access, shaping competition by providing new and joint market opportunities, and enhanced growth through overcoming barriers to market entry. These advantages are gained through the consortium’s provision of access to networking opportu-nities, economies of scale, technology and distribution networks, and access to a CRS, to name but a few. As with global airline alliances, hotel consortia include elements of both resource dependency and relational exchange, although the short-term (five or fewer years) nature of many consortia agreements suggest that resource depen-dence is perhaps of greater significance in this instance.
In view of the mentioned benefits, it is clear that many independent hotels view consortium membership as a means of gaining authority in the mar-ketplace through greater marketing muscle and lower purchasing costs.
However, there are some costs associated with consortium membership.
For example:
• Financial costs. These are the costs associated with supporting the coor-dination, administration, and marketing activity of the consortium.
• Operational costs. These may include the reduction in innovation and entrepreneurship of the individual hotel. Vulnerability due to mutual dependency and uncertainty may also be a problem, as can conflict, which may arise from the division of authority and decision-making power. There is always the potential for imbalances between benefits and commitment to arise, for the imposition of a standardised product and trading format, and for intermember conflicts.
• Marketing costs. These may include the loss of flexibility and quick response to the needs of the market, the erosion of individual com-70 Global Tourism
petitive position through the creation of a weakened bargaining posi-tion, and suppression of individual identity in order to enhance the brand image of the consortium.
There is little doubt that the large chains will continue to threaten con-sortia, especially the smaller players. However, by furthering collabora-tive marketing strategies, of which consortia membership is a classic example, there can be little doubt that many can survive provided they remain adaptable. Independent consortia are moving rapidly and crea-tively in building their core competencies by representing fine hotels and developing and maintaining high quality standards for their constituent properties. Small consortia are also continuing to grow, albeit at a slower rate than the large chains. One emerging strategy for consortia wishing to remain competitive is by forming yet further marketing partnerships and alliances, often in related business areas such as in travel, car hire, retailing, and online businesses (Chipkin, 2001). The scenario is one in which the continued existence of collaborative marketing approaches is achieved through the further expansion of the collaborative relational marketing agenda.