Analysis of Strategic Alliance as a Source of Competitive Ad.pdf

8/10/2019 Analysis of Strategic Alliance as a Source of Competitive Ad.pdf

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TIACA Juan Carlos Serna 1

Analysis of Strategic Alliances as a Source of CompetitiveAdvantage in the Airline Cargo Business -

Evaluation of SkyTeam Cargo and WOW Alliance.

Juan Carlos Serna VelezTIACA Masters Scholarship Program Recipient 2006

Dissertation presented in partial fulfilment of therequirements for the International MBA Programme

University of GreenwichBusiness School

July 2007


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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 Ihave learned from you.

To TIACA Education Committee for their support through theMasters Scholarship Program.


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Abstract

Utilization of strategic alliances in the airline industry is not a new

task. However, evolution in the air cargo side of the business cameafter the consolidation of major alliances in the passenger side. Thisdocument, intends to analyze the utilization of strategic alliances asa source of competitive advantage in the air cargo industry.Evaluation of specific cases, such as WOW Alliance and SkyTeamCargo are included as examples of such type of partnershipagreements in this sector.

As part of the evaluation, a disaggregated model of activitiesconforming the Value Chain for a Cargo Airline is presented, being

an important tool when analyzing possible strategic cooperationbetween airlines. Additionally, adapted implementation practices forstrategic alliances are included as a point of reference for futurepartnership studies.

This document suggests that strategic alliances have been a sourceof competitive advantage for the alliance members; however,recommends additional research on the perception and effects oncustomers of such type of cooperation.


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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


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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


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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 2025Figure 4 The Generic Value Chain (Porter, 1985)Figure 5 Inbound Logistics Activities modified for a Cargo Airline.Figure 6 Operations Activities Cargo AirlineFigure 7 Sales & Marketing ActivitiesFigure 8 Post - Service Experience Activities Cargo AirlineFigure 9 Primary Activities Cargo AirlineFigure 10 Value Chain Model for a cargo airline

Figure 11 Strategic Alliance Objectives

Tables

Table 1 Revenue & Tonnage SkyTeam Cargo Alliance MembersTable 2 Growth Rates 2005 by Major MarketTable 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 ofrelationships based not on ownership, but on partnership(Drucker, 1996)

The concept of Strategic Alliance has become during the lastdecade a usual term within the business language all over theworld. Its utilization is currently so wide, that when searching inGoogle for the term Strategic Alliances, it took only 0.28seconds to show 11.000.000 (Eleven million) possible linksrelated to that concept.

Despite the fact that academics and consultants see in strategicalliances a source of competitive advantage and supports withmultiple benefits and reasons this type of partnership ventures,high levels of failure showed by statistics presented by differentstudies makes the development and implementation of strategicalliances a challenging task.

In the airline industry the utilization of strategic alliances is notnew. During the 1990s, passenger airlines supported their

growth and expansion to international markets in the creation ofstrategic alliances as a result of deregulation of the industry andthe applicability of code-share agreements. In the cargo side ofthe business, this type of integration came late and only at thebeginning of year 2000, major alliance initiatives were presentedinto the market with the launching of SkyTeam Cargo andWOW Alliance. These partnership initiatives were the responseby alliances members to multiple challenges present in a highly-regulated, restricted, highly competed, low margin air cargoindustry. The need for competitiveness as individual

organizations and as a group of companies involved in a strategicalliance 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 discoverand implement ways of competing that are unique and distinctivefrom those of their competitors and that can be sustained overtime. The competitive position of an organization can bemeasured by their capacity of creating value, and therefore, theValue Chain model proposed by Porter is a useful tool to analyzesuch capability.


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In this document, I intend to evaluate three main issues relatedto the fact that strategic alliances are a source of competitiveadvantage in the air cargo business. The first one is to evaluatethe extent in which strategic alliances are a source of competitiveadvantage for the companies engaged in these partnerships,

understanding the reasons behind this decision and identifyingthe potential benefits of these agreements. Secondly, to identifyhow does a strategic alliance add value to customers, bypresenting a disaggregated value chain model for airlines in theair cargo industry, and as a third point, to identify differentimplementation practices that could be used by companies in theair cargo business to develop strategic alliances.

In order to do what are the aims of my research and thisdocument, I have structured it as follows:

In section 1, Company and Industry overview is presented. Abrief profile of the WOW and SkyTeam Alliances is shown as wellas an industry analysis made based on Porters Five ForcesModel. Additionally, I include forecast of future trends for the aircargo industry based on Boeing, Airbus and IATA sources.

Section 2 contains the results of my secondary data research onstrategic alliances. In here, I analyze different issues related tothe topic, including types of strategic alliances, the reasons

behind such decisions, key success factors, experiences ofstrategic alliances in the airline industry, competitiveness of suchpartnerships, how customers perceive these alliances and somereferences to academic works on implementation practices.

Section 3 includes information on the methodologies used forthis research and the limitations of this paper.

Section 4 covers an analysis made to the different activitiesperformed by an air cargo carrier in order to deliver their

services and add value to their customers. Here, I base myresults on Porters Value Chain Model and after disaggregatingthe different activities, at the end I present a Value Chain for anAir Cargo Carrier.

Section 5 presents an adapted framework to be used by air cargocarriers when evaluating the possibility of participating instrategic alliances.

At the end, I conclude that it seems to be a general agreementover the academics that strategic alliances are a source ofcompetitive advantage. The reality faced by carriers in the air


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cargo industry characterized by a protective regulatoryframework in a global economy, low margins and the need toadjust their organizational structure to be more flexible anddynamic makes of strategic alliances an adequate andcompetitive 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 - thesecond and third biggest international cargo airline according toIATA (International Air Transport Association)- and SAS, theScandinavian giant, joint forces to form an exclusive cargoalliance named WOW Alliance. On July 5, 2002 Japan AirlinesCargo decided to join the WOW Alliance, complementing thenetwork of destinations for the alliances customers and linking

the worlds major trading centers.

Through close cooperation, the alliance partners aim to offercustomers a greatly expanded network and have harmonizedtheir procedures in order to deliver in a seamless manner theirthree WOW offerings: General Cargo, Premium Express andDangerous Goods. Although the three products have retainedtheir established brand names, they now shares key features. Nomatter which of the partner airlines transports a shipment in thealliance's worldwide express network, the customer can count on

the same product promises and service guarantees. Any of threeproducts can be booked to the destinations within the commonnetwork.

The WOW Alliance vision, according to their website (2006), isto have the world's leading airfreight and logistics system.Together, we have the knowledge, experience and motivation tomake it happen. Its philosophy is based on three majorcornerstones that are: Seamless, Safety and Control. Thealliance ensures fully linked systems for Seamlessdelivery of

goods across five continents. Customers can always be assuredof the Safetyof their cargo and with fixed delivery times and acommon tracking system, the alliance offer complete Control- socustomers will always know the status of their cargo. WOWoffers optimal transport solutions with their large network,linking over 520 destinations in 103 countries.

In Annex # 1 to this document, a brief overview of thecharacteristics of each of the three products offered by the WOWAlliance members is presented. Additionally, in Annex # 2,information on each of the alliance partners is included, where a


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brief profile of each of the airlines is presented to offer betterunderstanding of the structure of the WOW Alliance.

1.2. SkyTeam Cargo Alliance

On September 2000, four carriers, already partners in theSkyTeam passenger airline alliance, joined forces for the cargomarket as well. Aeromxico Cargo, Air France Cargo, Delta AirLogistics and Korean Air Cargo announce the creation ofSkyTeam Cargo. Later in 2001, CSA Cargo and Alitalia Cargojoined the Sky Team Cargo Alliance expanding the number ofmembers and the alliances network. Then, between 2004 and2005, two new members KLM Cargo and Northwest AirlinesCargo completed the current members participation.

According to the SkyTeam Cargo website (2006), SkyTeamCargo has the largest global footprint of any alliance providingaccess to all major geographic regions, covering the globes keytrade routes. Since 2000, the alliance has grown from 411 to 728unduplicated destinations, from 100 to 149 countries served, andfrom 14 billion to 26.03 billion freight ton kilometers carried peryear.

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 trulyglobal air network, a high quality portfolio of common products,and ease of access to sale & operations through the single pointof contact & one roof concept. Together, these factors enableseamless cargo handling and movement throughout SkyTeamCargos global network. (SkyTeam Cargo website, 2006).

The expertise of the SkyTeam alliance offers customers thefollowing benefits:

Global Network: With 545 destinations, 127 countries, 1,200aircraft and 8,900 daily flights, it provides access to almostevery corner of the globe through an extensive hub system.

Expert Solutions: SkyTeam Cargo partner airlines haveadopted four common product categories under standardizedbranding - Equation, Variation, Cohesion, and Dimension- thathave been available across all partners beginning in October

2002.


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Seamless Processing: SkyTeam Cargo offers universalhandling procedures, providing consistency among all partnersand a smoother transaction for customers. These servicesenable SkyTeam Cargo to provide the simplest solutions for anyneeds of customers.

One Roof Service: 59 percent of the freight that movesthrough common SkyTeam cities is processed throughintegrated warehouse operations or by ground handlerscommon for three or more, enhancing the convenience,reliability and benefits that SkyTeam Cargo customers alreadyexperience.

Single Point of Contact: As a part of providing a centralizedservice for booking and sales, SkyTeam Cargo members AirFrance, Delta and Korean Air established the U.S. Export SalesJoint Venture in November of year 2001.

Flexible Service: Flexible service that anticipates customersneed 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 thealliance members and its revenue figures for 2005 is presented:

Carrier Revenue by AirlineCarried

tonkilometres

AeroMexico Cargo $136 million 271 million

Air France Cargo $1.714 billion5.937billion

Alitalia Cargo $595 million1.361billion

CSA Cargo $19.5 million 44.9 million

Delta Air Logistics $520 million1.923billion

KLM Cargo $1.178 billion4.893billion

Korean Air Cargo $2.1 billion 8.1 billion

Northwest AirlinesCargo

$0.9 billion 3.5 billion

Table 1 Revenue & Tonnage SkyTeam Cargo Alliance Members


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Source: SkyTeam Cargo Website 2006

In Annex # 3, information on each of the alliance partners isincluded, where a brief profile of each of the airlines is presented

to offer better understanding of the structure of the SkyTeamAlliance.


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1.3. Structural Analysis of the Air Cargo Industry

The first fundamental determinant of a firms profitability isindustry attractiveness. (Porter, 1985, p. 4). The understandingof the industry and the forces that drives such profitability is ofgreat importance when analyzing the competitive position of anorganization. Porter (1980) has presented a model where heidentifies five competitive forces that determines industryprofitability, which are: the entry of new competitors, the threatof substitutes, the bargaining power of buyers, the bargainingpower of suppliers, and the rivalry among the existingcompetitors (see Figure 1).

Figure 1 The Five Competitive Forces (Porter, 1980)

Based on the model presented above, the following is a briefanalysis of the Five Competitive Forces for the Air Cargo

Industry:

Potential

Entrants

IndustryCompetitors

Rivalry among

Existing Firms

Substitutes

BuyersSuppliers

Threats of

New Entrants

Bargaining Power

of Buyers

Bargaining Power

of Suppliers

Threat of

Substitute Productsor Services


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Potential Entrants Threats of New Entrants

One of the main characteristics of the airline industry is theregulatory framework in which it develops. During the past yearsefforts of open skies policies have been made, in order to put

the industry in line with the evolution of markets and economiesall over the world, as discussed in the ICAO 5thWorldwide AirTransport Conference in 2003 there is now broad acceptance ofthe need for regulatory change, although there are widedivergences between states and airlines as to how fast and howfar this should go. Advances have been made, with new bilateralagreements between countries; however, the concept of nationalairlines is still around and barriers for new entrants from theregulatory perspective can be found.

Substitutes Threat of Substitute Products or Service

Main threat from substitute services for the air cargo business isreflected in the efficiency and competition of other means oftransportation. For the international operation in which cargoairlines participate, main substitute competition is the maritimetransportation.

However, there is no direct substitution of the service. Still,

differences exist between these two types of services, such astime of delivery, cost and type of product to be transported. Inthe case of the perishable transportation market, efforts havebeen made by maritime companies to increase their capability ofmaintaining freshness and reducing times, but still there issignificance utilization by companies to move their perishablecargo via air services.

The existence of other model of transportation and theirefficiencies and increased capabilities to move diverse type of

cargo, presents a challenge to the air cargo business to identifyspecific market segments or product niches where value can beadded.

Suppliers Power of bargain of suppliers

Within the numerous suppliers cargo airlines use to fulfill theirneeds to run their operation, I would highlight the followingsuppliers that I consider play a strategic role:

o Aircraft Providerso Fuel Providers


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o Insurance Companieso Ground Handling Companieso Cargo Handling Companieso Heavy Maintenance Providers

From those above, Fuel Providers currently represent themost critical supplier for the airline industry. Any gainobtainable from a negotiation in this area will have a directimpact on the financial results of their operations. While twoyears ago, Fuel Costs comprised 20% of the total costs of anairline, today, due to sky rocketing prices, we find that theyare responsible for almost 40% of the total cost. Hedgingstrategies are needed to be in place in order to minimizeuncertainty and assure some level of control over theoperational costs.

On the other hand, negotiations with Aircraft Providers are ofstrategic importance as well. The decisions on the type ofaircraft to operate, the financing of the fleet program(purchasing aircrafts or leasing them), adequate timing ofnegotiation and delivery of fleet are key issues that willimpact the competitive position of the airline in its market.

Buyers Power of bargain of buyers

On this area, the role of the Top Multinational FreightForwarding Companies is something to pay attention to. Majoracquisitions between the Freight Forwarding industry havecreated very powerful organizations with global presencestrengthening their position in front of the airlines.

Being part of their distribution channel, the FreightForwarders have been able to assure control over the volumesof cargo, by offering logistic solutions for the differentindustries they serve. By working directly in the supply chain

of the importers or exporters of the different products, theyhave been able in the majority of the cases and markets tonegotiate and make the final decision over carrier utilizationfor their customers cargo. Therefore, high power of bargainof such organizations is suffered by the airlines whenestablishing corporate deals with the major freight forwarders.

Industry Competitors Rivalry among current players

There is an active competition between the different carriersthat serve the different markets, however, due to regulatoryissues the level of competition can vary according to the


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countries in which the airline is operating. Open Skiespolicies, mainly with the United States, have opened themarket for different airlines to participate actively in thebusiness.

Competition within the air cargo industry can be segmentedas follows:

- Passenger Carriers with Cargo Capacity: Most passengerairlines, in order to optimize the utilization of the capacityof their aircraft commercialize cargo services, offeringtransportation of goods in the bellies of their aircraft.Being that passenger revenue their key driver and financialsource of their operation, these types of players are able tooffer low rates in the market and high frequency of flights

for the customer to choose. However, limitations in termsof dimensions of cargo and type of cargo to be transportedapply to these types of airlines. Examples of airlines amongthis group are: American Airlines, British Airways,Continental Airlines, Delta Airlines, and others.

- Cargo Carriers: Under this group we identify those airlinesthat operate dedicated cargo aircrafts. Revenue generatedby their cargo business is their key driver and, different tothe passenger airlines, they compensate the limitation in

number of frequencies with high capacity in each of theirflights. Passenger airlines that run their cargo departmentoperating cargo aircraft classify under this category.Examples are: Air France Cargo, Lufthansa Cargo, KLMCargo, LAN Cargo, TAMPA Cargo, NCA, others.

- Integrators: Under this category we identify those airlinesdedicated to the courier services and that commercializeavailable space in their aircraft for freight operation. Due tothe high revenue generated by their courier services,

freight can be a secondary priority in terms of utilization ofspace 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 ofAir Cargo, I will base my evaluation on results presented byreports published by Boeing Industries Boeing World Air CargoForecast 2006 2007, Airbus Industries - Airbus Global MarketForecast 2006 2025 and the International Air Travel


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Association (IATA) IATA Passenger and Freight Forecast 2005 2009. These three studies are an important source ofinformation for the industry and are taken as a point of referenceby multiple industry publications.

Airbus forecasts that air freight expressed in terms of freight-tonne kilometres (FTK) will grow at a 6% average annual rateover the 2006-2025 period. The United States (US) domesticmarket, still the largest with a 11.9% share of world FTKs in2006, is also the most mature. Over the next 20 years, fastgrowing Chinese exports, as well as its emerging expressmarket, will radically change the hierarchy of the top freightmarkets. (Airbus, 2006)

The export of more time sensitive, high-value and high-techgoods, has grown fastest among globally traded commodities,largely contributing to the growth of air freight. As the value ofthe goods being exported increases, so does their timesensitivity and the likelihood they will be shipped by air. (Airbus,2006)

In Figure 2, I present the Top 20 freight markets in 2025according 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 ananalysis of the performance of the Air Cargo market during


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2005, year in which the industry grew 2.0%, following 12.0%growth in 2004. According to Boeing (2006), a majorcontributor to the slowdown in 2005 was the high cost of jetfuel. The spot jet fuel price increased 42% in 2005, ending atan 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 sometraffic that in other conditions would have moved by air cargochannels to less expensive forms of transportation, such asmaritime trade lanes.

Economic activity, as measured by world GDP, remains theprimary driver for air cargo industry growth. World GDP grew3.5% in 2005, following 4.0% growth in 2004. In the nearterm, the world economic outlook remains upbeat despite

turmoil in the financial markets, rising oil prices, and increasingtensions in the Middle East. (Boeing, 2006)

In Table 2, the growth rates for Air Freight in 2005 by majormarket, based on Boeing calculations are presented:

2005 Air Freight Growth byMajor Market

Percentage%

World 2.0

North America - 2.4Europe North America 1.4Asia North America 1.3North America Latin America -2.6Europe - Asia 9.0Intra - Asia 6.3Domestic 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 byAirbus, stating that world air cargo traffic will expand at anaverage annual rate of 6.1% for the next two decades, triplingcurrent traffic levels increasing from 178.1 billion RTKs in2005 to more than 582.8 RTKs in 2025. (Boeing, 2006, p.1).Additionally, Boeing evaluated the impact of the Asian marketconcluding that Asias air cargo markets will continue to leadthe world air cargo industry in average annual growth rates,


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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 AirCargo Forecast, which shows the growth trend for the World Air

Cargo Traffic over the next 20 years.

Figure 3 World Air Cargo Traffic 2006 2025Source: Boeing World Air Cargo Forecast 2006 2007

Air cargo is only one part of the global goods distributionnetwork. Shippers demand that shipments arrive at theirdestination on time, undamaged, and at a reasonable price,

regardless of transportation mode. Different transport modes(road, rail, maritime and air) often can move the samecommodities, 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; airtransport offers the benefit of speed. The maritime industry, asmeasured in tonne-kilometers of goods transported, is muchlarger than the air cargo industry. In 2005, the world maritime

industry generated a total of 53.4 trillion RTKs of traffic


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compared to 178.1 billion RTKs of traffic for the air cargoindustry. (Boeing, 2006)

Air cargo is an essential element in the globalization ofsourcing, manufacturing, assembling, and distribution of goods,

and this trend accounts for much of the growth in air cargotraffic. Other factors that affect the airborne freight growth rateinclude available capacity, cargo yields, jet fuel prices, relativecurrency strengths, regulations, and national industrialinitiatives. (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 anaverage annual rate of 6.3% between 2005 and 2009 (IATA,

2005, p. 8). On the same line, when evaluating regionalgrowth, IATA highlights the potential of Asian markets as keydrivers for growth in the industry on the next five years, statingthat routes linked with Asia Pacific, and China and India inparticular, 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 contractualalliances, have been launched worldwide in the past five years.(Bamford et al., 2004, p. 91)

The utilization of strategic alliances as a source of competitiveadvantage in todays world is a reality. No matter the size of theorganization or the industry in which it participates, mostorganizations see in a strategic alliance an interestingopportunity of growth, knowledge, efficiency and profitability.

The airline industry has not been aside of this reality, and initiallyduring the 1990s a wave of alliances came in place in thepassenger airlines industry, boosting their competitive position,expanding their networks and increasing levels of market sharefor members of the alliances. However, is not until the year 2000when major initiatives of strategic alliances in the air cargobusiness took place, as it was presented in the introduction ofthis document, with the creation and launching of SkyTeamCargo and WOW Alliance.

The discussion over the benefits and value created by suchalliances in the Airline Cargo Industry has been presented by


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different specialized publications. However, even though studieshave 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 madefocused 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 threeobjectives, focusing my analysis on the assessment of differentissues involving the case study on SkyTeam Cargo and WOWAlliance:

- Evaluate the extent in which strategic alliances are a source ofcompetitive advantage for the companies engaged in thesepartnerships, 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 valuechain of companies participating in these alliances.

- Identify different implementation practices that could be usedby companies in the air cargo business to develop strategicalliances.


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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 numerousperspectives. These perspectives include those of alliancerationale (Ohmae, 1989; Burgers et al., 1993; Contractor andLorange, 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) andcomplexity (Killing, 1988) partner selection and development(Hamel et al., 1989; Osborn and Baughn, 1990; Sheth andParvatiyar, 1992; Ring and Van de Ven, 1994; Brouthers et al.,

1995; Doz, 1996; Singh and Mitchell, 1996; Contractor andKundu, 1998) or performance measurement and value creationof alliances (Harrigan, 1986; Kogut, 1988; Parkhe, 1993 a, b;Dussauge and Garrette, 1995; Chan et al., 1997; Glaister andBuckley, 1998; Das et al., 1998; Doz and Hamel, 1998; Baum etal., 2000). (Kleymann, and Seristo, 2001, p. 304)

The effects of airline alliance have been extensively investigatedelsewhere, including emprirical studies by Gellman ResearchAssociates (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). Allof these alliance studies have focused on international allianceson passenger services. (Zhang et al., 2004, p. 85)

In their article, Airline Alliances Who Benefits?, Morrish &Hamilton (2002) present a consolidation of major studies inalliances in the airline industry, which we attach in Annex 4 ofthis document.

2.2. Strategic Alliances: Definitions and challenges

The concept of Strategic Alliances has become widely used in thebusiness language to refer to the different type of partnershipagreements between two or more companies that pursue clearstrategic collaboration objectives, with different levels of possibleintegration among the members. The definition presented byElmuti & Kathawala (2001, p.205), in my opinion, presents avery clear idea of what a Strategic Alliance should be about;


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Strategic Alliances are partnerships of two or more corporations or business unitsthat work together to achieve strategically significant objectives that are mutuallybeneficial.

From such definition, it is important to highlight the following

three ideas. The first one is the concept of partnerships of twoor more corporations; which opens the definition to theconstruction of network alliances, with more than two membersseeking for the benefits of such alliance. In this sense, Elmuti &Kathawala state that much of the discussion regarding strategicalliances has typically focused on alliances between twocompanies; 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 aset of firms linked together through such alliances and that

competes in a particular competitive domain; the constellationmay compete against other constellations, or against singlefirms (2003, p. 328).

The second idea to evaluate from Elmuti & Kathawalas definitionis the concept of achieving strategically significant objectives.Is in here, where I consider the main differentiation of StrategicAlliances over any other type of partnership can be identified.Companies throughout its business-life establish relationshipswith hundreds of companies, from suppliers to competitors, tocustomers; ones more deeply integrated or stronger than theothers, however, it is important to clearly identify which of thosepartnerships evolve to real strategic partnerships and whichones are just simple business relationships for the organization.

Bennet, cited by Evans (2001), distinguishes between tacticalalliances which are loose forms of collaboration which exist togain marketing benefits and strategic alliances which are alonger term, and wider in their scope and level of commitment.Airline tactical alliances frequently focus on code-sharingagreement and feed arrangements at airport hubs. Strategic

Alliances, whilst incorporating these arrangements, would alsoinclude such aspects as shared airport facilities, synchronisedscheduling, reciprocity on frequent flyer programs, freightcoordination and joint marketing activities. (Evans, 2001, p. 238)

T. Fan et al (2001, p. 350), identify three possible levels ofcooperation: ordinary, tactical and strategic. Ordinarycooperation activities, in the airline industry, is present whencarriers serving an airport infrequently may choose to ordinarilyoutsource the handling of general sales or airport functions to

another carrier or handling agency. These agreements may beindicative of mutual trust, however, they are not necessarily


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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 carriermarketing its code on anothers flight, limiting its cooperation tospecific 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, arecharacterized by joint, dedicated marketing entities for network-wide cooperation, characterized by extensive code-sharing,coordinated schedule and fare planning, reciprocal loyaltyprograms with the ultimate goal of delivering seamlesstransportation experience across the entire alliance network.

And the last idea that is important to highlight from the definitionof Elmuti & Kathawala is the concept of mutually beneficial. As

in every business relationship, the idea of a win-lose situation isfar from being accepted. Seeking for win-win opportunities for allthe members of the alliance is a critical element for the successof such partnership in the future.

Other definitions of strategic alliances can be introduced to havea wider idea of how academics perceive this concept. Wheelenand Hungar (2000, p. 125) state that a strategic alliance is anagreement between firms to do business together in ways thatgo beyond normal company-to-company dealings, but fall short

or a merger or a full partnership. Ernst & Bamford define analliance as an agreement between two or more separatecompanies in which there is shared risk, returns, and control, aswell as some operational integration and mutual dependence(2005, p. 134). Gomes-Casseres (2003, p.328) presents hisdefinition of alliance as any governance structure to manage anincomplete contract between separate firms and in which eachpartner has limited control, and the same author complementshis definition by stating that an alliance is a way of sharingcontrol over future decisions and governing future negotiations

between the firms it is a recognition that the initial agreementis in some sense incomplete (Gomes-Casseres, 1998(a)). Evans(2001, p. 230) states that the concept of strategic alliances isdefined as a particular horizontal form of inter-organisationalrelationship in which two or more organizations collaborate,without the formation of a separate independent organization, inorder 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 forhedging risk because neither partner bears the full risk and costof the alliance activity.


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More specifically into the airline industry and the alliances withinthat sector, Morrish & Hamilton (2002, p.401) present the ideathat an airline alliance is any collaborative arrangementbetween two or more carriers involving joint operations with thedeclared intention of improving competitiveness and thereby

enhancing overall performance.

Other new creative concepts have been introduced as well intothe market, such as the concept of Co-opetition, presented byRijamampianina 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 beencreated and implemented by different companies, academicstend to classify them based on different criteria. On one hand,we find those academics that classify the type of strategicalliances 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 ofalliances, 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%


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Under the same idea, Technology Associates and Alliances (TAA)(1999), a strategic alliances consulting company, lists thefollowing type of alliances: Marketing and sales alliances,Product and manufacturing alliances, Technology and know-howalliances (Elmuti & Kathawala, 2001, p. 207)

On the other hand, we have a group of academics that classifythe type of strategic alliances depending on the level ofintegration in the collaboration process. In this group, we canfind the work of Gomes-Casseres, who states that Alliances maybe structured as complex equity joint ventures or they may belooser arrangements for cooperating (2003, p. 328). Johnson etal. presents that there are a variety of types of strategic alliance;some may be formalized inter-organizational relationships; atthe other extreme, there can be loose arrangements of

cooperation and informal networking between organizations withno shareholder or ownership involved. (2005, p.354)

Analyzing the airline industry, we find classifications on alliancessuch as the one presented by Park (1997, cited by Morrish &Hamilton, 2002, p. 401) who distinguished two major type ofalliances as being either complementaryorparallel. The maindifference is that members of complementary alliances havenon-overlapping routes on their network, whereas in parallelalliances members face problems of routes being overlapped.

Apart from routes, the most common forms of collaborationinvolve code sharing; block spacing; shareholdings; andfranchising. Code sharing allows an airline to sell seats or cargoon a partners flight under its own designator code, whileblocking spacing is an agreement under which one airlineallocates a block of seats or cargo space on its flight to a partner.Shareholding (cross-equity holding) is usually subject toregulation if it involves an airline from another country, and doesnot require any type of strategic collaboration. Franchising, on

the other hand, has the franchisee paying a royalty to thefranchiser in exchange for the privilege of using the lattersmarketing package (Morrish and Hamilton, 2002, p.401). Also,Glison et al (1996, p. 27) define three types of alliances availablein the airline business, which are marketing, equity and frequentflyer programs.

2.4. Experiences of Strategic Alliances in Airlines

The development and implementation of strategic alliances in theairline industry is not new. During the 1990s, passenger airlines


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embraced a set of strategic alliances as a consequence ofderegulation initiatives and the benefits of code-sharingagreements. As a result, multiple bilateral agreements ofcomplementation of routes and services were signed betweenairlines of all over the world, increasing volumes, network

coverage and market share opportunities. Strategic allianceshave occurred in a broad spectrum of industries, among whichtheairline industry has the largest number of alliances (Oum etal., 2004).

In Table 3, I present the results of a survey conducted by thespecialized publication Airline Business on the number ofexisting airline alliances on the period 1994 1999. From there,we can see an increase of 18.3% during the 5 year period andthe increase on Non-Equity Alliances.

Table 3 - Airline Alliances in the global airline industry 1994 1999

1994 1995 1996 1997 1998 1999 % Change1999/1994

Number of Alliances 280 324 389 363 502 513 + 18.3With 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 allianceswithin the airline industry can be: the level of instability of theindustry, the low levels of margin and profitability and theregulatory framework in which the industry works. In the airlineindustry, , it is only recently that there has been an increase inalliance stability, and it seems that the degree of integration isone 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 proliferationof strategic alliances is presented by Morrish and Hamilton(2002, p. 403), stating that one explanation for the prevalenceof alliances in the airline industry is that although the industryhas achieved high growth rates, it suffers from intrinsically low-profit margins. Additionally, same authors analyze the factor of arestrictive environment, proposing that with global expansionconstrained by restrictive air services agreements, strategicalliances are seen as a strategy for growth.


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In the air cargo industry, the fever of strategic alliances havecome a little bit behind the passenger industry, even though, theutilization of bilateral interline agreement among airlines iscommon commercial and operational practice over the last years.

The cargo alliances have come in behind the more extensivepassenger alliances that grew out of the rapid expansion of code-sharing and other cooperative arrangements the scheduledairlines undertook during the 1990s to add international marketswith limited new investment (Wiebner, 2003, p. 39). Notice thatone difference between a cargo alliance and a passenger allianceis that for the passenger alliance, the burden of movingpassengers at the connecting airport is strictly the responsibilityof those persons. With cargo alliances, freight must be moved bya 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 onescreated in the passenger industry1, have been embraced onlysince year 2000 with the creation of SkyTeam Cargo and thencreation of New Global Cargo Alliance, that later would bebranded WOW.

SkyTeam Cargo was created in year 2000 by four carriers thatwere already members of the SkyTeam Alliance in the

Passenger side of the business. These carriers were AeromexicoCargo, Air France Cargo, Delta Air Logistics and Korean AirCargo. Since then, four other carriers have joined the alliance(Alitalia Cargo, CSA Cargo, KLM Cargo and Northwest AirlinesCargo) complementing the network and the type of productsoffered to their customers. The dynamic that this alliance hashad over the past years, has been reported by Conway (2004, p.58) stating:

Sky Team Cargo members are all adopting a single product portfolio basedoriginally in that of Air France and the alliance is committed to joint handling as faras possible. It also has a joint venture, which handles all outbound sales for AirFrance, Delta and Korean, with Alitalia and KLM expected to join too by the end ofthe year.

In 2004, it was reported by Air Cargo World that SkyTeamCargos Network (before Northwest Cargo joining in) servedmore than 500 destinations in 110 countries.

1In the passenger industry, three major group-alliances can be identified: One World, Star

Alliance and Sky Team.


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Being members of SkyTeam Cargo, Air France and KLM arealso set as an example of the evolution of strategic alliances inthe 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 havemoved to create one cargo organization, with a single management, harmonizedsales force and common IT platform, and to align freighter networks.

On the other side we have WOW, the cargo alliance created inApril 2000 by Lufthansa Cargo, the worlds biggest internationalairfreight carrier, Singapore Airlines Cargo, the world secondbiggest, and SAS Cargo, the Scandinavian giant (WOW website,2006). It was initially known as New Global Cargo; however, inApril 2002 it was re-branded as WOW and launchedharmonized services for the customers of the airline members. InJuly 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 expandednetwork. They have also harmonized their air cargo services sothat their individual products, such as express services, can betransported seamlessly throughout the alliance network. On thesame line, Taverna (2002) reports: WOW executives are

continuing efforts to harmonize their operations considered thekey to ensuring a genuine joint product offering. One are offocus is sales and handling, where the aim is to move under asingle roof whenever possible (2002, p. 52).

As it is presented in the description of both current alliances inthe Air Cargo Industry, they characterize by the fact that in bothof them exist a group of companies coming together to establishan alliance. As it was presented above, the idea of two-memberalliances has evolved to have alliance groups. An alliance group,

then, is a collection of separate companies linked throughcollaborative agreements (Gomes-Casseres, 1994, p. 65). Thesame author presents the idea thatcollaboration in business isno longer confined to conventional two-company alliances, suchas joint ventures or marketing accords. Today, we see groups ofcompanies linking themselves together for a common purpose(Gomes-Casseres, 1994, p. 62).

The fact that multiple organizations come together into analliance to work towards a common strategic objective, with

different management styles, resource capabilities and culturepresents a great challenge for the executives of such alliances to


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create a successful one. The challenges of integrating theoperations of a series of companies with disparate corporatecultures include everything from integrating informationtechnology systems to coordinating sales forces and productlines (Wiebner, 2003, p. 38). The need to coordinate and

integrate all the efforts within the alliancing members areevident when multiple organizations establish a strategicalliance, as it is in the airline alliances, and as it is stated byKleyman and Seristo (2001, p. 305) in a fully multilateralalliance network, where each member cooperates with everyother member, a single members decision will affect a large partof the network.

Armbruster (2002) presents an interesting fact, related to theperception of the alliances and its future by the industry

members:

In an electronic survey conducted by Cargo Network Services2at its annualconference in Las Vegas, 80% of the forwarders, carriers, vendors and otherparticipants said they expect consolidation and alliances to continue. A similarpercentage said they perceived alliances primarily as an opportunity, with only 20%viewing them as a threat.

2.5. Why Strategic Alliances? Reasons behind thedecision

The importance of strategic alliances in todays businessenvironment has been a common point of discussion fromseveral academics. Different set of reasons can be found as towhy a company should seek for strategic alliances in order tocompete in todays open, aggressive markets. For some of them,strategic alliances are a must in todays business strategy andare a matter of survival; Alliances between companies, whetherthey are from different parts of the world or different ends of thesupply 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 isprofound. No firm can afford to ignore the use of alliances incompetitive strategy. (Gomes-Casseres, 1998)

Rijamampianina et al., citing different authors, present the ideathat alliances are growing as a response of rapid advances in thebusiness environment. The basis for the growing number ofcompetitive business alliances lies in the rapid advancement oftechnology, 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.


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competition and the uncertainties and complexities of todaysbusiness environment (Escriba Esteve & Urra Urbieta, 2002;Zineldin, 2002; Tse et al, 2004) (2005, p. 93). The sameauthors, present as reasons to get involved in strategic alliancesthe different type of benefits that organizations can achieve from

them, stating that by forming alliances with strategically chosencompetitors, companies find that they can shorten developmentcycles, share financial risks, improve their organizational learningand increase their access to markets (Rijamampianina et al,2005, p. 93).

According to Elmuti & Khatawala (2001, pp. 206 - 207) thereasons for creating strategic alliances can be classified into:Growth Strategies and entering new markets, Obtain newtechnology and/or best quality or cheapest cost and Achieve or

ensure competitive advantage. They based their classification ina study of Coopers & Lybrand (1997) that shows that growthstrategies and entering new markets are among the mainreasons cited by organizations to form strategic alliances. At thesame time, the same authors citing Quinn (1995), state thatmany companies are forming alliances looking for best qualityor technology, or the cheapest labor or production costs (Elmuti& Khatawala, 2001, p. 206). In a similar line of thought we findSegil, 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 aninevitable result of the regulatory framework within which theinternational airline industry operates. Regulatory and legalrestrictions often prevents the full ownership of airlines byforeign companies and consequently alliances have beenperceived as the only viable market entry mechanism at least inthe short to medium term. (Evans, 2001, p. 239)

In a study presented by the Roland Berger consulting firm it wasstated, The main aim in forming an alliance is to create a globallogistics offering and hence increase market sharedisproportionately. When they form alliances, therefore, airlinesfocus mainly on optimizing their route networks andschedules(Wiebner, 2003, p. 39); Airlines have embracedalliances as a way to cut costs and expand sales by offeringservice to markets where the carriers themselves do not fly(Armbruster, 2002, p. 22).


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Kleymann and Seristo (2001, p. 305) present three categories inwhich benefits from alliances can be classified, being Market-presence related, Resource utilization related and Learning ofpractices. Learning of better practices is, in a way, an indirectsource of benefits as it eventually leads to financial benefits

either through better utilization of resources or throughmaximization of revenues. As to market-presence relatedbenefits, alliances have an impact over its members revenuesallowing them to be present in markets where they wouldntparticipate as a single organization. Concerning resourceutilisation benefits, we can differentiate, for instance, labourproductivity, aircraft productivity, and benefits of accruing fromlower costs of procured goods and services. Most of the costreduction potential is in labour costs, whether that labour is inmarketing, maintenance, ground handling or flight operations.

Other sources of cost reduction are in equipment and propertycosts, capital costs mainly for aircraft, and expenses paid forthird party services such as ground handling. Within marketing,the payment to the distribution channel offers a potential for costreduction. (Kleymann and Seristo, 2001, p. 305)

Button et al. (1998), suggest a number of possible reasons foralliance formation cost savings, market penetration andretention, 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 salesand marketing, station and ground facilities and

purchasing.

In their work, Agusdinata and Klein (2002, pp. 203-204) presenta very interesting approach on the factors that facilitate airlinealliances. These two factors are: Restriction on foreign ownershipand controland The nature of airline alliances.

Under the first factor, even though the airline industry is avehicle to promote globalization all over the world it remains,ironically, nationalistic in nature. In order for an airline to expandoperations into another countrys territory, the governments of


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any two countries have to establish bilateral agreements3thatwill 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 amain obstacle to true liberalization on the airline industry. If a

designated airline company is to represent a country in abilateral negotiation, then the nationals of the country inquestion must have majority ownership and dominantmanagerial control over the airline. Therefore, the only way toachieve international world-wide expansion would be by formingalliances with other carriers and integrating their networks. Sofar, some development has been made in this sense, being themost important one the deregulation in the US market followedby liberalization in Europe. However, as long as restrictions onownership 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 factorthat facilitate them, it is presented that despite the possiblefuture weakening of regulatory constraints thanks toliberalization efforts in major markets, it is presumed thatalliances will still play an important part in the global market.Additionally, it is expected that these alliances will stay and willnot necessarily evolve in mergers, mainly because the flexibilityoffered by the alliances compared to mergers is what is required

within a turbulent and uncertain industry such it is the airlineindustry. Furthermore, the size of the financial resources neededfor an airline to establish its own global network are enormousand 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 copewith such environment. A primary requirement of such anorganisational form should be the increased competitive ability to

survive in an environment that is characterised by fiercecompetition so that the benefits of entering new markets may bereaped and changing customer demand may be fulfilled. Theanswer presented by the airlines is to form global alliancesgroups because such organisational form is flexible, has rapidgrowth potential and promises to provide a worldwide networkwithin which member airlines can offer seamless global services.(Agusdinata & Klein, 2002, p. 204)

3Typical bilateral agreements will include consensus on issues such as: i) the

carrier(s), in other words, the designated airlines, (ii) the routes flown, (iii) thetypes of traffic rights granted for the designated airlines, (iv) the frequency offlights and capacities and (v) tariffs.


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Despite the fact that strategic alliances are a must in todaysbusiness environment and the multiple reasons and benefits thatorganizations can expect from entering into strategic alliances, it

seems it is not an easy task. The numbers with regards to thelevel 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 downprematurely and inflict financial damage on both partners (Dyeret al., 2004, p.109); The failure rate of strategic alliancesstrategy is projected to be as high as 70 percent (Kalmbach andRoussel, 1999) (Elmuti & Khatawala, 2001, p. 206); Theoverall success rate of alliances hovers near 50%, and theaverage life span of a joint venture is just five to seven years

(Ernst & Bamford, 2005, p. 133); It is widely accepted the factthat the majority (70 percent) of alliances either fail outright, fallcaptive to shifting priorities or achieve only initial goals, and 55percent fall apart within three years after they are formed(Segil, 2004, p. 31). Although strategic alliances are increasinglyperceived as strategic weapons even for competing within afirms core business (Harrigan, 1987), they are enormouslycomplex to manage successfully and they are frequently subjectto instability, poor performance and premature dissolution.(Parkhe, 1993). (Morrish and Hamilton, 2002, p. 402)

Existing alliances have already proven to be very rewarding, bothto the airlines (increasing profits) and to the consumers (bettersschedules and lower fares). Despite the proven success ofalliances, results from the airline sector and particularly fromother branches of industry, clearly show that alliances are ratherunstable, though no less stable than mergers (Agusdinata &Klein, 2002, p. 210). Many alliances in the airline industry haveemerged, alliances have failed and new alliances have beenforged 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 greaternow 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.


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However, we find also authors such as Gomes-Casseres whocriticizes the focus that some academics and consultants havehad over the rate of failure on strategic alliances; This focus ontermination rates misses the central point: alliances are a means

to an end, not an end in themselves. Alliance longevity isirrelevant strategic success is what counts (Gomes-Casseres,1998). In the same line of thought we can find Agusdinata andKlein (2002, p.204), who state:

It is not only the intrinsic flexibility of any airline alliance that makes it subject tochange but also the rapidly changing environment in which it is situated as well asthe changing perceived benefits and competitive pressures which force all alliances torethink their objectives many times during their existence and which, in turn, maylead 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 fororganizations to participate in strategic alliances to achievecompetitive advantage, but with such levels of failure statistics,executives are in a position where they need to find the magicformula to apply in their strategic alliance ventures in order tomake 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 factorsfor strategic alliances vary from simple concepts of trust andcommunication, to complex models involving several steps andmethodology. To make a strategic alliance succeed, itsmanagers must be able to create an environment of trust,maintaining broad strategic vision and feel genuine empathy forothers, even those who are still competitors in other areas(Ellis, 1996, p.8); Strategic and financial analyses contribute alevel of confidence to the alliances, but, like all new businessventures, collaborative relationships draw energy largely from

the optimistic ambition of their creators (Moss, 1994, p. 99);The effective management of relationships to build collaborativeadvantage requires managers to be sensitive to political, cultural,organizational and human issues (Moss, 1994, p. 108); Thesuccess or otherwise of the alliance, whatever its nature orpurpose, depends largely on how the details are communicatedto 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


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- 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 factorfor alliance formation is the element of trust. As it is stated byKleyman and Seristo (2001, p. 307), in addition to contractualstipulations, there are two prominent mechanisms in place whichcan to some extent mitigate the risk involved at high levels of

integration, namely trust and alliance-specific investment. Thetighter the cooperative integration between partners, the higherthe need for trust between them.

Additional work can be found in The eight Is that createSuccesful Wes (Moss, 1994) and the Alliance Success Factorspresented by Gomes-Casseres (1998). Also, Segil (2004) statethat the success on the alliances relies on the capacity tomeasure the benefits, and present in their work a set of metricsthat can be applied to measure the advances and success of

these partnerships. As stated by Segil, creating the alliance isthe easy part; managing it and measuring its success is muchmore challenging (2004, p. 35).

Agusdinata and Klein (2002, p. 205) focus on those elementsthat provide stability to the alliance, and therefore can be takenas critical success factors. Such elements are based on the abilityof the alliance to cope with economic downfall and to react in achameleon-like way to changing competitive environments. Analliance has to be able to harvest and secure the benefits of

increased economies of scale and scope during the upturn andpeakperiods of the economic cycle so that it is able to engageniche carriers in price battles during times of economic downfall.For the authors, the three most important categories of internalstability are:1. Trust, mutual forbearance and multi-culturalism2. 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.


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Now, another perspective could be to analyze the factors thatcould have an impact over the failure of the alliances. Accordingto Elmuti & Kathawala (2001, pp. 208 209), the reasons ofwhy strategic alliances fail can be explained by the followingfactors:- 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 toembrace in the creation and implementation of strategic alliancesthat would allow them to achieve competitive advantage hasbeen reinforced by work presented by different authors.However, the fact that there is a high percentage level of failureof such initiatives, create a challenge for executives today to findthe appropriate combination of factors that will assure thesuccess of their partnerships. Different results from research and

concepts from academic and consultants can be found on criticalsuccess factors for strategic alliances, as well as differentframeworks and methodologies; however it is clear that everyalliance is different, every industry is different, every company isdifferent, and therefore a best practice in the consolidation ofalliances is difficult to be developed.

2.7. Are the current SAs in the industry being a sourceof competitive advantage?

Above the reasons that organizations might have to enterstrategic alliances, and that have been presented above in thisdocument, there is a concept that embraces them all, and it is toachieve competitive advantage. Michael Porter (1985)introduced the concept of Competitive Advantage and it relatesto the ability of an organization to discover and implement waysof competing that are unique and distinctive from those of theircompetitors and that can be sustained over time.

It seems to be a general agreement over the academics thatstrategic alliances are a source of competitive advantage. In the


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global economy, a well-developed ability to create and sustainfruitful collaborations gives companies a significant competitiveleg up (Moss, 1994, p. 96); the ability to form and managethem [strategic alliances] more effectively than competitors canbecome an important source of competitive advantage (Dyer et

al., 2001, p. 37); Strategic Alliances are giving companies acompetitive advantage (Segil, 2004, p.31); Strategic alliances -a fast and flexible way to access complementary resources andskills that reside in other companies have become an importanttool for achieving sustainable competitive advantage (Dyer etal., 2001, p. 37); Cooperating to compete in any form givesparticipants greater opportunity for growth and a strongercompetitive edge (Amin, Hagen & Starret, 1995; Brandenburger& Nalebuff, 1996; Clarke-Hill et al., 2003) (Rijamampianina etal, 2005, p. 93).

Airline alliances have evolved from being a loose form of co-operation with each other to becoming one of the most importantstrategies 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 withthis highly competitive and volatile climate. A basic requirementof this organisational form should be to increase the competitiveadvantage of surviving in a highly competitive environment so

that the benefits of entering new markets may be reaped. Thiscan be achieved if the new organisational form is flexible andallows rapid growth potential. (Agusdinata & Klein, 2002, p. 210)

The competitive position of an organization can be measured bytheir capacity of creating value. In competitive terms, as statedby Porter (1985, p. 38), value is the amount buyers are willingto pay for what a firm provides them. A firm assures itsprofitability if has the capacity of generating sufficient value thatit exceeds the costs involved in creating the product, and this

creation of value shall be the goal of any generic strategy. Thecreation of value on the organizations can be explained throughthe Value Chain Model presented by Porter (1985).

As we have presented above, when analyzing the types ofstrategic alliances and the reasons behind them, we see thatcooperation at different levels within the alliances members ispresent in various stages of its value chain impacting thecapacity of such alliances to create value and enhance thecompetitive position of such organization. I consider that byunderstanding and disaggregating the different activities coveredby a cargo airline, with the support of the Value Chain Model


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developed by Porter (1985), the identification of opportunities ofcooperation within an alliance formation process and focusing inengaging cooperation in value-adding activities can generate ahigher impact in the results of the alliance and therefore securethe benefits behind its formation.

Below, in Section 4 of this document, I present a Value ChainAnalysis for a Cargo Airline, which can be adapted to any airlineparticipating of the WOW or SkyTeam Cargo Alliance.

2.8. Are customers perceiving the benefits of thealliances?

Despite the fact that Strategic Alliances have been in the

business environment for a while, it has been an element ofdiscussion and evaluation the impact and benefits that suchalliances have brought to their members, but much morediscussion has generated the fact that final customers areperceiving and getting benefits or not of such partnershipventures.

During the past couple of years, much has been written withregards to the new challenges that organization face in order tosatisfy and create value for their customers. When analyzing the

aims of the two group-alliances presented in this document, thefocus on customers is clearly identified. For example, SkyTeamCargos mission statement explicitly express the idea of being acustomer driven alliance; We, SkyTeam Cargo, aim to be themost effective and customer-driven Air Cargo Group in the globallogistics industry (SkyTeam Cargo Website, 2006).

So, how do customers benefit of such alliances? Differentopinions have been presented and multiple benefits can be citedby the executives of the members of such alliances. How do

clients benefit? By getting a better and expanded product for thesame price. It also cuts their organizing costs, as all thealliances routes are now available in a coordinated fashion. Thisone-stop-shopping reduces labor costs and speeds up theorganization of the transport (Wiebner, 2003, p. 39).

However, perception from the top executives of the major freightforwarding companies in the world in some cases leave out somequestions with regards to the effectiveness and transferred valuethat these alliances have brought to their businesses.Presumably alliances are created to provide a global offering to


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the major freight forwarders, the key customers of airlinesaccounting for over half of global air freight. But they remaindistinctly lukewarm about them (Conway, 2004); Like manyother forwarders, Tomasulo [EGLs Vice-president of airfreightand 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, seniorvice-president airfreight at freight forwarder Schenker, the bigdeficiency in the formal cargo alliances is that they do not have ashared bottom line (Conway, 2004).

And the perception of the major freight forwarders should be animportant element to evaluate and to be addressed by thecurrent Air Cargo Alliances, due to the fact that everyday, moreand more, they are achieving a stronger dominant position in the

Air Cargo Industry. The large multinational forwarders, it issaid, are on an inexorable upward path toward dominance on theglobal air cargo stage while small and medium-sized companiesare increasingly becoming bit-part players pushed to the outermargins (Hastings, 2004). Additionally, the Freight ForwardingIndustry has suffered of a major transformation andconsolidation of major players over the last couple of years, withbillionaire mergers and acquisitions in place, creating verypowerful organizations of which airlines need to be aware of. Andthese organizations are choosing with whom they want to work,

based on complex negotiations and with the creation of their ownPreferred Carrier Programmes. Instead, such forwarders seekglobal 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 statedby 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 woulddemonstrate the value of their alliance.

2.9. Implementation Practices for Strategic Alliances

Strategic Alliances have been a subject of study during the pastten years, with academics presenting analysis over differentissues concerning the definition, implementation and evaluationof such cooperation agreements. Different models to be appliedhave been developed by various authors, trying to establish a set


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of parameters of guidelines that could help managers to get thetrue benefits of strategic alliances.

The development of an alliance can be divided into three mainstages: formation of the alliance, management of the alliance

and evolution of an alliance (Baharum, 2004, p. 65). Thesethree stages can be seen in various models presented bydifferent authors who have evaluated the development ofinternational 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) andPekar & 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 thestudies 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 practiceand framework that could be used by cargo airlines to developstrategic alliances.

3. Methodology and Limitations of the Paper

In order to complete my research, a combination of differentmethodologies was used, based mainly on the utilization of theCase Study methodology, supporting my findings on a qualitativeevaluation of secondary data. Despite the efforts made to obtainsources of primary data within the companies evaluated in thisdocument, I was not able to obtain a positive response fromthem in order to gather some inside information and theirinternal perceptions over the evolution and management of thestrategic alliances evaluated in my research.

Is in this first point, where the main limitation to my researchexists. Focusing mainly on secondary data on the results andstructure of the strategic alliances, does not allow to deliverconclusive results that can be generalized to other partnershipexperience at a strategic level in the Air Cargo Industry.However, extensive research from secondary sources, includingacademic journals, books, industry publications and others wasmade in order to obtain as much information as possible tominimize the effects of this limitation.


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Now, as it was mentioned before, my research was conductedbased on the Case Study methodology. According to Yin (1994),the Case Study is a preferred approach when how or whyquestions are to be answered, when the researcher has littlecontrol over events and when the focus is on a current

phenomenon in a real-life context. For my research, these threecriteria were applicable, seeking to understand how strategicalliances can be a source of competitive advantage for airlines inthe air cargo industry in todays business environment andreality.

Yin (1993) listed several examples along with the appropriateresearch design in each case. There were suggestions for ageneral approach to designing case studies, and alsorecommendations for exploratory, explanatory, and descriptive

case studies.

In exploratorycase studies, fieldwork, and data collection maybe undertaken prior to definition of the research questions andhypotheses. This type of study has been considered as a preludeto some social research. However, the framework of the studymust be created ahead of time.

Explanatory cases are suitable for doing causal studies. In verycomplex and multivariate cases, the analysis can make use of

pattern-matching techniques.

Descriptive cases require that the investigator begin with adescriptive theory, or face the possibility that problems will occurduring the project.

Critics of the case study method believe that the study of a smallnumber of cases can offer no grounds for establishing reliabilityor generality of findings. Others feel that the intense exposure tostudy 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 ofevidence in case studies, being:

Documents Archival records Interviews Direct observation Participant-observation Physical artifacts


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For the specific case of my research, I worked with most of thesources presented above, except with interviews as it wasexplained above. Physical artifacts were not applicable to

Analysis of Strategic Alliance as a Source of Competitive Ad.pdf

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