University of Suffolk

Module: International Business

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Table of Contents
1.0 Introduction...................................................................................................................................2
1.1 Overview of Star Alliance...........................................................................................................2
2.0 Literature review...........................................................................................................................2
3.0 Analysis and discussion.................................................................................................................6
3.1 Motivations behind the formation of selected international strategic alliance..............................6
3.2 Critical Assessment of benefits and challenges of the selected strategic alliance to the partners. 7
3.3 Alternative market entry strategy.................................................................................................8
4.0 Conclusion....................................................................................................................................10
References..........................................................................................................................................10
1.0 Introduction
Strategic alliance is a cooperative arrangement among the businesses to be benefitted
mutually. Such kind of arrangement is very common in the competitive industry. Strategic
alliance can be broadly defined as the agreement between the two or more firms to share
value creating activities with each other’s in order to get mutual benefits and synergy (Dess et
al., 2011). However, Strategic Alliance in airline or aviation industry is very common at
present world. The largest airlines companies have formed strategic alliance with others
companies to capture the different markets and routes. The strategic alliance in the aviation
industry started growing since 1978 with deregulation in airline industry. This report chosen
‘Star alliance’ in the airline industry to conduct the whole report.

1.1 Overview of Star Alliance

Star Alliance is the Global first Strategi Alliance started journey in 1997. The five airlines’
companies have come into an agreement to form alliance among them. The five major
airlines include United airlines, Scandinavian airlines, Thai airways, Air Canada, and
Lufthansa. Star alliance is the world largest alliance in the aviation industry in many aspects.
Up o 2015 Star alliance was accounts for 23% of the global schedule traffic in the airline
industry. Star alliance is also the largest alliance in terms of passengers carried representing
762.67 million in 20018 relatively higher than other two alliance like ‘Sky Team’, and ‘One
world’. Currently 26 airlines companies are the member of these giant alliance and operating
with more than 5033 aircrafts and serving in 1300 airports of more than 195 countries.
Approximately 1900 departure are estimated from Star Alliance (Star Alliance, 2021).

2.0 Literature review

Defining strategic Alliance

Strategic alliance is cooperative arrangements among the different business firms for
achieving mutual benefits. Such types of arrangements and alliances is very common in
different types of industries. Many firms use this approach to enter in into different markets
for expanding their businesses. It is referring to an agreement between two or more firms
where the companies come into an agreement and give their consent to share value creating
activities with each by managing their own individual identity (Thompson et al., 2013).
Strategic alliance creates a win situation because it is beneficiary for all the companies of the
alliance. People often mis interpret strategic alliance as a merger. Merger and strategic
alliance vary greatly in terms of the nature of agreement and ownership entity. In strategic
alliance companies maintain their own identity while sharing only some value creating
activities with each other’s like combined production, distribution, and marketing etc. on the
other hand, merger is an absolute integration among the companies whereby companies come
into the contract and converted into a single ownership entity.

Purposes of Strategic alliance

Strategic alliance mainly formed with a view of gaining mutual benefits. Besides, strategic
alliance serves many others purposes of the company. the basic purposes of the strategic
alliance are narrated shortly in below.

 Companies intended to form alliance to share activities among them so that the
companies can easily benefitted from the sharing.
 Secondly, companies formed strategic alliance in order to gaining synergy which
means that greater output from the combined operations (Hitt et al., 2012).
 It also aimed at sharing of knowledges and technologies among the companies.
 Strategic alliance also focused and intended to reduce cost and maximize revenue.
 Business firm’s often form alliance with the companies in abroad market to enter into
the market.
 The purpose of strategic alliance is also to create new venture, launch a new product,
or new projects.

History of strategic Alliance in the airlines industry

The aviation industry is one of the fastest growing and competitive industry in the world. The
industry has undergone with several transformation in the last decades. This transformation
took place in the form of deregulation and consolidation (Tugores-Garc\’\ia and others,
2012). The culture of forming strategic alliance in airlines industry started after 1978 with
effect of deregulation of airlines industry in USA although the evidence of forming alliances
found since 1930 (Dimanche et al., 2006). The deregulations accelerate the growth of
aviation industry because enables companies to choose their route by themselves as well as
charging prices based on the demand rather than government intervention. The deregulations
encouraged companies to set their own business policy and enables the companies to
lowering cost and improving customer services. Besides, the competition among the
companies also grown due to deregulation which further forced the companies to form
alliances in order to improve competitiveness and decease cost and increasing revenue. The
airlines business survey reported that there are more than 579 alliances are currently working
which were only 280 in 1994. The current aviation industry is dominated by five major
alliances namely, Star, one world, Qualiflyer, Sky Teams, and Wings (Semercioz and Kocer,
2009). These alliances are mostly occupied the 60% of the world air travel. The leading
airlines alliances and their current scenarios are shown below.

Name of Current status

alliance
 Currently there are 26 airlines companies are in the alliance.
 Headquartered in Frankfurt, Germany.
 Current market share stands for 21.7% (Statista, 2019a)
Star Alliance
 Revenue of Star alliance $213.2 billion USD.
 19000 Departure per day.
 Slogan of the alliance is “The way the earth connects”.
 4500 aircrafts.
 More than 728 million passengers in a year.
 Started journey in 1999.
 Headquarter in New York, USA.
 Current market share is 15.6% (Statista, 2019a)
One World
 Revenue $142.4 billion USD.
 527.9 million passengers traveled in a year.
 Combined fleets 3500
 Daily departure 13000
 One world’s slogan is “An alliance of the world’s leading
airlines working as one.”
 Established in 2000
 The headquarter of the Sky Team Netherlands.
 It has 19 member airlines.
Sky Team
 Current market share is 16.1% (Statista, 2019a)
 Revenue $152.9 billion USD.
 Traveled 730 million passengers in a year.
  More than 4000 aircrafts
 More than 15000 departure in every day.
 The slogan of the alliance is “Caring more about you.”

The main reasons of forming strategic alliance in the airlines industry

Earlier, we said that the deregulations increase competition in the industry which further put
pressure on the companies for lowering cost and improving services. thus, companies
gradually come into the agreement of alliance. Besides, there are several reasons involved
with formation of strategic alliance in the airline industry.

 First of all, the most obvious reason of forming strategic alliance is technical which
involves with increasing the capacities and span of operations in airline industry
(Kuzminykh and Zufan, 2014). The formation of alliance among the companies
enhanced companies to enjoy many shared benefits such as combined aircraft facility
and code sharing facilities etc. the increasing capacities obviously reducing the cost of
operations.
 Second and most important reason of forming strategic alliance in airline industry is
to limit the competition. The formation of alliances among the group of companies
decreasing the competition within the companies (Kuzminykh and Zufan, 2014).
 Another intention to create alliance among the air travel companies is to increase
customer services and providing better customer services. the alliance in airline
industry enables companies to provide a greater number of flights in a particular route
which improve the customer experiences.
 The important motivation or reason behind formation of strategic alliance is
increasing business into new market. The companies in the aviation industry are very
frequently motivated to form alliance with the intention of increasing business into
newer market or route. The domestic companies are very often forming alliances with
the international companies in order to expand market.
3.0 Analysis and discussion

3.1 Motivations behind the formation of selected international strategic alliance.

This report chosen ‘Star’ alliance of airlines industry which is considered as on of the biggest
strategic alliance in airlines and aviation industry established in 1997. The main purpose of
forming alliance in airlines industry is to build cooperation and mutual benefits. The Star
alliance was initially formed with five major airlines. Later 21 more airlines companies
joined with the Star alliance. The key motivations behind the formation of Star alliance are
narrated below.

 Increase capacity: One of the main motivating factors of forming strategic alliance is
to increase capacity of operations through sharing of activities among the companies.
The strategic alliance among the companies significantly increases the breadth of
operations and improve the existing capacity (Casanueva et al., 2014). However, the
main motives of Star alliance in the aviation industry are to increase the capacity. The
alliance among the 26 giant airlines companies increases the capacity. Star alliance
accounts for more than 1900 departures in every day (Star Alliance, 2021). The
alliance increases the capacity of each airlines several times higher than normal
capacity which is not possible without forming alliance.
 Increased revenue: Strategic alliance is a mode of gaining mutual benefits.
Companies have come into the agreement of forming alliance in order to increase
revenue. One of the greatest motivating factors is that strategic alliance
simultaneously decreasing cost and increasing revenue (Goetz and Shapiro, 2012).
The Star alliance among the 26 airlines companies increasing the revenue since 1997.
The revenue of the Alliance grown steadily in the previous years. The total revenue of
the alliance was estimated as £213.2 billion US Dollar in 2018 (Statista, 2019b). The
reason obviously is sharing of value creating activities among the companies.
 Better access to new market: Companies motivated to form strategic alliance as a
means of access into the new markets. Strategic alliance with companies in host
country facilitates access into the new market which further enables companies to
earn more revenue and expand market.
  Improved customers services: Strategic alliance among the companies increase the
ability to serve the customers. The combined operations enables company to gain
synergy and enhances the company’s capacity to serve the customers better than
before (Kuzminykh and Zufan, 2014). In airlines industry service is one of the vital
factors for customers in choosing airlines. Star airlines motivated to form alliance
because the alliance can improve the services of the companies. Customers can use
the alternatives lounges.

3.2 Critical Assessment of benefits and challenges of the selected strategic

alliance to the partners.
In earlier section we have already clarified the motivating factors tat drives businesses to
form strategic alliances. Forming strategic alliances is now common in airlines industry due
to many reasons. Most of the biggest airlines companies in the world currently operating
under the strategic alliance agreement. However, alliance in airlines industry simultaneously
involved with different benefits as well as challenges.

Advantages of Star Alliance

 Cost saving: the most important benefits of every alliance in different industry is that
it reducing the cost. The large scale and combined operations bring economies of
scale as well as sharing of activities which further decreases the cost (Lin, 2013). Star
alliance is the best example in the airline industry to minimize cost. Star alliance
composed with 26 airlines companies where companies are sharing different value
creating activities like ticket booking, code sharing, using the same lounge, use of the
same aircraft etc. the sharing of activities among the companies greatly reduce the
cost.
 Code sharing: Strategic alliance in the airlines industry enables companies to share
code. Code sharing is an arrangement among the companies to which allows the
companies to sell the seats or tickets of the same flight under their own designator
number (U.S Department of Transportation, 2020). Code sharing has a biggest
advantage in the airlines industry. It reduces the cost and facilitates easy sell of tickets
in each flight. Customers are also benefitted from the code sharing agreement.
 Sharing of activities: Strategic alliance is mostly suitable for sharing and perform
different business functions together. Businesses come into the agreement of forming
alliances in order to sharing business activities and gaining advantages (Doganis,
 2005). Alliances in Airline industry is the greatest example of sharing business
activities. The common business activities are mostly shared with each other’s. Star
alliance enables its member airlines companies to mutually share their lounge, flights,
crews, and staffs with each other’s.

Challenges of Star alliance

 Increase managerial complexities: one of the biggest issues of forming strategic

alliance is that forming strategic alliance increase managerial complexities and
problems in appropriate coordination. It becomes difficult in managing the balance
and coordinating the diverse set of activities of the different businesses. However, the
main challenges of Star alliance involve with managing 26 airlines companies and
their flights simultaneously although Star alliance have a separate expert management
team to managing the companies of the alliance.
 Difficulty in balancing among the cultures of different companies: another vital
challenge involves with adapting with the cultures of different companies. The
companies of Star alliance mainly come from different countries having different
organizational culture. Therefore, it is obviously a challenging issue for the
companies to adapt with the different cultural values (Kasiti, 2018).
 Create monopoly and unfair competition: strategic alliances in many industries
have been criticized for creating monopoly and unfair competition. Forming alliances
enables companies to merge operate business in an integrated manner which actually
reduce the competition and create monopoly market. On the other hand, in strategic
alliances companies can charge relatively lower price which sometimes create unfair
competition in the market.
 Political and diplomatic challenges: another biggest challenging issue in forming
strategic alliance is political and diplomatic barriers. Political and diplomatic barriers
mostly affect strategic alliance in multinational context. Airlines industry is highly
vulnerable to political and diplomatic issue. Some countries and some routes in
aviation industry is highly restricted which creates challenges to the companies to
form alliances among them.

3.3 Alternative market entry strategy

Market entry strategies are referring to the modes available for entering in international
market. There are a lot alternatives market entry strategies available for the companies
irrespective of the industry and size of the company. company can use the most appropriate
and suitable one based on the assessment of feasibility. However, based on the degree of
ownership control and extent of investment and risks the market entry mode can be
categorized into different categories. The following diagram shows the alternatives modes of
entering into the international market.

Wholly
owned
Joint subsidiary
venture
Strategic
Alliance
Franchising
Licensing
Exporting

Every strategies mentioned in above has their own advantages and disadvantages. All
strategies are not likely to be feasible for all companies. However, Airline indusry is very
competotive due to fierce rivalry in both global and domestc market. Thus, companies have
to choose entry strategy carefully in international market. The matket is composed with all
the toughest competitors like British airlines, Thai airways, Air Canada, american airlines etc.
choosing alternative strategy beyond the strategic alliance need rigorous assessment about the
possible benefits, lmitations and risks of the each entry strategy.

Suugested alternative etry strategy

This study is about strategic alliances in airlines industry. Startegic alliance is one of the
useful strategy for the companies in airlines industry to enetr new markets. However, this
strategy may fail due to many reasons. Thus, the report suggested alternative entry strtegy to
the companies of the Star alliance. The recommnded entry strategy is Franchising.

 Franchising: franching is special mode of entry widely used by the companies for
entering in internal market. It is actually agreement between two companies to
whereby frnchsor (company wjich give permission) give permission to the franchisee
(which take permission) to use his brand name, copyright, trademark, patent, and
tradesecrets in exchnage for royalty for an agreed duration of time (Mahoney et al.,
2001). Unde the franchsing agreement, airlines companies can enter into the different
international markets. The largest airlines companies can easily give attract the
franchisee in international market through which they can easily enter into the
restricted market. Franchsing is a very preferred mode for many compaies today due
to some advantages of this entry strategies.

Why franchising is suitable?

 Franchsing agreement is relatively easiest entry mode in comparison with joint

venture, strategic alliance, and wholly owneed subsidairy.
 It enables companies to enter into international market without large investment (Hill,
2014).
 Franchsing provides greater ownership control then exporting and licensing.
 The large airlines copanies can easiliy use franchising strategy in international market
as there are a lot of small companies available in the market thos who are keen to take
franchisee.

4.0 Conclusion
The report is based on strategic alliance in the airlines industry. This report revealed the
motivations and reaosns behind the formation of strategic alliance in airlines industry.
Besides, the report also showed the potential chhalnges that might affect the alliance in
airlines industry. The report provided comprehenisve literature review regarding strategic
alliance and the alliances of airline industry. Finally, the reprot concluded with recommnding
alternative market entry strategy for the companies in airline industry.
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