Analysis of Global Airline Alliances as a Strategy for International Network Development by Antonio Tugores-García M.S., Civil Engineering, Enginyer de Camins, Canals i Ports Universitat Politècnica de Catalunya, 2008 Submitted to the MIT Engineering Systems Division and the Department of Aeronautics and Astronautics in Partial Fulfillment of the Requirements for the Degrees of Master of Science in Technology and Policy and Master of Science in Aeronautics and Astronautics at the Massachusetts Institute of Technology June 2012 © 2012 Massachusetts Institute of Technology. All rights reserved Signature of Author__________________________________________________________________________________ Antonio Tugores-García Department of Engineering Systems Division Department of Aeronautics and Astronautics May 14, 2012 Certified by___________________________________________________________________________________________ Peter P. Belobaba Principal Research Scientist, Department of Aeronautics and Astronautics Thesis Supervisor Accepted by__________________________________________________________________________________________ Joel P. Clark Professor of Material Systems and Engineering Systems Acting Director, Technology and Policy Program Accepted by___________________________________________________________________________________________ Eytan H. Modiano Professor of Aeronautics and Astronautics Chair, Graduate Program Committee 1 2 Analysis of Global Airline Alliances as a Strategy for International Network Development by Antonio Tugores-García Submitted to the MIT Engineering Systems Division and the Department of Aeronautics and Astronautics on May 14, 2012 in Partial Fulfillment of the Requirements for the Degrees of Master of Science in Technology and Policy and Master of Science in Aeronautics and Astronautics Abstract Since the late 1990s, network airlines worldwide have being enrolling in one of the three current Global Airline Alliances (GALs), oneworld, Star Alliance and SkyTeam. By 2011, airlines belonging to the three GALs transported over two-thirds of all international traffic. This thesis studies the reasons that cause an increasing number of airlines to join this collaborative scheme as a way to develop a wider network and to increase profitability by serving international connecting traffic. The evolution of GALs is characterized here by the analysis of the size of these alliances, as well as by the volume of partnerships and code share agreements between alliance partners during the period 2006-2011. The results of this study illustrate the differences between each of the GALs and the degree of dependence of airlines on alliances to develop their international networks. By most indicators, the largest alliance, Star Alliance, is the GAL in which member airlines rely more on their alliance partners when developing code share agreements with foreign airlines. In all three GALs, code share agreements between alliance partners are much less likely to be broken than with non- partner airlines. Airlines operating in the transatlantic markets appear to be the most advanced firms in the marketing of code shared itineraries. The empirical analysis is complemented with a review of the theoretical benefits of GALs to airlines, alternative network models for international growth, the impact of alliances on customers’ welfare, their potential anti-competitive effects on independent carriers, and the current regulatory framework affecting alliances on both sides of the North Atlantic. Overall, this work provides a holistic view of the GALs as a model for network development, to describe their policy implications, and to suggest key drivers in the future of airlines’ network development strategies. Thesis Supervisor: Peter P. Belobaba Title: Principal Research Scientist, Department of Aeronautics and Astronautics 3 4 Acknowledgments First and foremost, I want to specially thank my supervisor Dr. Peter P. Belobaba, to whom I will always be indebted for his guidance and vision. I feel appropriate extending my gratitude to Peter for his lectures in “16.75 Airline Management” and “16.71 The Airline Industry”. These two courses were extremely rewarding and motivating thanks to the enthusiastic and clear explanations of both Peter and William Swelbar. Their lectures were very valuable for developing a passion for this field and for undertaking this thesis. The freedom I had to develop this research would had not been possible without the great support of Obra Social ”la Caixa”, from Spain. Being recipient of a fellowship from ‘”la Caixa” has not only permitted me fulfilling my academic dreams; it has also provided me the opportunity of meeting many brilliant fellows ”caixeros”. I also want to thank Prof. Antonio Gens, Prof. Àlvar Garola, and Prof. Matthew Coop for helping me during the first steps of this journey, in 2009. My gratitude and debt to them for their initial trust are eternal. Thanks a lot to my colleagues and friends at my fortress hub, the MIT Technology & Policy Program. Indeed, I found many role models among my peers, and I enjoyed the enlightening discussions with them, usually at the interface of various fields. I learned a lot from Anna VdBoor, Sarah Fletcher, Mark Estaples, Dj Tanvir, Dr. Collins, Robert D. Brasington, Matías, Dr. Jacquillat, Dominic, Dr. Figueroa, John, Mike, Jan, Paul, Sen. Helfrich, Meg Idol, Dr. Cuéllar, Mau, Arthur, Cody, and Bernard, among others. They made of these two years the greatest of all times. I am very proud to count with the best collaborators within my family. Juan, Mariona and Aina Tugores—uncle, aunt, and sister, respectively—have always helped me with any of my doubts in the fields in which they are experts and for what I admire them a lot. Without their replies to my e- mails at inopportune times this thesis would have been of an inferior quality. Of course, the usual disclaimers apply. From these lines I warn them that more e-mails will come. My friends always play, indirectly, a great role in my work. I had the best partners at C.A. Piques— my joint venture, C.A. Pitiús, G(cid:4)er & Co., Stata Faculty Club, and Spain@MIT. They fuelled me with good times to avoid any turbulence during this journey. I also thank Inma, Borja, and Mike for flying to Cambridge from Ibiza, Barcelona, and Perth, respectively. During my day by day at MIT I could always count on my friends Maite, Marta, Magda, Joel, Fernando, Roberto, María José, Rubén, Patricia, Jorge, Noel, Xabi, Iñaki, Ferran, Paula Rc, Paula, Helena, my cousin Gomà, and my brother Enrique. Finally, for their unwavering support and encouragement I will be always indebted to my beloved parents, Marisa and Toni. Although they deserve much more, at least I want to dedicate this thesis to them, as well as to my aunt Alba. Thinking in the future, I am confident that Aina and my little cousins will make great things with their lives, and I hope that they consider my suggestion of dedicating their first works to our adored common mentor, la Bita. 5 6 Contents Chapter 1: Introduction ................................................................................................................................................ 13 1.1 The Airline Industry .......................................................................................................................................... 13 1.2 Strategic Alliances .............................................................................................................................................. 14 1.3 Motivation and Goals of this Thesis ............................................................................................................ 18 1.4 Literature Review .............................................................................................................................................. 19 1.5 Thesis Overview ................................................................................................................................................. 23 Chapter 2: International growth of airlines ......................................................................................................... 25 2.1 Introduction ......................................................................................................................................................... 25 2.2 Particularities of the international air transport services ................................................................ 26 2.3 Internationalization of airlines ..................................................................................................................... 32 2.3.1 Low Cost Carriers ..................................................................................................................................... 34 2.3.2 The alternative strategy of the Persian Gulf’s global connectors ......................................... 37 2.3.3 Network Legacy Carriers ....................................................................................................................... 41 2.4 Potential benefits of strategic alliances .................................................................................................... 44 2.4.1 Economies of scale ................................................................................................................................... 45 2.4.2 Economies of density .............................................................................................................................. 46 2.4.3 Economies of scope .................................................................................................................................. 47 2.4.4 Larger profits from pricing on code sharing routes ................................................................... 48 2.4.5 Marketing and branding benefits ....................................................................................................... 49 2.4.6 Financial economies ................................................................................................................................ 51 2.4.7 Joint purchasing ........................................................................................................................................ 53 2.4.8 Control on barriers to entry ................................................................................................................. 54 2.4.9 Learning ........................................................................................................................................................ 55 2.5 Chapter Summary .............................................................................................................................................. 56 7 Chapter 3: The three Global Airline Alliances ..................................................................................................... 59 3.1 Historical background ...................................................................................................................................... 59 3.2 The three Global Airline Alliances today .................................................................................................. 64 3.3 Analysis of the evolution of the Global Airline Alliances ................................................................... 69 3.3.1 Methodology ............................................................................................................................................... 69 3.3.2 Results ........................................................................................................................................................... 70 3.4 Chapter Summary .............................................................................................................................................. 84 Chapter 4: Policy Implications ................................................................................................................................... 87 4.1 Introduction ......................................................................................................................................................... 87 4.2 Impact on consumers ....................................................................................................................................... 88 4.3 Potential anticompetitive effects ................................................................................................................. 92 4.3.1 Potential for market foreclosure ........................................................................................................ 93 4.3.2 Potential for collusion ............................................................................................................................. 94 4.3.3 Network development ............................................................................................................................ 95 4.3.4 Multiple listing on distribution channels ........................................................................................ 95 4.4 Regulatory framework ..................................................................................................................................... 96 4.5 Prospects and challenges ............................................................................................................................. 101 Chapter 5: Conclusions .............................................................................................................................................. 111 5.1 Research contributions ................................................................................................................................. 111 5.2 Future research directions .......................................................................................................................... 114 References ....................................................................................................................................................................... 117 8 List of Figures Figure 1.2.1. Expected development of partnerships (Iatrou & Oretti, 2007). ............................................ 17 Figure 1.2.2. Different levels of cooperation within a Global Airline Alliance. ............................................ 18 Figure 2.2.1. Global share of the largest airlines in the airline industry and other selected industries. ....................................................................................................................................................................................................... 31 Figure 2.3.1. Route maps over 1500 miles for three largest Gulf carriers: Emirates (red), Etihad Airways (yellow), and Qatar Airways (pink). ............................................................................................................ 38 Figure 2.3.2. Distribution of airline groups according to their alliance of enrollment in 2011, 2006 and 2000. .................................................................................................................................................................................. 44 Figure 3.1.1. Evolution of multi-airline alliances other than the three current Global Airline Alliances during the period 1989-2003. ...................................................................................................................... 61 Figure 3.1.2. Distribution of valid code share agreements in September 2011 by its start date. ....... 64 Figure 3.2.1. Evolution in the number of members of the Global Airline Alliances until February 2012. ........................................................................................................................................................................................... 66 Figure 3.2.2. Star Alliance passenger traffic (RPK) in 2010. ................................................................................ 67 Figure 3.2.3. Oneworld passenger traffic (RPK) in 2010. ..................................................................................... 67 Figure 3.2.4. SkyTeam passenger traffic (RPK) in 2010. ....................................................................................... 67 Figure 3.2.5. Global passenger traffic flows in 2010. .............................................................................................. 69 Figure 3.3.1. Average number of code share agreements for aligned airlines (with any other airline in the top-150 of airlines) according to their GAL of enrollment. ..................................................................... 71 Figure 3.3.2. Number of partnerships (code share agreements) compared to revenue for each member airline in 2011 ...................................................................................................................................................... 72 Figure 3.3.3. Proportion of code share agreements with airlines of the same GAL by the unweight average of the proportion of the GAL members in a given year. ....................................................................... 73 Figure 3.3.4. Reliance on global alliance partners for code share agreements. ........................................... 74 Figure 3.3.5. Average proportion of GAL partners to whom aligned airlines in each of the GALs in a given year are partnered with (i.e. they have code share agreements).......................................................... 75 Figure 3.3.6. Broken code share agreement in the three GALs during the 2006-2011 period. ............ 77 Figure 3.3.7. Distribution of airlines for each of the three GALs according to the proportion of members of the same GAL to whom they were partnered (code share agreement) in 2011................ 78 9 Figure 3.3.8. Relation between the number of code share routes for a given airline with world top- 150 carriers, as reported by airlineroute in August 2010, and the 2010 annual revenue of the airline, as reported by Airline Business. ...................................................................................................................................... 80 Figure 4.2.1. Hub-and-spoke networks for Airlines 1 and 2, Country 1 and Country 2 (Brueckner and Whalen, 2000). ............................................................................................................................................................... 89 Figure 4.2.2. Hub-to-hub route. ....................................................................................................................................... 90 Figure 4.3.1. Airline network with choice of alliance partner (Bilotkach & Hüschelrath, 2010). ........ 93 Figure 4.3.2. Simple airline network with two alliances (Bilotkach & Hüschelrath, 2010). .................. 94 10