Merger, Acquisition or Alliance in the Global Airline Industry - Literature review Example

Merger, acquisition or alliance in the global airline industry Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: Merger, acquisition or alliance in the global airline industry Introduction Mergers, acquisition and alliances have been considered as strategic methods in different businesses around the globe. Their significance has been extensively felt in the global airline industry in the recent past. This fact is epitomized by Goel (2002, p. 1) who determined that the Airline Business Alliance Survey of year 2000 revealed an estimated 579 alliance agreements which were already in existence, which had gone up from 280 agreements in 1994 which had since doubled when a similar survey had been carried out. The survey in 2000 also revealed that there were five major alliances which accounted for 60% of air travel in the world. These were OneWorld, Star, Sky Team, Wings as well as Qualiflyer. In addition, diverse scholars have revealed the fact that the global airline industry has experienced elevated dynamics in the recent decades. This trend has been occasioned by diverse factors which include globalization as well as market liberalization. Stragier (2001, p. 2) determined that these dynamics in air transport has culminated in the rapid expansion of the airline alliances, mergers and acquisitions (M&As) as well as cooperation between groups of airlines and individual airlines. Majority of the proponents have argued that M&A in the global airline industry is an ideal tool which is integral in ensuring survival of individual airlines in the highly dynamic world characterized by globalization. This is founded on the fundamental importance of M&As and alliances in permitting growth, increasing access to new markets, leveraging risks as well as cutting down the cost of operation (Desai, 2011, p. 2). Against this backdrop, this paper will focus on the strategic alliance between Qantas Airlines of Australia and Emirates from Dubai which was instigated in 2012. It will also assess the motives of choosing this method, the strategic and organizational fit between these two parties, the potential gains and risks as well as the outcomes relative to expectations. Motives of choosing this method It is evident that Qantas airlines and Emirates resolved into entering into a strategic alliance rather than an M&A. It is imperative to gain an insight into the generic definition of an alliance in an airline industry point of view. Oum, Park and Zhang (2000, p. 4) determined that there is no substantial definition of the concept of strategic alliance which has been credited for gaining universal acceptance. That notwithstanding, they developed a definition of alliance from an airline industry point of view to mean a partnership which is long-term in nature, which involves more than two firms which make profound attempts to improve their collective competitive advantage against that of their competitors. This is usually done through sharing of scarce resources which entail market access capacity and brand assets, improving the quality of service delivery and subsequently enhancing their profitability. On the other hand, Goel (2002, p. 10) extended the applicability of the above definition from a practical perspective to insinuate to an alliance which entails the strategic commitment of the top management of the partnering airlines to connect a considerable segment of each of their route networks and engaging in cooperation in some fundamental areas in their airline business. From the above definition of strategic alliance from an airline industry point of view, it is an apparent fact that airlines, just like many other firms in different industries forge strategic alliances. This is often founded on the expectation of accumulating financial rewards in form of profit maximization, elevated revenues as well as cost minimization. Thus, the inherent value of any alliance is based on its capacity and ability to generate the aforementioned benefits, either through elevating the level of dominance in the market which is already in existence or opening up the level of access to new markets which has experienced limited exploitation in the past (Jangkrajarng, 2011, p. 50). There are some motives for choosing an alliance as opposed to merger and acquisition strategies. This is evidenced by the decision by Emirates from Dubai, which is considered as the largest of the Persian Gulf’s vibrant carriers to announce a wide ranging alliance with Qantas Airlines from Australia on September, 2012 (Mouawad, 2012, p. 1). Some of these motives are explored in the subsequent analysis. Firstly, an alliance between both of these airline giants was integral in ensuring that both airlines would increase their presence in both Europe and Asia. This is revealed in the Qantas Annual Report (2012, p. 6) where it is revealed that the 10 years strategic alliance founding the partnership between Qantas and Emirates was aimed at making the presence of this group in both Asia and Europe. This is based on the fact that the Qantas’ consumers would gain elevated access to the global network of Emirates as well as extensive flyer benefits. On the other hand, the extensive Asian network by Qantas was to be restructured aimed at enhancing the competitive niche of this alliance. Thus, this alliance would ensure that both the airlines would increasingly benefit from their dominant presence in different regions of the globe on a competitive platform. This would have been limited in case of an M&A where one of the airlines would have been taken over and minimized the competitive advantage in either of the regions. This is epitomized whereby in case Emirates was acquired by Qantas, a large portion of the its market share in Dubai would view the incoming Qantas airlines as a foreign firm and possibly opt for their competitors and eventually alienate their competitive advantage in the market. Secondly, marketing advantage can be perceived as another motive behind the alliance between Qantas and Emirates based on the fact that this partnership would facilitate the efforts towards carrying out joint advertisement campaigns. This fact is supported by Holtz et. al. (2007, p. 7) who determined that the process of integrating the networks which is apparent in alliances offers significant marketing advantage to the partners involved in the alliance. This is based on the fact that most of the alliances amalgamate their numerous flyer programmes as well as reservation programmes which are computer-based and proceed to run mutual advertisements. From the perspective of the travelers, this is integral in the sense that their airline in their particular locality is offering superior services through flawless travel destined to all the different network points. In addition, Doganis (2006, p. 87) revealed that alliance can play an integral role in elevating the loyalty of the consumers. This is founded on the presumed diversity of their destinations in different parts of the world. The above advantages are limited in M&As where the acquiring firm is primarily mandated with carrying out the promotional undertakings which cuts into its operational costs. Thirdly, the alliance decision between these airlines is key in overcoming some of the regulations which prevent foreign airlines from providing services at the domestic levels or owning national carriers. This is one of the provisions in M&As which are preconditions by extensive ownership of the acquired national carriers which can contravene some of the regulatory frameworks in some countries (Barla & Constantatos, 2005, p. 2). Thus, the need to overcome some of these regulatory frameworks either in Dubai or in Australia would have been a major motive underpinning these airlines’ decision to opt for an alliance as opposed to a merger and acquisition. The last motive which will be explored in this analysis is the reduced cost of entry into a new market which is more profound in an alliance strategy when juxtaposed with M&A. In this case, Jangkrajarng (2011, p. 57) cited that the alliance members can capitalize on the economies of network size without necessarily expanding the number of the points which they serve, mostly through code sharing. Moreover, an alliance is usually in a position of providing efficient connecting services to the new origin-destination markets without necessarily having to incur landing fees, capital investment, price wars or advertising, a phenomenon which is apparent in M&As. The strategic and organizational fit between the two parties Firstly, it is worth noting that both of the parties in this alliance (Qantas and Emirates) have been attempting to make some profound efforts to surmount some of these individual challenges which would be surmounted through their strategic alliance. On the side of Emirates, this airline based in Dubai had been seeking to elevate its business in Australia aimed at countering the moves by its primary competitors, Etihad and Qatar. This is founded on the backdrop that Etihad had doubled its stakes in Virgin Australia which is the main rival to Qantas and increased its Australian presence. On the other hand, Qatar airways had commenced its first service destined to Perth, and expressed its interest to partner with Australian carriers. This caused a major handle to the Emirates presence in Australia, prompting it to seek for a strategic alliance with Qantas aimed at preserving its presence in Australia (CNBC, 2013, p. 1). Similarly, Qantas had been making extensive efforts to strip some of its costs out its business prior to the alliance. This was after a year of troubled financial record influenced by increased competition in the European market, fuel bill as well as labor union which opposed the move by the airline to cut its spending. Thus, the arrangement in this strategic alliance would ensure that Qantas would switch the hub of the airline hub from Singapore to Dubai primarily for the flights to Europe. This would in turn facilitate the minimization of the trends based on making losses by Qantas in the international routes most notably in the European market and subsequently shift its attention on the budget and domestic operations which were profitable (CNBC, 2013, p. 1). Thus, the alliance between Qantas and Emirates would strategically fit the aspirations of both of these companies; Emirate increasing its Australian presence and Qantas cutting down the losses in international flights through switching its European flights hub from Singapore to Dubai. In regard to the organizational fit, both of these airlines had significant dominance in specific markets where either of them had interest in. This is epitomized whereby Qantas airlines had substantial dominance in the Australian market where Emirates was interested in. On the other hand, Emirates had significant dominance in the UAE and European markets where Qantas was interested in. In addition, the Qantas Annual Report (2012, p. 130) detailed that both of these airlines had roughly similar pricing, sales and scheduling models. As a result, they had a significant organizational fit and this strategic alliance would be central in ensuring smooth transition towards coordinated pricing, scheduling and sales in their partnership as well as the benefit sharing model. On the other hand, based on the fact that neither of the partners in this alliance was interested in acquiring the equity of the other which would have necessitated a probable M&A, this reality provided a further organizational fit where both companies were interested in retaining their autonomy (Qantas Annual Report, 2012, p. 130). The potential gains There are diverse gains which are apparent in the strategic alliance between Qantas airlines and Emirates. Some of the major gains are explored in the subsequent analysis. Shared risks; this is whereby both of these companies will be strategically positioned to share some of the risks which might arise from the diverse uncertainties in the highly dynamic airline industry. This fact is supported by Isoraite (2009, p. 42) who determined that risk sharing is one of the mostly cited rationale for firms entering into an alliance arrangement. This is based on the fact that when there are extensive instabilities and uncertainties in given market, then sharing risks becomes an integral part of forging an alliance. In addition, it is imperative to point out that based on the cut-throat competition which characterizes the business environment, for instance, in the airline industry, it is often problematic for the businesses entering into new markets or launching new products. Thus, sharing of the risks is one of the most sure way of minimizing the risks and this is one of the gains that both Emirates and Qantas will gain from their alliance. Shared expertise and knowledge; with recent evidence pointing to the fact that utilizing a knowledge-based approach in alliances is integral to their success (Parise, 2002, p. 2), sharing of knowledge and information becomes one of the major gains that partners in an alliance get from this set-up. In the case of Qantas and Emirates, both of these companies will be able to share knowledge, experience and expertise in different markets where they have secured significant domination which will influence their success. This is epitomized whereby by the virtual of Qantas sharing its knowledge, experience and expertise in the Australian market with Emirates, this will be key in informing the gradual success of Emirates in the Australian market and vice versa. In addition, both of these partners will be able to engage in joint diversification planning which will increase the viability of the approved plans based on shared knowledge. Ease of market entry; alliances have been cited as being suitable strategies which enable companies to enter in to new markets, mostly at international level with relative ease without incurring massive costs. This fact is supported by Soares (2007, p. 17) who determined that in most instances, the cost of penetrating a new market is often above the capability of an individual firm. Nonetheless, through entering into an alliance with another firm, there is the benefit of rapid entry into the desired market concurrently with incurring minimal costs. This is yet another gain that both Emirates and Qantas will gain from their alliance. For instance, Emirates is bound to incur limited costs while penetrating the Australian market as a result of the prior strong presence of Qantas. Synergy of competitive advantage; this will be the final gain in this analysis. In this case, Isoraite (2009, p. 42) determined that the competitive advantage of different firms becomes more robust and efficient when these partners leverage off the strengths of each other, combining their inputs into a process which would have otherwise been problematic to succeed if one of the firms attempted to enter the industry or market alone. In this case, Emirates is bound to make substantial gains in leveraging off the enormous market share of Qantas airlines in the Australian market and vice versa. All the above are some of the gains that either parties in this alliance is bound to gain from this alliance. Nonetheless, this is not to mean that there are no any risks which are involved in this undertaking, some of which are explored in the subsequent section. Potential risks Uddin and Akhter (2011, p. 50) cemented the fact that strategic alliance are not risk free, contrary to the misconceptions by certain firms. One of the risks of lack of trust whereby Radu (2010, p. 168) determined that building trust is maybe one of the most important objective for an alliance which will eventually achieve substantial success. This has led diverse scholars, for instance, Lewis (1992, p. 46) revealed that majority of the alliances have encountered failure as a result of lack of trust and understanding between the partners which makes the process of solving upcoming problems to be impossible. As a result, both Emirates and Qantas ought to formulate and implement ideal mechanisms which would promote trust between these alliance partners which is integral to the alliance’s success. Another potential risk is cross-cultural issues and incompatibility. Elmuti and Kathawala (2001, p. 208) determined that culture crash is one of the most detrimental risk confronting alliances in different parts of the world. In the case of Qantas and Emirates, there can be extensive cultural incompatibility based on the fact that Emirates comes from a region which is predominantly Muslim and Qantas from Australia comes from a region which is significantly multi-religious. In this case, there is bound to be some incompatibility between the Islamic culture in the UAE and the multi-religious culture in Australia which might affect the viability of the alliance between these two airlines. The last potential risk is lack of coordination between the management teams of these airlines. In this case, one of the management team might take a unilateral decision affecting the alliance without informing the other partner, a situation which often arises when the firms are still competitors despite the alliance. The impacts of this non-coordination can culminate in the breakdown of the alliance, and extensive court procedures in subsequent years and massive losses, a fact which was evident in the partnership between Volvo and Renault in 1993 (Bruner, 1999, p. 125). The outcomes relative to expectations It is worth noting that the Qantas-Emirates alliance is currently on track to officially commence on 31st March, 2013. According to the Qantas group financial result – first half 2012/13 (2012, p. 9), following the interim authorization from the Australian Competition and Consumer Commission, the Qantas-Emirates network has rolled out the sale of flights to 44 new destinations around the globe, which are bound to experience complete operation from 31st March, 2013. This has started to yield significant benefits to Qantas airlines with the net revenue rising from $8,048 , in December, 2011 to $8,242 in December, 2012. This shows a significant increase in performance as expected which can be attributed to the switch of the European freight hub from Singapore. In addition, all the operating segments in the Qantas airlines portfolio exhibited increased profitability with the sole exception of Qantas international. Nonetheless, the losses in Qantas international declined by an impressive 65% in the 1H13 when juxtaposed with 1H12 (Qantas group financial result – first half 2012/13 (2012, p. 9). This exhibits the upward trend of Qantas airline in the international freights which correlates with the expected outcomes after the alliance with Emirates. Conclusion In conclusion, it has been evidenced in this paper that mergers, acquisition and alliances are key strategic methods in the airline industry, mostly for purposes of expansion. This paper has identified that the alliance between Qantas airlines and Emirates has been a strategic method which has been motivated by the need to ensure that both airlines would increase their presence in both Europe and Asia. In addition, this arrangement is key in giving these airlines some marketing advantage through joint advertisements, assisting in overcoming regulations which inhibit foreign airlines from providing services at the domestic levels or owning national carriers as well as minimizing the cost of entry into new markets. Moreover, his paper has identified the organizational fit between Qantas and Emirates. On this point, the paper has talked about the efforts to surmount some of their individual challenges, the acknowledged dominance of these airlines in different markets as well as the fact that neither of the partners in this alliance was interested in acquiring the equity of the other which preferred an alliance over a M&A. This paper has also discussed the potential gains of this alliance in terms of shared risks, shared expertise and knowledge, ease of market entry and synergy of competitive advantage. Towards the end, the paper has looked into the potential risks of this alliance in terms of lack of trust, cross-cultural issues and incompatibility as well as lack of coordination between the management teams of these airlines. Lastly, this paper has explored the outcomes relative to expectations and evidenced that these airlines have greatly benefited from this alliance in terms of increased revenues among others. From the analysis, it can be concluded that alliances in the airline industry is a strategic method of attaining the desired expansion despite the risks that are bound to confront this business arrangement. 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Soares, B., 2007, ‘The use of strategic alliances as an instrument for rapid growth, by New Zealand based questor companies’, Masters Thesis, Unitec New Zealand Stragier, J., 2001, ‘Airline alliances and mergers -the emerging commission policy’, Paper presented at the 13th Annual Conference of the European Air Law Association, Zurich, 9th November. Uddin, MB., Akhter, B., 2011, ‘Strategic alliance and competitiveness: theoretical framework’, Journal of Arts Science & Commerce, Vol. 2, No. 1, pp. 43-54. Appendices 1. Qantas Financial print Out 2. Initial Strategic plan 3. Merger/Acquisition options Read More