Star Alliance: A Global Network

Star Alliance: strategic issues

The creation of Star Alliance is rooted in the deregulation of the Airline industry. Prior to that time most operators were viewed as inefficient carriers needing government support. Finally, governments had enough and decided to allow competitive forces eliminate inefficiencies from companies by deregulating the industry. One-way was to let new entrants into the marketplace and allow operating costs and prices to fluctuate depending on free market competition.

Deregulation ushered in alliances between many domestic and international carriers designed to increase routes. This "open skies" environment saw a free flow of travelers around the world. However, terrorism, a worldwide recession, and the Gulf war slowed air traffic by 25% (Bartlett, Ghoshal, & Birkinshaw, 2004). The terrorist's attack on September 11, 2004 dealt the airline industry another blow. With increased costs because of security and declining traffic, industry losses mounted to over $7 billion, which lead to over 200,000 job losses (Bartlett, et al. 2004). This new environment, along with the Internet and changing consumer behavior about air travel, created new low budget carriers such as Southwest, Ryanair, and easyJet.

In order to combat rising costs, decreased air travel, and low price carriers, airlines created alliances. These alliances increased competitive advantages for the member airlines by, combining marketing, procurement, systems, and even flight crews. By 1990 500 alliances were created. In May of 1997 Star Alliance was launched with Lufthansa, United, Air Canada, SAS, and Thai Airways. Today, Star alliance is the global leader, controlling 29% of the world's market share as measured by revenue passenger miles. A key strategy of Star Alliance is expansion. The recent addition of Air Portugal, South African Airways, Blue1, and Scandinavian Airlines, creates a network that covers 833 destinations in 152 countries (Mecham, 2004). However, the major target market is the large China market place. Star has made several unsuccessful attempts to entice Air China into their alliance. There has been a lot of skepticism from the Civil Aviation Authority of China over the longevity of Star Alliance (Mecham, 2004).

Another key strategy of Star Alliance is customer loyalty. They partnered with airline consortium Troughton Wunderman Inc. to oversee their frequent flier and customer loyalty programs. Star Alliance's advertising strategy will target existing members' customers with TV ads, direct mail, digital marketing, and customer relationship programs (Bold, 2004). In addition, Star launched a marketing campaign against rival Oneworld by offering to match status of its loyalty members. The campaign initially targeting British Airlines but will soon is rolled out internationally (Bold, 2004).

We would have to agree with Professor Yip's view of the continued successes of alliances. The assessment of the airline industry, through Porter's Five-Forces Model of Industry Analysis, indicates a very intense competitive industry, (attractive) high barriers to entry (attractive), increased bargaining power of suppliers (unattractive), increased bargaining power of buyers (unattractive), and threat of many substitutes (unattractive). This quick analysis would lead use to conclude that alliances would be beneficial in pooling carrier resources to create economies of scale, efficiencies, and competitive advantages. For example, regional airline Adria services several European countries. In 2003, its airport fees increased 9%, fuel charges 5%, tariffs 17%, and labor costs 21%, while traffic only increased 5%. Company CEO Brane Lucovnik indicates that joining Star Alliance will be critical for his company's survival. Specifically, linking Adria into the alliance's code share inventory system and joining Lufthansa's frequent flier program is a necessary step (Hill, 2004).

Industry Analysis

With the economic recession of the "post 9-11" world, it has been critical for airlines to develop global partnerships to survive. Star Alliance has been able to not only meet these challenges, but also lead the competition with their global alliance. Together, Star Alliance has been able to accomplish $62.7 billion in revenue and capture 29 percent market share (Bartlett et al., 2004). This success has come from being able to form a global alliance of airlines while still remaining true to their domestic identities. This has been accomplished by establishing the Star Alliance Group, which manages the integration of the different airlines and develops the strategy for the entire entity. Each airline still markets and competes domestically and with each other in the Alliance, but in addition they also help and leverage each other. To demonstrate how valuable alliance membership can be to a carrier, especially at a hub like Heathrow, BMI interline bookings from Star carriers had increased 68% - compared to 16% from other carriers - since his airline joined Star in July last year. In addition, a major part of the increase came from All Nippon Airways. Star Alliance, enabled BMI to market an integrated strategy to Japan that produced a massive growth in traffic through Heathrow and into to a wide range of BMI destinations in Europe. (ANA BMI, 2001). Membership clubs are also becoming a cost saver for some Alliance members due to the fact that the Alliance now has membership clubs in third country markets. This enables the airlines to offer club services at different portions of the world with out having to build a new service at every airport. Star's latest member, Finland's Blue1 Airline, exemplifies this expansion strategy into small markets. Regional members, in additional to other criteria, must be sponsored by an airline already within the alliance. In Blue1's case, the sponsor, Scandinavian Airlines, also happens to be its owner. Croatia Airlines will be on board next year (Business to Business, 2004)

When an airline explores the option of partnering with one of the world alliances, it's not only important to look at the financials such as the "Merrill Lynch Alliance Index" but to also look at how the company's strategy integrates with the alliance's. For instance, it's important that there is not too much competition with member airlines. Also, member destinations should compliment each other, not overlap. BMI, one of the Star Alliance partners is a good example of how the Alliance can create additional opportunities. BMI was able to open up Heathrow airport in the U.K. to the Alliance, which gave the Alliance better access to Europe. United and Singapore Airlines will gain access to each other's markets with