Airline Alliances – Best Practice or Doomed for Failure?
When partnering among competitors became fashionable in the 1990s it was the airline industry which first embraced the concept and went on to develop global multi partner ecosystems.
At the time many pundits proclaimed that airline alliances were merely short-lived marketing gimmicks doomed to fail. 25 years later time has proven the skeptics wrong. However, can a model conceived in the last century still be useful for the 2020s? This paper discusses the companies’ point of view, leaving the question of customer appeal to a future edition.
Make-or-Buy morphs into Make-or-Buy-or-Ally
Where academic text books are full of Make-or-Buy growth strategies, discussing the respective merits of organic growth versus acquisitions, we argue that savvy executives indeed have an additional alternative. Looking at their competitor they wonder: Do I really have to make an acquisition when I might as well find an intelligent form of partnering? Make-or-Buy morphs into Make-Buy-or-Ally and thus opens a whole new avenue to reap a good portion of the merger benefits without the merger pains.
Many reasons why an alliance can be the better Option.
Let’s look at the fundamentals. No matter which industry, if your company lacks the regulatory authority to expand into new products or foreign markets, if you are missing the skills or the financial power to grow into unfamiliar geographies, if speed to market is crucial in your business, if you operate in a network business where every new node exponentially increases the utility of the overall enterprise, if you are wary of the risks of an outright acquisition, if any of the constraints above sound familiar, then an alliance is an excellent tool to overcome those obstacles. Tried and proven in many industries and across the globe under real life conditions, the upsides are evident:
· No upfront investment
· Access to partners’ unique know-how
· Speed to foreign markets
· Leverage through recognized partner brands
· Growth outside your regulatory corset
· Low risk synergy testing before a merger
· Breeding ground for high margin Joint Ventures
More than icing on the cake.
Case in point: In the notoriously thin margined airline business, the typical 3% top line increment is more than just icing on the cake.
Why else are so very few carriers exiting their alliances? And why are those who do desperate to rush into another alliance (recent examples: China Southern, LATAM, likely Qatar)? Why are we seeing medium sized carriers eager to join global alliances (Royal Air Maroc, Fiji, Juneyao)? Finally, why are even low cost airlines that used to vehemently reject the idea, now beginning to form ecosystems that tie together competitors’ networks (EasyJet, Norwegian, WestJet)?
Because it is more profitable, that’s why.
Of the very large network carriers only Emirates pursues a stand alone strategy. Or does it? If you look more closely, Emirates has just deepened its wide ranging Joint Venture with Qantas, for precisely the benefits listed above.
Successful long term alliances are characterized by careful planning, a well designed governance and skillful diplomacy.
Clearly, any form of partnering needs to be well planned and properly executed. We have seen many companies that rushed into a “strategic alliance” without having first defined their “alliance strategy”. Note the difference! Blinded by the prospect of a fancy signing ceremony and front page news they often make costly and time consuming mistakes.
No, first things first: Any proper project will at least look at these crucial Elements:
· alliance strategy
· cost/benefit analysis
· partner selection
· degrees of collaboration
· profit sharing models
· integration project management
· alliance organization
· joint decision making
· conflict resolution
· graceful exit provisions
Keep showing the cooperation benefits and don’t forget to actively build trust early on. You will need it when issues occur.
Let’s not kid ourselves. Over time, even the most perfectly implemented partnership, with clearly demonstrable benefits will run into issues. Sooner or later diverging strategies and cultures will clash, in particular in international ventures. Be it intentional or simply an unfortunate misunderstanding, disputes are normal and manageable.
Only if left unattended, issues will fester and may ultimately lead to a nasty divorce. To overcome partnership problems, sometimes outside facilitation is useful to bridge gaps, provide arbitration and teach soft partner management skills. What is essential, however, is deliberate trust building, on a personal and organizational level, in the early stages of the relationship when top management attention and good will is high. Equally, a regular monitoring of the alliance benefits is essential to overcome problems when everyone can be reminded that hanging in there is worth it, lest the demonstrated gains are lost.
An intimate understanding of alliance dynamics, complexities and opportunities is rare to find.
Developing a successful alliance strategy requires skills that are hard to find inhouse, if you lack sufficient previous experience. Likewise, few strategy advisors understand good alliance governance, and even fewer have successfully managed large scale alliances from the inside. At UNEX we have.
We will be happy to discuss how we can guide and support companies with our topical know-how, accumulated and refined over 25 years.