Airlines Take To The Skies In Essay, Research Paper

Situation:

Throughout the time one of the most regulated industries has been the airline industry. The creation of the European Union (EU) had allowed for the airlines from those countries to fly among each other’s with fewer regulations. This deregulation has propelled a wave of changes for the carriers based on these countries. One of these changes is the proliferation of strategic alliances as the globalization of this market increases. These alliances are created with the purpose of lowering costs by reducing the number of aircrafts in service, sharing maintenance staff and buying together bigger quantities of supplies like fuel.

A study shows that in 1995 only a third of the intercontinental alliances in 1992 were still in service. One of the most successful international alliances is the one between KLM Royal Dutch Airlines and Northwest Airlines. After creating the alliance with Northwest, KLM was able to reduce costs by increasing the percentage of travelers on their flights. What made this alliance possible was a treaty signed in 1992, that allow for airlines companies from the United States and Netherlands to fly into each other’s markets. In this alliance the two airlines have code sharing; one can book seats in the others flights. Based on the opinions of experts, KLM and Northwest need to launch a market campaign so the general public perceives them as one company. As well to standardize service on each carrier so the passengers feel comfortable flying either one.

The second of the alliance is the proposed between American Airlines and British Airways. This alliance provoked a lot of controversy. This alliance faces a great number of regulatory obstacles; given the fact this alliance would create the biggest airline alliance. It will have to be approved by regulatory agencies in EU and the United States. Not only this, but also the United States and United Kingdom would have to sign an open-sky treaty before the alliance gets approved. Another of the obstacle is that the competition commissioner for the EU said that BA had to give 353 airport slots and these slots had to be given for free to the other carriers. The chairman for Virgin Atlantic, Mr. Richard Branson, is opposed to this alliance, because he sees it as anticompetitive and monopolistic in nature. He also mentions that the United States negotiate deals that are mainly beneficial to US carriers. The US domestic market is 40 percent of the worlds flying. We can continue to grow and compete elsewhere, but there is a large chunk closed to us. No doubt it’s important. Edmond Rose; Manger Government Affairs for Virgin Atlantic Airways. (Global air deals grounded, 06/09/2000). The air transportation industry in the United States accounts for approximately $75 billion of the gross domestic product.

The third alliance discussed is the one composed of United Airlines, Air Canada, SAS, Lufthansa and Thai Airlines. In this alliance none of the members have ownership or owns stakes on each other’s airlines. This alliance was evolving by itself and by common business strategies among its members. More recently, Alitalia tried to become part of the KLM-Northwest, but it was halted for reasons of antitrust policies. Things are getting complicated for airlines to become members of airline alliances.

Recommendations:

1. All airlines, domestic and foreign, should keep pushing toward the deregulation of the markets and try to gain better position across the world market. This effort have to start from within each country and not trying to force others countries to do so first. This applies specially to the case of the United States. A relevant fact is that wherever airline deregulation has been adopted, we have seen a lower fares, competition and better quality of service to gain the business of the flying public.

2. Safety regulations have to be equal to everybody. It has to be imposed to everyone that wants to provide service in the global airline industry. Safety is a priority to everyone; there will be no double standards that might favor one competitor or a segment of the global market. Pilot qualifications, airplane maintenance and operating procedures should be written in a way that will cover each country.

3. Continue to create airlines alliance until the market become globally deregulated. The creation of these alliances is a way to subsidize for the absence of a global deregulated market while lowering costs and increasing profits. In the KLM-Northwest alliance we were able to see how the government owned KLM posted a profit of $298 million the same year that others European government owned, but not alliance members, airlines reported losses.

4. The United States should sign and open-sky treaty with the United Kingdom. This will allow for the formation of different alliances and the opportunity to increase the deregulation of the airline market in the United States.

5. British Airways and American Airlines have to keep trying to form their alliance. With a properly formulated proposal they have better chances to be granted the permission to create the alliance. If permitted, this alliance will unite 60% of the airline traffic that goes through Heathrow Airport in the U.K. Considered to be gate of the European continent.

6. Star alliance should continue operating in the same way. As long as the companies involved are making progress and continue being profitable, they should not change their method of operation. A few changes that could lead to a change in the operating method of this alliance would be the deregulation of the airline industry, open-skies treaties signed between home countries of the airlines involved in the alliance and/or a change in the business strategy.

7. Support every effort to open and deregulate the global markets. It is imperative for the airline carries to go outside their home country. It will encourage competition in the different markets; this will serve as the catalyst for the carriers to look for what needs to be improved on their organization.

Financial Effect

Profitability for the airline carriers will increase. So far we have see a profit increase on the airlines operating in airline alliances. On KLM-Northwest, KLM posted a profit of $298 million as a result of the alliance. Lufthansa, member of the Star Alliance, reported an increase in their revenues of DM300 million.

Basis for recommendation

Competition and quality of services will increase; costs will decrease as a result of the percentage of seats occupied on the flights. The alliances are the second best method to deal with the restrictions, cabotage and foreign ownerships policies that exist in the countries. Competition would decrease fares to show real marginal cost instead of the power of an airline in any given market. In general, the travelers will beneficiate of a greater choice of carriers and lower fares.

Risks

One of the risks would be that safety regulations were not observed or became of a double standard nature to beneficiate certain carriers in specific. It is imperative for the United States to secure contracts from foreign airliners guaranteeing that they will be able to use their fleet in case of national emergency. Airlines will have to obey all local and international laws. The standards to be implemented are complicated to formulate and to implement. It will take a long time to implement and assimilate them. Timing will be a factor in the steps needed to he goal of Global Market.

Center For Trade Policy Studies

November 24, 1998

“Opening U.S. Skies to Global Competition”

CNN Financial (www.cnnfn.com)

February 15, 1999

“U.S. aims to open U.K. skies”

Dawn Wire Service, Issue: 05/19

May 8, 1999

“Pakistan, US sign ‘open skies’ accord”

CNN Financial (www.cnnfn.com)

May 14, 1999

“U.S. tries to open skies again”

CNN Financial (www.cnnfn.com)

May 10, 1999

“Alitalia ties with NWA, KLM”

CNN Financial (www.cnnfn.com)

June 9, 2000

“Global air deals grounded”

U.S. Department of Transportation (www.dot.gov /briefing.htm)

Office of Public Affairs

November 15, 2000

“United States, Asia-Pacific Aviation Partners Enter Multilateral Open Skies Agreement”

The Wall Street Journal (www.wsj.com)

February 2, 2001

“EU Weights On US-UK Airline Deal”