Airline Alliances and Frequent Flyer Programs

INTRODUCTION:				redeemed and the probability that a consumer will
It is not the strongest of the species that survives,				accumulate enough points to redeem a reward and
nor the most intelligent that survives. It is the one				achieve tier status.
that is the most adaptable to change-Charles Darwin.
				Even within airline alliances, FFPs remain a key
It would not be an exaggeration to state that				component of global strategy. It is interesting to note
today’s markets has undergone radical changes				that the very first airline alliance was built around a
facilitated by advances in global information				FFP. The defunct Swissair owned the
technology, economic development of third world				“Qualiflyer” FFP and took majority stakes in
countries, increasing interplay between various				various airlines which were linked with Qualiflyer. The
markets, political changes in various nations facilitating				three existing Global Alliances (Star Alliance, SkyTeam
openness in trading practices etc. As the Oft-quoted				and One World) aim to provide many benefits to
comment these days goes, the markets have turned				their clients, including reciprocal mileage accrual and
flatter than ever before facilitating increased				award tickets. Thanks to huge ICT investments,
movements & transactions between nations,				they introduced standard procedures for data
corporates, entrepreneurs and individuals.				exchange, miles and award settlement, recognition of
				higher tiers, web booking tools, etc.
Increased opportunities including enlarged existing
markets and emergence of new markets has been a				WORLDWIDE AIRLINE ALLIANCES:
mixed bag. Along with its obvious benefits, crippling				The three largest alliances that are centered on
disadvantages have also followed like its shadow.				passenger airlines are the Star Alliance, SkyTeam and
One of the industries that have had battle its effects				Oneworld. Alliances also have also been formed
is the airline industry. Paradoxically the increased				between cargo airlines, such as that of WOW
popularity of flying as a medium of faster				Alliance, SkyTeam Cargo and ANA/UPS Alliance.
transportation has also been one of the factors that				Alliances provide a network of connectivity and
have brought in impediments to profitability. Since				convenience for international passengers and
business deals are not restricted by geographical				international packages. Various aspects of airline
boundaries anymore and people have taken to				alliances have been discussed in detail above.
international travel like never before-be it for business				Loyalty programs are prime pivots that determine
or pleasure, a spurt in demand has resulted in				the success of airline alliances. Since there are multiple
over-crowding within the industry-all vying for the				airlines that are part of an alliance thus bringing with
same pie.				them multiple programs with varied and complex
				rules, alliances typically offers a single alternative
With most of the competitors operating from more				loyalty program that is also umblically integrated with
or less similar technology platforms and offering				the primary loyalty programme belonging to the
similar services, major players within the airlines				“home” airline. In order to protect and
industry has had to battle commoditization of its				maintain the primacy of individual airline FFPs most
services and offerings to its passengers. Airline and				alliances have the rule that the passenger has to take
the tourism industry operate in an interconnected				a minimum no. of flights a passenger before being
manner and are particularly vulnerable to global				eligible for an alliance loyalty programme. The alliance
incidents like epidemics, natural disasters like				loyalty programme also has its own set of tiers. The
earthquakes, cyclones, terrorism, volatile fuel prices				one world alliance tiers are branded as Emerald,
etc. These have hurt the industry where it matters				Sapphire and Ruby. By creating an alliance FFP
the most-profitability!				programme, a single data pipeline is created from
				varied sources that are many and also varied, giving
Every time there is a hit or threat to its financial				the alliance management the opportunity to process
bottom line, the marketers under pressure to				large amounts of heterogeneous data.
perform and improve cash-flow, would struggle to				FACTS AND NUMBERS-A SNAPSHOT
create innovative marketing campaigns to rise above				STAR ALLIANCE
the communications clutter and attract the
customers attention. Ironically in their urgency they				Year of Formation
end-up using the same self-destructive weapon that				1997
they would like to avoid for long term				Daily Departures
profitability-lower prices. Price-wars cannot be a part				16,500
of a strategy and every time it is used, it leaves a				Countries Served
bitter after-taste among the players within the				159
industry.				Lounges
				805
The industry has gained maturity over the years, and				Annual Passengers
airlines all over the world have been constantly				499.90 (m)
revising their strategies for growth and encountering				Number of Employees
competition. This has been driven by one particular				393,559
need, survival. These strategies cover cost cutting				Fleet
measures, better management and most importantly,				3,325
strategic alliances with other airlines. Importance of				Available Seat Kilometers
these alliances may be gauged by the fact that they				1280.5 (bil)**
are guided by the bilateral air services agreement				Global Passenger Shares
system between nations. In many cases code-sharing				454.4 (mil)**
agreements have been made to maintain or expand				Revenue Passenger Kilometers
coverage & these international codes-sharing has				980.8 (bil)**
become a part of bilateral negotiations.				Operating Revenue Shares
THE BUILDING BLOCKS:				127.2 (bil)**
				Frequent Flyer Members
An alliance may be understood as an agreement
between two or more parties, made in order to				SKYTEAM
advance common goals and to secure common				Year of Formation
interests.In matured markets, alliances makes				2000
business sense and are primarily motivated by cost				Daily Departures
reduction and improved service for the customer				16,787
among other factors. Typically alliance partners are				Countries Served
bound by a single agreement with equitable risk and				169
opportunity share for all parties involved and are				Lounges
typically managed by an integrated project team.				447
				Annual Passengers
Strategic alliances are common to any industry. Their				462 (m)
presence is being felt quite significantly within the				Number of Employees
airline industry. Formation of alliances has been a				356,998
collateral outcome of the deregulation of the airline				Fleet
industry in the United States in 1978. Deregulation				2469 (+1,255 from related carriers)
was the single most important event that brought				Available Seat Kilometers
about radical changes within the industry. Though it				1042.9 (bil)**
took around a decade for the European countries to				Global Passenger Shares
follow, the effects of deregulation was quick to				375.6 (mil)**
filter-in and the airlines were finally free from				Revenue Passenger Kilometers
governmental shackles. The airlines now could choose				818.9 (bil)**
the routes they wanted to fly and fix the prices as				Operating Revenue Shares
they saw fit without any regulatory interventions.				97.9 (bil)**
Thus, deregulation enabled airlines to operate based				Frequent Flyer Members
on demand-supply realities and other market realities.				152 (mil)
The freedom had its cons too-now the airlines had to				ONEWORLD
fend for themselves and had to take careful steps in				Year of Formation
order to walk the path of positive financial				1999
bottomlines.				Daily Departures
				8,951
The most commonly used word these days seem to				Countries Served
be “globalisation”. The all pervasive				134
globalisation did not happen at one go. Deregulation of				Lounges
the airline industry seems to have been a precursor				531
to it. Globalisation has set new rules and with				Annual Passengers
competition coming from and for new markets, the				318.6 (m)
ground realities have altered Airlines have been slowly				Number of Employees
adapting to these challenges. Maybe due to the				275,991
unpredictability of the new market and its inherent				Fleet
vulnerability to global incidents, the industry has had				2,228
to adapt itself many times over. With adaptation				Available Seat Kilometers
becoming its second nature, alliances with other				891.1 (bil)**
operations were nothing but a survival mechanism				Global Passenger Shares
that began many years ago. From basic				285.5**
code-sharing agreements, these alliances have come				Revenue Passenger Kilometers
a long way and today involves much closer				684.8 (bil)**
co-operation between partners. The flexibility of the				Operating Revenue Shares
format has ensured that even non-flying partners like				86.8 (bil)**
Hotels; Credit card companies etc have been				Frequent Flyer Members
successfully integrated. No Doubt, these alliances are
playing a significant role in the development of the
global airline industry.				** Source: IATA WATS published 2007. (3)
What the alliances offer a consumer is seamless
worldwide travel. To that end, participating airlines
have more or less integrated their flight routes,				These numbers indicate that alliances are a significant
coordinating their schedules and flying from common				factor within the airline industry, and that the success
terminals at shared hub airports so passengers				of these alliances will determine the success of global
connecting from one alliance partner to another can				airline markets. Not entirely, but a world class loyalty
do so with minimal effort and inconvenience. With an				program is a big contributor to business success.
integrated route network in place, airlines in an alliance				STAR ALLIANCE –SAMPLE UNIFIED LOYALTY
offer fares that favor a combination of alliance				PROGRAM:
partners, including round-the-world fares that				Star Alliance has two premium levels, Silver and Gold,
showcase the alliance’s global network,				based on a customer's tier status in a member
permitting travelers to circumnavigate the earth				carrier's frequent flyer program. Each of the member
exclusively using members of a single alliance. The				and regional airlines recognizes Star Silver/Gold status,
looming presence of alliances not withstanding, the				with a few exceptions (mainly pertaining to airport
consumer still seeks his pound of flesh for his				lounge access). The statuses have no specific
patronage from the alliance in the form of loyalty				requirements of their own; membership is based
miles. In order to satisfy the consumer craving for				solely on the frequent flyer programs of individual
miles, member airlines have linked their mileage				member airlines. Many member airlines also have an
programs to reward travelers for flying within the				additional premium status beyond Gold which is not
alliance network. Loyalty programs thus continue to				recognised across Star Alliance.
hold sway with the Airlines Industry.				Star Alliance Silver
AIRLINE ALLIANCES:				Star Alliance Silver status is awarded to customers
				who have reached a premium level of a member
In layman’s terms, an airline alliance may be				carrier's frequent flyer program.
defined simply “an agreement between two or				Benefits of Star Alliance Silver membership:
more airlines to cooperate on a substantial level”.				- Priority reservations wait listing
However Oum, Taylor, and Zhang (1993) offers a				- Priority airport stand-by
more comprehensive definition "a global airline				Some airlines also offer the following to Silver
network formed by a group of affiliated airlines which				members:
offer seamless services to consumers through a joint				- Priority boarding
use of computer reservation systems, through fares				- Priority airport check-in
and ticketing, automatic baggage transfer,				- Priority baggage handling
coordinated flight schedules, code-sharing of flights,				- Preferred seating
joint marketing, sharing of a frequent flyer program,				- Additional checked luggage allowance
etc." (1).				- Airport lounge access
				Star Alliance Gold
International strategic alliances represent one of the				Star Alliance Gold status is awarded to customers
strategies developed by firms to gain a competitive				who have reached a high level of a member airline's
advantage in the global marketplace. These alliances				frequent flyer program.
possess the following characteristics (de la Sierra				Benefits of Star Alliance Gold membership:
1995)(2):				- Priority reservations wait listing
1. The two or more firms that unite to pursue a set				- Priority airport stand-by
of agreed upon goals remain independent subsequent				- Priority boarding
to the formation of the alliance.				- Priority airport check-in
2. The partner firms share the benefits of the alliance				- Priority baggage handling
and control over the performance of assigned tasks.				- Additional checked luggage allowance of 20kg (or
3. The partner firms contribute on a continuing basis				one extra piece where the piece concept applies)
in one or more key strategic areas (e.g., technology,				- Airport lounge access to designated Star Alliance
products, and so forth).				Gold lounges on the day and at the place of
				departure, on presentation of a valid Star Alliance
				boarding pass.
Broad objectives of an airline alliance:				Some airlines also offer the following to Gold
				members:
Many researchers have examined the various reasons				- Preferred seating (exit seat, or even on a special
that have led to the formation and sustenance of				section on the plane on some carriers, which provides
strategic alliances within the airline industry. Burton				more leg room)
and Hanlon (1994) opine that alliances are central to				- Guaranteed seating on fully booked flights (subject
formulation of business strategy. Though there are				to the booking class code and notice period)
many objectives, the list below highlights a few				- Free upgrade (in the form of voucher/certificate or
important ones:				automatic upgrade upon check-in)
				CONCLUSION
(1) The primary objective for international strategic
alliances in the airline industry is access to foreign				Close relationships between airlines are nothing new.
markets.				Despite the cut-throat competition that exists among
(2) Being a part of an alliance enables the carrier to				individual airlines, the industry operates within a highly
offer a larger number of flights to a much wider				cooperative framework. Airlines routinely sell and
choice of destinations, leading to enhanced marketing				accept each other’s tickets, transfer luggage
opportunities.				between each other’s flights and offer other
(3) Airlines benefit from the economies of scale				conveniences. It always seems logical for
resulting from an increased scope of operations.				non-competitive airlines to take that kind of
(4) Increase traffic on the airline's routes. Higher				cooperation to the next level, sharing codes, creating
traffic levels allow the airline to operate larger, more				joint fares and participating in each other’s
efficient aircraft at higher load factors, which in turn				frequent flyer programs. Airline alliances were just
leads to lower unit operating costs.				another step in that direction. International strategic
(5) Reduce costs through the sharing of facilities and				alliances are an important strategy in the
services aircraft maintenance and ground handling.				development of global airline markets. A study
(6) Increase market feed. Many airlines that are				estimated that 66 percent or two out of every
dominant in their home markets have entered into an				three passengers fly with an alliance carrier which
alliance with an international airline to provide feed to				makes it apparent that in the aviation industry today,
their airlines.				alliances play a critical role. While there were many
(7) The linking of flights within computer reservation				doubters regarding the longevity of global airline
systems allows ticketing and seat assignments for				alliances, it has more or less been established as a
connecting flights to be completed at the point of				fact of today’s travel life. Today’s Airline
origin, which benefits the connecting passenger.				world is consolidating around three major alliances-
(8) Other objectives behind the formation of global				Star Alliance, Skyteam and Oneworld.
alliances between airlines include: the projected
growth of international travel versus domestic travel,				Loyalty Programs have been a vital marketing tool
intensified fare competition, gate/slot constraints, hub				for the airline industry that has enabled them to
congestion, market withdrawal costs, aircraft				constantly add value and de-commoditise their
systems development, human resource development				services and offerings. it is interesting to note that
and a desire to match strengths and weaknesses.				joint FFP plans seems to be the most common
				marketing activity entered into by alliance partners in
1. International strategic alliances represent one of the				attempting to build a seamless network for the
strategies developed by firms to gain a competitive				traveler. Frequent flier programs predominantly
advantage in the global marketplace. Strategic				developed as a tool to regain customer loyalty and
alliances between airline partners have become a				reward frequent & high yield passengers
popular business strategy.				continue to have substantial capability to impact the
Alliance benefits in a nutshell may be summarised as:				travel Industry. The successes that the alliances have
(1) Ability to offer a				posted have been due to various reasons including
wide range of airline partners.				seamless travel, better usage of amenities at airports
(2) Better lounge				etc, but one of the vital reasons remain that
airport facilities.				code-sharing effectively merges the members
(3) More				Frequent flyer miles and programs letting them use
destinations.				built-up mileage from one carrier on several others.
(4) Ability to offer
round fares/circle fares.				According to Harvard Business Review, A 2%
(5) Greater ability to				increase in customer retention can have the same
reward passengers.				financial impact as a 10 percent reduction in operating
(6) Faster Mileage				costs. Joining an alliance is proving to be a cost
accrual.				effective way of increasing both frequencies and
(7) Larger number				network pushing more and more airlines to be a part
of reward destinations.				of alliances. This has resulted in alliances increasing
(8) Better up sell				their joint market-share & thus being a catalyst
opportunities.				for change in the aviation industry.
(9) Cost-effective
monolithic customer retention/acquisition strategies.				In an uncertain conjuncture, airline alliances are
(10) Access to				becoming more influential due to the numerous
extended passenger database.				synergies that exist in the aviation sector. Each of
(11) Large and				the big alliances today offers an integrated worldwide
international partner portfolio.				network, harmonized customer benefits and
(12) Invest in				coordinated loyalty programmes. Here we are forced
sophisticated campaign management tools.				to concede that Airline alliances are here to stay and
(13) Joint				loyalty programs will continue to play their vital role in
development of easy to use services for passengers.				their success.
(14) Dedicated				REFERENCES:
professional management for meeting alliance				(1) Oum, Tae Hoon Taylor, Allison J. Zhang, Anming
objectives.				(1993), "Strategic Airline Policy in the Globalizing Airline
(15) Increased				Networks, "Transportation Journal, (Spring), 14-30.
cost-efficiencies.
(16) Increased				(2) De la Sierra, M. Cauley (1995), Managing Global
aircraft utilization.				Alliances: Key Steps for Successful Collaboration.
(17) Globalised airline				Workingham, England: Addison-Wesley Publishing.
operations.
(18) Simplified				(3)
mileage accounting.
				GLOSSARY:
FFP is the most visible joint product of the alliance on
the customers’ side. Consumer loyalty programs				(1) Available Seat Kilometers: One seat
such as frequent flyer programs (FFPs) have proven				transported one kilometer; the most common
their ability to alter the intensity of price competition				measure of airline seating capacity or supply. For
between firms. The increasing marginal benefits that				example, an aircraft with 100 passenger seats, flown
are built into the reward schedules of FFPs give				a distance of 100 kilometers, produces 10,000 ASKs.
consumers an incentive to concentrate their flying				Sometimes ALSO measured in available seat miles
with a single carrier, rather than choose carriers on a				(ASMs).
flight-by-flight basis. Indeed, both economists and				(2) Operating Revenue: Revenues from the
policy analysts have suggested that FFPs might				performance of air transportation and related
enhance the market power of airlines, in particular, of				incidental services, including (1) transportation
dominant carriers at hub airports. The FFP points				revenues from the carriage of all classes of traffic in
available on a flight are clearly a characteristic that				scheduled and nonscheduled services, and (2)
consumers consider in deciding which airline product				non-transportation revenues consisting of federal
to purchase. Consumers value frequent flyer points				subsidies (where applicable) and services related to air
because accrued points give them dual benefit-				transportation.
attractive rewards and the benefits of tier status.				Endnote: The author would like your feedback-both
Thus, the value of frequent flyer points is derived				bouquets & brickbats.
from the value of the rewards for which they can be

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Airline Alliances and Frequent Flyer Programs

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