Aviation Trends in the New Millennium

Ruwantissa I.R. Abeyratne

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780754612995
• eBook ISBN: 9781351956147
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Business General
• Index: Technology & Engineering

This timely and authoritative book addresses the commercial and liability issues following commercial aviation into and beyond the year 2000.

Part I
Commercial Issues

1 Strategic Alliances of Airlines

Introduction

Today's commercial competition has transcended the past era, where dominant markets protected their established market shares. Most mega commercial activity was then the purview of governmental control under instrumentalities of state which were mostly cumbersome bureaucracies at best. Perhaps the best analogy is the biggest commercial market – the United States – which had, until recently extensively regulated larger commercial activities pertaining to energy transport and telecommunications.

Happily, over the past decade, commercial air carriers have broken the shackles of rigid regulation to form strategic alliances among themselves. These alliances have been formed in the realization that the performance of an airline can be affected by two factors: the average performance of all competitors in the airline industry and whether the airline concerned is a superior or inferior performer in the industry. Michael Porter¹ encapsulates these two factors in the single premise that any business achieves superior profitability in its industry by attaining either higher prices or lower costs than rivals. Curiously in the airline industry it is the latter – lower costs – which has been the cornerstone of strategic alliances.

The reason for airlines banding together is to share an otherwise wasted market which is still regulated by bilateral governmental negotiations. This unfortunate state of affairs has been brought about by a lacuna in the Convention of International Civil Aviation² (Chicago Convention) which leaves the absolute prerogative of allowing air carriers to carry passengers, cargo and mail into and out of their territories to states.³ This privilege has encouraged the protective instincts of states to ensure that their national carriers obtain optimum market share 'belonging' to them, based on a now antiquated belief that all passengers, cargo and mail destined for a particular state, or leaving that state, are the birthright of the national carrier of that state. This stifling phenomenon has encouraged airlines to think more strategically over the past two decades, resulting in the pursuit of improved operational effectiveness in their activities.

The seminal response of most strategic airlines to the interference of governments was to 'share' each other's resources, including air traffic rights, thus gaining access to what was disallowed under bilateral governmental agreement. Recently, airlines have become more aware than ever that they are becoming an increasingly capital-intensive industry and have a compelling need to reduce costs in order to survive. The end result has been an array of commercial arrangements between airlines, from statements of common interests to block space arrangements, code sharing and coordination of frequent flier programmes, to name just a few.⁴

This chapter will examine the semantics of strategic airline alliances and the manner in which such alliances overcome bureaucratic obstacles to gain access to open competition.

The Philosophy of Strategic Alliances

Arguably, the most spectacular strategic airline alliance so far is the 'Star' Alliance, which was launched in 1997 by Lufthansa, SAS, United Airlines, Thai Airways International and Air Canada. Brazilian carrier Varig joined later, and it was expected that Ansett Australia and Air New Zealand would join the alliance in 1999. Recently, Singapore Airlines signed a commercial agreement with SAS – one of the 'Star' Alliance members – which will bring Singapore Airlines inextricably close to the alliance itself.⁵ It is evident that the carriers of North America, Europe and the Asia Pacific regions, which form the 'Star' Alliance, have skilfully manoeuvred their dominance of the regions they represent. The direction in which the alliance is heading, with the possible future membership of Japan's All Nippon Airways (ANA), is incontrovertibly to assert its presence in the burgeoning Asia Pacific market, in particular the Pacific Region.

The underlying philosophy of the airline alliances, typified by the 'Star' Alliance, is not so much an emphasis on the more effective use of resources such as labour, capital and national resources (which are inevitably important factors) but rather an overall reliance on the strategy of location, where the sharing of locations represented by the various airlines has enabled them to produce their goods and services in a consistent manner, thus achieving the status equivalent to a cartel, while still retaining their individual identities.

Airlines have developed both a corporate strategy and a competition strategy to cope with competition. Both these strategies are becoming increasingly complementary rather than being mutually exclusive, which they were at the inception of airline competition 50 years ago. As airlines began to compete with each other across the borders, they acquired the ability to locate themselves overseas, creating a compelling need for commercial airlines to be fully acquainted with locational strategy and competitive advantages of various locations. Very early in the game, giants such as PANAM and TWA began to realize that even the strongest company with an established position in the airline industry, unthreatened by competition from new entrants or smaller airlines, would start losing business if they faced a better or lower cost product. The threat of new entrants, the bargaining power of supplies and customers and the superior quality or low cost of substitute products were arguably the underlying reasons for established airlines to begin experiencing a downturn in the 1960s, which was exacerbated through the 1970s and 1980s. These threats could not be effectively circumvented or overcome by the established carriers, partly because of the sustained circumscription of market entry imposed by Article 6 of the Chicago Convention.

The genesis of airline alliances therefore was a contrived symbiosis or coexistence between the new entrants or new competitors – which had the clout of resources but not the dimensions of a larger carrier –and the larger carrier itself which had an established product to offer. Together, these two types of carriers could eradicate such obstacles as product differentiation (which was a distinct disadvantage to carriers which did not have an established brand), capital requirements (which again was a disadvantage faced by a smaller carrier), economies of scale (which forced a smaller carrier to compete on a large scale) and government policy (which affected both types of carriers, particularly the larger carrier which had the resources to operate air services but not the market access to a given region).

Another type of commercial alliance is the 'mega' alliance referred to earlier in analogy typified by the 'Star' Alliance. The precursor to this type of alliance could have been the modest 'pool agreement' between two carriers operating third and fourth freedom traffic; that is, traffic purely originating and ending in each other's territories. The pool agreement was written into a bilateral air services agreement between two states in order to ensure equal enjoyment of market share between their carriers in the route between their states' territories. This notion gave rise to an extension of the principle of pooling, which was to share locational traffic on a fifth freedom; that is, traffic which is picked up at intermediate points or points beyond on services between two states, and, more importantly, sixth freedom: traffic to which a carrier had no right but which it could operate under the air traffic rights of another carrier, through a commercial arrangement such as a code share agreement signed by and between the carriers.

Some Types of Strategic Alliances

Airline alliances, particularly code-sharing agreements, add destinations to a route network and offer more frequencies of service to customers. With such arrangements, an airline can add on flights using its code sharing partner's flight entitlement and operate to additional destinations without adding any resources. Of course, such an arrangement would create a duopoly, depriving customers of the benefit of competition, pricing and so on if the airlines concerned were in competition on a given route. Code sharing not only affects passenger traffic, but influences the consolidation of cargo carriage as well, as was seen in the Swissair-Delta Airlines cargo alliance across the Atlantic.⁶

In Europe, the 'open skies' concept, introduced by the European Union, as legislator, in 1977 was meant to open competition between European carriers in Europe in order to offer competitive airline services to customers. However, this has not had the desired effect, owing largely to airlines forming alliances under the umbrella of the open skies legislation. In particular, the four alliances headed by British Airways, Lufthansa, KLM and Swissair have vigorously entered into alliances with smaller carriers under franchising agreements in order to gain access to markets they have not obtained in their air services agreements.

There are approximately 1200 scheduled air carriers in the world. It is estimated that there are approximately 10 000 aircraft in the air at any given moment. Excluding China and the countries of the former Soviet Union, approximately 380 000 civil aircraft are registered in ICAO states. Of these, 45 000 are used by commercial operators.⁷ Forecasts of the number of passengers carried on scheduled services in nine intercontinental route groups show the trans-Pacific and Europe–Asia markets as the fastest growing, at 8 per cent and 7.5 per cent per annum, respectively, for the forecast period through to the year 2003.⁸ International scheduled passenger traffic is forecast to grow at an average rate of 6.5 per cent per annum compared with 4 per cent per annum for domestic traffic.⁹ These rapidly evolving trends will no doubt be accommodated by equally rapidly developing technology and economic norms of the airline industry. Incontrovertibly, code sharing and computer reservation systems (CRS) are at the helm of this process.

Although, technically, code sharing and functions of computer reservations systems are two different activities of the air transport industry, they become inextricably linked to each other when two air carriers who share each other's codes may wish to have their shared flights displayed in each of their CRS. The placement of a code-shared flight in one CRS of a code-sharing partner differently from the system of the other would make no commercial sense either to the air carrier concerned or to the consumer. Thus multiple listings of the same flight may appear in CRS and airline schedules, often misleading the potential passenger, but certainly drawing an identifiable link between the two systems. Both activities, therefore, which have undergone a significant exponential growth over the past few years, warrant a close analysis in view of their inextricable link to each other and joint quest for commercial credibility and consistency. An inexorable implication of this symbiosis is the impact the two activities may bring to bear on the principles of the law of contract. This chapter will also discuss code sharing and CRS against the backdrop of contractual liability principles of air carriers and CRS users obtaining at international law and common law jurisdictions as they relate to the carriage by air of persons.

Code Sharing

Code sharing between two airlines is essentially two different airlines posing as one, sharing or rotating aircraft crew and responsibil ity.¹⁰ It has been called a little more than a glorified inter-line agreement which occurs when one airline operates a flight but both its and another carrier's codes are used.¹¹ Thus, for example, a passenger who contracts with airline A to travel from Canada to Australia may find himself in the same aircraft with a passenger who contracted with airline B for the same journey.

The United States Department of Transportation (DoT) uses a somewhat technical definition for code sharing which it calls 'a common airline industry marketing practice where, by mutual agreement between cooperating carriers, at least one of the airline designator codes used on a flight is different from that of the airline operating the flight'.¹² The DoT then classifies code sharing under this definitive structure into two types: the first being the typical international airline operation where two or more airlines each use their own designator codes on the same aircraft oper...

Table of contents

• Cover
• Half Title
• Dedication
• Title
• Copyright
• Contents
• Foreword
• Preface
• PART I COMMERCIAL ISSUES
• PART II LIABILITY ISSUES
• PART III THE FUTURE OF AVIATION IN THE REGIONS
• PART IV CONCLUSION
• Index
• Table of Cases