WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airline... [1 ed.] 9783954895540, 9783954890545

Citation preview

Florian Smeritschnig

WOW and SkyTeam Cargo

Copyright © 2013. Diplomica Verlag. All rights reserved.

An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines’ Operations and Success

Anchor Academic Publishing disseminate knowledge

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Florian Smeritschnig WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines’ Operations and Success ISBN: «ISBNEAN» Fabrication: Anchor Academic Publishing, an Imprint of Diplomica® Verlag GmbH, Hamburg, 2013

All rights reserved. This publication may not be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publishers.

Copyright © 2013. Diplomica Verlag. All rights reserved.

Dieses Werk ist urheberrechtlich geschützt. Die dadurch begründeten Rechte, insbesondere die der Übersetzung, des Nachdrucks, des Vortrags, der Entnahme von Abbildungen und Tabellen, der Funksendung, der Mikroverfilmung oder der Vervielfältigung auf anderen Wegen und der Speicherung in Datenverarbeitungsanlagen, bleiben, auch bei nur auszugsweiser Verwertung, vorbehalten. Eine Vervielfältigung dieses Werkes oder von Teilen dieses Werkes ist auch im Einzelfall nur in den Grenzen der gesetzlichen Bestimmungen des Urheberrechtsgesetzes der Bundesrepublik Deutschland in der jeweils geltenden Fassung zulässig. Sie ist grundsätzlich vergütungspflichtig. Zuwiderhandlungen unterliegen den Strafbestimmungen des Urheberrechtes. Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten wären und daher von jedermann benutzt werden dürften. Die Informationen in diesem Werk wurden mit Sorgfalt erarbeitet. Dennoch können Fehler nicht vollständig ausgeschlossen werden und der Verlag, die Autoren oder Übersetzer übernehmen keine juristische Verantwortung oder irgendeine Haftung für evtl. verbliebene fehlerhafte Angaben und deren Folgen. © Diplomica Verlag GmbH http://www.diplomica-verlag.de, Hamburg 2013

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

TableofContents

1. Introduction ......................................................................................................................... 1 1.1.

Research Questions...................................................................................................... 1

1.2.

Methodology ................................................................................................................ 2

1.3.

Structure....................................................................................................................... 3

2. Research Background ......................................................................................................... 5 2.1.

Market Environment .................................................................................................... 5

2.1.1.

Challenges ................................................................................................................ 5

2.1.1.1.

Liberalization and Regulatory Environment ........................................................ 6

2.1.1.2.

Integrators and Competing Business Models ....................................................... 7

2.1.2.

Opportunities............................................................................................................ 7

2.1.2.1.

Innovation in Air Cargo Transport ....................................................................... 8

2.1.2.2.

Market Facts and Numbers .................................................................................. 9

2.2.

Idiosyncratic Economics of Air Cargo Operations.................................................... 13

2.3.

Reactions of Air Cargo Carriers ................................................................................ 14

2.3.1.

WOW ..................................................................................................................... 15

2.3.1.1.

Taking Off with High Hopes .............................................................................. 15

2.3.1.2.

Difficulties Getting Off the Ground ................................................................... 15

2.3.1.3.

The Recent Years ............................................................................................... 17

Copyright © 2013. Diplomica Verlag. All rights reserved.

2.3.2.

SkyTeam Cargo ..................................................................................................... 18

2.3.2.1.

The Early Days ................................................................................................... 18

2.3.2.2.

Rapid Growth ..................................................................................................... 19

2.3.2.3.

Status Quo and Outlook ..................................................................................... 20

2.4.

Summary of WOW and SkyTeam Cargo .................................................................. 20

3. Literature Review – State of the Field .............................................................................. 21 3.1.

A Definition and Distinction of the Alliance Term ................................................... 21

3.2.

State of the Field ........................................................................................................ 22 V

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.2.1.

Strategic Alliances in General ............................................................................... 22

3.2.2.

Strategic Alliances in Air Transportation .............................................................. 23

3.3.

The Concept of Strategic Alliances ........................................................................... 24

3.4.

Alliances in the Air Cargo Business .......................................................................... 26

3.4.1.

Driving Forces of the Alliance Decision ............................................................... 26

3.4.1.1.

Get Exposure to Growth ..................................................................................... 27

3.4.1.2.

Fight for Market Share ....................................................................................... 28

3.4.1.3.

Synergies and Complementary Assets ............................................................... 28

3.4.1.4.

Others ................................................................................................................. 29

3.4.2.

Alliance Advantages .............................................................................................. 30

3.4.2.1.

Access to Regional Knowledge and Established Relationships......................... 30

3.4.2.2.

Organisational Learning and Innovation ............................................................ 31

3.4.2.3.

Counteract Market Uncertainties and Volatility ................................................ 31

3.4.2.4.

Economies of Scale, Density and Scope ............................................................ 32

3.4.2.5.

Market Power and Presence ............................................................................... 33

3.4.2.6.

Usefulness for Professionals .............................................................................. 33

3.4.2.7.

Advantages for Customers ................................................................................. 34

Copyright © 2013. Diplomica Verlag. All rights reserved.

3.4.3.

Disadvantages ........................................................................................................ 35

3.4.3.1.

Result of Economies of Scale, Scope and Density............................................. 35

3.4.3.2.

High Requirements ............................................................................................. 35

3.4.3.3.

High Dependance ............................................................................................... 36

3.4.3.4.

Other Drawbacks ................................................................................................ 36

3.5.

Core Questions and Prerequisites for Alliance Integration ....................................... 37

3.5.1.

Value Creation and Distribution ............................................................................ 37

3.5.2.

Alliances as a Long Term Commitment ................................................................ 38

3.5.3.

Foreseeing of Conflicts .......................................................................................... 38

3.5.4.

Reciprocation in a Network of Alliances ............................................................... 39

3.5.5.

Prerequisites for Successful Alliance Creation ...................................................... 39

VI

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.6.

Alliance Criticism and Other Cooperation Strategies ............................................... 41

3.6.1.

Criticism................................................................................................................. 42

3.6.2.

Other Co-operation Methods ................................................................................. 43

3.7.

Challenges and Common Complications .................................................................. 43

4. Transition to Analytical Part ............................................................................................. 45 5. Analysis of Both Alliances’ Revenue-Tonne-Kilometres ................................................ 46 5.1.

Assumptions .............................................................................................................. 46

5.2.

Total Market and Peer Group .................................................................................... 47

5.3.

WOW and SkyTeam Cargo ....................................................................................... 48

5.3.1.

WOW Alliance....................................................................................................... 49

5.3.1.1.

Lufthansa Cargo ................................................................................................. 51

5.3.1.2.

Singapore Airlines Cargo ................................................................................... 51

5.3.1.3.

SAS Cargo .......................................................................................................... 52

5.3.1.4.

Japan Airlines Cargo .......................................................................................... 53

5.3.1.5.

WOW Conclusion .............................................................................................. 54

Copyright © 2013. Diplomica Verlag. All rights reserved.

5.3.2.

SkyTeam Cargo ..................................................................................................... 55

5.3.2.1.

Approach ............................................................................................................ 55

5.3.2.2.

SkyTeam Cargo Founding Members ................................................................. 56

5.3.2.3.

Korean Air Cargo ............................................................................................... 58

5.3.2.4.

Air France and KLM .......................................................................................... 59

5.3.2.5.

Delta Airlines and Northwest Airlines ............................................................... 60

5.3.2.6.

Aeroméxico ........................................................................................................ 61

5.3.2.7.

Alitalia ................................................................................................................ 62

5.3.2.8.

SkyTeam Cargo Conclusion............................................................................... 63

5.4.

Comparison WOW and SkyTeam Cargo .................................................................. 64

6. Conclusion and Further Research Opportunities .............................................................. 65 6.1

Summary .................................................................................................................... 65

6.2

Further Research Opportunities ................................................................................. 69 VII

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Copyright © 2013. Diplomica Verlag. All rights reserved.

References ................................................................................................................................ 70

VIII

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Figure 1: Alliance Research Broken Down................................................................................ 1 Figure 2: Air Cargo Growth Rates (Source: Boeing) ............................................................... 10 Figure 3: Freight Yield 1989 – 2009 (Source: Boeing) ........................................................... 10 Figure 4: World Air Cargo Traffic in RTK (Source: Boeing) ................................................. 11 Figure 5: World Air Cargo Growth (Source: Boeing) ............................................................. 12 Figure 6: Historical and Forecast Air Cargo Growth Rates (Source: Boeing)......................... 12 Figure 7: Total RTK 1998-2010 from the 100 Largest Cargo Airlines (in Million), Source: Airline Business, compiled by the author ................................................................................ 47 Figure 8: Total RTK 1998-2010 from All WOW Alliance Members (in Million) Source: Airline Business, compiled by the author ................................................................................ 49 Figure 9: Total RTK 2001-2010 from All WOW Alliance Members (in Million) Source: Airline Business, compiled by the author ................................................................................ 50 Figure 10: WOW Airlines RTK Market Share from 1998 to 2010, Source: Airline Business, compiled by the author ............................................................................................................. 54 Figure 11: Total RTK 1998-2010 from the SkyTeam Cargo Core Members (in Million) Source: Airline Business, compiled by the author ................................................................... 56 Figure 12: Total RTK 2001-2010 from the SkyTeam Cargo Core Members (in Million) Source: Airline Business, compiled by the author ................................................................... 57 Figure 13: SkyTeam Cargo Core Member RTK Market Share from 1998 to 2010, Source:

Copyright © 2013. Diplomica Verlag. All rights reserved.

Airline Business, compiled by the author ................................................................................ 63

IX

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

„Aerodynamically the bumblebee shouldn't be able to fly, but the bumblebee doesn't know that so it goes on flying anyway.” Mary Kay Ash

Copyright © 2013. Diplomica Verlag. All rights reserved.

-

X

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

1. Introduction The formation of highly integrated strategic alliances in the airline industry started during the 1990’s with Star Alliance as the first global player, as passenger airlines faced deregulation and wanted to support their growth and expansion in international markets. For cargo companies, this type of integration came around later at the beginning of 2000. As a result of this increased co-operation, major alliances were formed with the launch of SkyTeam Cargo and WOW. Beginning at the dawn of the new century, these alliances should mark a cornerstone that enables long term success and survival through synergy effects and higher competitiveness individually and as a group.1 Now, a decade later, WOW and SkyTeam Cargo have evolved, but in different directions and not all members or ex-members are content with the results.

1.1.

ResearchQuestions

The greatest change in corporate culture—and in the way business is being conducted—may be the accelerating growth of relationships based not on ownership but on partnership; joint ventures; minority investments cementing a joint marketing agreement or an agreement to do joint research … alliances of all sorts. -

Peter F. Drucker2

Strategic alliances in air transport have been studied widely in recent publications, most of which just cover the passenger side of the business. There is a lot of information, statements and common knowledge about what benefits alliances can bring to its members, but a literature review leads to the fact that research is very sparse when it comes down to evaluating the actual impact of alliance integration on air cargo carriers’ standing.

Copyright © 2013. Diplomica Verlag. All rights reserved.

ResearchonStrategicAlliances ResearchonS.A.inAir Transportation S.A.intheAirCargo Industry Figure 1: Alliance Research Broken Down

1 2

See Serna Velez (2007), p. 7 Drucker (1996)

1

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Strategic Alliances (WOW, SkyTeam Cargo) in Air Cargo Operations: It is the purpose of this book to analyze and interpret the impact of a strategic alliance on cargo airlines‘ revenuetonne-kilometres (RTK)3 key figures (provided by Airline Business 1998-2010) and market share developments. The goal is to provide answers to the questions if air cargo operators did profit from alliance integration and why that was the case or not? Can alliances create value for their respective members by increasing their market share in terms of RTK? Additional questions that will be addressed in the process of answering these core questions: x

What are the main benefits and disadvantages for alliance members

x

What major challenges do (prospective) members face in an alliance

x

Are there common success and stability factors and why do alliances fail

x

What alternatives are there to alliance formation

1.2.

Methodology

In order to complete this research, a combination of different methodologies is used, based mainly on content analysis, literature review, the secondary data analysis including books, academic journals, data provided from inter-trade organizations, airlines, aircraft manufacturers and suppliers of aircraft manufacturers. In the first part of the book the alliance history and the environment is discussed using secondary data. The second part on the concept of strategic alliances in general and in the air cargo sector draws mainly on literature review and content analysis. After the literature review, the main purpose is to analyze specific revenuetonne-kilometres derived from the Airline Business Cargo Surveys statistics on a year-to-year basis from 1998 till 2010. The revenue-tonne-kilometres data of the total market and of individual alliance members of both WOW and SkyTeam Cargo is extracted in order to serve as a basis for further analysis and also to be used to derive other market related figures. With the relevant data at hand, the market developments in terms of revenue-tonne-kilometres and reCopyright © 2013. Diplomica Verlag. All rights reserved.

spective growth rates are discussed, before each member carrier is analyzed on the basis of the absolute RTKs, the market share, the RTK growth rate, as well as on the global rank within the peer group (100 largest cargo airlines in terms of RTK) during the period under review. Additionally a compound analysis for both alliances is carried out.

3

For a definition of RTK, see page 9

2

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

1.3.

Structure

In order to fulfill the goals of the research, this book is structured as follows: Section one contains the problem statement that underlies this study. From there, different research questions are constructed. The section concludes with the proposed methodology that will be used to answer the research question. Under section two, a framework is presented that should help the delighted reader to understand the research background in greater detail. In this part, the market environment that air cargo carriers are facing today is described with all its challenges and opportunities. Idiosyncratic characteristics of air cargo operations are explained. The section concludes with a historical reflection of the development of both SkyTeam Cargo and WOW. Section three contains results of primary and secondary research with references to academic works and implementation practices. Firstly, a definition of the term alliance that suits the purpose of this study adequately is presented. After introducing to the concept of a strategic alliance in general, the book puts the focus on the application of this concept in the air cargo industry. From there, the purpose of an alliance for airlines, the possible advantages and the driving forces behind the decision to enter into an alliance are carved out. What is more, this section answers the core questions that every potential alliance prospect faces and states the prerequisites that must be met within an organization in preparation for alliance integration. The book sheds light on the challenges of alliance formation and alliance integration and potential critical success and stability factors. Concluding, the section provides a critical perspective on strategic alliances as well as a collection of other forms of strategic integration. Sections four provides a comprehensive conclusion of the literature review and acts as a transition to the analytical part of the research. It aims at giving the reader a short heads up before the book goes into a detailed examination of both cargo alliances.

Copyright © 2013. Diplomica Verlag. All rights reserved.

The fifth section contains the analytical part of this book. It analyses specific revenue-tonnekilometres derived from the Airline Business Cargo Surveys statistics on a year-to-year basis from 1998 till 2010. It includes an analysis of the total market development as well as an evaluation of the developments of both alliances, WOW and SkyTeam Cargo, in general, as well as of their respective members.

3

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

The final section provides a short summary of all chapters and the answers to the proposed research questions that have been reached through research and the preparation of this study.

Copyright © 2013. Diplomica Verlag. All rights reserved.

Concluding, further research directions are pointed out.

4

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

2. ResearchBackground

It is the purpose of this introduction to discuss relevant topics briefly in context of air cargo alliances and in a manner that relates to the subject of this book. It should help the delighted reader to get some sort of understanding about the current market conditions, without making any claims of being complete.

2.1.

MarketEnvironment

The business of air cargo operations has been a field of rapid changes and developments in the last few years. Embedded in a framework of global economics, trade development and subject to manifold regulations, air freight as a barometer of trade will continue to be a key driver in furthering globalization.4 For a detailed description of the development and the history of air freight services see Chiavi (2005) and Allaz (2004).

2.1.1. Challenges Air cargo carriers operating in a global market are faced with all different kinds of challenges, including rather recent developments like the liberalization of air transport markets, increasing competition through the growth of integrators, as well as inherent challenges like directional imbalance, marginal pricing of substantial volumes, the absence of new dedicated freighter aircraft, airport noise regulations and a dependence on belly cargo and therefore a schedule to please passengers. Adding to that, air cargo operations are highly dependent on the overall world economic situation and macroeconomic variables.5 It is not exclusively world trade activity that affects air cargo operators. Other factors, such as the development of the oil price can have a large impact on the demand for and the supply of air freight services Copyright © 2013. Diplomica Verlag. All rights reserved.

as well. As fuel costs make up a large part of the variable costs, especially on long haul freighter aircraft operations, a high oil price can lead to freight forwarders substituting the higher priced air transport services with road or maritime transport. Although the demand for air freight services has increased over the decades, freight yields have been declining sharply

4 5

See Chiavi (2005), p.489 See O’Connor (2001), p.200 and Grönlund and Skoog (2005), p.474

5

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

since 1989.6 Growth over the last 60 years has been rapid; yet profitability has remained very low.7

2.1.1.1. LiberalizationandRegulatoryEnvironment It can be argued that liberalization in the air transport market can both be seen as an opportunity as well as a challenge for established air cargo carriers. Increased competition has forced cargo carriers to act and change their old thinking patterns and behavior. No longer protected, they had to find other ways of keeping their strong market position and standing. This challenge has been one of the key drivers for the foundation of alliances in that sector. With deregulation, the air transport industry has moved away from strong economic regulations and to a large extend has been freed from the state’s control over prices, market entry and exit. With the new, in many cases still restricted, freedom of entry and exit, capacity, fares and operations, competition among international cargo airlines has increased fiercely as previously state-owned carriers and/or flag carriers no longer enjoyed protection.8 With increased competition came significant traffic growth, a sharp reduction in prices and an increase in product quality for customers. On a positive note, liberalization allowed airlines to operate more efficiently within alliances and on their own.9 Liberalization attempts have been ongoing among many countries and trade blocks worldwide. It may well be argued that in an integrated economic block like the European Union, several packages have led to a high degree of freedom and harmonization. Still, liberalization is an ongoing process and air transport freedom rights differ among all countries and are very much dependent on overall integration into a more open world economy. Global markets are far from contestable.10 This is particularly important when looking at traffic rights, as there are still hundreds of bilateral air service agreements (ASAs) in place. It may well be that an airline that wants to expand into another market by acquiring a competitor Copyright © 2013. Diplomica Verlag. All rights reserved.

will cause the traffic rights of the acquisition target to expire. This complex of problems has recently been in the news when Lufthansa took over Swiss and Austrian. In either case, Russia wanted to draw the traffic rights from both carriers as it no longer recognized Swiss as a Swiss airline and Austrian Airlines as being an Austrian company. In such cases, alliances can 6

See Boeing (2010), p.2 See Doganis (2005), p.4 8 See Liasidou, (2004), sl. 3-4 9 See Fu et al. (2010), p.374 10 See Kleymann and Seristö (2004), p.4 7

6

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

help to circumvent existing regulations. For a detailed analysis of the status of the liberalization efforts in the airline industry and the benefits of more open skies, see IATA (2006) study on liberalization.

2.1.1.2. IntegratorsandCompetingBusinessModels Although air cargo volumes increased rapidly (ten per cent annual growth between 1997 and 2004)11, the traditional airfreight sector suffered from an economic decline. With a different culture and methodology, offering a one-stop solution, integrators have been able to acquire an increasing share of the traditional sector’s high value customers, absorbing all of the premium market growth. During the past 20 years, companies like Federal Express, UPS, DHL and TNT expanded their presence by moving into the higher value express, door-to-door services. They have introduced new levels of service standards via extensive use of information technology and comprehensive global network (Melbin, 1997; Hamilton, 1997 and Chu et al., 2004).12

2.1.2. Opportunities However, air freight as a key instrument of globalization is still confronted with plenty of opportunities like an increase in international trade, rapid economic development of emerging markets and innovation. Liberalization and deregulation have enabled carriers to open new routes, enter new markets, attract new customers and build new relationships. Apart from air cargo carriers, Fu et al. (2010) summarize numerous reports and academic papers, which confirm that liberalization in air transport markets has had an important impact on worldwide economic growth and welfare gains.13 Although innovation is more incremental, air cargo operators, together with all other service providers in the air cargo supply chain, constantly

Copyright © 2013. Diplomica Verlag. All rights reserved.

seek to drive down costs in all segments and improve product offerings. Leaving unpredictable fuel costs aside (which can also be hedged to account for unpredictability and to allow safer planning), it is safe to assume that this results in a light gradual decrease in production cost over time.

11

See Piermartini and Rousová (2008), p.1 See Hui et al. (2007), Chu et al. (2004), Hamilton (1997), Melbin (1997) 13 See Fu et al. (2010), pp.2-3 12

7

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

2.1.2.1. InnovationinAirCargoTransport The necessity of innovation in air cargo operations has been neglected for a long time, after few breakthrough innovations during the last 60 years. At the same time, cargo airlines are integrated in ultra dense global networks that provide fast service for customers but still rely on outdated IT systems and procedures. Protective market conditions in the past and leftover structures of those times frustrated innovation and have directed the evolution of the industry into a contrived and artificial structure.14 As comes with long time-to-market and long usage periods of aircraft, there is also no breakthrough innovation when it comes to new airplane models. This is even more true for the cargo side of the business, as freighter aircraft are often happen to be converted ex-passenger aircraft and stay in service even longer. The newest models on the market are the Airbus A330F, the Boeing 777F Freighter and the Boeing 747800F. All of them are derived from passenger airplane models and come with all sorts of compromise for dedicated air cargo carriers. Innovation in the field of airplanes can best be described as being incremental. Nonetheless there has been a continuous stream of innovation in the fields of RFID, tracking and tracing, development of time sensitive express products as well as products that offer greater flexibility for customers. Innovations that yielded special products for temperature sensitive cargo could be one of the key drivers that have helped cargo carriers to gain access to totally new customer groups, e.g. the pharmaceutical industry. Notable initiatives in the recent years that try to obtain foothold in the industry are Cargo 2000 and E-Freight. Cargo 2000 aims at implementing a new quality management system for the worldwide air cargo industry that should reduce operating costs and enhance customer service while improving the efficiency of air cargo in general. All this should happen in close partnerships with courier service providers.15 E-freight is an industry-wide initiative involving carriers, freight forwarders, ground handlers, shippers and customs authorities that aims at taking paper work out of the air cargo supply chain and replace it with cheaper, more accurate Copyright © 2013. Diplomica Verlag. All rights reserved.

and more reliable electronic messaging.16 A topic that is gaining momentum worldwide and that is becoming increasingly important is the security of the supply chain as a whole. As an important part of the supply chain, air cargo operators are faced with the need to adapt to various new regulations and policies that have

14

See IATA (2006), p.3 See Hui et al. (2007), and IATA (2011), www.iata.org (1.11.2011) 16 See IATA (2011), www.iata.org (1.11.2011) 15

8

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

been implemented since the 9/11 attacks.17 This is particularly important as air transportation represents a large point of impact and finds favor with terrorist attacks. All of these changes require a capable IT infrastructure. IT systems are expensive to change but necessary to keep up with the pace of business integration and better customer service (booking, tracking etc) and - as with other investments – can help to lower the costs and improve service in the long term. Information technology and handling of information flow is definitely the key for many cargo change initiatives.18 Integration and concerted implementation within an alliance network can help individual air cargo operators to gain even more value from such initiatives. Another current development that aims at improving safety and security along the air cargo supply chain as well as at enlarging economic savings refers to the deployment of new ULDs (unit loading devices).19 With decreasing market regulation, air carriers are forced to compete more fiercely. Being on the edge of innovation, quick reaction to customer needs and development of new products can help them to gain a lasting strategic advantage over their competitors.

2.1.2.2. MarketFactsandNumbers Commonly used quantitative measures of the international air freight business are FreightTonne-Kilometres (FTK)20 and Revenue-Tonne-Kilometres (RTK)21. As stated earlier, the demand for air service operations depends heavily on the state of the world economy. A study in 2001 that used simple linear regression came to the conclusion that the growth of air freight equates 3.18 times GDP growth. From 1950 to 2000, the average growth rate for FTK was 9.76 per cent while the average GDP grew by 3.75 per cent. Four characteristics evolved in the analysis of the results:22 -

The average growth rate of freight forwarding is significantly higher than the development of

Copyright © 2013. Diplomica Verlag. All rights reserved.

world trade and GDP -

Air freight is strongly related to the business cycle and trade development

-

Air freight development shows a significantly higher volatility compared to real GDP

-

The relative volatility seems to have decreased from 1970 to 2000 17

See Pienaar and Vogt (2009), pp.394-396 See Conway (2009), pp.7-8 19 See Warehousenews.co.uk (2011), http://www.warehousenews.co.uk/ (2.11.2011) 20 FTK: the sum of the products obtained by multiplying the number of tonnes of freight and express carried on each flight stage by the stage distance. For ICAO statistical purposes freight includes express and diplomatic bags but not passenger baggage 21 RTK: One ton of cargo (mail and freight) that is transported for one kilometer 22 See Chiavi (2005), p.504-506 and MDS Transmodal et al. (2001), p.16 18

9

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Figure 2: Air Cargo Growth Rates (Source: Boeing)

The above chart from Boeing Airplanes describes the growth rates of air cargo in the last dec-

Copyright © 2013. Diplomica Verlag. All rights reserved.

ade and highlights the volatility in the demand for air cargo services.23

Figure 3: Freight Yield 1989 – 2009 (Source: Boeing)

According to Boeing, even though scheduled freight yield increased from 2002 to 2008 because of fuel surcharges, it had been declining since 1989, at an average rate of 4.9% per year, after adjusting for inflation.24

23 24

Boeing (2010), p.2 Boeing (2010), p.3

10

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Figure 4: World Air Cargo Traffic in RTK (Source: Boeing)

Latest data from Boeing shows that in 2009 the world maritime industry generated an estimated total of 60 trillion RTKs compared to 166.8 billion RTKs for the air cargo industry. However, this maritime traffic includes movement of bulk commodities such as oil, metal ores, and grains, most of which cannot be directly compared to high-value dry commodities associated with transport by air. A better comparison of the air and maritime modes can be made using the remaining maritime dry cargo after bulk commodities have been subtracted, which totaled about 16.9 trillion RTKs in 2009.25 The short term outlook is not comforting after all. Airport Council International ACI September 2011 statistics show a further decrease of 3.8% in airfreight handled. The CEO of ACI Europe, Oliver Jankovec points out that the difference between passenger and freight transport is increasing and stands now by 10,8%.26 The downward trend for freight demand is real and freight as an early indicator for world economic development points to further declines in economic activity which in turn will decrease the demand for air cargo services even Copyright © 2013. Diplomica Verlag. All rights reserved.

more in the near future. Still, the long term outlook is bright. Although recent statistics point to a decrease in demand for freight volume, the long term upward trend is intact. This is supported by studies of both Boeing and Airbus as well as by studies from international organizations like IATA and ICAO.

25 26

Boeing (2010), p.6 See Payer (2011), www.austrianaviation.net (8.11.2011)

11

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Figure 5: World Air Cargo Growth (Source: Boeing)

According to Boeing (2010) world air cargo traffic is expected to grow 5.9% per year over the next 20 years. Air freight RTK growth, including express traffic, will average 6.0% annually. Airmail traffic will grow much more slowly, averaging only 1.4% growth annually through 2029. It should be noted that because of the dramatic 2009 drop, the historic 10-year world air cargo growth rate fell from 3.9% during the 1997-to-2007 period to only 1.9% during the 1999-to-2009 period. Overall, world air cargo traffic will increase from 166.8 billion RTKs in

Copyright © 2013. Diplomica Verlag. All rights reserved.

2009 (down from its 2007 record of 191.4 billion) to more than 526.5 billion RTKs in 2029.27

Figure 6: Historical and Forecast Air Cargo Growth Rates (Source: Boeing)

27

Boeing (2010), p.8

12

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Asia’s air cargo markets will continue to lead the world air cargo industry in average annual growth rates, with domestic China and intra-Asia markets expanding 9.2% and 7.9% per year, respectively. Markets linking Latin America with North America and Latin America with Europe, as well as markets between the Middle East and Europe, will grow at approximately world average growth rate. The more mature North America and Europe markets reflect lower-than-average traffic growth rates.28 This long term upward trend is also reflected by estimates of Airbus and Boeing regarding the need for new freighter aircraft in the coming years: According to Boeing, the freighter fleet is forecast to expand by more than two-thirds, from 1,755 airplanes in 2009 to 2,967 airplanes in 2029.29 Apart from short term considerations, the future outlook for cargo carriers can be considered bright as growth will continue over the next decades with the support of an increase in international trade, development in emerging markets and the growing need to transport time sensitive, higher-value goods. For further information on market outlook, I would like to point the delighted reader to the Airbus Global Market Forecast 2011-2030, the Boeing World Air Cargo Forecast 2010-2011 and the Boeing Current Market Outlook 2011-2030.

2.2.

IdiosyncraticEconomicsofAirCargoOperations

Air cargo operators offer an undifferentiated, highly perishable product: Although companies try to differentiate their offerings from their competitors, provided services are still very similar. In addition to this, the air cargo services are highly perishable; an empty cargo hold cannot be stored for future sale and represents a dead loss for the service provider.30 Modern air freight enables fast transport of goods within a global network and therefore stands out due to a high economic efficiency, when compared to other modes of transport. However, because of its nature, the cargo business is also much higher regulated when it comes down to safety Copyright © 2013. Diplomica Verlag. All rights reserved.

standards and statutory requirements.31 As a key driver of international trade, air cargo is highly dependent on the global economic situation and constantly has to cope with fluctuations in demand. The supply with air cargo services, however, is very inelastic. This can come as a problem as companies configure their 28

Boeing (2010), p.8 See Boeing (2010), p.9 30 O’Connor (2001), p.6 31 Pompl (2007), p. 45 29

13

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

capacity in order to manage demand surges, which is usually part of a long term planning process. Reaction to unexpected demand shifts, such as a change in aircraft configuration or a change in fleet size can be costly and require great effort. Air cargo operators therefore employ a very complex fare structure to account for that. With regard to the cost structure of a cargo airline, large part is made up of fixed costs as marginal costs are low.32 Adding to that, fuel costs as a major part of the variable costs depend on the oil price and are therefore not entirely predictable. In times of a strong dollar, this can prove to be an even greater concern for air transport operators outside the United States of America. The competition in air cargo operations happens to be among carriers from all over the world, each carrier from a different home country. That implies that every air cargo operator has to deal with very different basic conditions in terms of available resources, economic and technical regulations.33 Various practioneers claim that air carriers from specific countries enjoy a greater degree of freedom as well as substantially lower cost structures and thus imply that the competition in some markets takes place in an unfair and distorted environment. Compared to other modes of transport, air freight volumes are very low as both passenger airlines as well as dedicated cargo carriers together carry only one per cent of the world trade volume with their aircraft fleets. However, research estimates the value of those – often time sensitive - goods to make up between ten and 30 per cent of the world trade value.34

2.3.

ReactionsofAirCargoCarriers

In order to face the challenges and to leverage the opportunities, air cargo operators have adapted their short term as well as long term strategy in different ways. Short term reactions to a decline in economic activity included taking airplanes out of service and storing them in the desert. Long term considerations have led to different kinds of co-operations with competitors, most importantly the formation of alliances, which should have helped to create econoCopyright © 2013. Diplomica Verlag. All rights reserved.

mies of scale, deal with the increased complexity of information flow and should have enabled each company to cover a bigger network.35

32

Pompl (2007), p.46 Pompl (2007), p.50 34 See Pienaar and Vogt (2009), p.389 and Piermartini and Rousová (2008), p.1 35 See Grönlund and Skoog (2005), p.484 33

14

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

2.3.1. WOW 2.3.1.1. TakingOffwithHighHopes After discussions and preparations started in April 2000, WOW (known under the project name New Global Cargo) was officially incorporated in October 2001 by three founder companies, namely Lufthansa Cargo, Singapore Airlines Cargo and SAS Cargo. Being autonomous, wholly owned subsidiaries of their parent companies, they enjoyed a greater degree of freedom and flexibility in decision making and in their operations. At that time, all parent companies were also members of the Star Alliance.36 Japan Airlines, now a member of the passenger alliance OneWorld, joined the alliance in mid-2002 for its cargo activities, without setting up a dedicated cargo subsidiary.37 At that time, the members of the WOW alliance together operated scheduled freighter operations to 523 airports in 103 countries.38 The name WOW is no abbreviation but should rather stand for a new, dynamic and innovative way of carrying freight. As a symbolic step Lufthansa Cargo started to add the WOW logo to their MD-11 freighters from 2003 onwards.39 The underlying premise of WOW was that customers are no longer seeking pure transportation services but innovative solutions to complex logistics requirements. Therefore the WOW alliance was looking for ways to harmonize business product lines, processing, handling and information technology systems as well as ways to unify freight networks, sales and marketing structures to meet customer demand for rapid, reliable and flexible global service.40

2.3.1.2.

DifficultiesGettingOfftheGround

Hopes to revolutionize the air cargo business in a way that Star Alliance has transformed air travel were flying high but the following years will eventually prove that the venture did not take off quite as planned and never managed to live up to the promising name.

Copyright © 2013. Diplomica Verlag. All rights reserved.

Right after the formation, the aftermath of 9/11 had a substantial impact on the venture: due to a decrease in demand for air cargo operations, Lufthansa Cargo had to ground two of its 20 freighters temporarily, while Singapore Airlines Cargo deferred the delivery of its 12th new

36

Star Alliance: The first and largest passenger airline alliance, founded in 1997 oneworld: The 3rd largest passenger airline alliance, founded in 1999 38 See Japan Times (2002): www.japantimes.co.jp (21.10.2011) 39 See Allaz (2005), p.351 40 See Taverna (2001), p.58 37

15

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Boeing 747-400F freighter by six months. The rollout of the brand name WOW was delayed until March.41 As soon as the first milestones had been reached, other challenges arose: In 2002 Andreas Otto, a member of the Lufthansa cargo board, proclaimed that over 80 per cent of the total cargo business of the three founding members are harmonized as well as 100 per cent of each firms’ time-definite offerings. This was only half the truth as each carrier has retained the individual brandings for their time-definite products (td.Flash of LH Cargo, SAS Priority of SAS Cargo and S1A Swiftride of SIA Cargo). At that stage LH Cargo has embarked upon long-term "business partnerships" with the major forwarders and was already planning new ventures with Deutsche Post World Net and DHL to enhance and promote their own products. SIA Cargo, on the other hand, openly admitted that it did not have the resources to set up such programs.42 After the launch of seamless joint express services on the worldwide systems and a timedefinite general cargo product, alliance planners now focused on the integration of sales, handling and IT systems as well filling missing geographical gaps in the global network to increase market share and global presence. Despite a combined fleet of 33 dedicated freighter aircraft (MD11 and 747F) and the underbelly capacity of 600 aircraft, the three founding airlines still held only about ten per cent of the global market share at that time, which showed the high degree of fragmentation in the air cargo industry.43 Aside from the founding airlines, two associated carriers, namely Thomas Cook/ Condor and Spanair also provided additional bellyhold capacity for the WOW alliance.44 Although it was unclear how much business actually moved as part of the alliance, each member carrier had set aside ten per cent of the capacity on all their flights toward a seamless, worldwide air freight network by September 2003. By 2004, the alliance had reached its peak, operating a combined fleet of 43 freighters and more than 760 passenger aircraft with belly-

Copyright © 2013. Diplomica Verlag. All rights reserved.

hold capacity, serving "an unparalleled route network of destinations, linking the world's major trading centers."45 On the contrary, the limits of alliances seem to have been immanent from the very beginning. In 2003, SAS Cargo launched 747-400 freighter flights to New York under a pact with Kore41

See Taverna (2002), p.52 See Turney (2002), pp.14-16 43 See Taverna, (2002), p.52 44 See Taverna, (2002), p.52 45 See Karp, (2004), p.20-25 42

16

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

an Air Cargo, one of the founding members of the rivaling SkyTeam Cargo.46 By 2005, Lufthansa Cargo has engaged in several global co-operations and deals like the foundation of Jade Cargo, a joint venture with the Chinese Shenzhen Airlines. What is more, the development of AeroLogic47 was well under way at that time. It was in the same breath that the founding member of WOW proclaimed that it is no longer bound by any alliance or partnership and was openly speaking about a portfolio of partnerships. This change of wording reflected the shift of thinking inside the German cargo carrier: The WOW alliance no longer had the highest priority.48 In a vicious circle, decreasing commitment of all members to the alliance and their partners led to an increasing engagement in other strategies, which led to further contradictions of the alliance.

2.3.1.3. TheRecentYears In 2008, a source at Lufthansa told Die Welt that the alliance is eventually going to be dropped by all its members as “no one is sufficiently aware of the advantages offered by the alliance". Other reports claim that members of the WOW alliance have competed against each other and have failed to agree on joint offers, in light of the general increase in competition within the global commercial aviation industry.49 Lufthansa Cargo mourned missing reservation systems and customer retention programs.50 Even before the announcement of its withdrawal from the alliance in 2009 Lufthansa Cargo has started to change the livery of their aircraft back to a pre-alliance state without any WOW markings. After entering bankruptcy in January and financial restructuration, Japan Airlines decided to suspend all scheduled freighter flights after more than 50 years of operations by November

Copyright © 2013. Diplomica Verlag. All rights reserved.

2010. With the storage and sale of six dedicated 747 and three 767 freighter aircraft, Japan Airlines simultaneously left the WOW alliance.51

46

See Air Cargo World (2003), p.4 AeroLogic: A joint venture between DHL Aviation and Lufthansa Cargo 48 See Turney (2005), pp.14-15 49 See Transportweekly (2008), www.transportweekly.com (21.10.2011) 50 See Airliners.de (2011), www.airliners.de (21.10.11) 51 See Shippingonline (2010), www.shippingonline.cn (21.10.2011) 47

17

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

To this day only Singapore Airlines Cargo and SAS Cargo belong to the WOW alliance, both operating as subsidiaries of the respective Star Alliance passenger airlines. SIA Cargo operates twelve dedicated 747-400 freighters and has a network that spans 72 cities in 37 countries with over 600 flights scheduled every week. In contrast, SAS Cargo – without dedicated freighter aircraft – uses free bellycargo compartments from aircraft of its parent company SAS.52 The alliance continues to exist but the effort and the dedication of both carriers is highly questionable, as there are barely any intersections in their operations, as well as no words from officials of either company or joint press releases. At present, the former website of the WOW alliance is no longer online and the domain wowingtheskies.com is currently (21.10.2011) not registered and up for sale.

2.3.2. SkyTeamCargo 2.3.2.1. TheEarlyDays SkyTeam Cargo was founded in September 2000 as a separate arm of the passenger airline alliance SkyTeam which itself has just been incorporated three months earlier. The founding members Aeroméxico Cargo, Air France Cargo, Delta Air Logistics and Korean Air Cargo were soon to be followed by Czech Airlines Cargo and Alitalia Cargo in 2001. In the same year, Air France Cargo, Delta Air Logistics and Korean Air Cargo launched the US Cargo Sales Joint Venture in Atlanta. With even tighter integration, they hoped to offer customers the benefits of a combined sales force, a centralized reservation and service center, a comprehensive route network and a common product line for US export shipments.53 The joint venture used its own IT system, revenue management and customer database.54 Both the wording and the appearance of the newly formed SkyTeam Cargo differed from the one and only competing alliance WOW. In 2002, Delta Air Logistics chief Anthony Charaf noted, that "they’d

Copyright © 2013. Diplomica Verlag. All rights reserved.

rather be small and effective than large and ineffective."55 On the other hand, unlike WOW, the Air France/Delta-led partnership intended to embrace all members of the SkyTeam passenger alliance, provided they agree to its overall marketing and product philosophy.56 Over the coming years this strategic concept led to fast growth in terms of members and broad geographical presence. 52

See www.siacargo.com and www.sascargo.com (21.10.2011) www.skyteamcargo.com, (22.10.2011) 54 See Conway (2002), p.9 55 See Air Cargo World (2002), p.6 56 See Taverna, (2002), p.52 53

18

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

2.3.2.2. RapidGrowth Although the members, too, were forced to adapt capacity to meet demand in the postSeptember 11 environment, the alliance did not ground any freighter aircraft. In 2002, the six present airline members represented a fleet of 1,103 aircraft, including 31 dedicated freighters operated by Air France Cargo and Korean Air Cargo. Between 2002 and 2003, Air France Cargo took delivery of four 747-400ERF as the launch customer for Boeing. Similar to WOW, SkyTeam Cargo harmonized its array of products with a few exceptions (such as Delta's Dash express offering within the U.S.) and additionally (in contrast to WOW) unified the brand names by adopting the ones already established by Air France Cargo. Coincidentally, with the joint venture in Atlanta that marketed capacity out of the United States and an already available joint express product (Equation) in Air France’s European route network, efforts to harmonize information technology as well as the implementation of single roof airport handling were well under way. A particular focus was set on the increase of the higher-value joint time-definite products.

Following the merger of Air France and KLM, KLM Cargo joined SkyTeam Cargo in 2004. Just one year later, Air France Cargo and KLM Cargo merged and started to operate under one single brand name AF-KL Cargo. As integration continued, SkyTeam Cargo was moving towards a 'storefront strategy', the storefront being the SkyTeam Cargo brand. For international shipments, forwarders would contract business via "the banner of SkyTeam Cargo" rather than through individual member carriers.57 With KLM's entrance into the alliance, the venture now had seven major cargo hubs, including Amsterdam, Mexico City, Rome, Seoul, Atlanta, Prague, and Paris-Charles de Gaulle as well as a total cargo network of more than 500 destinations in 100 countries.58 In 2005, Northwest Airlines Cargo joined the alliance and in 2008 Delta Air Lines acquired Northwest Airlines; both companies merged under the Delta Air Lines brand. In 2010, China Southern Cargo joined the alliance and recently in May 2011

Copyright © 2013. Diplomica Verlag. All rights reserved.

Aeroflot joined SkyTeam Cargo as the 9th full member.59 Even though the integration process and the growth seemed to be happening at a higher pace than at WOW, SkyTeam Cargo encountered similar challenges. In 2005, Air France Cargo executive vice president Marc Boudier said that the member carriers do compete against each other in some markets. He added that member carriers sometimes have to engage into agree57

See Karp, (2004), pp.20-25 See Air Cargo World (2004), pp.6-8 59 www.skyteamcargo.com (22.10.2011) 58

19

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

ments with carriers outside SkyTeam, even with WOW alliance members, as a co-operation only in the manner of the respective passenger alliance is not entirely feasible for SkyTeam Cargo.60

2.3.2.3. StatusQuoandOutlook At present, SkyTeam Cargo consists of nine full member airlines being the biggest air cargo alliance of the world. Together the cargo core carriers operate more than 50 dedicated freighter aircraft and can use the bellyhold capacity of more than 2100 passenger aircraft.61 With approximately 14.500 daily departures, the whole SkyTeam network spans 926 destinations in 174 countries.62 Major cargo hubs include Amsterdam Schipol, Anchorage Ted Stevens, Atlanta Hartsfield-Jackson, Mexico City, Paris-Charles de Gaulle, Seoul Incheon, Shanghai Pudong and Guangzhou Baiyun. China Airlines has entered into the SkyTeam alliance in September 2011 and it can be considered very likely that the flag carrier of Taiwan will enter into the cargo alliance as well.63 As for other possible candidates, the cargo subsidiaries of the other SkyTeam members are named as potential future members.

2.4.

SummaryofWOWandSkyTeamCargo

Both alliances have been started in the early days of the last decade in order to face the challenges and leverage the opportunities in the air cargo sector. As this strategic alliance concept has been adapted to the air cargo industry it should have marked a cornerstone that enabled long term success and survival through synergy effects and higher competitiveness individually and as a group.64 Both alliances have been formed with a view of combining networks, aligning products and services and the goal to take a major share of global growth. Now, a

Copyright © 2013. Diplomica Verlag. All rights reserved.

decade later, WOW and SkyTeam Cargo have evolved, but in different directions and not all members or ex-members are content with the results. WOW is now smaller than on the date of its inception whereas SkyTeam cargo has grown ever since its foundation and has gone through a lot of merger activity.

60

See Unknown (2004), pp.6-8 See www.skyteam.com, www.airfleets.net, www.martinaircargo.com, www.af-kml.com (29.11.2011) 62 www.skyteam.com (23.10.2011) 63 See Unknown (2011), www.airlinesanddestinations.com (22.10.2011) 64 See Serna Velez (2007), p. 7 61

20

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3. LiteratureReview–StateoftheField

3.1.

ADefinitionandDistinctionoftheAllianceTerm

The subject of strategic alliances has been studied widely in literature. Most often, authors introduce readers to their research by delimitating the whole concept and by stating their definition of the term alliance that fits the particular research direction. That is why - in literature - the term alliance is applied as a genus for a wide range of concepts and consistent use of the term cannot be found. In the following, I would like to include a few author perspectives on the term strategic alliance, which should enable the reader to get a good sense of an alliance construct. Merriam-Webster Thesaurus describes an alliance as “a state of having shared interests or efforts (as in social or in business matters).65 At Serrat (2009), for example, there is a multitude of alliance configurations along a continuum of cooperative arrangements that depend on the objectives and structure of the alliance. Similarly, Elmuti and Kathawala (2001) define a strategic alliance as different types of partnerships that involve two or more companies. Together those companies pursue clear strategic objectives in order to generate mutually beneficial value. The level of integration can differ from alliance to alliance.66 For this piece of research, it is necessary to introduce a narrower alliance term, one that covers the very high integration that airline alliances are built upon. Yoshino and Rangan (1995) state that these strategic interfirm relationships involve partners from varied parts of the world, each partner covering a range of functions and activities formed in response to major strategic challenges. It should help them to enhance the effectiveness of their competitive strategies.67 To narrow down the varied interpretations they define three characteristics that must be met to define an alliance: The members, who pursue a set of agreed upon goals, remain independent. Each partner has to contribute on a continuing Copyright © 2013. Diplomica Verlag. All rights reserved.

basis in one or more key strategic areas and benefits as well as control must be shared.68 As Morrish and Hamilton (2002) point out, airline alliances are collaborative arrangements between two or more carriers that involve joint operations with the goal of improving competitiveness and thereby enhancing overall performance. Following most authors reasoning, gen65

See Merriam-Webster Thesaurus definition See Elmuti and Kathawala (2001), pp.205-207 67 See Rangan and Yoshino (1995), p.ix 68 See Rangan and Yoshino (1995), pp.4-5 66

21

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

uine strategic alliances must be distinguished from licensing, cross licensing or franchising, equity investments, cartels, distribution cartels as well as from mergers, takeovers and acquisition or joint ventures. It is the same genuine alliance term that fits the direction of this book best. Plain code-sharing or interlining agreements and block spacing are not considered as a strategic alliance in that sense. As comes with no surprise, Serrat (2009) points out that alliances are all based on voluntary agreements.69 As the term strategic implies they are set up for the long term.

3.2.

StateoftheField

3.2.1. StrategicAlliancesinGeneral The concept of strategic alliances has been studied widely in academic literature, books and journals, being looked at, out of different research directions from economics to finance to human resource management and to legal issues. The range of analysis is executed out of different perspectives, namely value based perspectives, resource based perspectives, knowledge based approaches or out of a social and cultural perspective. Strategic alliances are common in all different kinds of industries and most sectors have been in the focus of specialized academic research. As with other fields in logistics, there is a wide range of different research approaches where positivist researchers use a more quantitative approach, while researchers that are more interpretative in nature usually apply a more qualitative approach. Hereunder an assortment of contemporary research about alliances is presented: Authors have studied the driving forces behind the decision to form an alliance (Doz and Hamel, 1998; Hook and Kuglin, 2002; Clover and Wasserman, 2003), the process of alliance formation (Yoshino and Rangan, 1995; Hook and Kuglin, 2002), critical success factors (Hook and Kuglin, 2002; Kale and Singh, 2009) and reasons for failure (Ulijn, Duysters, Mei-

Copyright © 2013. Diplomica Verlag. All rights reserved.

jer, 2010). Bonder and Pritzi (1992) proposed a theoretical framework for successful alliance co-operation. Others have studied if and how alliances can create value for all partners (Chan et al 1997; Doz and Hamel 1998; Bing-Sheng, 2003; Bai and Yoo, 2007; Wratschko, 2008; Bösecke, 2009) and how value added for each partner can be measured (Adegbesan and Higgins, 2011).

69

See Serrat (2009). p.2

22

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

A wider range of authors has devoted themselves to the topic of alliance management (Yoshina and Srinivasa, 1995; Elmuti and Kathawala, 2001; Kleymann and Seristö, 2004; Corsten, Kale, Schreiner, 2009; Martens et al, 2011). Agarwal, Croson, and Mahoney (2010) studied the role of incentives and communication in strategic alliances. The area of mutual learning process and knowledge transfer in strategic alliances has been commented on by Doz (1996), Iyer (2002), Muthusamy and White (2005) and Serrat (2009), who are all in agreement that learning processes are key for alliance success.

3.2.2. StrategicAlliancesinAirTransportation Strategic alliances in air transport have been a field of study since this concept took hold in that particular industry. However, most of the academic research focuses on the passenger side of the business, which comes not as a surprise as strategic alliances on the passenger side have developed earlier. What is more, they are a lot more common, bigger in size and importance and higher developed as their cargo counterparts. Various alliance and partnership concepts have been covered in the years. In a journal article, Morrish & Hamilton (2002) present an overview of the major studies about alliances in the airline industry.70 Starting in 1985, Oster and Pickerell focused on code-sharing agreements among major airlines. Some of the earlier studies were governmental and regulatory investigations commissioned in particular in the US and the UK (Gellman Research Associates, 1994; UK Civil Aviation Authority, 1994; US General Accounting Office, 1995). They looked at possible benefits and other alliance related effects that affect carriers and the market and have been used as a basis for decision making in policy-making, specifically relating to anti-trust and other competitive issues. Pustay (1992) and Dresdner and Windle (1996) wrote conceptual papers about alliances. Park (2007) studied the effects of airline alliances on markets and economic welfare. Chen and Chen (2003) studied the effect of strategic alliances and

Copyright © 2013. Diplomica Verlag. All rights reserved.

risk pooling on the load factors of international airline operations. Dresner et al (2005) covered the topic of trans-Atlantic airline alliances. Youssef and Hansen (1994) studied the effect on competition. Brueckner and Whalen (2000) studied the price effects of international airline alliances. Oum et al. (2000) studied airline alliances in the light of globalization and covered a wider range of areas. Other studies that dealt with passenger alliances include the work from Chan et al (1997), Glisson et al (2006), Flores Jr. (1998) and Wang and Evans (2002).

70

See Hamilton and Morrish (2002)

23

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Agarwal et al (2006) have studied carrier alliances and shipper collaborations in cargo transportation.

Other studies of alliances examine scale economies (White, 1979) and density and scope effects (Caves et al., 1984; McShan and Windle, 1990; Gillen et al., 1988; Antoniou, 1991; Park, 1997). Implications on cost economies were assessed by Keeler and Formby (1994). According to Morrell and Pilon (1999), most of these studies find constant returns to firm size, with mixed results regarding economies of traffic density and scope.71 Some general books, articles and studies about air transportation have devoted specific parts in their writing to the topic of alliances: A selection includes Greenberg (1990), Hamil (1993), Gomes-Casseres (1996), Button et al (1998), Flint (1999), Hanlon (1999), Sissen (1999) and Doganis (2005). Kleymann and Seristö (2004) cover the management of strategic airline alliances in all its aspects. Velez (2007) has investigated if strategic alliances in the air cargo sector can lead to comparative advantage for member airlines.

3.3.

TheConceptofStrategicAlliances

The intended purpose of an alliance differs among each construct. According to a survey of the Trendsetter Barometer by PriceWaterhouseCoopers the most prominent purposes are joint marketing, promotion, selling and distribution. While young and fast-growing technology companies use strategic alliances to benefit from more-established channels of distribution, marketing, or the brand reputation of bigger, better-known players, more-traditional businesses like established air transport operators tend to enter alliances for reasons such as geographic expansion, cost reduction, manufacturing, and other supply-chain synergies.72

Copyright © 2013. Diplomica Verlag. All rights reserved.

In a much broader sense Doz and Hamel (1998) see strategic alliances as a logical and timely response to intense and rapid changes in economic activity, technology, and globalization, all of which have cast many corporations into two competitive races: one for the world and the other for the future.73 By entering into an alliance, companies hope to enhance their strategic resources as self-sufficiency is becoming increasingly difficult. Organizations join forces in

71

Morrell and Pilon (1999) See 1000ventures.com, www.1000ventures.com (14.11.2011) 73 See Doz and Hamel (1998), p.xiii and p.39 72

24

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

an increasingly complex, uncertain, and discontinuous external business environment that calls for focus and flexibility in equal measure.74 Alliances can help airlines to focus on their core competences and markets while gaining additional flexibility through the integration with other carriers. According to Doz and Hamel (1998), there are three features that make the foundation of alliances essential; all of them can be applied to the air cargo industry. Firstly the opportunities of the information age call for the melding of skills and resources that no individual company possesses entirely. In air cargo transport this could be particular knowledge about local markets (skills) and the provision of infrastructure (resources). Second, the formation of alliances is not based on vertically integrated structures of single corporations but is being built on seamless networks that must be standardized. Customers in air cargo seek for strong network solutions and first movers should be able to gain lasting advantages. In an article Karp (2004) summarizes the opinion of many airline strategists and argues that their core business is really network management and that operating aircraft is really secondary to that effort. In that sense, alliances are an economical way of extending those networks.75 Third, alliances should help individual companies to combine insight and understanding in order to reduce complexity and uncertainties of the information economies.76 The formation of an alliance always calls for organizational learning process inside every member airline, as well as for interorganizational learning and knowledge exchange. On the other hand, we have to point out that every airline brings its own information technology systems into an alliance, which could lead to additional complexity during the formation stage. Even later on, this could prove to be a problem for alliance stability and longevity.

In a nutshell, alliances should help partners to access opportunities through the creation of seamless networks and the melding of skills while at the same time help to bypass costly self learning experience. Quicker learning can lead to quicker action, with the overall goal to imCopyright © 2013. Diplomica Verlag. All rights reserved.

prove competitiveness and thereby enhancing overall performance.77 In the simplest sense, alliance integration should decrease costs, generate additional value and help to reengineer financials, apart from strategic benefits for their members.78

74

See Serrat,(2009), p.1 See Karp (2004), pp.20-25 76 Doz and Hamel (1998), p.2 77 Hamilton and Morrish (2004) 78 Bamford and Ernst (2003), pp.9-3 to 9-4 75

25

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.4.

AlliancesintheAirCargoBusiness

In the next parts, attention will focus on the application of the strategic alliance concept in the air cargo industry. According to Park (1997) the majority of alliances in the airline industry are route based. Those so-called complementary alliances offer non-overlapping routes while parallel alliances’ routes overlap.79 For WOW and SkyTeam Cargo route and network considerations definitely played a big role in the alliance formation decision. Both alliances can be seen as complementary in that sense.

3.4.1. DrivingForcesoftheAllianceDecision Over the recent years, there has been an increasing number of airlines and cargo carriers going out of business. With this shakeout, came a strong tendency towards consolidation in air transportation as many large airlines merged to become even bigger in their operations, while other carriers formed or entered into alliances. Carriers are trying to solidify their market position.80 In a Flight International article, Hamil (1993) states a very important point, why airlines rather choose to work together in an alliance or acquire small shares in each other than merging operation entirely under one single entity. Alliance integration therefore allows for the benefits of joint operations (access to larger route network and better customer service) without encountering the danger of losing air service agreement rights induced by change of ownership.81 In a New York Times article, Marie-Joseph Malé, SkyTeam’s managing director, names the liberalization of international aviation treaties, the globalization of the economy and advances in technology as the three main factors contributing to the growing strength of airline alliances.82 The distinct need for airline alliances comes about manifold reasons, which are relevant (in

Copyright © 2013. Diplomica Verlag. All rights reserved.

different degrees) for mostly every air cargo company operating in today’s market environment. Of course, all of these drivers are interrelated and affect each other; they basically work – from a financial viewpoint to a strategic one - towards the main driving force behind any strategic decision. That is the choice to realize the highest possible NPV of an investment.

79

Hamilton and Morrish (2004) Grönlund and Skoog (2005), p.481 81 Hamil (1993), p.39 82 See Stellin (2011), p.6 80

26

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Bleeke and Ernst (1993) state that organizations are entering into alliances to overcome the inherent risks associated with new product development, innovation processes, as alliances can help increase the speed of innovation, to overcome budgetary constraints, and to gain access to resources otherwise not available to them.83 Additionally, large investments in IT systems, safety and security measures, cargo aircraft technology as well as airport and handling facilities improvements can be taken on with much more strength in an alliance construct.84 In the following, a more systematic approach to all those driving forces will be presented which includes: x

Exposure to growth

x

Increase of market share

x

Access to synergies and complementary assets

3.4.1.1. GetExposuretoGrowth Europe as a highly developed, fully integrated and very competitive airline market will yield 300 million US dollar net profits for its airlines next year while the worldwide net profit of the industry will comprise 4.9 billion US dollars according to the IATA. Growth potential of the old continents has been exhausted, while emerging markets are still in a process of rapid growth.85 Expansion abroad often is impractical or impossible, so well established carriers from saturated and matured markets are constantly looking for ways to gain exposure to growth.86 Even with growth continuing, the air cargo operators suffer from intrinsically lowprofit margins. As a result, carriers are continually looking out for a variety of strategies to improve performance, basically to cut costs and improve revenues. With global expansion constrained by restrictive air services agreements, strategic alliances can be one effective construct for long term growth by circumventing existing regulations.87 Additionally, acquisitions can lead a company to acquire more for a higher price, than what is actually needed. In this

Copyright © 2013. Diplomica Verlag. All rights reserved.

process, some of the resource and assets may not even survive the transaction.88

83

Bleeke and Ernst (2003) and Muthusamy and White (2005), p.415 Grönlund and Skoog (2005), p.481 85 aero.de (2011): www.aero.de (1.11.2011) 86 See Stellin (2011), p.6 87 Hamilton and Morrish (2002), Grönlund and Skook (2005), p.481, Hanlon (1999), Sissen (1999) 88 See Doz and Hamel (1998), p.3 84

27

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.4.1.2. FightforMarketShare .

European airlines as well as airlines from Asia and the US are increasingly challenged by their Middle Eastern counterparts. In addition, cargo airlines are facing tough competition from the presence of integrators, which has put additional pressure on their operations and financials. Being embedded into a successful alliance can give each member and the alliance as a whole a bigger clout against competitors. It enables them to coordinate and fine tune their individual strategies in order to combat competitors more effectively. Adding to that, it is easier for an alliance to offer the same ‘one stop shopping’ solutions (as integrators do) for customers than for an individual airline and recapture some of the high value business taken over by integrators. Vice versa, also integrators have consolidated their business to four or five carriers worldwide.89 As in some countries it is not allowed for a foreign company to possess a majority stake in another airline a global alliance can help to win market share abroad without a buyout or a merger.90 Additionally, with antitrust immunity, groupings are a way around the limits of international air services treaties, allowing airlines to offer new services not possible under current restrictions.91

3.4.1.3. SynergiesandComplementaryAssets A major benefit of alliance membership is the fact that members have access to other carriers’ assets, be it route network, capacity, handling, sales as well as other local infrastructure. With the entrance into an alliance, an air cargo carrier usually gets exposure to the route network of other members. With WOW and SkyTeam Cargo, as complementary alliances, the routes are non-overlapping, leading to an even bigger gain in network expansion. In practice this can be handled in various ways, e.g. WOW carriers obligate themselves to reserve ten per cent of load capacity on every freighter aircraft for alliance partners.92 In addition to greater network coverage, this can help to improve the load factors on certain routes and counteract and bal-

Copyright © 2013. Diplomica Verlag. All rights reserved.

ance uneven cargo flows. Equally important is the fact that an alliance enables members to fall back on the partners’ knowledge about local markets, business procedures and the already established supply chain relationships in those markets. Concerning overlapping routes, an

89

Air Cargo World (2002), p.5 See Stellin (2011), p.6 91 Wiebner (2003) 92 See Karp (2004), pp.20-25 90

28

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

increase in frequencies can improve customer experience and can lead to a strategic advantage over competitors.93 Additionally, as an alliance grows in terms of size, it will be able to create economies of scale and synergies through a unified array of products and handling processes, maintenance facilities and integrated flight planning, operations and information services. Different departments and offices of carriers can be merged (see SkyTeam Cargo Joint Venture in Atlanta) and the appearance of a large alliance increases the market power of each carrier. This can reduce costs when negotiating aircraft deals, landing slots, handling fees and spare parts etc. Unified marketing efforts and a strong alliance brand name should help to improve the customers’ perceived image of the alliance as a whole and of every member airline. However as we can see by the example of WOW a particular extraordinary name alone is not enough as it is important to live up to the promise at the end of the day.

3.4.1.4. Others Concluding, air cargo operators that enter into an alliance hope to unlock additional benefits, to strengthen their market position and their long term strategy in a rough market environment. Alliances should allow them to have greater stamina in an increasingly challenging world economic climate that is very volatile und uncertain. Warner commented on the situation in a very accurate remark: “Because it [demand for air freight services] is a barometer of world trade, it is sometimes said that air cargo is one of the first industries to go into a recession and one of the first to come out. We work at the heart of world trade and when it suffers, we suffer. Before Sept. 11, going into an alliance, forging a merger or making an acquisition was seen as a way to increase market share, profit from economies of scale and increase a company's global presence and capability. Since Sept. 11, for many companies this has become the difference between survival and bankruptcy. There is no doubt that companies will Copyright © 2013. Diplomica Verlag. All rights reserved.

be forced to get together to safeguard their futures, and governments will have to reconsider current regulatory barriers that stand in the way of these changes.[…] The identities and ownership of others will change.”94 As the necessity of forming alliances has been noticed, even leading air cargo associations like IATA, FIATA and TIACA have agreed to join forces and created an alliance themselves.95 93

Holloway (2008), p.204 Warner (2001), p.15 95 Air Cargo World (2010) 94

29

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.4.2. AllianceAdvantages Over the past decade strategic alliances have been praised in literature for their benefits they bring along for the involved companies. Above all, cost reduction, risk sharing, interorganizational learning and greater market coverage have been named as primary reasons for companies to enter into alliances. Hamel and Doz (1998) speak of three main benefits that corporations in an alliance should leverage. Co-option should turn potential competitors in allies that offer complementary assets that allow creation of new business opportunities. Cospecialization creates synergistic value by combining previously separate resources, positions, skills and knowledge. As a third point, they state that alliances are an avenue for learning and internalizing new skills.96 Additionally, other important points have to be included when talking about the advantages alliances can offer its members: x

Access to regional knowledge and established relationships

x

Organisational learning and innovation

x

Counteraction of market uncertainties and volatility

x

Economies of scale, density and scope

x

Market power and presence

x

Usefulness for professionals

x

Advantages for customers

3.4.2.1. AccesstoRegionalKnowledgeandEstablishedRelationships Apart from access to the route network of a partner airline, what is probably more important is the fact, that a carrier also can fall back on the partner’s regional know how and can rely on already established valuable business relationships and government contacts. With globalization and expansion into unknown parts of the world, very time consuming management of intercultural differences gets more and more attention. This can be a critical success factor Copyright © 2013. Diplomica Verlag. All rights reserved.

and alliance engagement can help a carrier to unlock that additional potential in a local market, while spending fewer resources on the new market. That allows the carrier to fully concentrate on its core competences and to strengthen the ties in its core markets.

96

Doz and Hamel (1998), pp. 4-5

30

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.4.2.2. OrganisationalLearningandInnovation As noted before, learning processes are key elements inside a strategic alliance. They start to evolve long before a carrier actually enters into the alliance. As an air cargo carrier begins to look into this matter and evaluates the potential strategic decision, it also has to review its own present standing very accurately and keenly. This might be a cause for improvement on its own term. As the strategic alliance evolves, learning processes will happen within the organization but more important on an inter-organizational level as well. First and foremost, carriers should use the opportunity to learn tacit, collective and imbedded knowledge from their partners.97 With the pooling of resources it becomes easier for alliance carriers to develop and introduce joint new products. The bigger the alliance and market share, the bigger the dispersion of newly introduced products will be. Provided the product is successful enough and enjoys a circulation on a global scale, this could even lead to the development of new product standards for the industry and the creation of customer lock-in effects. In turn, alliance members would gain a significant advantage over competitors.

3.4.2.3. CounteractMarketUncertaintiesandVolatility Air cargo carriers that operate on a global scale are exposed to manifold economic uncertainties. One particular characteristic is the development of exchange rate differences, which can especially come as a problem when costs happen to be in higher valued (home)-currency while revenues are denominated in a lower valued foreign currency. Adding to that, worldwide operators have to face differences in price levels in various markets. Apart from the inherent challenge of directional imbalance, airlines have to deal with market volatility - especially in the last ten years oscillations have become bigger and airlines are

Copyright © 2013. Diplomica Verlag. All rights reserved.

constantly faced with a need to adapt to surges and slumps in demand for their services. Integration in a global route network can help them to align their flight schedules in order to balance fluctuations in demand and to achieve higher average load factors. With global operations and carriers from all parts of the world, an alliance can also help to counterbalance some of the effects of differences in exchange rates and price levels.

97

See Serrat (2009), p. 4

31

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.4.2.4. EconomiesofScale,DensityandScope Economies of scale refer to a decrease in unit costs when total production is increased as fixed costs are spread over an increasing volume of output. However, industry research has proved that economies of scale in the airline business seem to be limited.98 But still, an alliance allows unlocking of specific value in certain areas. Similar fleets may enable joint maintenance agreements, joint cargo terminal operations and services, which can help to decrease costs through synergies.99 Economies of density occur when unit costs go down as the volume provided increases at a fixed network size. In cargo alliance context the network density is a very important concept. It can be reaped by increased efficiency through optimization of partner feed like schedule harmonization and hub and spoke systems. In order to unlock those benefits, an optimized coordination among all alliance partners is needed.100 When comparing strategic alliances with other cooperation efforts it becomes apparent that they are most often created without any exchange of shares or capital investment.101 Although they might be highly integrated in the alliance network, companies still remain independent entities. Economies of scope or network size occur when unit costs go down as the variety of products increases. In the airline case, this refers to markets and city pairs served. Alliances offer the opportunity to enlarge the number of routes served without a physical expansion of the carrier’s own network. Probably the most valuable benefit of scope for the customer is a seamless access to a larger number of points.102 The fact that joint networks can lead to a higher amount of stopovers and an increase in handling procedures does not come as a problem in air freight. Unlike self loading freight (passengers) cargo does not complain. The same principle at work can be observed at long haul routes, where fully laden cargo aircraft rather stop for refueling than leaving freight behind in the first place (e.g.: Anchorage is an important pivot point for refueling stops on Trans-Pacific

Copyright © 2013. Diplomica Verlag. All rights reserved.

cargo routes; Lufthansa Cargo uses Krasnoyarsk as a refueling stop on Europe-Asia routes for their MD11 freighters).

98

See Kleymann and Seristö (2004), pp. 5-8 See Stellin (2011), p.6 100 See Kleymann and Seristö (2004), pp. 5-8 101 See Galil et al (2009), p.2 102 See Kleymann and Seristö (2004), pp. 5-8 99

32

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.4.2.5. MarketPowerandPresence One of the most important goals after alliance foundation is to quickly develop a strong brand name. Concerted use of marketing instruments can help to achieve a broader market presence. Similar to the concept of economies of scope, this is self enhancing and can lead to a so called reputation effect as customers see alliance membership as a sign of quality and approval.103 Kleymann and Seristö (2004) state that this marketing function is the core of each alliance and should enable global reach and play an essential role for survival and prosperity.104 An alliance background enables its members to enter into new markets at a much higher pace and more efficiently. A higher market penetration can be achieved with lower cost and greater flexibility. Adding to that, alliances help to protect existing markets due to a joint use of products, services and technology.105 Of course, with bigger size comes greater market power for all alliance members. This can be helpful in the manifold business and regulatory relationships that modern air carriers are embedded in. With global presence comes the power of leveraging greater lobbying efforts and therefore greater influence on the decisions of regulatory agencies. In the same line, individual members that appear as a group may benefit in negotiations with key partners and intermediaries in the field. This ranges from local relationships with aviation authorities, airports, handling agents and all other different kinds of agents to maintenance facilities and even aircraft manufacturers. The better negotiation position can help to decrease costs for overflying rights, airport-, landing- and handling fees, spare parts and maintenance or even the purchase of new aircraft (additionally, when buying aircraft in bulk, there is usually a large discount on the individual aircraft price).

3.4.2.6. UsefulnessforProfessionals

Copyright © 2013. Diplomica Verlag. All rights reserved.

Among professionals from the field, opinions on the most valuable alliance advantage differ. Many of them, however, argue that their core business consists of network management and the operation of aircraft is really secondary to that effort. With that in mind, for them alliances are an economical way of extending those networks. In 2004, Steve Blane, general manager for alliances at Delta Air Logistics, told Air Cargo World that for him the biggest advantage is the network and the ability to access capacity and markets that a standalone carrier does not 103

See Kleymann and Seristö (2004), p. 8 See Kleymann and Seristö (2004), p.113 105 See Serrat (2009), p.2 104

33

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

enjoy in that extent. Robert Dahl, an aviation consultant, takes the same line and argues that alliances allow airlines to extend their route structure, and that's particularly important in the international market.106 Mark Boudier, executive vice president of Air France Cargo, said that the highest advantage of an alliance is the fact it provides a forum for continuous discussion on the myriad issues that affect the international movement of freight.107 For the former American Airlines chief executive the biggest opportunity of an alliance lies in the revenue line and not in the cost line.108

Concluding, air cargo operators that enter into an alliance hope to establish a co-operation in a group that produces better results as the ones that can be gained from a standard market transaction. As the competitive markets keep improving, and with that the market transactions, the alliance must improve as well by continuously making advances to stay ahead of the market.109 Together, alliance members may even create higher value business models that are similar to the one implemented by the integrators. As Dyer and Singh (1998) and Sako (2000) point out, alliances can help to realize several strategic benefits in a faster and more cost efficient manner, at the same time with lower risk than on a single carrier basis - provided they manage to stay ahead of the market and the competition.110

3.4.2.7. AdvantagesforCustomers The big selling point of the alliance is that it provides a single point of contact for customers wanting to deal with any of the involved carriers. Ideally carriers complement one another and together are able to offer a much larger network. For forwarders, communication and collaboration with fewer service providers is a more efficient way of doing business. Joint alliance sales and handling may offer space on the participating carriers' flights at a lower rate simply because it should have lower costs than its competitors. That, in turn, can be a princi-

Copyright © 2013. Diplomica Verlag. All rights reserved.

pal benefit to shippers. It is important that all carriers in an alliance share the same operations, communications and handling systems so that forwarders can go to one storefront and buy a whole array of services from several carriers in order to unlock the additional customer value.111 106

See Karp (2004), pp.20-25 See Air Cargo World (2004), pp.6-8 108 See Kleymann and Seristö (2004), p.113 109 Lewis (2007) 110 Carr et al (2007), with Dyer and Singh (1998), Sako (2000) 111 See Karp (2004), pp.20-25 107

34

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.4.3. Disadvantages At a first glance, strategic alliances seem to bring only benefits to its members and even after a deeper look from a qualitative point of view, very few possible drawbacks arise. Even though contemporary literature praises alliances as an essential means to do successful business in modern times, it should be noted that most practical research shows that more than half of strategic alliances end up as a failure.112 In the following, further inside into what distinct disadvantages may evolve that can even lead to alliance termination will be provided.

3.4.3.1. ResultofEconomiesofScale,ScopeandDensity As Kleymann and Seristö (2004) point out, the creation of economies of scale must be offset against the fact that alliance membership coincides with higher overhead costs, entry fees and inefficiencies due to coordination efforts. The realization of economies of density requires a very high degree of integration and comes with high costs. As with any other cross border operation, airline alliances are subject to countless policy regulations of countries and their regulatory authorities. Regulatory constraints that can come in form of air service agreements or labor agreements can have a painful impact on the proposed advantages.113

3.4.3.2. HighRequirements Alliances are complex constructs that member companies must understand in detail to make it work in their favor. In order to manage the alliance successfully companies are required to put an enormous amount of work in the development and the day-to-day operations. In addition to the high demand for man-hours, alliances need the know-how of dedicated specialists that work together in a distinct department to handle alliance efforts and coordination with partner companies. As decisions in combination with the alliance are of high importance, senior man-

Copyright © 2013. Diplomica Verlag. All rights reserved.

agement needs to devote some of its valuable time in order to be included in the process. Joint infrastructure and notification systems for communication must be implemented, IT systems aligned and adjusted to provide a reasonable framework for collaboration. With regard to handling processes, alliances can only become more effective when carriers interchange and use harmonized systems.114

112

See Duysters et al (2010), p. 1 See Kleymann and Seristö (2004), pp. 5-8 114 See Karp (2004), pp.20-25 113

35

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.4.3.3. HighDependance Entering into an alliance is associated with a high up-front investment in the first place. In order to profit from this costly process, a membership is only viable if carriers stay in the alliance for a longer period of time. With high initial cost and deeper integration, carriers can become more and more dependent on each as the alliance evolves. This can come as a problem if one member leaves the alliance for various reasons like conflict, disagreements or bankruptcy. With one carrier pulling out, the remaining air cargo carriers are left with a huge gap in their operations and their network. From an individual carrier perspective dependence can have a very serious impact if the venture evolves in a way that has not been planned for. Once a carrier has entered into an alliance there is a lot of capital and know how bound within that agreement. Exit or a switch of alliance will only come with high cost. As an example, according to Buyck (2000), the passenger alliance switch of Austrian Airlines in the 90’ies cost the airline around $40 million.115

3.4.3.4. OtherDrawbacks Other disadvantages include the opportunity cost of an alliance: With the entrance into an alliance, an air cargo operator always foregoes other opportunities. From that point onwards, it will be restricted in its decision making processes and the strategy planning. Coordination efforts and concerted planning and arrangements may hamper fast decision making and decrease flexibility in certain scenarios. As with other co-operation processes, a strategic alliance may hold the incentive for individual members to behave opportunistically. This would happen if one partner lacks the appropriate alliance-specific investments but is fully benefiting from the alliance and the future earnings.

Copyright © 2013. Diplomica Verlag. All rights reserved.

From an employee perspective, alliance as a means of network enlargement without expansion of the own company network through partnering, may well be perceived negatively. Alliance co-operation can make growth plans of individual carriers redundant and a realization of synergies may even lead to job cuts.

115

Buyck (2000), pp.49-53

36

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.5.

CoreQuestionsandPrerequisitesforAllianceIntegration

Doz and Hamel (1998) name several core questions that need to be considered when creating or entering into an alliance:116 x

Value creation and distribution

x

Long term commitment

x

Conflict management

x

Management of various alliance memberships

In the following section their ideas will be outlined and a connection to the air cargo sector will be established.

3.5.1. ValueCreationandDistribution Both SkyTeam Cargo and WOW stated that the alliance integration is beneficial to all members as well to customers and helps to unlock potential value. Air cargo operators hope to unlock the value in the sources already mentioned under section 2.3.1. and section 2.3.2. Therefore the logic of value creation should set the agenda.117 For successful collaboration these sources should be exploited in a concerted manner, with every carrier investing the same amount of time and money in the alliance. Equally important is a shared value distribution among all member airlines. In this context, an evaluation of the impact on shareholders and stakeholders might be appropriate.118 As the exact value created through an alliance is hardly tangible and attributable there is no single method of evaluating this matter. Possible approaches include measurement of the extent to which alliance objectives have been met and market-based methods that analyze stock market developments.119 Partners expect to be treated equally as a prerequisite for any co-operative arrangement. Thus, a fair reward in accordance with a fair value distribution system is essential in successful inter-organizational rela-

Copyright © 2013. Diplomica Verlag. All rights reserved.

tionships.120

116

See Doz and Hamel (1998), pp.8-11, 87 Doz and Hamel (1998), p.57 118 Serrat (2009), p.3 119 See Dyer et al (2001) 120 See Das and Teng (2001) 117

37

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.5.2. AlliancesasaLongTermCommitment Both alliances were planned as long term ever-growing ventures with a focus on sustainable growth and expansion. At the point of inception, all members proclaimed their long term commitment to growth and cooperation. This is necessary as the true value of an alliance evolves only over time. Significant results are rarely achieved in the first two years. By their nature, alliances usually require considerable investment and effort before a substantial payoff can be realized.121 As founding or entering into an alliance can be quiet costly, it is failure that every member and the alliance as a whole have to prevent. To avoid this, careful planning and considerate execution of an alliance venture is of utmost importance. Rights and duties of each member must be stipulated before the inception in a clear, correct and coherent manner. By strong commitment to the alliance, all partners have to make sure that this decision is in line their company strategy and their long term goals.

3.5.3. ForeseeingofConflicts As with other co-operations in the business world, opportunistic behavior, onesided dependence, an imbalance of power or unequal investment in terms of time or resources can eventually come as a threat to strategic alliances. The members of WOW and SkyTeam Cargo had to plan ahead for such implications. At first, there needs to be some sort of awareness that conflicts can appear and are actually very likely to evolve in day-to-day alliance interaction. With know-how about what might arise, it becomes easier for carriers to spot troubles in an early stage and to identify the exact problems. It is important to take measures in advance that aim at minimizing the chance of conflicts and standardized actions and rules that deal with such situations once they have come about. It is particularly important to take possible conflicts into account as they can diminish the value for all other members of the alliance or in more serious cases can even cause the termination of the collaborative venture. To name an exam-

Copyright © 2013. Diplomica Verlag. All rights reserved.

ple, the WOW alliance suffered from a lack of commitment and failures in executing the planned venture. Main threats came to play as carriers tried to exploit opportunities (cooperation with rival airlines) and at the same time counteracted alliance rules and goals.

121

See Hughes and Weiss (2007)

38

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.5.4. ReciprocationinaNetworkofAlliances An important issue that needs to be addressed before entering into a strategic alliance is how this will affect the other business relationships and alliances an air cargo carrier is embedded in. With global operations in various parts of the world, air cargo operators have to maintain a complex system of multiple partnerships, alliances and other co-operations. The interplay of all this agreements like codesharing, interlining, or individual co-operations and on-site contractual relationships that range from maintenance to sales and handling services must be taken into account. Every member of SkyTeam Cargo and WOW has to make sure that each individual relationship with other partners of the airline industry does not affect or violate the terms that have been stipulated under the alliance agreement and vice versa.

3.5.5. PrerequisitesforSuccessfulAllianceCreation In addition to the important core questions, I would now like to go one step further to deal with another subject of utmost importance for alliance carriers: the prerequisites every carrier has to fulfill and the embodiment of the alliance which - in combination - should lead to success. This is of particular interest as studies suggest that the alliance failure rate hovers between 60% and 70%, even though those alliances account for nearly a third of many companies' revenue and value.122 Steinhilber (2008) proposes three key elements that are immanent for setting the alliance venture on a solid foundation: the right framework, the right organization and the right relationships.123 For Ernst and Bamford (2005) alliance members have to share risk, returns, as well as control in an equal manner.124 Several studies outline the fact that learning within an alliance is paramount and has a large

Copyright © 2013. Diplomica Verlag. All rights reserved.

impact on the success or failure. Doz (1996) stated that successful alliances are highly evolutionary as they go through a sequence of interactive cycles of learning, reevaluation and readjustment. Failures on the contrary are highly inertial, with little or divergent learning between cognitive understanding and behavioral adjustment or frustrated expectations.125

122

Hughes and Weiss (2007) See Steinhilber (2008), from the abstract 124 See Bamford and Ernst (2005), p.134 125 Hamel et al. (1989), with Berg and Hamilton (1998), Doz (1996) 123

39

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Different growth targets and goals are a common reason for alliance failure in the air cargo industry. When carriers decide to work together in an alliance, they have to look for synergies and realize them under one umbrella.126 The strategy must be articulated clearly and understood in the context of the alliance and each single air cargo carrier.127 Most importantly, the alliance must be embedded in the long term strategy planning of each carrier with the mutual objectives and the scope well defined and understandable for every member. Systems that monitor and evaluate performance (with the right set of metrics)128 must be implemented that allow for value creation identification and fullest transparency of all procedures. With the integration process, distinct contact persons and intersections at every member air cargo operator must be implemented. Adding to that, it would be wise to introduce a government system that oversees the alliance, enforces its administration and helps to build trust as the venture evolves.129 In order to reach all those conditions, a diligent search for fitting partners that complement one another is paramount. Air cargo alliances had to define knock-out criteria for membership: “More and more belly carriers are not involved in this business anymore; it is not their core business," Peter Jansen, chairman of Lufthansa Cargo's executive board said in an interview. "If you want to be involved in cargo, you have to do it right or leave it.”130 Dedicated freighter aircraft simply offer greater flexibility, efficiency and compatibility when dealing with cargo, as they have larger hatches, greater floor bearing rates and handling technology for freight movement installed.131 Another important criterion is the reliability a partner can offer. Freight forwarders usually do not care which airline they choose as long as the cargo gets to its destination on time. When a carrier has an unfavorable record or if the shipper fears the airline may be going out of business, the reputation of the alliance suffers as a whole.132 Hughes and Weiss (2007) propose a somewhat different approach that should help alliances on their road to success:133 -

By focusing less on the right business plan, goals and contract terms and more on the devel-

Copyright © 2013. Diplomica Verlag. All rights reserved.

opment of a sound relationship, the alliance should be able to yield significantly greater value. Air cargo is a service business and therefore good relationships with partners and customers

126

See Biedermann,(2001), p.30 See Kleymann and Seristö (2004), p.180 with Koza and Lewin (2000) 128 Bamford and Ernst (2003), pp.9-10 129 See Serrat (2009), pp.2-3 130 Air Cargo World (2002), p.5 131 Pienaar and Vogt (2009), p.300 132 See Armbruster,(2002), pp.90-91 133 See Hughes and Weiss (2007) 127

40

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

are crucial for smooth and sound business operations. Doz and Hamel (1998) agree, as they argue that the initial design and agreements are less important than the management of the alliance relationship over time and the adaptability to change.134 -

Metrics should be developed that not exclusively focus on “ends” measurements of financial values but more on alliance progress. In the air cargo sector, carriers could hand out surveys to be completed by staff members from each partner carrier or introduce some other sort of audit to scale the development of the alliance.

-

Air Cargo carriers enter into alliances in order to leverage key differences like markets, routes, customers, know-how, processes and cultures. Instead of eliminating differences they should perceive them as the source of value that they are (see section 3.4.1.3).

-

The working relationship must be nurtured throughout the alliance life. The alliance members should go beyond formal governance structures to secure collaborative behavior. While doing so, airline managers should not over-identify with the partner airlines and should not exclusively deal with partners and customers. They still have to care about the proceedings that are happening inside their own company. Employee integration is an important means to reach internal alignment in favor of the strategic alliance.

A strategic alliance in the air cargo industry is always building upon existing relationships with customers. Therefore success oriented alliances must ensure a smooth transition for regular customers when entering into a new alliance.135 Service quality and logistic solution must be at the same high level for every individual alliance carriers that customers can access easily without any increase in complexity. In turn, service provided by the alliance must be better with shorter lead times, quicker and more stable information flows.136

3.6.

AllianceCriticismandOtherCooperationStrategies

Alliances have not only been praised in literature. In fact, there is a fair amount of authors and researchers that have reviewed the strong growth of alliances very critically. They claim that Copyright © 2013. Diplomica Verlag. All rights reserved.

this sort of strategy can have a negative impact on customers as well as on alliance members. What is more, air cargo operators should by no means see alliance integration as the only possible solution in the wake of an increasingly challenging market environment. Airlines should keep an open mind and constantly review their strategic standing and their co-operation engagements. 134

Doz and Hamel (1998), p.xv See Biedermann (2001), p.30 136 Grönlund and Skoog (2005), p. 478 135

41

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

3.6.1. Criticism With strategic alliances trending in all different kinds of industries, soon the issue of industry dominance was brought to the table. Greenberg (1990) is particularly concerned that route domination by a small group formed by large carriers can lead to increasing airfares and decreasing airline service. He suggests that if alliances produce significant benefits for its members, the number of airlines would decrease.137 A particular example is discussed in the New York Times that refers to the fact that cross-Atlantic fares have risen disproportionately three times faster as competition shrunk. For non-alliance members survival has become increasingly difficult.138 Even without alliances, today’s market zones are characterized by oligopoly tendencies. One reason for that might lie in the size and scope effects discussed earlier under section 2.3.2.4. Alliances may enable to unlock additional market leverage and to worsen the situation for smaller carriers.139

In a study conducted about the alliance between Swissair and SAS, Youssef and Hansen (1993) come to the conclusion that the alliance lead to an effective monopolization of nonstop services between the alliance partners' hubs and fares in nonstop markets served by the alliance were found to have increased relative to those in non-alliance nonstop markets.140 Concentration and a simultaneous increase in air fares are issues of high relevance for public policy makers. Regulators must understand the effects of strategic alliances, the associated improvements in multimodal integration and the influence on prices and consumer welfare. Antitrust authorities are suspicious about possible collusion among alliance members as a recent global investigation into alleged price-fixing by top cargo airlines made clear.141 While this issue is definitely relevant on the passenger side of the airline business with its established alliances, a connection to the cargo side cannot be established that easily. The two cargo alliances are not that highly integrated nor have the size of their passenger counterparts.

Copyright © 2013. Diplomica Verlag. All rights reserved.

Additionally, the cargo alliance carriers still compete against each other in specific markets. Other authors have criticized alliances for their liability to asymmetries, as the relative size, resources, and market power of the partners can affect the risk perceptions of strategy-makers. Alliances can be different in their alliance motives and structuring process, depending on the

137

See Greenberg (1990) See Stellin (2011), p.6 139 See Kleymann and Seristo (2004), p.4 140 See Hansen and Youssef (1993) 141 See Hui et al. (2007) 138

42

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

equality of the partners. Oliver (1990), Bleeke and Ernst (1995) found out that partner asymmetry - that allows one partner to exercise power and control over another partner - is one of the key alliance motives for stronger partners that have a hidden agenda. They contend that alliances between unequal partners are unlikely to be successful. Osborn and Baughn (1990) pointed out that small firms are more vulnerable to opportunistic behavior from partners. Therefore they are exposed to a higher relational risk.142

3.6.2. OtherCooperationMethods There are several other co-operation strategies that are commonly combined under the term ‘airline alliance’. Kleymann and Seristö (2004) list the following: cost sharing ventures, asset pools, pro-rate agreements, codesharing and feeder, marketing alliances, joint ventures, integrated feeders and equity stakes among others.143 An actual example of a cargo airline joint venture is Jade Cargo, which was set up by Lufthansa Cargo and Shenzhen Airlines to combine the cargo handling knowledge of the German carrier with the Chinese expertise and market access of Shenzhen Airlines.144 Simpler agreements involve pre-reserved space on other carriers’ airplanes on specific routes. Two examples are the agreement between SAS Cargo and Korean Air Cargo on trans-Atlantic routes and the agreement between Lufthansa Cargo and US Airways on the US carrier’s bellyhold cargo across the Atlantic.145 It should be noted that all of these contractual agreements among air cargo carriers have the power to counteract alliance integration.

3.7.

ChallengesandCommonComplications

Copyright © 2013. Diplomica Verlag. All rights reserved.

As they evolve, strategic alliances and the proverbial win–win situations they promise frequently meet with difficulties. Serrat (2009) names the following factors that pose challenges for alliance members throughout their commitment from the decision to form an alliance, selection of the partner, choice of the governance structure for the alliance, dynamic evolution of the alliance to the performance of the alliance and the consequences for the partners: poor 142

Das and Teng (2001) with Oliver (1990), Bleeke and Ernst (1995), Osborne and Baughn (1990) For description of each construct see: Kleymann and Seristö (2004), pp. 13-14 144 See Turney (2005), pp.14-15 145 See Air Cargo World (2003), p.4 143

43

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

communications, incompatible objectives, inability to share risks, opportunism, (perceived) low performance and flexibility, control and ownership arrangements, lack of trust, and conflict.146 Throughout the venture, alliance members have to face uncertainty and ambiguity: Value creation is not preordained and the way the partner relationship evolves over time is hard to predict.147 As already established products represent high-value and high-recognition names, airlines face a difficult decision when merging product ranges across the alliance venture. Adding to that, it can prove to be a challenge trying to bring together sales and customer service personnel from vastly different corporate and national cultures. Every carrier must adhere to a common set of rules and procedures that are established within the alliance.148 With the creation of an alliance, carriers face multiple challenges as they enter unknown territory. Their skills will be tested to manage complex relationships. By systematic attention and commitment each member constantly has to balance between competition and cooperation.149 For established legacy carriers integration of the – often outdated – individual information technology networks can prove to be difficult. This is particularly challenging as most existing systems are legacy applications built 25 to 30 years ago and do not link to other carriers, agents or handling companies. They are slow, cumbersome and expensive to update. This can be a major contributing factor in the collapse of some alliances. When asked about this process Gabriela Maria Kroll, vice president for strategic airline alliances at Lufthansa Cargo, said it will be a long and complex process that will take some time. “The next step, a common

Copyright © 2013. Diplomica Verlag. All rights reserved.

platform, will take years,” she admitted.150

146

See Serrat (2009), p.3 Doz and Hamel (1998), p.xv 148 See Karp (2004), pp.20-25 149 See Yosihino and Rangan (1995), p.x 150 See Taverna, (2002), p.52 147

44

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

4. TransitiontoAnalyticalPart

Strategic alliances in the air cargo sector are a relatively young concept. Most of the general alliance characteristics can be applied to this sector. With WOW and SkyTeam Cargo, two major alliances have been formed in the last eleven years. One of them (WOW) is now smaller then on the date of its inception while SkyTeam Cargo grew ever since the year 2000. Recently, Lufthansa Cargo announced that they would like to give the cargo alliance concept another try within the already established Star Alliance network.151 The following part of this book will look at how strategic alliances have worked for the carriers by looking at the developments of the revenue-tonne-kilometres, based on data provided by Airline Business statistics from 1998 to 2010. From the analysis, the question ‘whether or not this is an essential concept in the new millennium for air cargo carriers’ should be an-

Copyright © 2013. Diplomica Verlag. All rights reserved.

swered by looking at market share developments and respective growth rates.

151

Airliners.de (2011), www.airliners.de (14.12.2011)

45

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

5. AnalysisofBothAlliances’RevenueTonneKilometres

5.1.

Assumptions

The Airline Business Cargo Surveys include the Top 100 airline ranking which is compiled by the Air Transport Intelligence. The ranking provides an overview of important key figures of the cargo airlines on a yearly basis including cargo traffic in RTK, cargo revenue, market share and yield for the 50 biggest cargo carriers in terms of RTK. For the air cargo operators that are ranked between the 51 and 100, only the revenue-tonne-kilometres are provided. In order to work with the existing data provided by Airline Business it is important to make certain assumptions when looking at the alliance impact on air cargo carriers’ RTK. The analysis starts from the premise that the impact on RTK figures of operators will commence in the year after alliance admission of a particular airline. The author decided to make himself avail of this, probably most important assumption for two reasons: First, alliances are complex ventures and start to generate (in every industry) its value only after some time, the integration usually being a long term process. In the eyes of the author, starting to look for an impact in the year after alliance integration fits this general characteristic, e.g.: Japan Airlines joined the WOW Alliance in mid-2002, therefore the 2003 RTK figures will most likely include the first meaningful effects of alliance integration. Secondly, by taking this approach other obstacles such as missing monthly data and research that would go beyond the scope of this analysis can be circumvented. This book looks at two alliances. For WOW, an alliance with a relative constant member base, it might also be seen as an interesting aspect to also look at the total market share of all four member carriers during the period under review. SkyTeam Cargo grew in terms of members since its inception. That fact has to be considered when looking at the total market share

Copyright © 2013. Diplomica Verlag. All rights reserved.

developments over time as it could otherwise lead to wrongfully distorted argumentation. Concluding, it is important that the period under review is rather short due to data constraints, however, as it covers the formation years of alliances it is still suited to look at how alliance integration might have had an impact on the cargo carriers’ key figures in relation to the total market.

46

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

5.2.

TotalMarketandPeerGroup

Before focusing at each alliance separately it is deemed useful to first look at the total market development for the period of 1998 to 2010. The 100 largest cargo airlines (in terms of RTK) are used as a representative peer group for both alliances, as the given data set is restricted to the RTK of those air cargo carriers. 215.000 195.000 175.000 155.000 135.000 115.000 95.000 75.000 1998 1999 2000

2001 2002 2003 2004 2005 2006

2007

2008 2009 2010

Figure 7: Total RTK 1998-2010 from the 100 Largest Cargo Airlines (in Million), Source: Airline Business, compiled by the author

Looking at the graph, it is obvious that the RTK of the 100 largest cargo airlines have almost doubled between 1998 and 2010 from 117,777 million RTK in 1998 to 201,203 million RTK in 2010 which represents an absolute increase of 83,432 million RTK or 70.83% in relative terms. The average growth rate per year in this period was just short of 5% with 4.93%. Two downturns in RTKs are visible in 2001 (followed by rather sluggish growth in the two subsequent years) and in the period from 2008 to 2009. The first slowdown might have been caused by the aftermath of the 9/11 attacks and the following uncertainty that directly affected the air cargo markets, whereas the second downturn in RTKs over this twelve year period could be explained by the impact of the worldwide financial crisis. Both slowdowns were followed by Copyright © 2013. Diplomica Verlag. All rights reserved.

rather immediate and robust growth in the subsequent years which can be seen as proof for the fast-paced development, the ability to recover quickly and, probably most important, for the strong long term upward trend of growth in air cargo movements and tonnage (see 2.1.2.2.). Alliance formation for both WOW and SkyTeam Cargo started in the year 2000. With the assumption that the first effects of the alliance integration were only felt in the subsequent year, this research takes a closer look at the total market development between 2001 and 47

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

2010, the relevant period for both alliances’ existence. With a 5.30% average annual growth rate, this period is marked by a slightly higher growth, where the annual RTK (in million) increased by 83,426 from 130,175 to 201,203. The first six years show a robust and steady growth with a minor setback during the year 2006. After that, growth continued for one year with a very similar pace as we have seen it during the first six years. The years 2008 and especially 2009 saw a decline in total RTK. This might be seen as the result of the worldwide financial crisis. Equally interesting is the fact that in the subsequent year 2010, the total RTK increased by 21.25% alone, thus offsetting the declines in the previous years at a large amount. The following chart should table shows the numerical figures for the year 2001 to 2010. Year RTK(inmillion) 2001 130,175 2002 143,062 2003 146,177 2004 166,356 2005 176,293 2006 177,890 2007 189,897 2008 179,434 2009 165,941 2010 201,203

Growth 9.03% 9.90% 2.18% 13.80% 5.97% 0.91% 6.75% 5.51% 7.52% 21.25% 

Table 1: Total RTK from 2001 to 2010 from the Largest Cargo Airlines (in Million), Source: Airline Business, compiled by the auhtor

5.3.

WOWandSkyTeamCargo

In the following section WOW and SkyTeam cargo will be analyzed. The approach is the same for both alliances. A compound analysis of the alliance is carried out, being followed by a closer look at each member carrier of the alliance. For WOW, the group consists of all carriers that have been part of the alliance, whereas for SkyTeam cargo the compound analysis is Copyright © 2013. Diplomica Verlag. All rights reserved.

restricted to the four co-founding members, termed as the ‘core members’. The reason for this approach can be found under the relevant section. Both individual carriers’ as well as the alliance compounds’ figures are compared to the figures of the general market. The carriers are analyzed on the basis of the absolute RTKs, the market share, the RTK growth rate as well as with a view to the global rank within the peer group (100 largest cargo airlines in terms of RTK) during the period under review.

48

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

5.3.1. WOWAlliance To get an overview of the situation of all carriers that participate today or have participated in the WOW Alliance their concerted RTK developments from 1998 to 2010 are shown. 25000 24000 23000 22000 21000 20000 19000 18000 17000 16000 15000 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Figure 8: Total RTK 1998-2010 from All WOW Alliance Members (in Million) Source: Airline Business, compiled by the author

In the year 1998 their total RTK comprised 16,506 million, which represented 14.01% of the total RTK of the large 100 cargo carriers. During the following twelve years their concerted RTK grew at an average growth rate of 1.51% per annum, leading to 19,138 million RTK in the year 2010, which represents 9.56% of the market share (within the 100 largest cargo carriers). Striking is the fact that from 2004 onwards the total RTK of the alliance stagnated for four years, in a period where all carriers should have been permanently integrated into the alliance. The alliance RTK increased by 2.19% from 21,583 in 2004 to 22,055 in 2007,

Copyright © 2013. Diplomica Verlag. All rights reserved.

whereas the total market RTK increased by 14.15% from 166,356 in 2004 to 189,897 in 2007.

49

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

23000 22000 21000 20000 19000 18000 17000 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Figure 9: Total RTK 2001-2010 from All WOW Alliance Members (in Million) Source: Airline Business, compiled by the author

The WOW Alliance was founded in 2000 by the three members Lufthansa Cargo, SAS Cargo and Singapore Airlines Cargo. Japan Airlines, however, joined in mid-2002. The author decided to include Japan Airlines figures for this overview. During the relevant period from 2001 to 2010 the total RTK of all four member carriers grew at an average rate of 0.28%. Their total RTK increased from 17,852 to 19,138 million. This represents a gain of 1,286 mil-

Copyright © 2013. Diplomica Verlag. All rights reserved.

lion RTK or 7.2%. Year RTK(inmillion) AllianceGrowth MarketGrowth GaptoMarket 1998 16,506 1999 18,070 9.5% 8.77% 0.70% 2000 19,132 5.9% 11.70% 5.82% 2001 17,852 6.7% 9.03% 2.34% 2002 20,019 12.1% 9.90% 2.24% 2003 19,599 2.1% 2.18% 4.28% 2004 21,583 10.1% 13.80% 3.68% 2005 21,919 1.6% 5.97% 4.42% 2006 21,931 0.1% 0.91% 0.85% 2007 22,055 0.6% 6.75% 6.18% 2008 20,421 7.4% 5.51% 1.90% 2009 17,955 12.1% 7.52% 4.56% 2010 19,138 6.6% 21.25% 14.66% Table 2: Total RTK from 1998 to 2010 from All WOW Alliance Members (in Million), Source: Airline Business, compiled by the author

50

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

What is probably most striking when looking at that table is the fact that the WOW Alliance was only able to outperform the peer group in two years, namely 2001 and 2002 - the years after alliance formation. For every consecutive year, the market grew at a stronger pace than the alliance, often by large amounts. In the following sections each individual member carrier will be discussed briefly.

5.3.1.1. LufthansaCargo Lufthansa Cargo is one of the three co-founding members of the WOW Alliance and therefore participated right from the beginning in late 2000 in the alliance venture. The German flag carrier announced its withdrawal in 2009. 1998 1999 2000 LufthansaCargoRTK* 6,696 7,071 7,666 MarketRTK* 117,777 128,107 143,094 MarketShare 5.69% 5.52% 5.36% LHCargoGrowthRate 5.60% 8.41% MarketGrowthRate 8.77% 11.70% Rank 2 2 2 *RTKinmillion,Market:100largestcargocarriers

2001 7,081 130,175 5.44% 7.63% 9.03% 2

2002 7,158 143,062 5.00% 1.09% 9.90% 3

2003 7,089 146,177 4.85% 0.96% 2.18% 2

2004 7,961 166,356 4.79% 12.30% 13.80% 4

2005 7,829 176,293 4.44% 1.66% 5.97% 6

2006 8,103 177,890 4.56% 3.50% 0.91% 5

2007 8,451 189,897 4.45% 4.29% 6.75% 6

2008 8,283 179,434 4.62% 1.99% 5.51% 6

2009 7,425 165,941 4.47% 10.36% 7.52% 6

2010 8,905 201,203 4.43% 19.93% 21.25% 4

Table 3: Overview of Lufthansa Cargo RTK Developments from 1998 to 2010, Source: Airline Business, compiled by the author

The period from 1998 to 2000 refers to the alliance free operations of Lufthansa Cargo (grey background). During that time the market growth rate was on average just over 3% higher than the growth rate of Lufthansa Cargo, leading to a decrease in the market share of the German carrier from 5.69% to 5.36%. Nonetheless, a global 2nd rank was maintained. In the year after alliance formation Lufthansa was able to beat the global market slowdown by 1.5% with a negative growth rate of -7.63%. In the following years, however, that momentum could not be maintained and the growth rate of Lufthansa Cargo has always been lower – most of

Copyright © 2013. Diplomica Verlag. All rights reserved.

the time by significant amounts - than the growth rate of the market, thus decreasing the market share from 5.44% in 2001 to 4.43% in 2010, ending up on the 4th rank.

5.3.1.2. SingaporeAirlinesCargo Singapore Airlines Cargo is also one of the three co-founding members of the WOW Alliance and to this day one of the two left members in the alliance venture.

51

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

1998 1999 2000 SIACargoRTK* 4,919 5,668 6,075 MarketRTK* 117,777 128,107 143,094 MarketShare 4.18% 4.42% 4.25% SIACargoGrowthRate 15.23% 7.18% MarketGrowthRate 8.77% 11.70% Rank 5 5 5 *RTKinmillion,Market:100largestcargocarriers

2001 5,954 130,175 4.57% 1.99% 9.03% 4

2002 6,909 143,062 4.83% 16.04% 9.90% 4

2003 6,749 146,177 4.62% 2.32% 2.18% 4

2004 7,333 166,356 4.41% 8.65% 13.80% 5

2005 7,874 176,293 4.47% 7.38% 5.97% 5

2006 7,996 177,890 4.49% 1.55% 0.91% 6

2007 7,959 189,897 4.19% 0.46% 6.75% 7

2008 7,299 179,434 4.07% 8.29% 5.51% 7

2009 6,659 165,941 4.01% 8.77% 7.52% 8

2010 7,174 201,203 3.57% 7.73% 21.25% 7

Table 4: Overview of Singapore Airlines Cargo RTK Developments from 1998 to 2010, Source: Airline Business, compiled by the author

During the three pre-alliance years of the period under review SIA Cargo was more or less able to hold its market share and the 5th rank. The subsequent years under the alliance banner show an intermingled picture. The growth rates fluctuated heavily around the market growth rate: at the beginning in 2001 rather in favor of SIA Cargo and during later stages with the direction of a distinct downward trend. This leads to the fact that at its peak during the period SIA Cargo was able to reach 4.83% market share and rank four in 2002. From there on the market share decreased continuously with an especially sharp drop in 2010, where the global market growth outpaced SIA’s growth by more than 12%. In 2010 Singapore Airlines Cargo’ ended up at rank seven with a market share of 3.57%.

5.3.1.3. SASCargo SAS Cargo is the smallest of the three co-founding members and together with SIA Cargo it is still an active member of the WOW Alliance venture. 1998 1999 2000 SASCargoRTK* 803 793 812 MarketRTK* 117,777 128,107 143,094 MarketShare 0.68% 0.62% 0.57% SASCargoGrowthRate 1.25% 2.40% MarketGrowthRate 8.77% 11.70% Rank 40 41 43 *RTKinmillion,Market:100largestcargocarriers

2001 770 130,175 0.59% 5.17% 9.03% 42

2002 928 143,062 0.65% 20.52% 9.90% 37

2003 1,012 146,177 0.69% 9.05% 2.18% 38

2004 986 166,356 0.59% 2.57% 13.80% 42

2005 1,039 176,293 0.59% 5.38% 5.97% 43

2006 1,082 177,890 0.61% 4.14% 0.91% 41

2007 2008 1,024 893 189,897 179,434 0.54% 0.50% 5.36% 12.79% 6.75% 5.51% 44 46

2009 588 165,941 0.35% 34.15% 7.52% 51

2010 556 201,203 0.28% 5.44% 21.25% 62

Copyright © 2013. Diplomica Verlag. All rights reserved.

Table 5: Overview of SAS Cargo RTK Developments from 1998 to 2010. Source: Airline Business, compiled by the author

Summarizing SAS Cargo’s development during the period under review, it can best be described as being relatively unrelated to general market trends. During the pre-alliance years, the individual growth rate significantly lacked behind the market growth rate and the market share decreased by 0.11% from 0.68% to 0.57%. The subsequent alliance years are marked by high volatility and large fluctuations around the general market growth rate. SAS Cargo was able to improve its standing during the first years, however was not able to maintain the pace

52

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

and fell behind the market quickly, having lost 22 ranks and more than half of the market share by the end of 2010. With 0.28% of global market share, it was ranked 62nd.

5.3.1.4. JapanAirlinesCargo Japan Airlines was the only non-founding member of the WOW Alliance and joined its ranks in mid-2002 for its cargo activities without setting up a dedicated cargo subsidiary.152 After entering bankruptcy in January and financial restructuration, Japan Airlines decided to suspend all scheduled freighter flights after more than 50 years of operations by November 2010. With the storage and sale of six dedicated 747 and three 767 freighter aircraft, Japan Airlines simultaneously left the WOW alliance.153 1998 1999 2000 2001 JapanAirlinesRTK* 4,088 4,538 4,579 4,047 MarketRTK* 117,777 128,107 143,094 130,175 MarketShare 3.47% 3.54% 3.20% 3.11% JapanAl.GrowthRate 11.01% 0.90% 11.62% MarketGrowthRate 8.77% 11.70% 9.03% Rank 9 7 9 7 *RTKinmillion,Market:100largestcargocarriers

2002 5,024 143,062 3.51% 24.14% 9.90% 6

2003 4,749 146,177 3.25% 5.47% 2.18% 10

2004 5,303 166,356 3.19% 11.67% 13.80% 10

2005 5,177 176,293 2.94% 2.38% 5.97% 11

2006 4,750 177,890 2.67% 8.25% 0.91% 12

2007 2008 4,621 3,946 189,897 179,434 2.43% 2.20% 2.72% 14.61% 6.75% 5.51% 13 13

2009 2010 3,283 2,503 165,941 201,203 1.98% 1.24% 16.80% 23.76% 7.52% 21.25% 15 25

Table 6: Overview of Japan Airlines RTK Developments from 1998 to 2010, Source: Airline Business, compiled by the auhtor

Japan Airlines was able to reach its 6th rank during the five pre-alliance years. Growth was marked by heavy fluctuations around the market growth, with particularly high oscillations in some years, e.g. 2005, where Japan Airlines growth rate outpaced the general market growth rate by more than 14 percentage points. Similarly to its alliance partners, that growth was not sustained and in the year after alliance admission, JAL lost 4 spots with a market share decreasing by 0.25%. From there on the individual growth rate was lower than the market rate for every consecutive year in the period under review. This downward trend accelerated dur-

Copyright © 2013. Diplomica Verlag. All rights reserved.

ing the following years, starting in 2005. Japan Airlines lost 15 ranks and after an already sluggish year, JAL ended its cargo operations in November 2010 leaving it at the 25th rank with a market share of 1.24% in 2010.

152 153

oneworld: The 3rd largest passenger airline alliance, founded in 1999 See Shippingonline (2010), www.shippingonline.cn (21.10.2011)

53

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

5.3.1.5. WOWConclusion A closer look at the market developments in the period under review gives a good overview of the general market characteristics. The market for air cargo transportation is highly fragmented und fiercely contested. Small changes in the growth rate lead to shifts in market share and even small shifts in market share can change a carrier’s position in the worldwide ranking. The competition and the fight for particular ranks gets many times greater for smaller scale carriers in the lower brackets of the ranking as can be seen by looking at SAS Cargo’s RTK developments. The chart below shows the market share of all four member airlines during the period under review. 6,00% 5,00% 4,00% 3,00% 2,00% 1,00% 0,00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 LufthansaCargo

SingaporeAirlinesCargo

SASCargo

JapanAirlines

Figure 10: WOW Airlines RTK Market Share from 1998 to 2010, Source: Airline Business, compiled by the author

By looking at the chart above, it is striking that no carrier of the WOW Alliance was able to increase its market share during the alliance membership but rather the opposite is true. A Copyright © 2013. Diplomica Verlag. All rights reserved.

downward trend for all four carriers is clearly visible and intact over the whole period. From all carriers it was Lufthansa Cargo that maintained the strongest market position, still losing more than 1% in market share over the period. Japan Airlines saw a steep decline in its cargo activities which resulted in bankruptcy and the end of all cargo operations during restructuration efforts in 2010. In 2001 and 2002 SIA and SAS show small increases in their market share, the same applies to Lufthansa Cargo in 2001. For Japan Airlines, a similar increase can be seen in 2002, the year of the alliance admission. In the bigger picture, these short term increases could be seen as a single effect after alliance formation, as during the subsequent pe54

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

riod market share decreases dominate the picture. This fact is strikingly emphasized by the 2004 to 2007 period, where the total RTK of the alliance almost stagnated with only 2.19% growth, where the total market advanced by more than 14%. From a strict focus on the RTK one might argue that the alliance integration in the case of WOW did not yield any benefits as compared to the total air cargo market. In a period where all four carriers should have been permanently integrated into the alliance, the growth rate of the total market outperformed WOW by a large amount. Judging from this, a negative effect might be assumed.

5.3.2. SkyTeamCargo 5.3.2.1. Approach SkyTeam Cargo yields a few special cases in combination with the data provided by Airline Business statistics and the period under review. These will be explained on an airline-byairline basis that should make the following approach that is used to look at potential alliance impact on the member carriers’ RTK more transparent. The first outlier is Aeroméxico, one of the four founding members of SkyTeam Cargo. The airline dropped out of the top 100 (the representative peer group) once, in 2004, with a global 121st rank. In 2007, however, it was also excluded from the official Airline Business data, even though, the 2008 statistics look back at 2007 and extradite a 94th rank for Aeroméxico in the previous year. The author decided to include that 2007 position and calculated the RTK by using the growth rate and RTK of 2008. As a founding member, Aeroméxico belongs to the core members of the SkyTeam Cargo alliance that will be analyzed jointly with the other founders. The reasons for this selection will be stated below. By missing the top 100 in 2004, the reader is reminded that the airline will not contribute any RTK to the grouped result in

Copyright © 2013. Diplomica Verlag. All rights reserved.

that year, which will lead to a slightly lower result for the group as a whole. Still, the missing RTK of Aeroméxico only would contribute less than 0.1% to the total groups’ RTK and can therefore be neglected in that year. The second anomaly refers to Czech Airlines, which joined SkyTeam Cargo in 2001. The Czech flag carrier was never able to enter the 100 largest airline bracket in terms of RTK and is therefore never included in the Airline Business statistics. There will be no individual anal-

55

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

ysis of Czech Airlines’ minuscule impact. Additionally, adding data manually to the already existing 100 largest cargo carriers would distort the actual results of other carriers. Both Aeroflot and China Southern Airlines joined in 2010, therefore the impact of the alliance integration is not registered in the period under review and both carriers are excluded from individual analysis. Before looking at each carrier individually, the following part will cover a specific analysis of the four founding members.

5.3.2.2. SkyTeamCargoFoundingMembers Under this section, this book will take a closer look at the consolidated results of the four founding members of the SkyTeam Cargo alliance. The constantly increasing number of member airlines, consolidation and mergers in the SkyTeam Cargo alliance lead to the fact that taking all present member carriers into that picture would yield no meaningful result. Still, the picture will include distorting effects through the mergers of Air France and KLM in 2004 and Delta Air Lines and Northwest Airlines in 2009 and therefore it should not be used as a direct comparison to the WOW Alliance during the same period under review but should rather be seen as an interesting addition to the individual carrier analysis. 24.000 22.000 20.000 18.000 16.000 14.000

Copyright © 2013. Diplomica Verlag. All rights reserved.

12.000 10.000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 11: Total RTK 1998-2010 from the SkyTeam Cargo Core Members (in Million) Source: Airline Business, compiled by the author

56

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

During the pre-alliance years all four founding members of the alliance were able to achieve strong consolidated growth rates. In 2001, the year after the alliance formation, the growth from the previous three years has been largely offset by a drop, which can be attributed as being a result from the 9/11 terror plot and its consequences on the airline industry. The following years (2002-2007) were marked by a slower growth curve that steepened over time (the sharp hike in 2004 is deliberately excluded by this analysis as this was the result of the Air France KLM merger with an additional carrier entering the results). In 2008, the start of the financial crisis, RTK figures of the core members dropped again by more than 8%. The drop could be offset in 2009 only through the admission of a new carrier, Northwest Airlines through the merger with Delta Air Lines into the core member bracket. Still, this addition was only able to improve records once, as in 2010 the consolidated results of the four founding member carriers (+ KLM as part of the Air France KLM group and Northwest Airlines flying under the Delta Air Lines banner) again plunged to 2008 levels. The following figure is a more detailed look at the relevant period, starting one year after the formation of the SkyTeam Cargo alliance. 24.000 22.000 20.000 18.000 16.000 14.000 12.000 10.000

Copyright © 2013. Diplomica Verlag. All rights reserved.

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Figure 12: Total RTK 2001-2010 from the SkyTeam Cargo Core Members (in Million) Source: Airline Business, compiled by the author

57

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Year RTK(inmillion) AllianceGrowth MarketGrowth GaptoMarket 1998 12,678 1999 13,845 9.2% 8.77% 0.43% 2000 15,031 8.6% 11.70% 3.13% 2001 13,072 13.0% 9.03% 4.00% 2002 13,601 4.0% 9.90% 5.85% 2003 14,639 7.6% 2.18% 5.45% 2004 20,504 40.1% 13.80% 26.26% 2005 21,073 2.8% 5.97% 3.20% 2006 21,782 3.4% 0.91% 2.46% 2007 23,009 5.6% 6.75% 1.12% 2008 21,153 8.1% 5.51% 2.56% 2009 23,075 9.1% 7.52% 16.61% 2010 21,015 8.9% 21.25% 30.18% Table 7: Total RTK from 1998 to 2010 from SkyTeam Cargo Core Members (in Million), Source: Airline Business, compiled by the author

By looking at the growth rates of the alliance compound in relation to the general market growth rate, it becomes evident that the SkyTeam Cargo core members were able to outperform the peer group in only two years, namely in 2003 and 2006 (2004 and 2009 are excluded as they include the hugely distorting effects of the Air France - KLM and the Delta Air Lines - Northwest Airlines merger). The following section will look at the member carriers individually.

5.3.2.3. KoreanAirCargo Korean Air Cargo is one of the four co-founding members of the SkyTeam Cargo alliance in

Copyright © 2013. Diplomica Verlag. All rights reserved.

2000. To this date, Korean Air Cargo is still an important backbone of the alliance venture. 1998 1999 2000 KoreanAirCargoRTK* 5,225 5,962 6,590 MarketRTK* 117,777 128,107 143,094 MarketShare 4.44% 4.65% 4.61% KoreanAirCargoGrowthRate 14.11% 10.53% 8.77% 11.70% MarketGrowthRate Rank 4 4 3 *RTKinmillion,Market:100largestcargocarriers

2001 5,571 130,175 4.28% 15.46% 9.03% 5

2002 6,247 143,062 4.37% 12.13% 9.90% 5

2003 7,062 146,177 4.83% 13.05% 2.18% 3

2004 8,345 166,356 5.02% 18.17% 13.80% 3

2005 8,139 176,293 4.62% 2.47% 5.97% 4

2006 8,857 177,890 4.98% 8.82% 0.91% 4

2007 9,677 189,897 5.10% 9.26% 6.75% 4

2008 9,005 179,434 5.02% 6.94% 5.51% 4

2009 8,426 165,941 5.08% 6.43% 7.52% 4

2010 8,430 201,203 4.19% 0.05% 21.25% 6

Table 8: Overview of Korean Air Cargo RTK Developments from 1998 to 2010, Source: Airline Business, compiled by the author

Korean Air Cargo was able to improve its market share during the three year pre-alliance period and climbed one rank to the 3rd position in 2000. The years after alliance formation are 58

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

marked by higher volatility around the market growth rate. In 2001 and 2002 lower market share figures lead to a 5th global rank before the carrier was able to take the 3rd rank again in 2003 and 2004. Between 2006 and 2009, the cargo carrier was able to maintain its market share at around 5% with a 4th rank. Stagnant growth in 2010 led to a large drop in market share from 5.08% to 4.19% and to a descend from rank four to rank six. During the period under review, Korean Air Cargo increased its absolute RTK figures by 3205 million, whereas the market share decreased by 0.25%.

5.3.2.4. AirFranceandKLM Air France is one of the four co-founding members of the alliance. The European carrier merged with KLM in 2004 and the Dutch airline entered the SkyTeam passenger and the Sky Team Cargo alliance. Starting from 2004, the figures of the Air France KLM Group are jointly reported. Primarily, the pre-merger period of KLM will be looked at. 1998 1999 2000 KLMCargoRTK* 3,885 4,149 4,304 MarketRTK* 117,777 128,107 143,094 MarketShare 3.30% 3.24% 3.01% KLMCargoGrowthRate 6.80% 3.74% MarketGrowthRate 8.77% 11.70% Rank 10 10 10 *RTKinmillion,Market:100largestcargocarriers

2001 4,042 130,175 3.11% 6.09% 9.03% 8

2002 4,042 143,062 2.83% 0.00% 9.90% 11

2003 4,392 146,177 3.00% 8.66% 2.18% 13

Table 9: Overview of KLM Cargo RTK Developments from 1998 to 2003, Source: Airline Business, compiled by the author

Before teaming up with Air France, KLMs pre-alliance growth rate lagged behind the market growth rate most of the time, leading to a decrease in market share to 3% and an overall 13th

Copyright © 2013. Diplomica Verlag. All rights reserved.

market position in 2003. 1998 1999 2000 2001 2002 2003 AirFranceCargoRTK* 4,595 5,237 5,384 5,117 4,862 5,432 MarketRTK* 117,777 128,107 143,094 130,175 143,062 146,177 MarketShare 3.90% 4.09% 3.76% 3.93% 3.40% 3.72% AirFranceCargoGrowthRate 13.97% 2.81% 4.96% 4.98% 11.72% MarketGrowthRate 8.77% 11.70% 9.03% 9.90% 2.18% Rank 7 6 6 7 7 6 *RTKinmillion,Market:100largestcargocarriers,2004:MergerResultwithKLM

2004* 10,078 166,356 6.06% 85.53% 13.80% 2

2005 10,830 176,293 6.14% 7.46% 5.97% 2

2006 10,986 177,890 6.18% 1.44% 0.91% 2

2007 2008 11,365 10,217 189,897 179,434 5.98% 5.69% 3.45% 10.10% 6.75% 5.51% 2 2

2009 2010 11,155 8,692 165,941 201,203 6.72% 4.32% 9.18% 22.08% 7.52% 21.25% 2 5

Table 10: Overview of Air France Cargo RTK Developments from 1998 to 2010, Source: Airline Business, compiled by the author

59

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Even though Air France’s pre-alliance years and first three years within the alliance are market by rather high volatility in market share, they still yield a relatively stable outcome at a 6th rank in 2003 with a market share of 3.72%. The merger with KLM and the combination of both carriers’ results in 2004 immediately led to an increase to just above 6% market share and a global 2nd rank for the airline group. Fluctuations heavily continued in the subsequent years. Still, a 2nd rank was maintained until 2010 where Airline Business recorded a negative growth rate of 22% and a consequent drop in market share of more than 2%. Air France KLM ended up at a 5th global rank.

5.3.2.5. DeltaAirlinesandNorthwestAirlines Delta Air Lines was the American co-founding member of the SkyTeam alliance, both on the passenger and the cargo side of the business and still plays a vital role in the alliance network. Northwest Airlines joined the alliance in 2005. Four years later in 2009 both carriers merged under the Delta Air Lines brand. 1998 1999 NorthwestAirlinesRTK* 3,145 3,758 MarketRTK* 117,777 128,107 MarketShare 2.67% 2.93% NorthwestAirlinesGrowthRate 19.49% MarketGrowthRate 8.77% Rank 13 12 *RTKinmillion,Market:100largestcargocarriers

2000 4,024 143,094 2.81% 7.08% 11.70% 13

2001 3,145 130,175 2.42% 21.84% 9.03% 15

2002 2003 3,578 3,189 143,062 146,177 2.50% 2.18% 13.77% 10.87% 9.90% 2.18% 15 14

2004 2005 3,765 3,335 166,356 176,293 2.26% 1.89% 18.06% 11.42% 13.80% 5.97% 13 16

2006 3,313 177,890 1.86% 0.66% 0.91% 15

2007 2008 3,018 2,391 189,897 179,434 1.59% 1.33% 8.90% 20.78% 6.75% 5.51% 17 23

Table 11: Overview of Northwest Airlines RTK Developments from 1998 to 2008, Source: Airline Business, compiled by the author

During the eight year pre-alliance period, Northwest Airlines’ growth rate showed significant deviations from the market developments. Revenue-tonne-kilometres peaked out in 2000 at 4,024 million at a market share of 2.81%. The next years were marked by strong fluctuations in RKT and growth rates within a general downward tendency, where Northwest Airlines lost

Copyright © 2013. Diplomica Verlag. All rights reserved.

three spots on the global ranking with a market share of 1.89% in 2005. The downward trend continued after alliance integration and led to a 23rd rank in 2008 with a market share of 1.33% in 2008 before the acquisition by Delta Air Lines.

60

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

1998 1999 2000 2001 2002 2003 2004 2005 DeltaAirLinesRTK* 2,764 2,554 2,946 2,284 2,405 2,048 2,081 1,987 MarketRTK* 117,777 128,107 143,094 130,175 143,062 146,177 166,356 176,293 MarketShare 2.35% 1.99% 2.06% 1.75% 1.68% 1.40% 1.25% 1.13% DeltaAirLinesGrowthRate 7.60% 15.35% 22.47% 5.30% 14.84% 1.61% 4.52% MarketGrowthRate 8.77% 11.70% 9.03% 9.90% 2.18% 13.80% 5.97% Rank 15 17 17 19 19 24 25 27 *RTKinmillion,Market:100largestcargocarriers,2009:MergedResultwithNorthwestAirlines

2006 1,809 177,890 1.02% 8.96% 0.91% 28

2007 1,812 189,897 0.95% 0.17% 6.75% 30

2008 1,778 179,434 0.99% 1.88% 5.51% 29

2009* 3,341 165,941 2.01% 87.91% 7.52% 14

2010 3,657 201,203 1.82% 9.46% 21.25% 16

Table 12: Overview of Delta Air Lines RTK Developments from 1998 to 2010, Source: Airline Business, compiled by the author

Delta Air Lines’ results worsened on a continual basis since 1998, both in absolute and relative terms. RTKs decreased from 2,764 million in 1998 to 1,778 million in 2008, which was accompanied by a decrease in market share by more than 1.3%. The merger with Northwest Airlines and the consolidated results doubled Delta Air Lines’ market share to 2.01% in 2009 and pushed the now larger carrier back up to a 14th rank. The last year of the period under review showed weaker growth than the global market which led to a decrease in market share to 1.82% and a 16th rank.

5.3.2.6. Aeroméxico Aeroméxico was part of the SkyTeam Cargo alliance from the very beginning as a founding member and still holds a membership status. The airline dropped out of the top 100 (the representative peer group) once, in 2004 with a global 121st rank. In 2007, however, it was also excluded from the official Airline Business data, even though, the 2008 statistics look back at 2007 and extradite a 94th rank for Aeroméxico in that previous year. The author decided to include that 2007 positioning and calculated the RTK by using the growth rate and RTK of

Copyright © 2013. Diplomica Verlag. All rights reserved.

2008. 1998 1999 2000 AeroméxicoRTK* 94 92 111 MarketRTK* 117,777 128,107 143,094 MarketShare 0.08% 0.07% 0.08% AeroméxicoGrowthRate 2.13% 20.65% MarketGrowthRate 8.77% 11.70% Rank 77 86 89 *RTKinmillion,Market:100largestcargocarriers

2001 2002 100 87 130,175 143,062 0.08% 0.06% 9.91% 13.00% 9.03% 9.90% 88 91

2003 2004 2005 2006 2007 97  117 130 155 146,177 166,356 176,293 177,890 189,897 0.07%  0.07% 0.07% 0.08% 11.49%   11.11% 19.23% 2.18% 13.80% 5.97% 0.91% 6.75% 90 121 98 96 96

2008 153 179,434 0.09% 1.29% 5.51% 96

2009 153 165,941 0.09% 0.00% 7.52% 93

2010 236 201,203 0.12% 54.25% 21.25% 87

Table 13: Overview of Aeroméxico RTK Developments from 1998 to 2010, Source: Airline Business, compiled by the author

During the pre-alliance years Aeroméxico was able to maintain its small market share of 0.08%; however, the carrier from Latin America lost twelve spots on the global ranking and was placed 89th in 2000. The market share remained relatively constant around 0.07% during the subsequent alliance years before starting to increase by 0.01% in 2007 and 0.01% in 2008. 61

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

In 2010, the growth rate of 54.24% largely outpaced the market growth rate, leading to a total market share of 0.12% and a 87th rank.

5.3.2.7. Alitalia Italy’s flag carrier joined the alliance in 2001 and to this date is still an active member. Air France KLM is aiming to buy Alitalia in 2013 through a share swap.154 1998 1999 2000 2001 2002 AlitaliaRTK* 1,522 1,637 1,743 1,565 1,378 MarketRTK* 117,777 128,107 143,094 130,175 143,062 MarketShare 1.29% 1.28% 1.22% 1.20% 0.96% 7.56% 6.48% 10.21% 11.95% AlitaliaGrowthRate MarketGrowthRate 8.77% 11.70% 9.03% 9.90% Rank 27 26 26 30 30 *RTKinmillion,Market:100largestcargocarriers

2003 1,374 146,177 0.94% 0.29% 2.18% 30

2004 1,393 166,356 0.84% 1.38% 13.80% 32

2005 1,404 176,293 0.80% 0.79% 5.97% 33

2006 1,398 177,890 0.79% 0.43% 0.91% 32

2007 1,630 189,897 0.86% 16.60% 6.75% 31

2008 2009 1,574 335 179,434 165,941 0.88% 0.20% 3.44% 78.72% 5.51% 7.52% 33 69

2010 427 201,203 0.21% 27.46% 21.25% 68

Table 14: Overview of Alitalia RTK Developments from 1998 to 2010, Source: Airline Business, compiled by the author

During the pre-alliance period, Alitalia’s RTKs and market share did show significant changes which led to a market share of 1.2% and a 30th rank in 2001. Even though the market share saw a constant decrease after alliance formation until 2006, the carrier managed to keep a spot in the lower 30ies bracket until 2008. 2007 and 2008 were marked by higher growth rates that outperformed the general market, which resulted in a market share of 0.88% and a 33rd rank at the end of 2008. The year 2009 proved to be a disastrous year for Alitalia’s cargo figures with a relative RTK decrease of almost 80% and the loss of 0.68% in market share. This can be explained by the fact that Alitalia Cargo and the dedicated cargo airplanes have been sold to Cargoitalia at the beginning of the year and only the remaining belly capacity of the Alitalia passenger fleet was available for cargo transportation.155 Individual growth rate outpaced the market in 2010 by 6%, still Alitalia ended up at the 68th rank with a market share of only

Copyright © 2013. Diplomica Verlag. All rights reserved.

0.21%.

154 155

See ATWOnline (2012), www.atwonline.com (16.03.12) See Verkehrsrundschau.de (2009) www.verkehrsrundschau.de (17.03.12)

62

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

5.3.2.8. SkyTeamCargoConclusion Below is a chart that shows the market share of all four core member airlines during the period under review. 8,00% 7,00% 6,00% 5,00% 4,00% 3,00% 2,00% 1,00% 0,00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 KoreanAirCargo

AirFranceCargo

DeltaAirLines

Aeroméxico

Figure 13: SkyTeam Cargo Core Member RTK Market Share from 1998 to 2010, Source: Airline Business, compiled by the author

By looking at the chart above, it is striking that no core member of SkyTeam Cargo was able to increase its market share during the alliance membership. In strict terms, Air France was able to record a small increase in market share, however this stems from the fact that the French carrier merged with KLM in 2004. With that said, the small overall gain becomes even more intriguing. Delta Air Lines’ market share decreased from the early beginning onwards, starting in the pre-alliance period and continued with the same pace during the alliance venture. The merger with Northwest Airlines led to a short term hike in overall market share

Copyright © 2013. Diplomica Verlag. All rights reserved.

in 2009. The downward trend, however, continued for the now enlarged American carrier in 2010 with a similar pace that resulted in a smaller market share just below 2% than at the beginning of this record period. Korean Air Cargo was able to slightly increase the market share during the alliance period, nonetheless saw a sharp drop in 2010 that resulted in an overall smaller market share than at the beginning of the period under review. Aeroméxico, the smallest of the four core carriers of the alliance can look back at a marbled decade, with one drop out of the 100 largest cargo carriers in 2004. From 2005 onwards, the situation improved and the Latin American carrier saw an increase in its market share. 63

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

In the years after alliance formation, both Korean Air Cargo and Air France saw a small increase in the market share. This picture is similar to the short term increases of the WOW alliance members and could be seen as a single effect after alliance formation as during the subsequent period, market share decreases dominate the picture. From a strict focus on the RTK one might argue that the alliance integration in the case of SkyTeam Cargo did not yield any benefits as compared to the total air cargo market. In a period where all four carriers should have been permanently integrated into the alliance, the growth rate of the total market outperformed the compound growth rate of the four core members for every year but two. Judging from this, a negative effect might be assumed.

5.4.

ComparisonWOWandSkyTeamCargo

Both alliances have been formed in 2000, stating basically the same objectives, goals and principles (for a closer look at their formation and the subsequent years, see section 2.3.). With the same intents, however, they developed in a rather different direction in terms of member admission and size. WOW only added one new airline member (Japan Airlines in 2002) to the already existing launch carriers, while SkyTeam Cargo grew ever since inception, building a larger global presence. The troubles that they had to get through were relatively similar to each other and also the barriers during development don not differ much in that respect. When we look at RTK developments for both alliances’ carriers, the results are similar as well. Figures of members of both alliances give a good overview of the general market characteristics that include high fragmentation and fierce competition. Small changes in the growth rate lead to shifts in market share and even small shifts in market share are enough to change a carrier’s position in the worldwide ranking. The market share developments have been very volatile for most carriers included in the previous analysis. The competition and the Copyright © 2013. Diplomica Verlag. All rights reserved.

fight for particular ranks is getting many times bigger for smaller scale carriers in the lower brackets of the ranking. Short term increases in RTK and market share of a new alliance member could be seen as a single effect for carriers of both alliances as during the subsequent period, market share decreases dominate the picture.

64

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

6.

6.1

ConclusionandFurtherResearchOpportunities

Summary

After introducing the reader to the topic, the research questions, methodology and structure in section one, section two provides an overview of the current situation in air cargo markets. On the one hand, opportunities like a strong long term growth perspectives and innovation and on the other hand challenges including tougher competition and declining yields have had an impact on airline decision making. Additionally, the diverging histories of both WOW and SkyTeam are outlined and it becomes obvious that both alliances pursued the same goals and faced the same difficulties. Still, both look back at very different growth paths and a converse development of their global presence. In section three, an extensive literature review yields the result that the topic of strategic alliances has been dealt with out of many different perspectives in all different kinds of industries. The analysis of strategic alliance concepts and the application on the air cargo sector with its advantages (exposure to growth, synergies, organizational learning,…) and drawbacks (dependence, organizational requirements,…) makes the formation of an alliance venture look like a worthwhile opportunity for cargo carriers; at least in theory. Adding to that, the important key questions and prerequisites of alliance formation and integration play an important role in the overall success of such a venture. Airlines must show their long term commitment and plan for conflicts to happen in order to have a chance to be successful and to create value in the long run. Common complications include the merger of different ranges of products and the integration of IT systems. The purpose of the analytical part of this book was to analyze and interpret the impact of a strategic alliance on cargo airlines‘ revenue-tonne-kilometres key figures (provided by Airline Business 1998-2010) and market share developments. The goal was to provide an answer to Copyright © 2013. Diplomica Verlag. All rights reserved.

the question if air cargo operators did profit from alliance integration through an increase in their market share in terms of RTK. Overall, it cannot be denied that for the overwhelming number of alliance members, both for WOW and SkyTeam Cargo, the market share in terms of revenue-tonne-kilometres declined during their alliance membership period. By strictly looking at the RTK and the related growth numbers a negative impact on the carriers’ operations might be assumed. However, with only a three years pre-alliance reference period, the real impact is hard to evaluate. 65

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

It is true that by only looking at the market share developments some information might be lost for the analysis process as RTK and market share alone do not tell about the yield situation and other benefits of the carriers included. Some benefits might be neglected but it is important to keep in mind that it is one of the most important purposes of an alliance to increase the consolidated market share of all members, giving them an edge over the competition through consolidation. By looking at the figures above, it is difficult to assume that alliance integration brought about some of the real benefits that should be the result of such a venture (see section 3.4.1.). By taking the additional costs and complexity of such ventures into account, the real value for carriers comes even more under scrutiny. Even before working with the Airline Business statistics, it became somehow obvious by screening literature and journalistic publications that alliance carriers did not show real satisfaction with the venture. It might be assumed that alliances failed to provide additional value and even brought about negative consequences to each carrier due to the reasons stated under sections 2.3., 3.4.3 and 3.6. or the failure of asking the core questions and meeting the prerequisites for alliance integration stated under section 3.5. Readers may keep in mind that alliance formation is a difficult process to organize and implement, so the carriers might also need some more time to make it work for them and the alliance as a whole. Additional questions that have been addressed in the process of answering the core question

Copyright © 2013. Diplomica Verlag. All rights reserved.

are: x

What are the main benefits and disadvantages for alliance members?

x

What major challenges do (prospective) members face in an alliance?

x

Are there common success and stability factors and why do alliances fail?

x

What alternatives are there to alliance formation?

As a major benefit air cargo operators that enter into an alliance hope to unlock additional value, to strengthen their market position and their long term strategy in a rough market environment. Alliances should allow them to have greater stamina in an increasingly challenging world economic climate that is very volatile und uncertain. These benefits should be unlocked with the help of an additional exposure to growth, the use of synergies and complementary assets, access to regional knowledge and established relationships, increased organizational 66

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

learning and innovation. The most important disadvantages include the effects that stem from the realization of economies of scale, namely increased overhead costs, entry fees and inefficiencies due to coordination efforts. It is obvious that in order to manage the alliance successfully, companies are required to put an enormous amount of work in the development and the day-to-day operations. In addition to the high demand for man-hours and senior executive involvement, alliances need the know-how of dedicated specialists that work together in a distinct department to handle alliance efforts and coordination with partner companies. With high initial cost and deeper integration, carriers can become more and more dependent on each as the alliance evolves. The following factors pose challenges for alliance members throughout their commitment from the decision to form an alliance, selection of the partner, choice of the governance structure for the alliance, dynamic evolution of the alliance to the performance of the alliance, and the consequences for the partners: poor communications, incompatible objectives, inability to share risks, opportunism, (perceived) low performance and flexibility, control and ownership arrangements, lack of trust and conflict.156 Throughout the venture, alliance members have to face uncertainty and ambiguity as value creation is not preordained and the way the partner relationship evolves over time is hard to predict.157 As already established products represent high-value and high recognition names, airlines face a difficult decision when merging product ranges across the alliance venture. Adding to that, it can prove to be a challenge trying to bring together sales and customer service personnel from vastly different corporate and national cultures.158 For established legacy carriers integration of the – often outdated – individual information technology networks represents a major difficulty. From a theoretical standpoint, there are definitely common success and stability factors for an alliance. This is of particular interest with alliance failure rates hovering between 60% and 70%.159 As they enter unknown territory, multiple challenges will test their skills to manage complex relationships. By systematic attention and commitment, each member constantly has Copyright © 2013. Diplomica Verlag. All rights reserved.

to balance between competition and cooperation.160 Setting the alliance venture on a solid foundation is of utmost importance. Steinhilber (2008) proposes three key elements for that matter: the right framework, the right organization and the right relationships.161 Before build-

156

See Serrat (2009), p.3 Doz and Hamel (1998), p.xv 158 See Karp (2004), pp.20-25 159 Hughes and Weiss (2007) 160 See Yosihino and Rangan (1995), p.x 161 See Steinhilber (2008), from the abstract 157

67

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

ing the alliance from scratch the core questions proposed by Doz and Hamel (1998) need to be addressed: In short, airlines should be able to measure the value that will be created during the long term commitment. Proper conflict management should be introduced and the value should be distributed equally among all members in order to guarantee positive co-operation, while managing the membership in many different alliances.162 The strategy of all carriers involved should match, which includes similar growth targets and goals. When carriers decide to work together in an alliance, they have to look for synergies and realize them under one umbrella.163 The strategy must be articulated clearly and understood in the context of the alliance and each single air cargo carrier.164 In order to achieve transparency and excellence, the alliance should consist of reliable, fitting and respected partner airlines that share risk, returns, as well as control in an equal manner.165 Additionally, several studies outline the fact that learning within an alliance is paramount and has a large impact on the success or failure.166 As a strategic alliance in the air cargo industry is always building upon existing relationships with customers, success oriented airlines must ensure a smooth transition for regular customers when entering into a new alliance.167 Service quality and logistics solutions must be at the same high level for every individual alliance carrier.168 Regarding the alternatives to alliance formation, several other co-operation strategies are commonly combined under the term ‘airline alliance’. Kleymann and Seristö (2004) list the following: cost sharing ventures, asset pools, pro-rate agreements, codesharing and feeder, marketing alliances, joint ventures, integrated feeders and equity stakes.169 An actual example of a cargo airline joint venture in the context of this thesis is Jade Cargo, which was set up by Lufthansa Cargo and Shenzhen Airlines.170 Simpler agreements involve pre-reserved space on other carriers’ airplanes on specific routes like the arrangement between SAS Cargo and Ko-

Copyright © 2013. Diplomica Verlag. All rights reserved.

rean Air Cargo on trans-Atlantic routes.

162

See Doz and Hamel (1998), pp.8-11, 87 See Biedermann (2001), p.30 164 See Kleymann and Seristö (2004), p.180 with Koza and Lewin (2000) 165 See Bamford and Ernst (2005), p.134 166 Hamel et al. (1989), with Berg and Hamilton (1998), Doz (1996) 167 See Biedermann (2001), p.30 168 Grönlund and Skoog (2005), p. 478 169 For description of each construct see: Kleymann and Seristö (2004), pp. 13-14 170 See Turney (2005), pp.14-15 163

68

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

6.2

FurtherResearchOpportunities

In order to get a clearer picture of the situation, the evaluation of other core figures of airline cargo operation, such as a comparison of yields, is deemed useful. This sort of analysis, however, depends on the availability of a better, more consistent data set. With Lufthansa Cargo planning to set up a new cargo alliance venture within the existing Star Alliance passenger airlines network, the concept of a strategic cargo alliance will be given a new go. Interested readers may watch the development of this venture closely from the very beginning. It remains to be seen if the German cargo flag-carrier will be able to implement the

Copyright © 2013. Diplomica Verlag. All rights reserved.

key learnings and findings of the failed WOW alliance venture within the new alliance.

69

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

References 1000ventures.com: Strategic Alliances Why and How to Build Them. http://www.1000ventures.com/business_guide/strategic_alliances_main.html (14.11.2011) Aero.de, 2011: Europas Airlines stagnieren – Branche wächst auf anderen Kontinenten. http://www.aero.de/news-13789/Europas-Airlines-stagnieren---Wachstum-auf-anderenKontinenten.html (1.11.2011) Air Cargo World, 2002: Sky Teamed, in: Air Cargo World 92, no. 1, January: p.6 Air Cargo World, 2002: Japan's WOW, in: Air Cargo World 92, no. 8 August, p.5 Air Cargo World, 2003: Seeing Alliances' Limits, in: Air Cargo World 93, no. 9 September, p.4 Air Cargo World, 2004: SkyTeam Adds, in: Air Cargo World 94, no. 10 October, pp.6-8 Air Cargo World 2010: Air cargo industry signs historic agreement, in: Air Cargo World 100, no. 12 December, 4 Airfleets.net: search for every member airline. http://www.airfleets.net/home/ (29.11.2011) Air France-KLM. Fleet. http://www.afklm.com/cargo/b2b/wps/portal/b2b/kcxml/04_Sj9SPykssy0xPLMnMz0vM0Y_QjzKLN4o3dDZwA8mB2 GZGAfqRmILSIJB%20t76vh75uan6AfoFuaER5Y6OigA7maKy/delta/base64xml/L3dJdyEvd0ZNQUFz QUMvNElVRS82XzJfNkJU (29.11.2011) Airline Business, 1999-2011: Cargo Special Reports and Cargo Surveys for 1998 to 2010, in: Airline Business November Issue 1999-2007, October Issue 2008-2011 Airlines and Destinations, 2011: Taiwan’s China Airlines Becomes a SkyTeam Member. http://www.airlinesanddestinations.com/airlines/taiwans-china-airlines-becomes-a-skyteam-member/ (22.10.2011) Airliners.de, 2011: Lufthansa plant erneut Cargo-Bündnis. http://www.airliners.de/management/marketing/lufthansa-plant-erneut-cargo-buendnis/23959

Copyright © 2013. Diplomica Verlag. All rights reserved.

(21.10.2011) Allaz, C., 2004: History of Air Cargo and Airmail from the 18th Century. Paris: Institut du Transport Aèrien Armbruster, W., 2002: Cargo alliances catch on, in: Joc Week 3, no. 1 January 8, pp.90-91 Bamford, J.and Ernst, D., 2003: Getting Alliances Right – The Management Perspective, in: Wasserman, C. et al: Partnerships, Joint ventures and Strategic Alliances. New York: Law Journal Seminars Press Bamford, J. and Ernst, D., 2005: Government Joint Ventures. Washington: McKinsey and Company

70

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Berg, J. and Hamilton, R.T., 1998: Born to fail? International strategic alliance experiences of New Zealand companies, in: Journal of International Business and Entrepreneurship, 6 1&2, pp. 63–76 Biederman, D., 2001: Stronger than Alliance, in: Traffic World 265, no. 48 November 26, p.30 Bleeke, J. and Ernst, D., 1993: Collaborating to Compete. New York: John Wiley & Sons Bleeke J. and Ernst, D., 1995: Is your strategic alliance really a sale?, in: Harvard Business Review, 73 1, pp.97–105 Buyck, C.: The big move, in Air Transport World, 37 6 (2000): 49–53 Buyck, C., 2012: Air France KLM eyes full Alitalia acquisition in 2013. http://atwonline.com/airlinefinance-data/news/air-france-klm-eyes-full-alitalia-acquisition-2013-0307 (16.03.2012) Carr, J. et al., 2007.: An empirical examination of the role of social exchanges in alliance performance, in: Journal of Managerial Issues, Volume 19, Issue 1 Spring Chu S. et al., 2004: 4th Party Cyber Logistics for Air Cargo. Boston: Kluwer Chiavi, R., 2005: Airfreight Development Supporting the Strategy of Global Logistics Companies, in: Delfmann et al.: Strategic Management in the Aviation Industry. Hampshire: Ashgate Publishing Limited, pp.489-516 Conway, P., 2002: WOW woos cargo market but the old brand names remain, in: Airline Business 18, no. 4 April, p.9 Conway, P., 2004: Team work, in: Airline Business 20, no. 11 November pp.58-59 Conway, P., 2005: Pulling together, in: Airline Business 21, no. 4 April, pp.37-39 Conway, P., 2009: Air Cargo’s Innovation Agenda, in: Cargo Matters, 1-2009, pp. 6-8 Crabtree, T. et al., 2010: Boeing World Air Cargo Forecast 2010-2011. Seattle: Boeing Commercial Airplanes Das, T.K. and Teng, B., 2001: A Risk Perception Model of Alliance Structuring, in: Journal of International Management, Volume 7, Issue 1, Spring, pp. 1-29

Copyright © 2013. Diplomica Verlag. All rights reserved.

Doganis, R., 2005: Flying off Course The Economics of International Airlines. New York: Routlegde, rd

3 edition Doz, Y., 1996: The evolution of cooperation in strategic alliances, in: Strategic Management Journal— Supplement, 17, pp.55–83 Doz, Y. and Hamel, G., 1998: Alliance Advantage The Art of Creating Value through Partnering. Cambridge: Harvard Business Press Drucker, P., 1996: Nonprofit Profit, in: The Alliance Analyst, Nov 11. http://www.allianceanalyst.com

71

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Duysters, G.; Meijer, E.; Ulijn, G., 2010; Strategic Alliances, Mergers and Acquisitions The Influence of Culture on Successful Cooperation. Cheltenham: Edward Elger Publishing Ltd Dyer, J. et al., 2001: Value Creation and Success in Strategic Alliances: Alliancing Skills and the Role of Alliance Structure and Systems, in: European Management Journal, Volume 19, Issue 5, October, pp.463-471 Dyer, J. and Singh, H., 1998: The Relational View: Competitive Strategy and Sources of Interorganizational Competitive Advantage, in: Academy of Management Review 23 (4), pp.660-679 Elmuti, D. and Kathawala, Y., 2001: An Overview of Strategic Alliances, in: Management Decision 39/3, pp.205-217 Fu, X. et al., 2009: Air Transport Liberalization and its Impacts on Airline Competition and Air Passenger Traffic, in: International Transport Forum 2009 Journal Papers Galil, K. et al., 2009: A Re-Examination of Value Creation through Strategic Alliances. Beer Sheva: Monaster Center for Economic Research Ben-Gurion University of the Negev Greenberg, P.S., 1990: The new global airlines. Europe, 297, pp.31–32. Grönlund, P. and Skoog, R., 2005: Drivers of Alliance Formation in the Air Cargo Business, in: Delfmann et al.: Strategic Management in the Aviation Industry. Hampshire: Ashgate Publishing Limited, pp.473-488 Hamel, G. et al., 1989: Collaborate with your competitor and win. In: Harvard Business Review, 67, pp.133–139 Hamill T., 1993: World Airline Directory. Flight International, Volume 143 pp.43-61 Hamilton, S., 1997: E-Commerce for the 21st century. IEEE Computer, 30 5, pp.44–47 Hamilton, S.C. and Morrish, R.T., 2002: Airline Alliances –who benefits?, in: Journal of Air Transport Management, Volume 8, Issue 6, November, pp.401-407 Hanlon J.P., 1999: Global Airlines. London: Butterworth-Heinemann, 2nd edition Holloway, S., 2008: Straight and Level Practical Airline Economics. Hampshire: Ashgate Publishing Copyright © 2013. Diplomica Verlag. All rights reserved.

Ltd., 3rd edition Hughes, J. and Weiss, J., 2007: Simple Rules for Making Alliances Work, in: Harvard Business Review. Cambridge: Harvard University Press Hui, S. et al., 2007: Intermodal Alliance and Rivalry of Transport Chains: The Air Cargo Market, in: Transportation Research Part E: Logistics and Transportation Review, Volume 43, Issue 3, pp.234246 IATA: Cargo 2000. http://www.iata.org/whatwedo/cargo/cargo2000/Pages/index.aspx (1.11.2011)

72

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

IATA: e-freight. http://www.iata.org/whatwedo/cargo/efreight/pages/index.aspx (1.11.2011) IATA, 2006: The Economic Impact of Air Service Liberalization. Montreal: International Air Transport Association Japan Times, 2002: JAL Joins International Air Cargo Alliance. http://www.japantimes.co.jp/text/nb20020706a3.html (21.10.2011) Karp, A., 2004: Airlines Pairing Off. Air Cargo World 94, no. 1 January, pp. 20-25 Kleymann, B. and Seristö, H., 2004: Managing Strategic Airline Alliances. Hampshire: Ashgate Publishing Ltd. Koza, M. & Lewin, A., 2000. Managing Partnerships and Strategic Alliances: Raising the Odds of Success, in: European Management Journal, Vol. 18, No. 2, pp.146-151. Lewis, J., 2007: Trusted Partners: How Companies Build Mutual Trust and Win Together. New York: Free Press Liasidou, Sotirula: Air transport liberalization and its impact on the aviation and tourism industries: a case study on Cyprus. fpedas.utc.sk/~icrat/ppt/163%20Cyprus.ppt (1.11.2011) Martinair Cargo. Fleet. http://www.martinaircargo.com/equipment facilities/fleet/?sg=%7B762C339E787A-4225-87D3-901D72E34EEE%7D (29.11.2011) MDS Transmodal Limited et al., 2006: East of England Freight Scoping Study Stage 2 Report: Final Report - East of England Development Agency, June Melbin, J.E., 1997: The need for speed. Distribution, 96 8, pp.58–84 Morrell, P.S. and Pilon, R.V., 1999: KLM and Northwest: A Survey of the Impact of a Passenger Alliance on Cargo Service Characteristics, in: Journal of Air Transport Management, Volume 5, Issue 3, July, pp.153-160 Muthusamy, S.K. and White, M.A., 2005 : Learning and Knowledge Transfer in Strategic Alliances: A Social Exchange View, in: Organization Studies, Vol.26 (3), pp.415-441

Copyright © 2013. Diplomica Verlag. All rights reserved.

O'Connor, W., 2001: An introduction to Airline Economics. Westport: Praeger Publishers, 6th edition Oliver, C., 1990: Determinants of interorganizational relationships: integration and future directions, in: Academic Management. Review, 15, pp.241–265 Osborn R.N. and Baughn, C.C., 1990: Forms of interorganizational governance for multinational alliances, in: Academic Management Journal, 33, pp.503–519 Payer, R., 2011: Fracht bereitet Europas Airports Sorgen. http://austrianaviation.net/newsinternational/news-detail/datum/2011/11/08/fracht-bereitet-europas-airports-sorgen.html (8.11.2011)

73

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Piermartini, R. and Rousová, L., 2008: Liberalization of Air Transport Services and Passenger Traffic. Geneva: World Trade Organization Pienaar, W. and Vogt, J., 2009: Managing International Supply Chains, in: Business Logistics Management. Oxford: Oxford University Press Southern Africa, 3rd edition, pp.383-420 Pompl, W., 2006: Luftverkehr: Eine ökonomische und politische Einführung. Berlin: Springer Berlin Heidelberg, 5th edition Sako, M.; 2000: Does Trust Improve Business Performance?, in: Trust Within and Between Organizations. Eds. C. Lane and R. Bachmann. Oxford: Oxford Press SAS Cargo: About SAS Cargo. http://www.sascargo.com/SASCargo/About.aspx (21.10.2011) Serna Velez, J.C., 2007: Analysis of Strategic Alliances as a Source of Competitive Advantage in the Airline Cargo Business - Evaluation of SkyTeam Cargo™ and WOW™ Alliance. Greenwich: Greenwich Business School Serrat, O., 2009: Learning in Strategic Alliances, in Asian Development Bank Knowledge Solutions, September Shipping Online: JAL to shut down all-cargo group, but bellyhold still available. http://www.shippingonline.cn/news/newsContent.asp?id=15034 (21.10.2011) Singapore Airlines Cargo: Fleet & AULD. http://www.siacargo.com/Fleet_Auld.asp (21.10.2011) Sissen, J., 1999: Charting a course, in: Airfinance Journal (Supplement International Capital Markets). September, pp.2–5 SkyTeam. About Us. http://www.skyteam.com/de/About-us/Our-members/ (29.11.2011) SkyTeam Cargo. History. http://www.skyteamcargo.com/de/About-us/Our-history/ (22.10.2011) Steinhilber, S., 2008: Strategic Alliances: Three Ways to Make Them Work. Cambridge: Harvard Business School Press Stellin, S., 2011: The Clout of Air Alliances, in: New York Times, May 03,p.6

Copyright © 2013. Diplomica Verlag. All rights reserved.

Taverna, M., 2001: Lufthansa Spearheads Alliances In Freight, Express and Logistics, in: Aviation Week & Space Technology 155, no. 9 August 27,p.58 Taverna, M., 2002: Wow, SkyTeam Cargo Consolidate Alliances and Look at Expansion, in: Aviation Week & Space Technology 156, no. 24 June 17,p.52 Transport Weekly, 2008: Alliance Expected to Die. http://www.transportweekly.com/pages/en/news/articles/49541/ (21.10.2011) Turney, R., 2002: Wowing Cargo, in: Air Cargo World 93, no. 5 May, pp.14-16

74

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

Turney, R., 2005: Diversifying Lufthansa, in: Air Cargo World 95, no. 5 May, pp.14-15 Verkehrsrundschau.de, 2009: Cargoitalia kauft Alitalia Cargo. http://www.verkehrsrundschau.de/cargoitalia-kauft-alitalia-cargo-807428.html (17.03.12) Warehousenews, 2011: George Utz is flying high with new air cargo innovation http://www.warehousenews.co.uk/2011/06/george-utz-is-flying-high-with-new-air-cargo-innovation/ (26.10.2011) Warner, M., 2001: Will Alliances Improve Air Cargo?, in: Traffic World 265, no. 50 December 10, p.15 Wiebner, M., 2003: No Flying Solo, in: Air Cargo World no. 07455100 January 03, p.1 Yoshino, M. and Rangan, S., 1995: Strategic Alliances. Cambridge: Harvard Business Press Youssef, W. and Hansen M., 1994: Consequences of strategic alliances between international airlines,

Copyright © 2013. Diplomica Verlag. All rights reserved.

in: Transportation Research, 28A, pp.415–431.

75

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05

You will find further scientific studies of all topics under: www.diplom.de

Anchor Academic Publishing

Copyright © 2013. Diplomica Verlag. All rights reserved.

disseminate knowledge

Smeritschnig, Florian. WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and The Impact on Cargo Airlines' Operations and Success : An

05