Star Alliance

Background
The airline industry took flight and yielded its first signs of competition in the late 1970s with deregulation. The US
Airline Deregulation Act was signed into law on October 24, 1978 . This act caused the slow reduction in the powers
of the Civil Aeronautics Board, which up to that point had strong control over pricing, market entry and most other
airline functions. Deregulation in Europe followed similar suit which essentially ended many of the existing constraints
on European carriers. As deregulation broke down, many international carriers entered into arrangements with
foreign partners to expand their network routes. This type of arrangement is one of key reasons why the Star Alliance
was formed .The 1944 Chicago Convention spawned some governance and control across the international
marketplace. Air routes, frequency and fares were all governed by this bilateral agreement. The industrys restrictions
continued as a protectionist framework took precedent in governing international air transport.
In the mid-1980s a few airlines began practicing a new joint effort called code sharing. This allowed for airlines the
ability to advertise other airlines as their own. The obvious benefit here is to create a larger presence and increase
the chances of generating additional sales. This practice would also become common across the current alliances we
see today in the airline industry.
Another noteworthy piece if airline history was that of the U.S Open Skies agreements of 1992. This key bilateral air
treaty granted KLM and Northwest full anti trust immunity. Its main purpose was to bring about the liberalization of all
global air routes. This allowed KLM and Northwest the ability to act as one company with regards to most aspects of
their business functions. This key piece of legislation assisted in the growth and enhancement of business worldwide.
The Gulf War of in 91-92 had a detrimental effect on the airline industry as it increased the price of fuel and created a
massive downturn in travel / tourism. Just as quickly the airline industry spiked between the years of 95 and 98 just
after the Gulf War.
One of the major faults that big airlines were faced with was that of overcapacity. A most critical time came after 9/11
when consumers dramatically limited their travel habits, which in turn adversely affected the entire aviation industry.
Given this trend, a new form of airline travel formed called budget carriers. These scaled downed planes focused
primarily on low-cost point-to-point travel . These budget carriers completely restructured the standard airline
business model by providing a simple service with increased fare rates, dispensing travel agents and selling directly
over the internet.
Emergence of strategic alliances.
The mid-90s spawned a new level of competitive awareness in the airline arena as a made dash into strategic
alliances ensued. This paradigm shift was driven by the necessity to gain those much desired competitive
advantages. Code-sharing, as mentioned earlier, expanded within these newly developed alliances. This practice
allowed for an immediate virtual growth in market share and thus brought about the rise of super-alliances around the
world. More than 500 alliances were formed in the late 1990s. All of which were ultimately consolidated into five multi

carrier alliances that currently exist today. The 5 carriers were: The KLM.Northwest alliance, Oneworld, the Qualiflyer
Alliance, SkyTeam and the Star Alliance.
Star Alliance
The Star Alliance was formed on May 14 1997 . It launched with a total of five members under its belt. Air Canada ,
Lufthansa, Thai, United and SAS made up the alliance. Even though the alliance housed all the airlines under one
entity or network, the airlines still retained their individual identities. As it stands today there are a total of 16 airlines in
the star alliance.
Objectives
It was clear that all airlines had different reasons for joining the alliance but the common thread that linked them all
was the desire to expand their geographic network in the most efficient way. Star Alliance members agreed on this
commonality and virtually overnight increased the scope of their services. One of the reasons that the scope of
services or the ability to cover every corner of the world .Code-share arrangements also allowed for flexibility and
rationalization in terms of route decision making. By having such a close arrangement and understanding of partner
schedules, airlines were able to lean on partner airlines to cover various routes that were a more logical fit both
logistically and financially.
from the customer perspective.
Alliances were also a great way to leverage carriers local strengths to build up the entire networks market presence.
The structure also presented invaluable flexibility to alliance members. Such flexibility could be seen in their
opportunities to negotiate a broad range of agreements with non-alliance members. An example of one of these
agreements was the ability to share mileage points across both frequent flyer programs. This of course yielded a
powerful consumer benefit which widened their scope of travel destinations across multiple airlines.
From the business perspective , it allows a more seamless integration of offerings across alliance partners and
increases the overall scope of services. Alliances created trade barriors so that new comers couldnot venture out
on their own. There is such an allure to the potential overhead reductions and the ability to rapidly increase service
offerings.
The Start Alliance vision or mission is to facilitate the growth of long term results well beyond the means of individual
airlines capabilities. The relevance of star alliance structure can be ralate to two guideiing principles .The first was:
customers want global access. The second: They want their status to travel with them. Lastly: They want a
seamless travel experience.
2. What

factors affect the sustainability of the alliance and how can they be managed?

The five criteria of a strategic alliance

Many alliances default to some form of revenue generationwhich is certainly
important but revenue alone may not be truly strategic to the objectives of the
business. There are five general criteria that differentiate strategic alliances from
conventional alliances. An alliance meeting any one of these criteria is strategic and
should be managed accordingly.

1.
2.
of
3.
4.
5.

Critical to the success of a core business goal or objective.

Critical to the development or maintenance of a core competency or other source
competitive advantage.
Blocks a competitive threat.
Creates or maintains strategic choices for the firm.
Mitigates a significant risk to the business.

Factors affect the sustainability of the alliance and how can they be managed
1.

Governance
Essentially the Star Alliance started as a small group of 5 partners managed under one umbrella structure by a
committee of participants. As the alliance grew, so did the layers of organizational complexity. A full time staff was
eventually formed and each airline company became an equal shareholder in the alliance. The early years of the
organization were quite painful ones as there were regular frustrations caused by the cultural requirement of
unanimous buy-in for various objectives.. As the project management matured, processes were streamlined and
became second natured. Processes are still being refined to this day but they have made substantial improvements
since the alliances inception.

2.

Competing and Collaborating

The delicate blend of competition and collaboration was another aspect of the Star Alliance that I felt was quite
impressive. From the outside looking in I would think alliance members would be scrambling for any and all routes to
increase their own profits. There seemed to be some jockeying for position in the early stages of the alliance but as
the integration matured each airline began to realize that they can be much more effective by leaning on affiliates for
assistance.To ensure fair play and an effective culture, all members within the alliance were prohibited from executing
hostile takeovers on fellow members. This, I would imagine, was a pivotal piece of governance that really set the
stage for a more collaborative environment.It was clear from the onset that each airline had a different perspective in
terms of enhancing internal processes. Each was united by the same sense of vision or benefits but just the same
members still had their own thoughts on increasing value.

3.

Culture
The Star Alliance was founded on the premise of a consensus driven business model. The culture presented both
distinct benefits and deficiencies. The most obvious benefit being each member had a voice in establishing or altering
overarching strategic visions for the alliance. The most obvious deficiency was the length of time it took to get total
buy into a new idea. In theory, this seems like a great idea to get everyones buy-in before finalizing directives but the
logistics behind this approach would make me skeptical from the start. A consensus driven model across 3 or 4
organizations might make sense in certain situations but a 14 member alliance seems as though it would a futile
exercise. The alliance has greatly improved their buy-in process over the years but it was not without some pain and
compromise along the way.Every member had their own initiatives whose feedback was vital in reaching one
common resolution. Compromise and sensitivity were common themes that were vigorously developed in order to
enhance the alliances member wide buy-in culture.

4.

Coping with Crisis

It is said that the greatest challenge any organization can face is an inconceivable disaster that relates directly to
ones industry. Theres no roadmap or guideline that would assist in coping or adjusting to such a disaster. There is,
quite simply, only so much preparation that can be done to account for the endless number of disaster variables. One
of our most catastrophic events of our time, 9/11, would test the Star Alliance business model and push its
boundaries to the limit.
The alliance members regrouped shortly after 9/11 as they quickly realized those tragic events of September 11
would forever change the aviation industry. Immediately after 9/11, a taskforce was formed which was geared
towards cutting costs across the entire alliance. Some initiatives included consolidation of projects, joint purchasing,
and avoiding the duplication of processes at airports and call centers. The main objective was to identity immediate
cost reductions and laid the foundation for long term cost savings.A tragedy of unprecedented devastation forced
alliance members to lean heavily on one another. It allowed for most of its members to stay afloat during those
difficult times which essentially impacted the entire airline industry. If ever there was a question of the alliances
purpose, I think this event emphatically answered to those critics. Theres no telling how many airlines would have
survived a post 9/11 era if they did not have an alliance to support consolidation efforts.
SWOT Analysis of Star Alliance

Strengths:

Weaknesses

Large geographic network.

Seamless travel experience is inconsistent.

* Cost savings via joint purchasing, marketing,

* Non coordination in certain instances. (i.e. lounge

planning, etc.

access availability, baggage issues)

* Higher number of flights offered. (increases potential #

* IT systems (incompatibility of systems).

of sales)

* Lack of innovation. Alliance is essentially a facilitator,

* Relatively seamless travel experience.

not an innovator.

* Code sharing. (Increased route rationalization.)

* Poor metrics in determining how effective the alliance

* Increased opportunity to reach economies of scale.

really is.

* Assist in elevating brand awareness (i.e. Thai airlines,

* Inconsistent synergies in purchasing. (I.e. Canadians

much greater exposure)

disappointed in failure of cost effective purchasing of

* Increased sale synergies.

cups and napkins.)

* Top marks in Merrill Lynchs annual league table of

airline industry alliances.
* Leadership is able to take control in home markets.
(.i.e. bmi better understands business in the Ireland
market and is able to pass along opportunities to fellow
members.)
* Ability to leverage position via strong association with
other carriers.
* Creates a higher quality network.

* Mileage accruals on frequent flyer programs.

* Low value frequent flyer mileage redemption with
quick turnaround time.
* Expanded lounge access.
* Waitlist priority.
* Additional checked-in luggage allowances.
Opportunities

Threats

* Further integration of services (i.e. Facilities in

Airline industry is fragile which poses many

airports, services in regions, IT systems, etc)

uncertainties.

* Development of tools to measure effectiveness of

* Too many alliance members. Can lead to conflicts of

alliance (metrics). i.e. Measure which passengers were

interest, which in turn can lead to dwindling competitive

brought in as a result of alliance. Also, measure the

advantage.

intangible benefits that the alliance exudes across the

* Poor integration can lead to lose of consumer

board.

confidence in the alliance. (i.e. Ansett Australia went

* Expand on joint purchasing initiatives.

bankrupt in 2001 causes a huge disruption in baggage

* Pursue activities that could bolster economies of

transportation resulting in negative publicity for the

scale.

entire alliance.)

* Consolidation of alliance members, where applicable,

* An abrupt departure of a large alliance member that is

as current large number increases the complexity of

weighed upon heavily may cause massive disruptions

operations

in the flow and effectiveness of the alliance. Such an

event could bring about the quick collapse of such an
alliance.
* Rise in popularity of low cost travel carriers

Recommendations
The most important area the Star Alliance must focus on moving forward is to further integrate their services. Their
business model works as it clearly offers customers a much larger travel coverage area, frequent flyer miles, etc. It
just needs to be refined a bit more. The most critical issue is the lack of consistent integration across the alliance
which can be achieved through a 2 prong approach.
First, they should create a more robust centralized IT infrastructure that integrates all systems. This would ensure that
both tacit and implicit knowledge would be disseminated to all alliance members in an efficient manor. There are
many instances of a customer who felt defrauded by loosing their luggage or not having the lounge access, etc.
though the services the alliance claimed offer and did not follow through on consistently. As a result t this type of
deficiencies that can make or break customer retention rates. The Star Alliance to further streamline their operations
and create that seamless travel environment they claim to have.
The second approach would be to develop the necessary tools to quantify the alliances absolute value. This of
course would be done in concert with the enhancement of the IT infrastructure. worth. Right now its clear that the
alliance adds value but not in a definitive way. By having metrics in place, airlines could measures just how much

they are getting out of the alliance and determine whether or not theyd be a better fit elsewhere. Theres no sense in
keeping an airline on board just for the sake of having a larger network. There would be a much clearer focus of what
is and is not working to benefit the alliance as a whole if all the data is on the table.