Insights on alliance management, accountability, Sarbanes-Oxley, marketing theory and leadership competencies

European Business Forum, Spring, 2005 by Angela Andal-Ancion, George Yip, Ben Kedia, Somnath Lahiri, Al Lovvorn, Dermot Williamson

Dilemma 6: what should each member give up doing?

For members to derive maximum benefits from the alliance, each must give up something that the alliance makes redundant. The pharmaceutical industry is quite heavily reliant on alliances to help in new product development. Research and development costs are steep, and pharmaceutical companies are reluctant to take on research in an area where they do not have expertise.

Star Alliance members gave up their less competitive offerings (mainly routes) and relied on other members. Code-share agreements enabled the carriers to offer their passenger routes under co-ordinated times in certain markets. Lufthansa stopped its services to Australia in 2000, and instead relied on its partner Singapore Airlines for coverage. Similarly, Singapore Airlines made London and Frankfurt its main European hubs where it relies on partners bmi and Lufthansa to serve onward destinations across Europe.

Consolidating airport lounges became a sticky subject for members. Airlines insisted on keeping individual lounges in strategic or home markets, but agreed to consolidate in third markets. For Air Canada, the decision to integrate depended on the strength of airlines' market presence in different markets. Where there was no dominant presence of a member airline, it made sense to promote the Star Alliance brand more strongly by having one lounge. This also generated cost savings and efficiency. But individual lounges remained the norm in cities where dominant carriers were present (for example, Frankfurt with Lufthansa, Chicago with United, and Montreal with Air Canada). It was difficult to give away 'sacred cows' that have received high brand investment from the individual carriers.

Customer feedback also indicated a strong preference for experiencing carriers' individual personalities. 'They don't want to fly 'vanilla' airlines', explained Alliance members. For example, customers choose to fly Thai because of the Thai experience; its Royal Orchid Service extends a traditional Thai welcome that includes a fresh orchid for its female passengers. Thai sees the importance of keeping this experience intact for its key markets.

Identifying other touch points for passengers remains a challenge for the Star Alliance carriers. For example, should napkins on board members' aircraft be branded 'Star Alliance' or with the individual carriers' names? The potential to generate big cost savings from having a consolidated order of napkins must be weighed against maintaining the carriers' individual identities.

There are still many opportunities for co-operation, particularly in maintenance, fleet purchasing and operation, and industrial training of employees. The effects of 9/11 on the airline industry have prompted members to work more closely and negotiate as a group, for example with insurance companies, where an alliance can deliver strong bargaining power.

Dilemma 7: should members be involved with each other outside alliance business?

In some alliances, members strictly keep to alliance business and refrain from getting involved in their partners' other activities. Star Alliance takes the opposite approach. Its members openly help each other to leverage partners' strengths. For Air Canada, co-operation within Star Alliance helped them win some key battles. Air Canada was once denied route rights to Rio de Janeiro because of unrelated competitive issues between its fellow Canadian company, regional jet manufacturer Bombardier, and the latter's Brazilian competitor, Embraer. Through the lobbying support of alliance partner Varig, the Brazilian government saw that the two battles were separate, and eventually awarded the route rights to Air Canada.