Question

Royal Jordanian Airlines and the OneWorld Alliance

In the airline industry it is common for companies to form partnerships to gain some of the benefits of economies of scale. There are a number of sound arguments for the development of such partnerships, but to what extent do they also create monopoly power? Look at the arguments put forward in this article, and in the light of the content of this chapter assess the extent to which you would agree that the benefits of such a partnership outweigh the potential costs of greater monopoly power.

Royal Jordanian [RJ] and its OneWorld alliance partners including American Airlines, British Airways, Iberia, Finnair and Malev Hungarian Airlines – filed with the US Department of Transportation (DOT) for antitrust immunity in 2008.

The application seeked to allow cooperation among the carriers in a wide variety of operational areas, including selling seats on each other’s flights, codesharing, frequent flyer programs, route and schedule planning, advertising and marketing, pricing and yield management, revenue allocation, ground handling, cargo services, information technologies and distribution systems, and several other areas.

According to the airlines, the proposal will significantly improve customer choice and convenience, produce important operating efficiencies that provide greater value to passengers and shippers, and increase competition with other alliances in thousands of city-pair markets. An alliance with antitrust immunity is of vital strategic importance and helps [retain competitiveness] with other transatlantic alliances that already have such immunity.

The combined market shares of RJ and the other joint applicants are comparable or well below the transatlantic market shares of immunized members of the competing Star and SkyTeam alliances. Each of the joint applicants will retain its own separate and independent corporate and national identity under the proposed application. Final approval for Oneworld was granted in the summer of 2010. This means the three largest alliances have about 60 percent of the market between them.

RJ joined the OneWorld airline alliance on April 1, 2007, being the first Arab airline to join any of the three global airline alliances.

Virgin Atlantic think it is very unfair for non-aligned carriers like itself. Virgin Atlantic believes that such partnerships result in a greater concentration of monopoly power.

It just may be right. In 2016 Oneworld was the third largest global airline alliance in terms of passengers carried. Star Alliance carries most passengers followed by Skyteam. The market concentration of these three alliances was 61 percent in 2015.

In 2016 two low-cost carriers alliances were formed. These are U-Fly alliance and Value Alliance serving the Asia-Pacific region.

However, some experts believe that airline alliances have run their course and are not the solution to there being too many carriers, especially if barriers were eased. It maybe that a future solution will be a consolidation of carriers.

Airlines regularly look to make partnerships to exploit greater monopoly power.

 

Questions and Tasks

1.      How does an airline alliance like Oneworld work?

2.      What are the benefits of airline alliances to passengers?

3.      What are the concerns of airline alliances to passengers and airlines that lie outside the alliances?

4.      How might the airline industry look should the air alliances break up?

5.      Find out which gulf carriers belong to which alliance.

6.      Find out about the market share of Coca cola and Pepsi Cola, of the iPhone and Samsung Galaxy. Should this be cause for concern?

Answer 1

Solution 1:

Airline alliances are partnerships that are formed among or between airlines. Through this collaboration, the partner airlines are able to share resources, extend routes as well as increase customer base.

Alliances work to provide international passengers with a network of connectivity and convenience through codesharing agreements. It allows airlines to serve a large range of destinations.

An airline alliance like ONWRLD helps to build cooperation among the different carriers in different operational areas such as the selling of seats of each other's flights, codesharing between the airlines, sharing the frequent flyer programs (like the accumulation of points), planning of schedules and routes, advertising and marketing, pricing and yield management, the allocation of revenue, handling of the ground, cargo services, information technology, and distribution systems, and multiple other areas. Through alliances, the airlines benefit from economies of scope, as bigger networks are better. It is possible to build virtual networks with little investment and have fewer risks.

Airline alliances like ONWRLD provide passengers with extended networks that make bookings and travel connections more efficient and easier. Strategic alliances help the airlines to improve their performance and ensures operational efficiency, productivity, and profitability.

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Solution 2:

To reach ONWRLD status, the members need to first accrue status with the help of the respective airline partner of their choice. The members that travel on eligible ONWRLD member airlines accrue points or miles and can redeem them across the entire ONWRLD network. It also allows the members to speed through the fast track lanes at some of the partner airports and gives them access to six hundred and fifty plus airport lounges across the world. It gives passengers access to priority check-ins, fast tracks through security as well as elite status boarding processes.

Airline alliances provide passengers with a seamless travel experience when they have to travel on multiple flights to reach their destination. Travelers benefit due to the reduced costs of the airlines. Alliances thus increase customer convenience and provide them with greater value.

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Solution 3:

The concerns that the airlines which lie outside the airlines' alliance face are -

As the aviation industry is extremely competitive, there is a possibility that airlines that do not form alliances can go bankrupt. Although having an alliance membership does not ensure the profitability of airlines, most airlines benefit from forming global alliances. Airlines that are not part of alliances often face volatility in the economic and geopolitical environment, supply chain management issues, competition in international and domestic markets, difficulty in compliance with a huge range of restrictions and regulations.

The passengers who are not members of the alliance do not have advantages such as cost benefits, extended networks, access to loyalty points, lounge access, etc.

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Solution 4:

If the airlines' alliances break then it will have a major impact on the aviation industry. Benefits such as economies of scope will be affected. It will result in increased prices, as the lower volume of passengers in aircraft will decrease load factor, thereby increasing the trip costs. The breaking up of alliances will affect advantages such as the smooth management of the supply chain, increase competition in international and domestic markets, there will be difficulties in compliance with the wide range of regulations and restrictions. In effect, the smooth functioning of the aviation industry will be impacted. It will create monopolistic markets, and the passengers will lose their bargaining power.

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Solution 5:

The QATAR ARWYS, RYL AR MRC, RYL JRDNN are the gulf airlines that are part of the ONWRLD alliance.