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While joint ventures offer more pros than cons, they require both parties to get government approval. Alliances, while offering fewer pros, is a much looser contract and does offer many marketing benefits.

Joint Ventures

Definition

  • Cornell University states that a joint venture is “a legal organization that takes the form of partnership in which the persons jointly undertake a transaction for mutual profit. This means that all parts of a deal contributes assets and share all the risks”.
  • Historical Listing of Joint Airline Ventures

historical joint ventures

Pros

  • In a joint venture, risks and costs are shared by both parties.
  • Joint ventures make ti easier to open new routes since airlines will most likely be operating in different markets. One airline can access the established markets and distribution channels of the other airline.
  • A joint venture skips the legal procedures for merging two companies and it is less risky than outright acquisition.
  • This is a temporary agreement and can be broken, if needed.
  • The size of the geographical network will increase with a joint venture, therefore increasing the number of routes, new services, and the ability of the airlines to offer more flexible schedules because they now have more flights.
  • A joint venture provides an immediate team of local employees who understand the market and needs of the new geographical area.
  • There are increased access to resources that the company might not have the resources to provide on their own, for example, a maintenance hub or other facility, or a new investment opportunity.

Cons

  • If the companies are large ones, for instance a company like American Airline or Qantas, the joint venture must be approved by the government to make sure it is not to the detriment of consumers or against competition rules.
  • Two different corporate cultures are now merging. This can cause disputes about control and decision-making and ultimately deciding who has the final say in decisions.
  • Finding the right balance of oversight and control is difficult. On one hand, the company must be protected, but too much oversight results in frustration.
  • If either party makes a bad decision or does not have the same amount of commitment as the other party, the results of the joint venture will be mixed, at best.
  • There can be a lack of clarity regarding obligations and responsibilities of both parties.

Alliances

Pros

  • An alliance will provide a greater access to other markets and a greater virtual network.
  • Marketing can be shared by both parties, reducing costs.
  • A strategic alliance can limit competition.
  • An alliance is cost saving since facilities can be shared. The cost savings and sharing of facilities can be passed on to give the highest value to customers. Facility sharing can also apply to member perks like lounges and frequent flier programs, or airline back offices.
  • While working in the new market, the company also saves on employees that take care things like boarding, taxiing, and baggage loading, since they can use the services and employees of the airline they are in an alliance with.
  • Customers get more flexibility of choice when it comes to when and where they fly. Usually, they also enjoy cheaper ticket prices.
  • Certain alliances can make a monopoly on a certain destination or flight, letting the company agree on a set prices since they are no longer in competition. While this is not a benefit for the consumer, the airline does benefit.

Cons

  • Being an alliance member could close or reduce opportunities with other airlines because they belong to a different alliance.
  • If the airline is a smaller entity, the costs might outweigh the benefits. While they will get a seat at the table, their voice will most likely not carry the same weight of a large airline.
  • Since the airlines normally do not serve common destinations, “and, as a result, the distribution of benefit is, at best, asymmetric“. Being a member usually does not solve most airline problems, and is sometimes just a diversion of management’s time.
  • It is difficult to measure the exact “tangible value” of an alliance, and many airlines state they do not have the “metrics to make people feel comfortable that their investment is returned”. An executive from Star stated it was like being a member at a health club, “To measure an improvement in fitness is difficult; you have to feel it,” he explained. “In Star we perform an annual analysis of benefits to our members. On the cost side it is clear. For revenue, it is less clearly identified.”
TDM

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