Growing Alliances: Core Issue in the Industry, The State of Affairs, Political, Social, Cultural Climate, Impact of Profitability in the Industry (Research Paper Sample)

Growing Alliances
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Abstract
The air transport sector has witnessed tremendous growth and expansion in recent times. The IATA asserts that global travel is set to surpass earlier projections and assists airlines in recovering from profits earned in previous years. KQ is expected to recover from losses and expand its fleet to venture into new routes. The air travel segment is supposed to mature as more acquisitions, alliances and mergers are witnessed.
Growing Alliances
The airline industry has witnessed tremendous evolution and expansion since the inception of the industry. The air transport industry contributes nearly $ 2 trillion roughly 33% of the world’s gross domestic product. Globalization of global economies and business has enhanced expansion, mergers, acquisitions and liberalization in the air transport industry. The changes have resulted in stiff competition, the emergence of Low-Cost Carriers (LCC), the creation of alliances and government-affiliated lobbying. The air transport industry formulated a global association to spearhead and champion market integration, policy regulation and enhanced the technical growth of the industry. The industry established the International Air Transport Association (IATA) headquartered in Montreal, Canada. The association consists of 250 major airlines globally, mainly major airlines. Alliances within the organization serve different interest for various carriers. Alliances in the air transport industry are distinct groups amongst airlines serving interests of the carrier such as code sharing, similar price structures, single sourcing of inputs and championing an alliance expansion to new markets. Currently, there exists three major unions in the world; SkyTeam, Star Alliance and Oneworld. This year (2015), the SkyTeam alliance was awarded for the best industry association by Air Transport News for its efforts in enhancing customer focused products. Some of the members of the coalition include Kenya Airways (KQ), KLM (KL), Delta Airlines (DL), Air France (AF) and Korean Air (KE). The Alliance employs over 450,000 employees and earns revenues amounting to more than $ 180 billion annually. KQ is one of the powerhouses of the air transport in Africa and headquartered in Kenya. The airline is a public listed firm on the Nairobi Securities Exchange and is majorly owned by KLM and the Kenyan government. The growth of the East African region has enhanced the aggressive expansion of routes and acquisition of new aircraft to replace the aging fleet. The expected formation of the economic union in East Africa is expected to increase traffic in air travel both within and from other countries. The essay seeks to evaluate growing alliances with KQ in the ever-changing airline industry.
Context of alliances
Air transport experienced teething challenges since its inception. The air travel network was conceived to broaden the transport corridor for major trading blocs. Air travel was the preferred mode of transport for overseas travel since it took shorter periods unlike other means of transportation, cost efficient and allowed for easier connectivity amongst countries. KQ was established in1977 by the government of Kenya after the collapse of the East African Community. Prior to the establishment of the entity the East African Airlines operated in the region and other international markets. However, the state privatized the airline to enhance the expansion and technical support for the infant carrier. Professional partners in the air transport industry were mooted with British Airways, Lufthansa, South African Airways and KLM, mooted as possible strategic partners. KLM mooted and advanced KQ’s integration into the SkyTeam, which later accepted full membership of the Kenyan unit in June 2010 (Vasigh, 2008). Increased competition in the African space by other players such as South African Airways, Ethiopian Airlines, and EgyptAir further convinced the airline seek an alliance with strategic partners. The SkyTeam initially advanced interests in code sharing, expansion into new markets and proprietary uniform regulations for operation (O’Connor, 2003). The alliance has contributed to KQ’s routes development in the recent future due to the expected traffic increase in the region. The airline’s attempts to diversify into new markets through government to government negotiations yielded little as talks dragged on for years. The alliance was an opportune alternative for the airline to access different markets. Moreover, the cost of doing business was spiraling and eating up revenues of the firm. The SkyTeam’s initial members support through single sourcing of the airlines oil needs to reduce the cost of doing business. Oil prices at the time were spiraling to trade embargos imposed on Iran and falling production by OPEC members. The recent onslaught by budget carriers in major routes operated by KQ has further forced the airline to restructure the organization of the firm. KQ initially offloaded aging airplanes, laid off a significant portion of the workforce and established a budget carrier on local routes to reduce competition on the core business of the firm. However, recent losses have denied the firm’s aggressive expansion through the differing purchase of new airlines to a later date. Therefore, the integration of KQ into the alliance has enhanced capacity and traffic to the airline.
The State of Affairs
Air transport has been a compelling industry for both regional and major players in the industry. The industry has witnessed more mergers, acquisitions and partnerships than any other industry. Records from the International Association of Air Travel, indicates major airlines have significant stakes in other airlines. The merger between American Airlines and US Airways, to American Airlines in 2013 enhanced membership of the Oneworld alliance (Oum, 2004). The frequent mergers and enhanced participation in associations are, as a result, stiff competition in the segment. Airlines have evolved from price competition, product differentiation and recently to customer focus products. Airlines are serving similar routes but within different alliances have on many occasions charged differently to differentiate products from the competition. Moreover, airlines offer different products for different customers ranging from economic and business travel classes. However, airlines have struggled competitively owing to the adoption of larger airplanes in the main competitive routes. KQ faces competition from other African carriers destined for routes in the Middle East due to the increased traffic on the ways. KQ operates daily flights to Guangzhou, an important business hub in mainland China. Similarly, South African Airways, Ethiopian Airways, and the Fly Emirates have launched an onslaught to the route offering different prices and packages for different customers. The concentration of airlines in routes with magnanimous traffic often affecting the profitability of the routes. The Middle East region has experienced an increase in global and local traffic as a result of increased business in the area. Translocation of multinationals to the Middle East enhanced foreign direct investments and proximity to the Asian Pacific, and African region has led in frantic efforts for expansion of major airlines in the area. Moreover, fluctuation of oil prices in 2012 negatively affected the profitability of the air transport industry. KQ suffered $US 92 million loss in the full year results for 2013. The results indicated a more than 30% drop in revenues from a mix of factors affecting the airline. The airline has suffered from travel advisories from European countries, jitters over post-election violence and panic of retaliatory aggression from Al-Shabab. Therefore, the Alliance offers reprieve for the airline due to access to markets within the alliance.
Political, Social, Cultural climate
Globalization of air travel has enhanced enormous political involvement in the aviation industry. Previously, major airlines were majorly owned by respective governments due to the initial high capital outlay involved. Evolution of the air travel allowed for the dilution of government ownership in most airlines. However, the issue of state ownership has been terse amongst major players in the conflict of interest in the regulation of the actors operating in major hubs. The Fly Emirates and Ethiopian Airways have significant shareholding from the respective governments. The Ethiopian government has invested heavily in the airline and closed the Ethiopian hub for major airlines to protect its turf. The Fly Emirates has enhanced global business through non-affiliation to any alliance, enormous government investment and expansion of routes through government negotiated deals (Adey, 2007). The two airlines have benefitted from the deep pockets of the respective governments to succeed further in the tumultuous industry. Moreover, the two airlines continue to expand their fleet, route coverage and continuous growth in revenues aggressively over the years. However, KQ has been negatively affected by the apathy of the European governments to work with the Kenyan government in the precincts of the prevailing court cases bedeviling the presidency in the ICC (International Criminal Court). Furthermore, the government’s policy on more business partnership with the East, particularly China, has further denied traffic from previous source markets especially for the tourism sector. However, the new government has established cordial relations with former allies such as the USA and the UK to enhance business relationships. A recent article in the Business Daily articulated the Kenyan government’s efforts to create direct flights ...