Let's say you're a businessperson in New York who needs to fly to Hong Kong. Logging on to bitz you find that American Airlines (AMP) offers a nonstop round-trip flight for $2,692 Because Orbitz recommends that you Act Fastly Only 1 ticket left at this price' you buy your ticket online. On your departure date, you arrive at the American Airlines ticket desk, only to be referred to the Cathay Pacific Airways counter. Your flight, the ticket agent informs you, is actually operated by Cathay, and she points to the four-digit code*we number' on your ticket. Bewildered but hoping that you're booked on a flight to Hong Kong, you hustle to the Cathay counter, where your ticket is ii fact processed.
Settled into your seat a few hours later, you decide to get on your Laptop to see if you can figure out why you are and are on the flight that you booked. Going back to Orbitz you find that, like American, Cathay does indeed offer a nonstop round-trip flight to and from its borne city of Hong Kong-for $1,738. It dawns on you that if you'd bought your ticket directly from Cathay, you'd be sitting in the same seat on the same airplane for almost $1,000 less.
If this scenario sounds confusing, that's because it is, even to veteran flyers. What's confusing about it is the practice of code sharing which works hke this: You buy a ticket from Airline A for a flight operated by Airline B on a route that Airline A doesn't otherwise serve This practice is possible if both airlines, Like AMP and Cathay, belong to the same airline alliance (in this case, One world).
On the surface, the advantages to the airlines may seem mostly a matter of perception: An airline seems to be serving certain markets that it doesn't actually serve and flying certain routes more frequently than it actually does. The networks formed by code sharing agreements, however, are real, and the breadth of an airline's network is a real factor in attracting high-margin corporate travelers. In fact, the spread of code sharing has led directly to the formation of much Larger 'afliances' of carriers who cooperate on a substantial level, including codes baring and shared frequent-flyer programs.
The Largest airline alliances are the Star Alliance, which ides United Airlines, US Airways, Air Canada, Air China, and Scandinavian Airlines: Sky Team, which includes Delta, Air France, Alitalia, and Dutch-based KLM; and One world, which includes AMP, Cathay, Qantas, British Airways, and Japan's JAL
An airline alliance is one form of a virtual organization- in this case, a temporary alliance formed by two or more organizations to pursue a specific venture or to exploit a specific opportunity. Although each member remains an independently owned and managed organization, alliance members can save money by sharing sales, maintenance, and operational facilities arid staff (such as check-in boarding, and other on-the-ground personnel), and they can also cut costs on purchases and investments by negotiating volume discounts. The chief advantages, however, are breadth of service and geographical reach-in short, size (both perceived and real). Star Alliance, for example, operates 21,000 daily flights to 1,160 airports in 181 countries, According to the most recent data, its members carried 603.8 million passengers for a total of nearly 1 trillion revenue passenger kilometers (1 rpk means that 1 paying passenger was flown 1 kilometer).
Based on rpk (which is real a measure of sales volume), Star commands 29.8 percent of global market share in the airline industry-greater than the combined market share of all airlines that don't belong to any of the three major alliances.
Note that our definition of a virtual organization indicates a "temporary alliance," and shifts by members of airline alliances are not unheard of. In January 2009, for example, a few months after merger talks had broken down with United Airlines,
Continental Airlines, a member of Sky Team since 2004, announced that it was joining United in the Star Alliance, According to one analyst, the move, which took effect in October 2009, "was obviously a precursor to a full-blown merger," and, sure enoL4\ Continental and ticked merged in May 2010 under a parent company called United Continental 1-loldings. The new airline remains a member of the Star Alliance
The Continental-United merger was particularly bad news for both AMP, a member of One world and the country's largest stand-alone airline, and US Airways Group, a member of Sky Team and the fifth Largest US carrier. With the merger of Continental and United, says Vaughn Cordle, chief analyst at Airline Forecasts, a specialist in industry investment research, "the odds of... bankruptcy for US Airways and American increase because it will be too difficult, if not impossible, for them to remain viable as standalone businesses.. - Without a new strategic direction and significant changes in the industry's structure,' Cordle predicts, AMP and US Airways "wI continue on the slow - -- path to failure
Cordle recommends consolidation, and many analysts say that AMP management had begun considering its options even before the Continental-United merger. The best strategy, adds George Van Horn, an analyst at the research firm lBlS World, needn't be a merger but could involve some lord of looser alliance, Who is the likely partner if AMP decodes to consolidate? John Kasarda, an aviation expert at the University of North Carolina's Kenan-Flagler Business School. Thinks that an AMP-US Airways merger isn't out of the question: it would be more out of necessity," he admits, but both airlines have been asleep at the switch" and can expect their respective shareholders to demand some kind of action A merger, however, would require US Airways to leave the Star Alliance, and US Airways says that "we highly value our membership in Star and maintain that it's the strongest alliance."
In any case, observers agree that AMP needs to make some kind of strategic move. Once the worlds largest airline, it's now n..jriber three, behind the new Continental-United and Delta Airlines. Among U.S. airlines, AMP has the lowest margins and highest costs, and it's also the only U.S. airline that lost money in 2010. lBlS Worlds Van Horn points out, however, that AMP has considerable experience at the kind of deal making in question: American, he reminds potential investors, "helped originate the whole idea of alliances and partnerships, If somebody should be good at it you could make the argument they should be."
Take a situational view of organization design what roles have technology and environment played in the development of alliances and virtual organizations in the airline industry? In what ways does the corporate-Level strategy of joining an alliance affect an airline's organizational functions?