Strategic Alliances in the Aviation Industry

Table of Contents

List of Abbreviations

List of Figures and Tables

1 Introduction
1.1 Problem Definition and Objectives
1.2 Course of the Investigation

2 Inter-firm Cooperation and Strategic Alliances
2.1 Strategic Alliances as a Special Form of Cooperation
2.1.1 Attributes of Inter-firm Cooperation
2.1.2 Specific Characteristics of Strategic Alliances
2.2 Classification of Strategic Alliances
2.3 Objectives of Strategic Alliances

3 Development of the Aviation Industry
3.1 Characteristics of the Airline Business
3.2 Historical Development of the Airline Industry
3.2.1 The Phase of Regulation
3.2.2 Domestic Deregulation and Liberalised Markets
3.3 Current Status of the Airline Industry
3.3.1 The Way to a Trans-Atlantic Common Aviation Area
3.3.2 Period of Crises and Growing Low-Fare Competition

4 Emergence of Strategic Alliances in the Airline Industry
4.1 Airline Alliances: Background Information
4.1.1 Marketing versus Strategic Airline Alliances
4.1.2 Areas of Cooperation in Airlines Alliances
4.2 From Interline Agreements to Global Airline Alliances
4.3 Motivation for Strategic Alliances Formation between Airlines
4.3.1 Analysis of the External Environment in the mid-1990s
4.3.2 Motives and Objectives of Strategic Airline Alliances

5 Current Developments of Strategic Airline Alliances
5.1 Strategic Alliances between Airlines in the 21st Century
5.1.1 Analysis of the Current External Environment
5.1.2 Change of Focus of Strategic Airline Alliances
5.1.3 The Key Question - To Join or not to Join Strategic Alliances?
5.1.3.1 Motives for Joining - The Case of Turkish Airlines
5.1.3.2 Motives for not Joining - The Case of Emirates Airlines
5.2 Alliances versus Mergers - The Question for the Future

6 Conclusion

Reference List

Appendix

List of Abbreviations

illustration not visible in this excerpt

List of Figures and Tables

Figure 1: Types of Strategic Alliances

Figure 2: Marketing and Strategic Airline Alliances

Figure 3: Evolution of Airline Alliances

Table 1: Opportunities and threats for major airlines in the mid-1990

Table 2: Opportunities and threats for major airlines in the 21st century

Table 3: SWOT Turkish Airlines.47 Table 4: SWOT Emirates Airlines

1 Introduction

1.1 Problem Definition and Objectives

“Companies are just beginning to learn what nations have always known: in a complex, uncertain world filled with dangerous opponents, it is best not to go it alone” (Ohmae, 1989, p. 143). This statement emphasises the significant developments in firms’ corpo- rate strategy in the 1980s. As a response to the rise of globalisation, and thus, increased competition, companies throughout the world started collaborating with partners with inter-firm cooperation. Their cooperative practices, though, were not equally relevant in all branches, but concentrated mainly on industries that were affected most by the in- creasing environmental dynamic and complexity. Therefore, firms in various industries, such as the automotive or telecommunication industry, established alliances with their competitors in order to stay competitive and to jointly expand into world markets.

However, the aviation industry, in particular, has experienced downright alliance frenzy since that time. With the gradual liberalisation of international air transport, collabora- tions between carriers have steadily gained importance. Therefore, airline alliances have developed from purely horizontal links into more complex and integrated strategic alli- ances. These strategic alliances have been established mainly to bypass existing regula- tory restrictions and to adapt to customers' altered preferences by extending the airlines’ networks. However, with the incidents that occurred during the first years of the 21st century, such as the terrorist acts of 9/11, partner airlines were forced to react to the changed external conditions. This development highlights the high dependence of air- lines and their strategic behaviour on the external environment.

Therefore, this thesis aims to analyse the external conditions that persuaded the airlines to align in complex strategic alliances, and how these factors influenced their objectives. Furthermore, the thesis reveals the extent to which the changes in the external environ- ment have induced a reorientation in the airlines’ alliance strategy.

1.2 Course of the Investigation

This thesis is divided into six chapters. The second part of this work explains strategic alliances' theoretical background in order to enable readers to comprehend the differ- ences between these alliances and other inter-firm cooperations. Therefore, based on the term "cooperation," the paper defines the concept of strategic alliance and presents a classification and objectives of strategic alliances. Furthermore, because the airline in- dustry's evolution is highly important for understanding the formation of airline alli- ances, the third section exhibits the airlines business' historical and current develop- ments, and shows the industry's characteristics.

The subsequent part four of this thesis illustrates the emergence of strategic alliances in the aviation industry. Therefore, after distinguishing between marketing and strategic airline alliances, as well as different areas of cooperation, the paper examines major airlines' external environment in the mid-1990s by means of a PEST analysis. The re- sults of this investigation are then applied to explain the motives for forming strategic alliances and the objectives pursued with this cooperation. In order to compare these findings to airlines alliances' current situation, and to exhibit the reoriented alliance strategy, an examination of the current external environment is conduct in the fifth sec- tion. Furthermore, based on SWOT analyses, airlines' current motives to join strategic alliances or not are exposed.

Finally, part six summarizes the findings of this thesis and concludes that the formation of strategic alliances and their three-stage evolution is a logical consequence of the avia- tion industry's external conditions.

2 Inter-firm Cooperation and Strategic Alliances

2.1 Strategic Alliances as a Special Form of Cooperation

When deciding to embark on a cooperative strategy, companies can choose from a wide range of forms of collaboration. Unfortunately, management practice and business re- search denotes these different types of inter-firm cooperation with a plurality of terms, with unclear and contradictory definitions (Mellewigt, 2003, p. 8). In particular, the term strategic alliance, which is central to this paper, has been used in a rather infla- tionary manner, without a distinct definition (Schwamborn, 1994, p. 5). Thus, for the purpose of this paper, it seems to be appropriate, to derive a clear definition, to depict a classification, as well as to describe the objectives of strategic alliances. The starting point for this is based upon the term cooperation.

2.1.1 Attributes of Inter-firm Cooperation

The term cooperation is generally understood as “the joint performance of an activity by at least two actors in a way that the actions undertaken by one partner intendedly facilitate the actions undertaken by the other partner/s” (Anders, 2005, p. 5). However, in business administration, this abstract definition can be specified when incorporating business firms as the actors, and thus taking inter-firm cooperation into consideration. Accordingly, Anders describes this interacting behaviour among companies as a “coop- erative interorganizational relationship” (p. 8). Provided that the activities of the coop- eration are precisely delimited within a formal contract, he states, moreover, that this relationship can be designated as an alliance. An alliance can therefore be considered as “a close, collaborative relationship between two, or more, firms with the intent of ac- complishing mutually compatible goals that would be difficult for each to accomplish alone” (Spekman, Isabella, & MacAvoy, 2000, p. 37).

The definition given above illustrates the two constitutive attributes of an alliance (Mellewigt, 2003, p. 9). The formation of this type of cooperation in selected tasks of the companies, leads to interdependency in these activities, as well as to a constricted autonomy. The interdependency between the partners results from the need to coordi- nate the formerly independent activities of the companies in order to achieve the agreed objectives (Justus, 1999, p. 23). Therefore, according to Mellewigt (2003), this volun- tary, explicit ex-ante coordination of actions between the partners, enables one to distin- guish the alliance from the mere market transaction, which implies coordination via the market.

While the interdependency within an alliance partially narrows the economic autonomy of the partners because of the need to coordinate, the legal autonomy of the companies, in contrast, persists completely. Considering an acquisition, however, one of the com- panies involved abandons its economic independence, and moreover, in a merger, the merged company does not only cede its legal autonomy but also its economic auton- omy. Thus, this second attribute renders it possible to differentiate an alliance from ac- quisitions and mergers (Justus, 1999, p. 24).

These distinctions presented above demonstrate that, in order to be regarded as an alli- ance, there has to be a minimum degree of interdependence as well as autonomy, whereas, with increasing levels of integration (Das & Teng, 2001, p. 15), the interde- pendence between the companies rises, and the autonomy declines. Therefore, referring to the concept of transaction cost economics, alliances are hybrid forms between market transactions and hierarchy (Mellewigt, 2003, p. 11).

2.1.2 Specific Characteristics of Strategic Alliances

Having determined alliances as a specific form of inter-firm cooperation, it is further- more possible to define more accurately strategic alliances. Hence, in order to delineate this type of alliance from others, several authors allude to different criteria to specify strategic alliances (Justus, 1999; Mellewigt, 2003; Schwamborn, 1994). However, there are three characteristics which in literature are frequently considered as key.

First, it is often pointed out that the strategic dimension, which becomes already appar- ent in the term as such, is fundamental. This aspect implies an intended long-term orien- tation of the relationship, as well as depicting the pursuit of establishing potentials for success and, simultaneously, a competitive advantage over the rivals who are not part of the alliance. In addition, it distinguishes strategic alliances from “traditional” opera- tional alliances which focus on the short-term, as well as operational duties, and do not seek primarily to achieve a competitive advantage (Hofer, 1997, p. 14; Schwamborn, 1994, p. 7). In this context, Porter and Fuller (1986) observe that “coalitions are becom- ing more strategic, through linking major competitors together to compete worldwide. More traditional coalitions were often tactical, involving tie ups with local firms to gain market access or to transfer technology passively to regions where a firm did not want to compete directly” (p. 315).

Furthermore, in strategic alliances, the partner firms focus on the realisation of synergy effects. By combining the critical resources and production factors, they seek to enhance the value-creation potential, and thus to improve their competitive position. Therefore, this characteristic is closely related to the previously presented strategic dimension (Schwamborn, 1994, p. 9).

Finally, in general, alliances are frequently categorized in terms of the direction of inte- gration. Accordingly, alliances can be either described as horizontal, vertical, or exter- nal. Horizontal alliances refer to inter-firm cooperation with competitors of the same production stage, whereas vertical alliances indicate those with partners from an up- stream or downstream stage of production or trade level. In contrast, external alliances label those alliances which are formed with companies operating in other industries (Burton & Hanlon, 1994, p. 211; Fleischer, 1997, p. 15; Justus, 1998, p. 29). In this con- text, it is often mentioned that strategic alliances are primarily restricted to horizontal cooperation. However, this opinion is not without controversy in the literature (Justus, 1999, p. 29; Michel, 1996, p. 27). Due to the fact that strategic alliances are often formed between direct competitors, this limitation seems to be apparent. Though, as vertical as well as external alliances can also exhibit a strategic dimension, the restric- tion to horizontal alliances should not apply with respect to this paper.

Hence, with the three characteristics, as well as the constitutive attributes of alliances given above, for the purpose of this paper, a strategic alliance is defined as “a long-term partnership of two or more firms who attempt to enhance competitive advantages col- lectively vis-à-vis their competitors by sharing risks and resources, market access capa- bility, improving product quality und customer service, and thereby, improving profit- ability” (Oum, Park, & Zhang, 2000, p. 4).

Strategic alliances encompass various forms, ranging from simple to more complex long-term partnerships, as depicted in the next section.

2.2 Classification of Strategic Alliances

In the prevailing literature, there are different concepts of how to classify strategic alli- ances. Accordingly, Justus (1999) proposes to structure strategic alliances via various criteria, for example, via their content of activities, or their duration of cooperation. Fur- thermore, Schwamborn (1994) suggests organizing them according to the functions they involve. However, most authors resort to the criterion level of integration (Das & Teng, 2001, pp. 15), which contains the degree as to how strongly the cooperating firms con- strict their legal autonomy, and therefore they range the diverse strategic alliance types in compliance with the concept of an alliance as a hybrid form, depicted in section 2.1.1 (Mellewigt, 2003, p. 12; Schwamborn, 1994, p. 14).

In a typology of strategic alliance forms developed by Das and Teng (2001), the crite- rion of level of integration is complemented by two further criteria, equity position as well as that of forming of an independent entity (Anders, 2005, p. 44). Taking these three criteria into account, while distinguishing non-equity as well as equity alliances, the authors determine four basic types of strategic alliances: (1) unilateral contract based alliances, (2) bilateral contract based alliances, (3) minority equity alliances, and (4) joint ventures (Das & Teng, 2001, p. 15) (Figure 1).

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Figure 1: Types of Strategic Alliances, Adapted from Justus (1998, p. 26) and Das & Teng (2001, pp. 15)

According to Das and Teng (2001, p. 15), unilateral contract based alliances are charac- terized by a relatively low level of integration and hence higher economic independence between the partners when performing their activities. Therefore, this type of strategic alliance contains more simple alliances, such as licensing or distribution contracts. In contrast, in bilateral contract based alliances, the economic autonomy of each of the partners is more constricted, as this type necessitates the continuous cooperation in the defined tasks in order to build up joint assets by sharing complementary or similar re-

sources. Joint marketing or closer supplier relationships can be taken as an example of this type of alliance (Das & Teng, 2001, p. 16).

In minority equity alliances, the firms do not only bring in resources, but also acquire an equity stake in one or more of the partners (Anders, 2005, p. 46). With an equity swap in the formerly mentioned relationships, the partner firms become more integrated and thus interdependent. Contrary to this type, joint ventures involve the creation of a new legal entity, whereas the collaborating companies retain their total legal independence. All duties which are agreed to cooperate upon are conducted exclusively within the new entity (Oum et al., 2000, p. 3). Although there is some disaccord concerning whether joint ventures represent a special form of strategic alliances or not (Flouris & Oswald, 2006, p. 109), for the purpose of this paper, joint ventures are a strategic alliance type falling short of a merger.

2.3 Objectives of Strategic Alliances

Strategic alliances were implemented in different industries all over the world in the past two decades (Elmuti & Kathawala, 2001, p. 205). The underlying reason for this trend is often detected in a change of external factors, such as the economy or technol- ogy, which result in a perceived lack of resources. This shortage constitutes a potential threat for the firms’ competitive advantage, and thus needs to be amended (Child & Faulkner, 1998, p. 69). Therefore, firms will cooperate if the relationship with a partner can either secure or enhance their advantage, and the opportunity to do it on their own is not an option. In the situation of change, in order to maintain their competitive position, firms pursue various objectives by establishing an alliance. If these targets are actually achieved or not, depends largely on the resources and strengths the partner companies possess. The predominant objectives companies seek to achieve in a strategic alliance are exhibited shortly in the following.

Market access

When entering into new geographical markets that offer future growth potential, com- panies are possibly confronted with several problems. First, the access to the market is often hindered by state regulations which aim to protect the domestic companies. Trade barriers will not be overcome unless the foreign company establishes an alliance with a domestic partner. Even if the entry is unrestricted, it could be an advantage to form such an inter-firm cooperation, due to a lack of knowledge about the market which is not possible to derive within a short period of time, but which the company can gain through the partnership. Furthermore, an alliance with a domestic partner provides ac- cess to its distribution system, and therefore avoids the development of a new system which involves high initiation costs (Elmuti & Kathawala, 2001, p. 206; Mellewigt, 2003, p. 17; Steininger, 1999, p. 138).

Cost advantages

When cooperating, the companies can effectively influence their cost structure, and hence achieve a cost advantage by combining their activities and assets. This renders it possible to achieve economies of scale or learning cure effects. The former one occurs when the marginal cost of producing an additional unit is lower than the total average cost, whereas the latter one can be ascribed to the decrease of production costs due to an increased productivity by learning. Moreover, when the partners are able to revert to the same production factors, an alliance can lead to economies of scope. Beside these ef- fects, a cost advantage is furthermore realized by improved capacity utilization (Justus, 1999, p. 37; Steininger, 1999, p. 141).

Sharing of risk and resources

Strategic alliances limit the risk inherent in some corporate activities or projects in two different ways. On the one hand, an alliance causes a mitigation of risk, as both of the partners provide resources as well as bear responsibility for the success, and therefore spread the risk. On the other hand, it is possible to decrease the risk for each of the companies because of the fact that they provide complementary resources, thus elimi- nating some of their individual weaknesses, and consequently increasing the probability of success. In addition, even in the case of failure, the individual financial loss is smaller, as the sum invested is not as high as when competing alone (Child & Faulkner, 1998, p. 77; Elmuti & Kathawala, 2001, pp. 206; Mellewigt, 2003, pp. 19).

Impact on intensity of competition

Firms can deliberately influence the intensity of competition within their market by joining forces in strategic alliances. The competition in a market is reduced when stop- ping competition between companies and starting to vie through alliances. As the firms within an alliance will furthermore decrease their competitive behaviour, there is a ten- dency towards collusion, which poses an entry barrier for new potential competitors (Justus, 1999, pp. 42; Steininger, 2003, pp. 139).

3 Development of the Aviation Industry

3.1 Characteristics of the Airline Business

The airline industry has a substantial impact on the development and shape of the global economy. By offering its product of air transport, airlines facilitate world wide travel as well as international trade, and they redound to the wealth of the country where they are registered (Heracleous, Wirtz, & Pangarkar, 2005, p. 1). However, it is often mentioned that the airline industry is different from other industries, and that it is a business with unique characteristics which frequently lead to precarious excess capacities in times of recession (Joppien, 2006, p. 111). Because of the fact that these specific criteria deci- sively contribute to the conditions airlines have to cope with for being profitable, it is crucial to expound the most important ones.

In the airline business, the simultaneous production and consumption of the service of- fered by the airlines causes a perishability of the product for air transport (Joppien, 2006, p. 112). Therefore, every seat in the aircraft which is not sold at the time of depar- ture does not generate proceeds. This fact might lead to price erosion, as airlines tend to sell free seats for a lower price in the case of need, and thus reduce profitability (Stein- inger, 1999, pp. 101). A pressure on profitability can also arise from the high product homogeneity inherent in the air transport service. From the customer’s perspective, it is hardly possible to identify a difference between one aircraft and another. Accordingly, the air transport product is considered as representing a commodity (Stoll, 2004, p. 96). Therefore, in order to be silhouetted against the competitors, airlines need to offer addi- tional service which charges the cost side, or they need to lower the price, which results in less revenue.

These effects reinforce the traditional tendency to low margins in the airline business compared to other industries (Kleymann & Seristö, 2004, p. 129). This low margin trend can be ascribed to three airline-specific factors, amongst other things. First, due to various influences, the airline industry has noticed a steady decline in yields since 1990 (Stoll, 2004, p. 4). Moreover, with a small proportion of variable costs, airlines face high fixed costs, such as aircraft or reservation systems, which “during the through of a business cycle, […] adversely affect financial performance” (Heracleous et al., 2005, p. 17). Thus, a high percentage of total costs are independent from the amount of airborne passengers, while the cost of an additional passenger is rather small (Steininger, 1999, p. 100). In addition, some elements of costs are beyond the airlines’ control, as for ex- ample, airport or government charges (Heracleous et al., 2005, p. 15). So, according to Joppien (2006), as cost and profit per unit lie at close quarters, airlines might fall into a “yield-cost-dilemma.” (p. 115).

Another cost component which cannot be influenced by airlines consists in the price of oil and fuel, respectively. Airlines are sensitive to changes of, and are exceedingly de- pendent on oil prices, as fuel accounts for the highest portion of cost beside labour ex- penses (Heracleous et al., 2005, p. 12). In this context, “IATA [International Air Trans- port Association] claimed that every dollar increase in the price of a barrel of oil adds about $ 1 billion to airline industry costs” (Doganis, 2006, p. 11).

However, the complexity of the airlines’ business does not only stem from the depend- ence on oil prices, but also from other peculiarities of the airline industry. Thus, for in- stance, air travel demand exhibits substantial cyclical as well as seasonal fluctuation (Joppien, 2006, p. 114). While seasonal variations in demand are easily predictable, the trend of demand in the airline industry is highly dependent on the development of the world economy (Shaw, 2004, p. 43). As the income elasticity of air travel demand is estimated to be between 1 and 2, the airline industry tends to grow and diminish in a larger scope than the economy does (Steininger, 1999, p. 17). The influence on the de- velopment of the airline business is even more considerable in terms of scale and dura- bility, if, in the case of an economic downturn, the development “is accompanied by – or caused by – external factors that can in turn adversely impact on the airline sector” (Doganis, 2006, p. 5).

Furthermore, an effective adjustment to these cyclical trends of demand is a nearly un- feasible task for airline management. As procurement of aircraft requires a long-term strategic lead time, airlines are not able to rapidly adopt their supply of air transport to the corresponding demand. This inevitably leads to excess capacity in times of marginal demand, and thus has a negative effect on price and on profitability (Joppien, 2006, p. 116).

Another main feature of the airline industry is the lack of scale economies in an airline’s aircraft operation. According to Kleymann and Seristö (2004), there is a “limit to economies of scale that an airline can derive purely from being large in size” (p. 5) as unit cost does not vary between carriers “as long as factors such as the average stage length, traffic density and input unit prices remain the same” (p. 6). In contrast, other upstream or downstream activities in the airline value chain can generate economies of scale, as for example, in the joint procurement of fuel or joint marketing (Stoll, 2004, p. 95).

However, in addition to the characteristics outlined above, there is another important distinguishing mark which significantly influences the development of the airline busi- ness all times. In the last two decades, almost all formerly regulated industries passed through a process of liberalisation, and now enjoy open competition, as well as free market access. However, although more liberalised than 20 years ago, the airline indus- try is still an unusually highly protected industry, in particular, in international markets. This development is exposed in the next two chapters.

3.2 Historical Development of the Airline Industry

The historical development of the airline industry underlies a paradoxical phenomenon of world trade (Doganis, 2006, p. 27). Although the airline sector was one of the main drivers for globalisation and thus the shrinking of the globe, it was not allowed to fol- low the regular path of global industry development (Stoll, 2004, p. 64). Due to severe regulation and foreign ownership restrictions, the structures of the airline industry did not develop as internationally as its operations are. However, since the late 1970s, the airline business has been going through a process of deregulation and liberalisation. Despite these endeavours for deregulation, national interests still prevent the airline in- dustry from being a competitive one.

3.2.1 The Phase of Regulation

After the acknowledgement of sovereignty in the airspace above the territory in the Paris Convention in 1919, most governments throughout the world enacted regulation acts on air transport (Stoll, 2004, p. 65). The reasons for government involvement and the implementation of these severe economic rules on air traffic lay in several aspects, such as fear of market failure, national prestige, safeguarding of national defence, or concern about a lack of safety due to free competition (Heracleous et al., 2005, p. 8). The prevailing regulatory body of thought resulted in restrictive decisions about market access, and fares as well as frequencies. Furthermore, by means of high subsidies and state ownership, the national flag carrier was to be prevented from going bankrupt (Steininger, 1999, p. 28).

Despite the ambitions of the United States to achieve a free market organization, the globally predominant regulatory policy also became accepted in international air trans- port by the agreements based on the inter-governmental Chicago Convention in 1944 (Beyen & Herbert, 1991, p. 23). In the aftermath, “the international market that devel- oped was characterized by national airlines from each country serving routes, airlines charging same fares, and often sharing markets and revenues” (Evans, 2001, p. 234). This evolution was a consequence of the strict regulatory system which was to prevail until the early 1980s, and which consisted of three instruments that stipulated market access, fares, and capacities: bilateral air service agreements (ASAs), inter-airline pool- ing agreements, as well as the tariff-fixing machinery of the IATA (Doganis, 2006, p. 27; Steininger, 1999, p. 29, Stoll, 2004, p. 66).

The bilateral air service agreements represented the central part of the regulatory system and, however, still determine international air transport between most countries (Doganis, 2006, p. 31). These ASAs are inter-governmental memoranda of understand- ing which aim at arranging traffic rights between two countries in terms of, for example, routes to be flown or frequencies to be tendered (see Appendix 1). Furthermore, they contain nationality-based directives about ownership and control in order to expel those carriers from the negotiated traffic rights that do not belong to the signatory states (Civil Aviation Authority, 2006, p. 1).

Due to these rigid and inflexible instruments, there was little incentive for competition on price, or differentiation among the flag carriers, as well as few opportunities for new airlines to enter the market. Thus, a process of concentration was benefited which bred oligopolistic and duopolistic market structures, respectively (Beyer & Herbert, 1991, p. 19; Grundmann, 1999, p. 31; Steininger, 1999, p. 29). This environment, as well as sub- stantial state subsidies, led in turn to a lack of innovation and efficiency, and impeded the insolvency of inefficient airlines (Doganis, 2006, p. 31; Sinha, 2001, p. 68).

However, during the 1970s, various developments in the world economy, as well as in the airline industry, such as the Oil Crisis or the entry of lower-priced charter airlines which did not follow the IATA tariff guidelines, brought growing concern about this regulatory system. Moreover, the public was annoyed about the protection of high-cost airlines and their high fares, and efforts for more efficiency and profitability attracted notice (Doganis, 2006, p. 29; Kleymann & Seristö, 2004, p. 1). Therefore, first in the United States, and subsequently in other countries, there was criticism against the strin- gent rules of the regulatory regime, and a process of deregulation and liberalisation emerged.

3.2.2 Domestic Deregulation and Liberalised Markets

Against the background of the public pressure and efforts for “economic disengage- ment” by deregulation and privatisation throughout all industries, domestic aviation markets were deregulated in order to allow liberal competition among the carriers, and thus higher productivity and lower fares (Burton & Hanlon, 1994, p. 209; Kleymann & Seristö, 2004, p. 2). However, this trend of economic disengagement in domestic mar- kets was not able to effectuate a likewise open international market. Although slightly more liberal, in the mid 1990s, international air transport was still regulated by bilateral agreements, and restrictive provisions about ownership and control.

The impetus for domestic deregulation was the ‘Airline Deregulation Act of 1978’ in the U.S.A., which led to a rapid and radical reformation of the U.S. domestic aviation market - the largest domestic market (Glisson, Cunningham, Harris, & Di Lorenzo-Aiss, 1996, p. 26). With entry barriers removed, there was free competition, and thus new carriers with lower fares flooded the market that resulted in pressures on price, and a loss in market share of the major airlines (Chan, 2000, p. 495).

However, in the early 1980s, the established airlines developed counter-strategies which created novel effective entry restrictions for new airlines. So, in order to reduce costs, they launched frequent flyer programmes (FFP), yield-management systems, computer reservation systems (CRS) and, in particular, hub-and-spoke networks which were hoped would substantially influence the aviation industry (Steininger, 1999, p. 37). In the aftermath, the major airlines propelled a process of consolidation which redounded to a domestic market dominated by five airlines (Iatrou & Oretti, 2007, p. 7). However, when focusing on international markets, the carriers’ expansion plans were not easily realizable due to the existing ASAs. Therefore, the U.S. government started negotiating bilateral open skies agreements for liberalising the international air service (Chan, 2000, pp. 496).

Whilst in the meantime, several countries followed the U.S. efforts for deregulating their domestic market and thus facilitating the establishment of new domestic and inter- national airlines, the European Union (EU) made gradual movements towards a single European aviation market, beginning in 1987 with the first liberalisation package (Doganis, 2006, p. 45). In the context of the political endeavours of the European states to create a unified “domestic” market, the Council of Ministers agreed on three “pack- ages” of measures to deregulate the European airline market (Iatrou & Oretti, 2007, p. 8).

While the first package issued in 1987 constituted the fundamental redirection of the regulatory framework for European air transport with more liberal fares and the equal sharing of capacities (Steininger, 1999, pp. 41), it was the “Third Package” of 1993 which brought about the fully liberalised intra-EU air traffic, and thus an open skies scheme (Doganis, 2006, p. 46). In this context, free market access, abandonment of price controls, as well as the harmonization of “the criteria for granting of operating licences and air operators’ certificates by EU members states” (Doganis, 2006, p. 47) were established. Furthermore, the national ownership regulation was substituted by a “community ownership” provision. Since then, the ‘substantial ownership and control’ of an airline must be in hands of an EU-citizen, and not essentially in those of a citizen of the state in which it is registered (Steininger, 1999, p. 43). Eventually, in 1997, the European open skies system was completed with the unfettered permission of carbotage rights (Kleymann & Seristö, 2004, p. 2).

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