Airline I ndustry Alliances in 2004

Performance in the Beleaguered Airline I ndustry

The Sky Team Alliance
Marketing Plan

Christa Shuman
Gregory Steinbrenner
Michelle Laura Thomas
Jacinda Tran
William Donald Walker III

















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Table of Contents

Executive Summary .......................................................................................................... 3
Situational Analysis .......................................................................................................... 3
Introduction ...................................................................................................................... 3
Market Analysis ............................................................................................................... 3
Customer Analysis ........................................................................................................... 4
Competitor Analysis ........................................................................................................ 4
Company Analysis ........................................................................................................... 5
Marketing Objectives ....................................................................................................... 6
Marketing Strategies ........................................................................................................ 7
Action Plans ....................................................................................................................... 8
Peformance ...................................................................................................................... 8
Promotion ......................................................................................................................... 8
Distribution ...................................................................................................................... 9
Customer Service ............................................................................................................. 9
Market Research ............................................................................................................. 10
Financial Analysis ........................................................................................................... 10
Contingency Plans ........................................................................................................... 10
References ........................................................................................................................ 11
Appendix .......................................................................................................................... 11











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Executive Summary

Sky Team is an airline alliance founded in 2000, becoming the last of the three major airline
alliances to be formed after Star Alliance and oneworld. However, in terms of the number of
passengers and members, Sky Team has grown to be the second largest alliance in the world,
second only to Star Alliance, after a merger between Air France and KLM. Sky Team has seen
great success with 490 million in annual revenue along with 81 million from the development
of passenger sales joint ventures. In addition, Sky team is market leader in some of the key
performance metrics such as global passenger share.

Sky Team continues to develop strategies that will allow it to become a market leader among the
three major airline alliances in other performance metrics such as global operating revenue.
There are also challenges that Sky Team is facing in the near future such as SARS, the conflict in
Iraq, terrorism, and the global economy. This marketing plan represents how Sky Team will deal
with these challenges while embracing opportunities to become a market leader in the global
airline industry. Sky Team hopes to achieve that by creating superior customer service,
increasing revenues and cutting costs. In addition, they plan to create new partnerships with
airlines, particularly in areas with increased market growth such as China and India.


Situational Analysis

I ntroduction
The airline industry consisted of full-service scheduled airlines, low-cost airlines, regional
airlines, and holiday charter airlines. In 1992, individual airlines began to form alliances
internationally with the goal of increasing revenues. These alliances were soon seen as a tool to
save costs by sharing resources such as staff, marketing, aircraft purchases, and maintenance.
Furthermore, code sharing allowed airlines to expand and optimize their flight paths. However,
in the early 2000s, the airline industry faced terrorism, SARS, the Iraqi war, and a dropping
worldwide economy, which caused the industry to suffer financially. In an effort to overcome
these obstacles, alliances worked to increase their airline membership. By 2004, there were three
major airline alliances that made up 60% of passenger traffic: Star Alliance, oneworld, and Sky
Team.

Market Analysis
In 2004, there were approximately 1.6 billion airline passengers worldwide. However, passenger
traffic had only increased by 6.5% compared to what it had been in 2001, a significant
disappointment compared to the 50% increase that was estimated in 2010. The United States
held the largest air transport market with 31.6%, Asia Pacific with 23.7%, and Europe with
21.8% of passengers (see Exhibit 1).

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In 2003 to 2004, The European Commission and United States Department of Transport had
attempted to negotiate deregulation of their airline markets, but the European Union transport
ministers ultimately rejected the proposal in 2004. This not only stood in the way of further
deregulation, but it also became an obstacle for European airlines to gain access to the U.S.
market. This access to the U.S. market was particularly important because transatlantic flights
between North American and Europe accounted for the highest percentage of intercontinental
flights at 3.6% (see Exhibit 2 and 3).

By 2004, the airline industry as a whole not only continued to struggle to augment passenger
flight travel, but it also faced increasing oil prices and insufficient competition.

The following are Key Success Factors to company growth in the airline industry:
Access to niche markets
Prompt delivery to market
Effective cost controls
Ability to pass on cost increases
Well-developed internal processes
Access to the latest available and most efficient technology and techniques

Customer Analysis
Sky Teams customers are the people who choose to do their business and personal travel with
one of the 20 airlines who are affiliated with this alliance. Nearly 16,323 daily flights. 1,052
destinations awaiting your arrival. 177 countries to explore. Our 20 Sky Team member airlines
make it possible for you to travel the world in a better way. Whether making a personal journey
or doing global business, youll enjoy more flexibility, convenience and choices along your
journey with Sky Team. Were working together so we can focus more on caring about you
(Sky Team, 2014).

Many of the airlines affiliated with the Sky Team alliance pride themselves on being innovative,
technologically advanced, and focused on the customer service experience. That being said, Sky
Team is focused on building a consumer base that values the same thing. Additionally, Sky
Team is focused on quality international travel where customers can be connected, through
utilizing one of the airlines, to a variety of countries in all corners of the world. Each of the
affiliated airlines specifically name countries that are available for quick, easy, and comfortable
travelwhich is great for a business professional who is interested in or must travel
internationally. Their focus on technology can attract the same audience as they focus on
keeping customers connected via air travel, but connected via ease of access to technological
advancements in international communication.

Outside of individual consumers, Sky Team is able to building a strong Business to Business
(B2B) consumer base because of their Sky Team Cargo alliance, which differentiates them from
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the other major alliances. By specializing in international cargo trade, Sky Team has
opportunities for businesses to ship and trade goods at a lower cost than the other airline
alliances. This is an attractive quality for businesses to align themselves with Sky Team,
particularly in more dire economic times.

Competitor analysis
The worlds largest airlines, Lufthansa, British Airways, Air France, and KLM, each went their
own way to create separate alliances. The first airline alliance was formed by KLM and
Northwest in 1992, and it later evolved into Wings alliance. Several airline alliances were set up
after 1992, but most, including Wings and Qualiflyer, were dissolved due to financial troubles.
However, three major alliances were in play in 2004, holding 65.7% of revenue passenger
kilometers, 64% of global operating revenues, and 60.8% of total passengers.

Star Alliance
Lufthansa, United Airlines, Air Canada, Thai Airways International, SAS Scandinavian Airlines,
and VARIG Brazil first established Star Alliance in 1997. By 2004, it had become the largest
alliance with 15 airlines (see Exhibit 4) and potentially an additional three. Based in Frankfurt,
Star had a market share of 26.1%, and its scope spanned 755 destinations in 132 countries.

Star Alliance took full advantage of its large network by integrating its member airlines IT
systems into a single platform, optimizing technology, service, and sales. The collaboration also
allowed members to share airport facilities, provide greater benefits for passengers, and reduce
airline purchase and maintenance costs. Star Alliance was unique in employing the advertising
services of GroupM to advertise the alliance as a whole, saving its members millions.

However, many members of the alliance, including two of its largest airlines, United Airlines
and U.S Airways, were in significant financial danger of bankruptcy and closure.

oneworld
In 1999, British Airways, American Airlines, Cathay Pacific, and Quantas formed the oneworld
alliance, which quickly grew to add four more members by 2004. With 576 destinations in 134
countries, oneworld had a market share of 17.2% in global operating revenue (see Exhibit 5). In
2000, oneworld Management Company (oMC) was formed and based in Vancouver. Heads of
various functions such as costumer service, advertising, and IT formed a core team that reported
to the oMC, allowing for greater continuity and communication.

oneworld greatly benefited by holding major players in Asia and the United States. However,
because there was no open skies agreement between the United States and Great Britain,
oneworld was the only alliance that did not have full antitrust immunity. Furthermore, another
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weakness oneworld faced was when Swiss International Airlines rescinded its intention to join
the alliance.

Unlike Star Alliances financial struggles, oneworld showed a profit in 2003, and the alliance
benefited individual member airlines with 1.65 billion Euros between 2001 and 2003.

Sky Team Company Analysis
Strengths
The merger of Air France and KLM set a precedent in the Airline Alliance industry.
Sky Team controls 2/4 of Europes most important airports.
Delta has experienced significant revenue increase and projected for more while being
affiliated with Sky Team.
Exhibited rapid growth after being the newest alliance to enter the market now in
second place in market power.
Engaged in negotiations with an airline in China for Sky Team membership.
Tripled the number of membership since alliance formation, particularly significant due
to a struggling global economy and challenging years for aviation.

Weaknesses
Product portfolio focusing on customer services, revenue increases, and cost cutting not
yet synchronized.
Delta is the only US airline that is a member of the Sky Team Alliance, limiting its
benefits in such a large market.
For customers, Sky Teams incentive programs tend to have weak value customer
loyalty points are difficult to trade in as the value is low and too many domestic
restrictions when using loyalty points.
Perception from customers tend to be less than favorable.

Opportunities
Sky Team has a narrow market lead in global passenger share, while in a close second
place for capacity and global operating revenues.
Sky Team has the only cargo alliance out of the three major airline alliances.
With antitrust immunity, members can benefit from joint passenger sales and other
ventures, only offered through an alliance.
With the pooling of resources, more can be done with marketing, handling,
administration, profit savings, and fuel purchases.
As the fastest growing alliance, there is the opportunity to acquire more, unaffiliated
groups.

Threats
Star Alliance currently controls the market, Sky Team may continue to only be number
two as Star Alliance continues to growthey may not be able to dominate the market.
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The other alliances seem to have a firm hold on bundling needs of all participant airlines,
including advertising and purchase of aircraft, resulting in significant cost savings.
With poor customer perceptions, there may be incentive for unaffiliated groups or Sky
Team Airlines to switch to other alliances to increase sales.

Marketing Objectives

1. Continue commitment to create value through superior customer services, revenue increases
and cost cutting.
2. Differentiate company from competitors, thus guaranteeing a competitive product.
3. Continue pursuit of partnerships with other potential airlines.
4. Create the basis and essential conditions for long-term growth.

Marketing Strategies

1. Strengthen marketing position

Major increases in fuel prices in 2004 forced the Airline Industry Alliances to find new ways of
doing business in order to not only survive the crisis situation, but to stay afloat along with
competitors. By effectively differentiating Sky Team from its competitors, we believe that the
alliances marketing position will be strengthened. To differentiate Sky Team from its
competitors, among other ways, is through competitive pricing which will allow the alliance to
maintain/increase its market share. One way that competitive pricing can be achieved is through
cost cutting, such as staff reductions and integration of resources. Further competitive
advantages can be achieved through an increased usage of Internet and e-ticketing in sales and
extreme restructuring to increase cooperation within alliances.

2. Aggressively pursue potential partnerships with other airlines

Sky Team stands to save millions and substantially increase revenue with additional
partnerships. This has already been proven in the past. Set up by Air France and Delta Airlines,
Sky Team had been in third place of Star Alliance and oneworld from its formation until 2004.
However, in 2004, a major merger propelled it to a close second place to Star Alliance. Clearly,
this was an essential merger between Air France and KLM in addition to KLMs partners from
the former Wings alliance, Northwest and Continental Airlines. A significant precedent was set
in the industry through the merger of the two flag carriers, Air France and KLM. In this regard,
the core member, Air France, of Sky Team then controlled two out of four of Europes most
important airports, in Paris and Amsterdam. Most importantly, Air France and KLM predicted
that the pooling of resources in areas such as marketing, handling and administration would save
them an additional E500 million 2 per cent of the costs of the combined company, in addition
to benefits from the alliance.
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3. Creating long-term growth

As of 2004, Sky Team has an alliance of six member airlines. Such members include founding
members: AirFrance, Delta, AeroMexico and Korean Airlines (June 2000); additional members:
CSA Czech Airlines (March 2001) and Alitalia (July 2001); and future members: KLM,
Continental Airlines and Northwest Airlines (2004). Sales revenue has the potential to increase
greatly with new partnerships with other profitable airlines as mentioned previously in the above
(second strategy) marketing strategy. Also, there needs to be greater consistency in reference to
the network adjustments by European Airlines (exhibit 10) as these adjustments are resulting in
significant loss of revenue. Regarding these network adjustments, AirFrance had a net loss of
ten after adding seven new destinations, but removing seventeen and KLM had a net loss of eight
after starting services to three new destinations while cutting services to eleven existing
destinations.
Action Plan
Sky Teams marketing mix will be comprised of the following approaches:

Operational Excellence
Sky Team will look internally at operations to determine ways to reduce costs in order to achieve
operational excellence. First, Sky Team will examine the fuel efficiency of all of their members
aircraft to establish a benchmark for when aircraft should be retired due to declining fuel
efficiency. New aircraft can cut fuel costs but are also expensive and often require significant
waiting periods for airlines. Therefore, Sky Team will work with members to update its existing
planes to reduce drag and install lighter braking systems to reduce operating costs. In addition,
fuel costs are critical to airlines. Sky Team will explore the possibility of purchasing an oil
refinery to process its own fuel. While this will not protect Sky Team members against oil-price
fluctuations, the refinery would reduce the costs associated with refining the oil into jet fuel.
Although the initial investment will be high, the refinery will provide long-term cost savings.
Promotion
The Sky Team Alliance will pool common resources and form a central body for marketing. A
portion of marketing dollars will be spent developing the Sky Team brand overall. A common
logo and mission statement will be developed by the Sky Team Steering Committee Roundtable
and marketed as a cohesive product. Part of the brand image overall will be an increased focus
on customer service and satisfaction. With less than favorable ratings from customers, this is an
area in need of attention. Each member airline will need to learn how to integrate their individual
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marketing strategies with those of the alliance to ensure a consistent message overall. It is
important for each member airline to maintain some sense of individuality in their marketing, as
the customer base can differ from member to member. For example, the mass market customer
flying KLM requires a different marketing strategy than the business customer flying Air France.
While these two customers are very different with regards to how much they spend and reasons
for traveling, they should both expect to receive a high level of customer service and satisfaction
consistent with the Sky Team brand when flying. New services such as a rewards program across
all member airlines will be developed and heavily marketed to attract and maintain loyal
customers. The strength of incentives in the rewards program will be increased to compete with
the offerings of other alliances. Restrictions on redeeming points should be kept to a minimum
and opportunities to earn points should be balanced and cumulative across each member airline.
For example, customer will be able to trade in points for domestic flights. An additional portion
of marketing dollars should be geared towards increasing awareness of the cargo alliance. Sky
Team will capitalize on being the only alliance with a cargo component by strengthening this
aspect of their business to bring in additional revenue. Marketing of the cargo alliance will be
geared towards global distribution companies and businesses in need of alternate, lower cost
options to carriers such as FedEx.
Distribution
Sky Team will increase its share of global operating revenue and capacity by strategically
expanding the alliance. Sky Team will aim to acquire members representing Latin America,
Africa, China, and India to more fully complete the global footprint. Acquisition of a Chinese
airline will be Sky Teams top priority, particularly one that will give the alliance controlling
rights to Beijing Capital International Airport (the second busiest airport in the world behind
Hartsfield-Jackson Atlanta International, which is already controlled by the Alliance via Delta).
Sky Team members will be co-located in the terminals whenever possible at the major hubs
around the world to promote the cohesive brand image and shared services like Sky Team elite
passenger lounges.

Customer Service
Sky Team will continue to evolve their products, for instance through the roll-out of modernized
cabins, and through the development of products fit for their entire fleet of aircraft. This will
include new in-flight entertainment systems being introduced on their new long-haul aircraft.
Sky Team will refine the terminal experience for premium passengers, as well as making
targeted investments in both domestic and overseas lounges. They will work to develop
information systems and internet technology to enhance the way customers interact with Sky
Team airlines. Finally, Sky Team will work to reaffirm their brand in a changing and fiercely
competitive marketplace.



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Market Research
An important part of the action plan for Sky Team will be increased marketing research across
all members. Sky Team will embark on an initiative to more fully understand its operations in
order to identify opportunities for synergies in the route network. Using data on most popular
destinations across the alliance, timetables at Sky Teams major hubs can be altered to
accommodate certain connections between members. For example, Delta Flights entering Atlanta
can be timed with Air France flights leaving Atlanta to move Sky Team customers quickly and
efficiently from the United States to Europe. Sky Teams menu of global routes should be
complimentary and never redundant. Sky Teams route synergies should work together to
seamlessly move people across the globe. Marketing research efforts will also attempt to
understand which destinations are being over-offered and which are being under-offered in an
effort to focus the coordination of the fleet.

Financial Analysis
The financial analysis will focus on the two largest Sky Team airlines, Air France and KLM,
which merged in 2004 as part of their alliance with Sky Team. The Air France-KLM (AFK)
operate independently from hubs in Paris and Amsterdam, but draw on existing synergies from
their combined operations and as members of the Sky Team marketing and code sharing alliance.
Together, they have an estimated 3.7% market share and operate 1,500 daily flights in France,
Europe and worldwide. AFK operates in three segments, passenger transport, cargo transport
and aircraft maintenance services. Passenger transport is the groups primary business,
accounting for about 75% of total revenue. The company has its headquarters in Paris and
employs about 100,000 people.

AFK and Delta Air Lines signed a joint venture code sharing agreement, whereby the partners
will jointly operate their transatlantic business by coordinating operations and sharing the
revenue and costs of their transatlantic route network. The airlines will cooperate on routes
between North America and Africa, the Middle East and India, as well as on flights between
Europe and several countries in Latin America.

Contingency Plans
There will always be concerns of margins turning negative due to factors such as sluggish
demand, fierce price wars and high fuel prices. Sky Team must be prepared to institute extensive
cost-cutting measures and increased investment in labor saving technology. Sky Team should
evaluate the possibility of self-check in units in order to reduce the need for staff. We believe
that this will help prevent negative margins and potentially increase profit margins. In addition,
airlines should consider using higher fees to recover some of the expenses lost with increasing
fuel costs. Sky Team members should consider fees for additional baggage. The U.S.
Department of Transportation reports the potential for $465 million from baggage fees. Sky
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Team may have to consider consolidation of some of its airlines also. In addition, Sky Team
airlines could consider purchasing assets from each other in order to minimize expenses.


References
And the world's busiest airport is .... Katia Hetter. CNN.
http://www.cnn.com/2014/03/31/travel/worlds-busiest-airport/. Retrieved 29 September 2014.

SkyTeam website (2014), http://www.skyteam.com, Retrieved September, 27, 2014.

SkyTeam Fact Sheet (2014), SkyTeam,
https://www.skyteam.com/Global/Press/Facts%20and%20figures/2014%20Jan%20update/Fact_
Sheet_SkyTeam_2014_update_5mar14.pdf, Retrieved September 28, 2014.


Appendix
Exhibit 1.









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Exhibit 2.

Exhibit 3.


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Exhibit 4.




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Exhibit 5.