46 . 31
Dns llyjatf
fc/.Jt,
Sales Channels - A Barrier to Entry in the Airline Industry
by
Maria Dembrower and Daniel Grenblad,
Stockholm School of Economics, Stockholm1
February 2003 (Work in Progress)
Accepted after Review to
the 7th Air Transport Research Society World Conference (ATRS),
Toulouse, France. July 10-12, 2003.
Keywords: Airline Distribution, Competition, CRS, e-distribution, Entry Barriers,
Industry Growth, Low Cost Airlines, Scenarios for the Future, Travel Agents.
1
Maria Dembrower. M Se. Phone: +46-8-736 97 37, e-mail: maria.dembro\verfrj),hhs.se.
Daniel Grenblad, Ph D Candidate. Phone: +46-8-736 95 48, e-mail: daniel.grenbladCg.hhs.se.
Both al Stockholm School of Economics, Center for Marketing, Distribution and Industry Dynamics,
PO Box 6501, SE-113 83 Stockholm, Sweden.
Authors are listed in alphabetical order to signify equal contribution.
Dembrower, Maria. & Grenblad, Daniel (2003).
Abstract
Growth in the Airline industry has taken place in the low cost segment. With their low
prices the low cost Airlines have attracted new kinds of customers and travels, created
new märket segments and thus expanding the total potential märket. This industry growth
is hindered by several factors; flight rights, slöt rights, and environmental factors (like
war threats, slow economy, and established alliances). This paper examines if another
factor, the distribution channel, also can prohibit new entries into the märket. The main
research question in this paper will be to study the distribution strategies chosen by new
Airlines, given the two options; the Travel Agent and Internet. Secondly, we will discuss
if the distribution of ticket sales could constitute an entrance problem.
The CRS (Computer Reservation System) provides centralized information and booking
facilities for air travel and other products, thus acting as aggregators. The CRS has long
had an important position in the distribution channel serving the travel agents. However,
since the CRS required both infrastructure investments and speciali/ed knowledge, the
travel agent has retained an important position in the distribution channel. As the Internet
became commercialized in the second half of the 90's, the end-customers gained direct
access to various ways of booking and increased their power. For the low cost Airlines
that emerged, this meant that they had an option to either distribute through the
traditional channel or through the Internet channel. The Traditional Travel Agent still
accounts for a large part of total sales through established relationships with customers.
The Internet, on the other hand, has been a challenge to traditional ways of distribution.
Empirical data is gathered from Airlines operating in Sweden. Supplemental data comes
from the largest travel agents in Sweden. The interviews were conducted in 2003.
Analysis will be made using Network Theory, where actors in the network contribute
with resources of different relative strengths and create dependencies through linkages
(Håkansson & Snehota, 1995).
Our preliminary findings show that there are ät least five different ways Airlines can
position themselves in the distribution channel network; through Traditional Agent,
Agent Web, CRS Web, Proprietary Web, or Collaborative Web (these will be further
explored in the paper). Which alternative(s) the new entrant should choose is not self
evident. Once chosen, there seems to be an entrance problem when the new Airline tries
to get a position, since it does not yet have a given place in the distribution network.
Thus, there may be an entry barrier with the selling of tickets and to attain a position in
the
industry,
i.e.
to
reach
the
customers
and
create
revenue.
Dembrower, Maria. & Grenblad, Daniel (2003).
Table of Contents
1.
2.
3.
4.
Introduction
l
Method
l
Network Actors
3
Theoretical framework
5
4.1.
Which distribution strategy does each actor have?
6
4.1.1.
Airline - Empirical Findings and Analysis on Strategy
6
4. l .2.
CRS - Empirical Findings and Analysis on Strategy
7
4.1.3.
Traditional Travel Agents- Empirical Findings and Analysis on Strategy 7
4. l .4.
Web- Empirical Findings and Analysis on Strategy
8
5. Sales Network Link Analysis
9
6. Implications of Links
12
6.1.
Network Changes
13
6.2.
Can ticket sales itself constitute an entrance problem (new Airline)?
16
6.2.1.
Airline -Empirical Findings and Analysis on Barriers
16
6.2.2.
CRS - Empirical Findings and Analysis on Barriers
17
6.2.3.
Traditional Travel Agents - Empirical Findings and Analysis on Barriers
18
6.2.4.
Web - Empirical Findings and Analysis on Barriers
19
7. Discussion
20
8. Conclusion
23
9. Future Research
24
10.
References
25
Dembrower, Maria. & Grenblad, Daniel (2003).
Table of Figures
Figure l: Interviews made with the case companies during April 2003 (Own
development)
2
Figure 2: The Sales Channel graph, showing alternatives that Airlines can use. Airline
(A) to Airline (D) depicts typical way of using the Traditional Travel Agents and
Web alternatives. (Own development)
4
Figure 3: The Sales Network Link graph, showing relationships between actors. Stronger
links are displayed with thicker lines. (Own development)
11
Figure 4: Actor changes in the network relationship perspective. (Own development)... 15
Dembrower, Maria. & Grenblad, Daniel (2003).
1. Introduction
Deregulation of the Airline industry in Sweden starting July lsl in 1992 has eased the
establishment of new Airlines such as low cost carriers. The increased use of Internet has
made it easier for new actors to fmd distribution channels and to sell their tickets över
Internet. But still the Traditional Travel Agents play an important role on the märket
because of their long term relationships with companies which can offer them loyal
business customers. The fäet that the new carriers don't have a well known name and
don't have any established relationships with the Traditional Travel Agents could make it
härd for the new actors to grow.
The separate areas of changes described above makes it interesting to examine the
intersection of those, namely the combination of new Airlines and new ways of
distribution in this industry. The purpose of this study is to examine if ticket sales itself
could constitute an entrance problem. To do this, we first analyze which distribution
strategy each type of actors has. The intention is that this paper will serve as an
explorative study and render future possible research.
2. Method
We used judgmental sampling and selected two actors from each actor type in the Airline
industry sales network in Sweden. This sales network consists of Airlines, CRS:s, Web
Sellers and Traditional Travel Agents. We have chosen to exclude the end-customers
from the interviews even though they are a part of the sales network. The interviews were
made över the telephone with marketing managers, sales directors and/or managers
responsible for relationships with other actors in the network, see Figure 1.
In this study we have not interviewed all the different types of Airlines. We wanted to
interview a second low cost carrier (in addition to Sterling) that had implemented a
Proprietary Web, but experienced non-response from the Airline. We also experienced
non-response of one of the CRS:s and from one of the selected actors from the Web
Seller group, the Collaborative Web. During the study we became aware about that it
would have been preferable to interview one of the Airline partners in the Collaborative
Webs too. Unfortunately we couldn't incorporate that into our research due to time
constraints. Since we had several other actors contributing with complete answers, the
non-response and narrow sampling have a limited impact of this explorative study.
Dembrower, Maria. & Grenblad, Daniel (2003).
Company
SAS
Actor Tvpe(s)
Airline (Traditional
International Carrier, Web
Seller (Proprietary Web)
Skyways
Airline (Traditional), Web
Seller (Proprietary Web)
Airline (Low Cost), Web
Seller (Proprietary Web)
CRS
Sterling
Amadeus
Nyman & Schultz
(American Express)
Traditional Travel Agent
Ti eket
Traditional Travel Agent,
Web Seller (Agent Web)
Resfeber (Travelocity)
Web Seller (CRS Web)
Respondcnts" Roles
CRS Relationship Mgr (15
April 2003), CRS
Information Mgr (15 April
2003), Marketing Director
(22 April 2003)
Marketing Director (25
April 2003)
Country Marketing Mgr (23
April 2003)
Marketing Director, (22
April 2003) Technical
Specialist (24 April 2003)
Marketing Director (15
April 2003), Airline
Relationship Mgr (21 April
2003)
Marketing Director (14
April 2003), Airline
Relationship Mgr (25 April
2003)
Vice President/Marketing
Director (11 April 2003)
Figurs 1: Interviews made with the case companies during April 2003 (Own development).
The three interviewed Airlines are of different kinds. Their age varies from established in
recent years to 50 years of operation, the size also varies greatly. The route network
operated is also different in scope and also type. Some of the airline companies fly from
point-to-point (like Sterling) while others use a spoke-and-hub network (like SAS).
The current world events like Iraq war, SÄRS, and slow economy may have influenced
the respondents' attitudes and made them more prudent in their statements on e.g.
competitive impact.
Dembrower, Maria. & Grenblad, Daniel (2003).
3. Network Actors
Airlines in this paper are the scheduled airlines, thus charter, fright and taxi airlines etc
are excluded.
CRS, Computer Reservation Systems, are the aggregators that gather the Airlines' and
other travel producers' offerings in one place and make them available to travel sellers
equipped with a suitable computer. In essence, the CRS sell information distribution to
the Airlines and information access to the travel agents etc. Traditional Travel Agents
refers to the brick-and-mortar travel agents that have a broad range of products in
categories such as Airlines, Hotels, and Car rental etc.
Web Sellers mainly use Internet as their customer interface. Four sub types in the Web
Sellers group have been identified: Agent Web, a travel agent with Internet as the main
customer interface and sells many Airlines tickets, makes hotel reservations etc. Some
Traditional Travel Agents have a web interface in conjunction with their physical stores.
CRS Web, an online travel agent owned by a CRS. Proprietary Web, a web interface
owned and operated within an Airline's organization. This Web Seller often only offers
its' own tickets. Sometimes other Airlines' offerings are also available; tickets on
Airlines in the same alliance are more common to be offered in this case. Collaborative
Web, a joint-venture between Airlines with several Airlines' offerings; the owning
Airlines' and others.
Other actors that are selling tickets, such as Airline's ticket offices, call centers, and
consolidators, and tour operators are outside the scope of this paper. Actors that are
discussed here are presented in Figure 2.
Dembrower, Maria. & Grenblad, Daniel (2003).
Figure 2: The Sales Channel graph, showing alternatives that Airlines can use. Airline (A) to Airline (D)
depicts typical way ofusing the Traditional Travel Agents and Web alternatives. (Own development).
Airlines started to develop CRS jointly in groups of Airlines. It resulted in four major
CRS companies; Amadeus, Galileo, Sabre, and Worldspan. For a long time the
dominating way of selling Airline tickets was through the CRS to Traditional Travel
Agents, like Airline of type "A" in Figure 2. In the mid 90-ties, Airlines started to use
web sites operated by them to sell tickets in addition to the CRS channel, depicted by
Airline "B". One of the first was British Midland that started to sell online in January
1995. Some chose to only sell through their own Proprietary Web, like Airline "C". It
was many times low-cost carriers who did it to cut transaction costs associated with ticket
sales. The lowest cost would be when the web site is directly linked to the Airline's
inventory. Many Airlines still use CRS, even for their Proprietary Web. (Grenblad &
Rosén, 1999) The Internet opportunities also gave birth to a new form of collaboration
between Airlines, where they created a joint-venture web site, Collaborative Web. In this
case there is a mix of directly connected Airlines and the ones connected through a CRS.
Several Airlines tickets are aggregated to one web site and then sold on the web site
directly to the end-customer. Airlines involved as an owner in a Collaborative Web is
shown as Airline "D". Today, the traditional Airlines use several sales channels
simultaneously and Buyers alternate their choice of channels.
Dembrower, Maria. & Grenblad, Daniel (2003).
4. Theoretical framework
This paper takes on the markets-as-networks approach (Mattsson, 1982), which is a
different research stream compared to the marketing-mix approach (Borden, 1964).
Markets-as-networks is well suited in this case because it acknowledge multiple actors
and interdependence among them, rather than a dyadic transaction based relationship. All
actors contribute with different activities and resources, so that the Airline ticket can be
sold to the end-customer. A definition of a network is:
"A network is groups oftwo or more connected relations ".
(p. 725, Cook & Emerson, 1978).
The boarder of the network is limited here by using a more narrow definition of the
network where only those actors that are acting towards a shared goal are included (Van
den Ven & Ferry, 1980). Here in this paper the shared goal is to sell Airline tickets.
What characterize a network are the actors and dependencies between them. Examples of
links could be dependence of each others resources, such as technical solutions, or social
relationships. Dyadic relationships are also of importance, because of the indirect links
through the dyadic actor to the rest of the network. The strength of the links varies
depending on the situation. The links between actors can be of different sorts. The link
can be direct between actors or indirect through other actors.
Relationships between actors can be look upon in closer detail and three different basis
for links are possible (Håkansson & Snehota, 1995):
> Activity-links; technical, administrative and commercial activities that can be
connected to other actors and in this way develops a relationship.
> Resource-ties; connects various resources (technical, material, knowledge etc) to
the company.
> Actor-bonds; connects actors and affects how the actors are perceived. This link
also influences their identities and organizational structure.
With a market-as-networks analysis, the actors within the network can better understand
their business context: Who are the dominating actors, not only through size, but also in
terms of centrality in the network. Are groupings within the network are unevenly
distributed and less accessible. If there are power hierarchies were actors are able to
influence how others should act. It also helps the interpretation of other actors' strategies
and actions.
Dembrower, Maria. & Grenblad, Daniel (2003).
4.1. Which distribution strategy does each actor have?
First we describe the empirical fmdings of our research which will be continued by
analysis of the empirical fmdings.
4.1.1. Airline - Empirical Findings and Analysis on Strategy
Actors the Airline is depending on are CRS, Travel Agents, booking system
suppliers, IATA and credit card companies. The main sales channel for traditional
Airlines involves the travel agent. Some Airlines see the travel agent as a sales
channel partner and others see them as customers. Difficulties related to these
relationships include high costs of the CRS service and travel agents' trust in the
Airline. New cost Airlines are more often trying to use Internet as the main
channel. Established Airlines often have a diversified sales channel strategy. New
Airline have a more focused strategy, probably because of a lack of resources
needed to use multiple channels. It has been suggested that the Internet is more
suitable for younger customers and travel agents for older. Internet sales are seen
as a less costly sales channel. Other Airlines can constitute partners as well as
competitors. When the Airline wants to offer interlining (a combined ticket for
travel on different Airlines) an agreement with the Airline might be needed in
addition to the available industry rules. A small but important part of the Airlines'
revenue comes from direct agreements with corporate customers for a certain
amount of travel for a predeflned price. The interviewed Airlines also said that they
needed booking systems and other IT resources such as CRS.
The Airlines seem to be well aware of their dependence on other actors and that they
together act in a kind of system (here denoted as the sales network). Some of the
dependencies are indirect through other actors; the best example is the Travel Agent
dependency. They also recognize that they need certain resources that they get from other
actors, e.g. the system provided by CRS companies. These circumstances can better be
incorporated in the market-as-network theory compared to a transaction based theory,
which would suggest that the theoretical frame work used in this paper is well suited.
Other Airlines see the Traditional Travel Agents as customers, a link more based on
activity-link. The Airline/travel agent link is stronger in the partner situation. Difficulties
related to the relationship are the CRS costs to involve the travel agents and that is why
many new low cost Airlines use Internet as their main channel.
Dembrower, Maria. & Grenblad, Daniel (2003).
4.1.2. CRS - Empirical Findings and Analysis on Strategy
The overall activity performed by the CRS is connecting the Airlines with the travel
agents. Travel agents are seen as customers. Both web and physical travel agents
are served. A well defined distribution strategy is needed, so that marketing is
performed towards the right target group. CRS systems offers different levels of
support aimed ät business travel. The use of CRS Web travel agents varies between
CRS:s and geographical märkets. When making the choice if a web channel
directly to the end Buyers should be used, the relationships with travel agents are
considered. There are a relatively few large actors in the Swedish air travel märket
such as CRS, business travel agents, and corporate customers. The CRS were
created to cater to the needs to the traditional Airlines, which means that the needs
of Airlines with new business mode Is might not be appropriately supported by the
CRS
In those cases new Airlines näve to create new solutions. The CRS companies see
themselves as a service unit towards the Airlines, a resource-tie. Both on and
offline Travel Agents are thought of as customers, thus an activity-link.
4.1.3. Traditional Travel Agents- Empirical Findings and Analysis on
Strategy
The view of the travel agent's business is not completely shared by all people, not
even ät the same travel agent. One respondent was certain that their role was to
provide various travel management services to the customers and act as their
purchasing representative. Another respondent ät the same travel agent saw their
role as sellers of the Airlines' offerings.
Actors that they depend on areflrst ofall CRS:s, travel producers and ticket whole
sale companies.
To contact the customers the travel agents need resources such as telephone, e-mail
and web. On the supplier side the CRS is crucial. Some travel agents use the CRS
not only for booking tickets, but alsofor travel management e.g. customer profiles.
There has been a change in the travel agent industry were the agents role has shifted from
being an advocate of the Airlines offering to being an advisor to the customer. One of the
important drivers for this change has been the cannibalization of the travel agent channel
made by Airlines' Proprietary Web. This meant that the travel agents had to define their
position clearer to justify their existence. A second driver is the related change of
Dembrower, Maria. & Grenblad, Daniel (2003).
compensation given by Airlines; the commission has been lowered or removed
completely. This meant that the travel agents had to fmd new sources of revenue,
resulting in "consulting fees" charged in parallel to the ticket price. (Grenblad & Rosén,
1999) The respondents ät travel agents showed that they are not, as of today, completely
certain what they are. Are they still selling on behalf of the Airlines, or are they helping
customers to buy?
Resources needed to link to the customers are telephone, e-mail, web, and physical
stores. A necessity for the travel agents business is the CRS resource because without it
they wouldn't have much to sell. Even if some tickets are bought through Proprietary
Web, the väst majority comes from the CRS.
4.1.4. Web- Empirical Findings and Analysis on Strategy
Activities needed for a web travel agent to function include direct sales, technical
unit, production unit, and sales unit. In addition a focus on marketing is seen as
important. An Internet access provider is a relationship that has to work for the
web actor. "Meeting the customer" is one rule mentioned for organizing the
distribution strategy, meaning adapting to a customer segment 's habits and needs.
The Internet is seen as the most important channel, with support from telephone. A
major advantage of the channel is the speed: E.g. when there is an opportunity to
sell an attractive, but time-limited product, it can quickly be offered and sold to the
customers. The least important is physical stores. Just as for physical travel agents,
some web travel agents are also packagingproducts into an offering, in addition to
trading travel products.
A special characteristic of the Web Sellers is the dependency on the resource Internet
connection. To reach as many customers as possible it is of importance to create a strong
brand.
Dembrower, Maria. & Grenblad, Daniel (2003).
5. Sales Network Link Analysis
All actors chosen to be included in the sales networks share the activity "selling airline
tickets". This common characteristic is not discussed for each one of the relationships,
only those aspects that are signifying the relationship in other aspects.
Airlines contribute with resources to the CRS:s in the form of information on sellable
products, i.e. the Airline tickets available of their inventory. A CRS can also be seen as
contributing with resources to the Airline. This is the technical resource of the actual
reservation system as a standardized interface to the travel agents. The link cannot be
characteri/ed as based on actor-bonds; the choice is more about how to get a more
complete coverage of the märket. Therefore it is more of a resource-tie, a relationship
based on exchange of resources.
The Traditional Travel Agents and Web Sellers use CRS:s as resources for information
on Airlines offerings and book Airlines' tickets. Traditional Travel Agents that serve
corporate customers are sometimes using additional resources, such as storing customer
profiles and travel policy guidelines in the CRS, which means that they are more
dependent on the CRS. The Traditional Travel Agent and CRS are linked through
resource-ties. It should be remembered that Traditional Travel Agents can also have a
web site were they sell tickets, an Agent Web.
Traditional Travel Agents and Buyers links to each other differently depending on the
Buyer type and travel type. Leisure travel is usually less frequent transaction were the
customer is indifferent to where the ticket is bought. More important is what kind of
product is obtained for the price. This means shopping around for the best offer and the
Traditional Travel Agent/Leisure Buyer relationship is limited to a resource-tie.
For Corporate Buyers that prefer long-term relationships implying that the linkage is
based on actor-bonds, which means that linkages are based on social relationships and
perceptions about the other actor. It is further emphasized by the fäet that Corporate
Buyers typically wants to limit the number of suppliers. However, the relationship with
the Corporate Buyer can also be based on resource-ties. This because the corporate
customers often have demands for additional services in the travel management area, in
which case the Traditional Travel Agent even might be embedded in the Corporate
Buyers' organization.
When the ticket is for a simple travel, e.g. between one metropolitan city to another in
Europé, the link is mostly a resource tie. There is a different case with complex travel,
such as a package of complementary products or difficult itineraries with several flight
legs. It can also be an Actor-bond, a social relationship catering for trust, when the brand
Dembrower, Maria. & Grenblad, Daniel (2003).
10
of the travel agent influence which travel product is chosen to be used by the Buyer, e.g.
to get advice on how to decide on alternative packages. Furthermore, complex travel can
induce new activities taken on by the travel agent beside the finding and booking of
tickets. This could be finding and providing information about the travel locations. New
activities might spring out of the interaction, such as needs for additional services. It can
be seen as an activity-tie, because it is a co-production with intense interaction between
each actor. E.g. providing information on hotel booking or tailored sightseeing
arrangements.
Traditional Travel Agents have relationships with Airlines for other purpose than the
ticket reservation. It could be about promotional campaigns or special agreements on
behalf of Corporate Buyers. The Airline's interest might be to nurture the connection
with a large Traditional Travel Agent with many Corporate Customers. This relationship
is an activity-link since resource use is not involved in that activity, rather it prepares for
låter resource use (via CRS). Other actors may also have such relationships, but they are
less important.
The Web Sellers' links to the Buyer is more based on resource-ties, than the Traditional
Travel Agent because the Buyers are in these cases comparing offers and prices more
than seeking advice and augmented services. CRS Web, Collaborative Web, and
Proprietary Web have linkages to the Buyer that are clearly resource-tied.
One of the Web Sellers, the Agent Web, is in one way similar to the Traditional Travel
Agent. The actor-bond is present in this link too, with the role that brand has as a
"guarantee" for the products offered. It is possible that Buyers who are new to online
purchasing prefer to use an Agent Web that they are familiar with, i.e. those that are
Traditional Travel Agents too. However, it is weaker in the aspect of social relationship.
The Agent Web relies on Internet as the main interface; personal contact is possible
through the telephone but still not a primary mean of communication.
CRS Web links are strongly based on actor-bonds since they are tied legally through
ownership. It would be unlikely to find the CRS Web to use another source for the
products sold. There is of course a resource-tie with the technical system involved, just as
e.g. an Agent Web actor.
11
Dembrower, Maria. & Grenblad, Daniel (2003).
Collaborative Web and Proprietary Web have the option to link to CRS for product
sourcing, or to connect directly to Airlines' inventories. One of the Collaborative Web
actors, Opodo, is partly owned by a CRS, Amadeus, which wants to influence this
strategy. Both the Proprietary Web's and Collaborative Web's link to the CRS, is mostly
a resource-tie. The Proprietary Web is strongly linked to an Airline through an actorbond, due to the ownership. The Collaborative Web has actor-bonds to several Airlines,
since it is a joint-venture between Airlines. While the Collaborative Web is operated as a
separate company, the Proprietary Web is typically a unit within the Airline's
organization.
Airline (A)
Airline (B)
Airline (C)
1
1 Airline (D)
Figure 3: The Sales Network Link graph, showing relationships between actors. Stronger links are
displayed with thicker lines. (Own development)
Dembrower, Maria. & Grenblad, Daniel (2003).
12
6. Implications of Links
From the perspective of the Airline, the links discussed above have the following
implications. Airlines use the CRS not because of the CRS itself. The reason is to reach
the resellers in turn use CRS. Le. the CRS serves as an indirect link to the Traditional
Travel Agents and to the Web Sellers. The advantage of this is the märket coverage that
is achieved. A väst majority of the Airline ticket sales still goes through CRS. The main
disadvantage is the high cost per sale of ticket, compared to the Proprietary Web
alternative.
For this reason, new Airlines have been seen to focus on the Proprietary Web channel.
Still, it is not associated with lower cost in every aspect. The Airline is believed to need a
larger marketing budget in order to make the Buyers find the web site and to trust the
product offered. When Airlines use the Traditional Travel Agents this marketing cost is
in part carried by them.
The advantage of having direct distribution is also to gain better ownership of the Buyer
(Grenblad & Rosén, 1999). This means more information on the customer and better
possibilities to influence them e.g. through customized campaigns. A downside is the
reach of the Web Sellers' channels, only counts for a smaller part of total Airline ticket
sales.
Airlines try to shift the customers from the Traditional Travel Agents to Proprietary Web
through using low prices only available ät the Proprietary Web. The reason for this could
be that the actual ticket cost less there and/or the sales cost associated with the CRS travel
agent channel has been eliminated.
The analysis of the individual links above leads the discussion of what it means ät an
aggregated network level. The strong relationships to and from the CRS actor and
centrality in the sales network indicate power in the network. It could be an explanation
of the relatively higher net profits (DÖT) of the CRS systems, compared to the other
actors in the network.
Dembrower, Maria. & Grenblad, Daniel (2003).
13
6.1.Network Changes
The network approach gives the opportunity to describe types of changes: First, a
refmement of existing activities and resources, a Structuring process. Structuring is a
continuous process as it changes both the technical and the social elements över time.
Structuring implies that actors try to improve the utilization of the ideas, through refming
technical connections and rationalizations. This requires increased standardization of
input and output and in this way resources are used more efficiently. The network is
made clearer and stronger through this Structuring process. This process involves several
actors and relationships that are essential to change the industrial network. The Critical
elements are the social interactions. Individual companies initiate the changes and they
näve impacts on the whole network.
Second, develop new ways of combining activities and resources, Heterogenization
process. This process implies that the actors try to apply new ways of using the resources
of the same activities. Heterogenization competes with the Structuring process, because it
develops alternatives to the established structure. The process can be done within the
established network or it can be done with the help of companies belonging to other
networks. While the Structuring process increases efficiency, the Heterogenization
process increases effectiveness. Both of the change processes seek to limit the resources
used.
The companies want to control resources, which leads to two other change processes. The
relationships can be seen as ways of creating opportunities to combine resources and to
mobilize other actors' abilities to solve the problems. Increasing control of activities and
resources held by fewer actors can be seen as a third change process, a Hierarchization
process. The Structuring process is a foundation of the Hierarchization process. When a
network is structured it allows for another process, where fewer and fewer control more
and more. Ät the same time the actors get more limited connections between activities
and resources. One way of getting more power in a network is through controlling more
resources and activities. By controlling the resources, the actors get more power in
relation to other actors. It can be achieved through ownership or relationships with actors
that posses the resource. For the individual company it means conflicts (e.g. price
competition) and cooperation (e.g. coalitions) simultaneously.
A competing process to the Hierarchization that we label the Dilution process. In this
fourth process, the control över activities and resources get distributed över more actors.
The different actors continuously affect these development patterns. Each actor usually
belongs to several networks, how the development patterns look depends on which
network that is used during the analysis. The network approach highlights the
interdependence among actors that changes typically have repercussions for several
Dembrower, Maria. & Grenblad, Daniel (2003).
14
network members. Adjustments of strategies etc are important to survive in the network
and those who adapt are more likely to enjoy success. (Håkansson, 1992)
The major changes mentioned in the introduction, deregulation and e-Business, nas lead
to changes in the whole Airline industry.
The lack of competition and the dominance of a few actors on the Swedish märket have
made the policy makers to deregulate the Airline märket in 1992. The aim of this
deregulation was to make it easier for new actors to enter the märket and increase the
competition between the firms. The effects from the deregulation were not before the end
of the 90's shown on the märket through the establishment of new Airline firms. Low
cost Airlines perhaps have received the most attention. They have performed the activity
travel in a new way, by flying point-to-point. Airports were used as resources in a new
way as they contributed to the marketing of the Airline's flight route. Thus, it can be
categorized as a Dilution and Heterogenization process.
When Internet started to be used commercially in the mid 90's (Grenblad & Rosén,
1999), Airline tickets were one of the earliest products to be sold. Incumbent Airlines
developed web sites to sell tickets. It was a new combination of resources triggered by
the enabling technology Internet. In other words it is a Heterogenization process. A
stronger över all change for the traditional airlines might be structuring of their business
triggered by the increased competition from the low cost carriers. The change can be seen
as a form of developing the existing activities and resources, a structuring process. There
would probably follow mergers Hierarchization among traditional airlines where fewer
actors control activities and resources. On the other hand, the low cost carriers' entries
have developed the industry towards Dilution and Heterogenization.
Internet also introduced new Web Sellers to establish on the märket. Some of these new
actors even came from other industries such as Software (Expedia/Microsoft). In addition
new actors appeared that used Internet as their primary channel. Web Sellers are involved
with the existing activity of sell ing tickets using the new resource. This is probably the
most obvious Dilution and Heterogenization process.
Traditional Travel Agents are simultaneously in a Structuring and Heterogenizaion
process. Structuring is the development of existing activities and resources, e.g. in the
area of services for travel management. Travel agent might merge to increase the
efficiency through a Hierarchization process. Some Heterogenization takes place through
using the new resource, Internet.
The Traditional Travel Agents are competing with the growing Web Sellers. The
entrance of Web Sellers has induced the balance in the network. This has forced the
Traditional Travel Agent to rethink their business model and operations. This has meant
selling through the web and not just selling through the physical stores and through the
15
Dembrower, Maria. & Grenblad, Daniel (2003).
telephone. They have also tried to create stronger relationships with both the airlines and
the CRS actors that they still give them attention. Since the role between the CRS and the
buyers has been challenged, the Travel Agents have been obliged to clarify their position
in the network and where their loyalty is. Are they on the sellers' side or are they on the
buyers' side? If it is a Traditional Travel Agent that target corporate buyers they have
been leaning to being an allied of the Corporate Buyers. If it is a Traditional Travel Agent
that target leisure buyers they are still in many ways sellers of the travel producers'
offerings. Över all it means that the Traditional Travel Agents and Web Sellers need to
find "available" competitive positions.
CRS actors have developed their existing activities and resources, through a Structuring
process. Beside of this the CRS Web is using the new resource Internet, a
Heterogenization process taking place, adding a new type of actor to the network, a
Dilution process. The numbers of CRS actors are already a few on the märket and we
have not seen that it has been another Hierarchization process yet. The CRS Web
companies will probably develop as the other Web Sellers will do.
Heterogenization
New combinations of activities
and resources
•V
Low
Cost
Airline
Hierarchization
Fewer actors control activities
and resources
—-^5~.___*s
Travel
\
Agent
'N.
Web
sales
Dilution
More actors control activities and
resources
Structuring
Development of existing
activities and resources
Figure 4: Actor changes in the network relationshipperspective. (Own development)
Dembrower, Maria. & Grenblad, Daniel (2003).
16
6.2. Can ticket sales itself constitute an entrance problem (new
Airline)?
First we describe the empirical findings which then will be analyzed with help from the
theoretical framework.
6.2.1. Airline - Empirical Findings and Analysis on Barriers
Something that can be an entrance problem is the necessity ofearly revenue due to
the high upfront costs when storting up the business. For an individual flight to
give a net contribution to the firm a high load factor is needed. Which for a low
cost carrier typically should be higher (perhaps 80 %) than for a traditional
carrier (perhaps 60 %). This means that a strong sales strategy is crucial. The
Airline industry is regulated in some ways, both by industry actors, e.g. LATA, and
public actors, e.g. EU. The regulated environment puts constraints on the kind of
activities feasible to undertake. Direct Internet distribution results in lower
distribution costs that will enable lower ticket prices.
A more extensive Airline/'Airline agreementfor interlining might not be possible for
a new Airline to get. For instance ifthe potential Airline partner already have such
agreement for the route through an alliance. If the new Airline chooses to
participate in the traditional sales channel, they are depending on the CRS:s
because theyfunction as the link to the physical and online travel agents. With the
alternative of direct Internet sales, a solution for the payment of the tickets is
needed. Usually this means that credit card companies are involved.
The new Airline needs to build a strong brand early. The brand represents the trust
needed for the travel agents to promote the Airlines offering, especially towards
corporate customers. The brand also injluences the traffic and sales of the Internet
channel. Credibility is a key factor for success; the Airline should not risk
disappearing from the märket. Furthermore, since the customers essentially are
buying time when they choose flying as a travel option, they must have reliability in
the booking andflights. Numerous departures on the same route add to the "shelfspace " in the CRS that the travel agent sees. This can be further accentuated by
code-share agreements. In both cases it is an advantage to a larger established
Airline.
Especially the newer Airline mentioned the importance offinancial endurance to
enable the advertising that would attract customers to their Internet channel.
Financial strength is also believed to influence the trust given by the travel agents.
Dembrower, Maria. & Grenblad, Daniel (2003).
17
Some Airlines have indicated an interest in lowering their dependence on other actors by
doing more of the activities themselves, such as direct distribution through Internet. The
relationships that the actors already have influence both current and potential
relationship. (Håkansson & Snehota, 1995) An example of this is the difficulty of getting
an Airline/Airline agreement, especially when you are a new actor on the märket (in other
words an entry barrier).
Brand in the shape of credibility and reliability is once again mentioned that as a resource
that would be needed to create a good brand to the customers. Combined with the high
upfront costs it calls for good finances and early sales volumes.
6.2.2. CRS - Empirical Findings and Analysis on Barriers
A possible barrier for a new Airline could be to get a strong enough brand which is
recognized by the travel agents. A reason for the need of large financial resources
is the difficulties of changing customer 's habits. This also means that it could be
wiser to adapt the strategy to the customers' present behavior, perhaps by using
travel agents since they still sell the majority oftickets.
The new Airline could experience the cost oftechnical systems as a barrier, e.g. to
connect to the CRS: s. Connection to BSP and credit card company is needed for the
payments. A way to get some of the distribution channel resources needed is by
using hosting services offered by actors such as EDS and Scandinavian Airlines. It
is important to find strategic places were to do the sales, e. g. which travel agents to
focus on. The travel agents must believe in the survival of the new Airline, since the
travel agent is betting their own brand when they sell Airlines tickets. This is
especially important in business travel, because the travel agent and corporate
customers are usually seeking long-term relationships. It is important to gain
revenue fast due to the fixed costs and since it is impossible to sell seats once the
flight has departed.
The trust and expectations regarding the new Airline is important. Rumors could
have an impact on the relationships with the travel agents.
When choosing channels the new Airlines might choose direct sales when they
focus on leisure travel, since it is characterized as single transactions. Business
travel is characterized as continuous relationships. Travel agents offer larger sales
volumes. Large corporate customers do not only mean benefits in terms of large
potential sales. The downside are demands for a more developed booking system
that includes more features and service, more demanding professional purchasers,
andmorepricepressure. The travel agents often "own the customer".
Dembrower, Maria. & Grenblad, Daniel (2003).
18
The resource financial assets appear to be an important factor for the success of the new
Airline. One reason is that it is directly linked to the perceived brand credibility and also
a mean to create a strong brand. The brand can be seen as a necessary Airline resource for
the actor bond between the travel agents and Airlines to emerge on the märket. The travel
agent does not want to risk their own brand resource especially those who work with
corporate customers since it is a lasting cycle based of activities. Especially large
corporate customers use the travel agent as a resource that provides travel management.
New Airlines have to consider the resources as the BSP, credit card company for
payments.
6.2.3. Traditional Travel Agents - Empirical Findings and Analysis on
Barriers
An important activity is to create a strong brand, so that the Airline could be seen
as a viable actor by the travel agents. The travel agent is putting their own brand ät
stake, if they sell a questionable product to the customer. Marketing is needed to
create the brand and to drive the sales. The direct sales alternative leads to lower
ticket distribution cost. Due to the large initial costs, immediate revenue is of
importance. Which stress the need for a viable marketing strategy and
implementation. The new Airline might want to cooperate with other Airlines e.g. to
create a strong brand.
Good märket knowledge is needed. Which is the torget group and how should it be
reached? Sales stoff is needed as a complement, even if the web is used. Money is
needed for the marketing. Ifthe Airline chooses to use a web interface for the travel
agents it must be adapted to the travel agents needs.
Many traditional travel agents cater to all kinds of customer groups. Nowadays the
respondents point out the increased importance of defming the target group and
understanding it so that the marketing activities are effective and efficient. The
customer group of this business must be recognized as being different compared to
others.
Dembrower, Maria. & Grenblad, Daniel (2003).
19
6.2.4. Web - Empirical Findings and Analysis on Barriers
According to a web travel agent, a new Airline requires travel agent sales and
agreements for cooperation with other Airlines. Costs faced by a new Airline are
for adapting the booking system to travel agents and CRS:s. The new Airline must
get large sales volumes to reach the loadfactor targets. The largest sales volumes
are believed to continue to be through the travel agent channel in the next few
years. The have speed in larger sales volumes, the ticket should be electronic.
Resources needed include good finances, a long-term business plan, customer
knowledge, technical knowledge, IT-support, access to a booking system, and
agreements with CRS. The chosen sales channel solution should be simple. The
Airline 's sales system must be adapted to travel agents.
The suggestion to use travel agents is because of their ubiquitous stores that constitute a
big resource, since it gives such broad märket coverage. This could be something that
would help to achieve the load factors needed due to the economics of Airlines.
Electronic tickets can be seen as a resource as it eases the distribution of sold tickets. The
new Airlines resources in the shape of technical systems should be in accordance with the
travel agents demands to create an actor bond. The obvious way of doing that is to use the
CRS system and it is however to a small extent also with web interfaces.
The already mentioned necessity of an Airline brand is confirmed with the travel agent
respondent. It can be interpreted as corresponding the actor-bond type of link as an
important impact for the overall relationship. Another area of consensus is the need for
the Airline to get revenues quickly. From a network perspective the need of fast incomes
lead to the importance of having a good financial situation before you start to operate. If
the Airline cooperates with an actor outside the sales network it can amass the resources
needed in a better way than relying on their own finances. Or, a second opportunity is to
create an actor-bond with an established actor (Håkansson & Snehota, 1995), e.g. an
Airline of good reputation and thus improving their own brand. A third issue confirmed is
the need for adaptation of web interfaces.
Dembrower, Maria. & Grenblad, Daniel (2003).
20
7. Discussion
The large volume of Airline ticket sales is still in the Traditional Travel Agent channel,
approximately 80 % ofall sales (empirical fmding from interviews). High growth of sales
is on the other hand taking place in the Web Sellers' channels. Online travel sales in
Western Europé increased by 53 % in 2002, while total travel sales increased only with
1.2 % (CRTR, 2003). This indicates that the Web cannot be neglected as a channel, even
if the volumes still are small relative to the Travel Agent channel. For the Airline it
means that Web Sellers are important to them. This is especially true for the Proprietary
Web and Collaborative Web, since these are the Web Sellers' channel they can control
through their legal ties.
Traditional Airlines have a legacy in the Traditional Travel Agent channel, why choosing
between using them or not is already made in a way. For them it is more about how much
emphasis they place on the Proprietary Web. For new Airlines it is a different case.
Without having any established relationship to take into account, it allows for more
freedom to choose the channel that seems to fit their business model. The two main
alternatives and their differences are:
> The Traditional Travel Agent channel with 80 % märket share (empirical fmding
from interviews). The channel suffers from higher cost per sold ticket due to the
CRS and Travel Agent intermediaries, which translates into higher priced tickets.
These incremental costs for each sold ticket are distributed över time and can thus
be seen as a marketing expense. Since this is an established channel, buyers know
how and where to fmd a Traditional Travel Agent. Le. there is no marketing cost
associated with creating this awareness. All Traditional Travel Agents more or
less have possibility to sell all Airlines, i.e. as soon as the buyer is ät a Traditional
Travel Agent the Airline's offering can be sold. Airlines however loose control
över the sales situation, they have to rely on advertising and incentives to
influence the purchasing choice.
> A Proprietary Web channel. The Web Sellers as a group has about 20 % märket
share (empirical fmding from interviews). A first limitation of this channel is that
the potential märket is smaller since not every one use Internet. For countries in
EU and North America Internet usage in September 2002 ranged from about 2070 % of the population (Nielsen, 2003). Secondly, with 40 Million web sites
(Netcraft, 2003) the chance of ending up ät unknown site by luck is small. To get
a part of the web sales, large marketing expenses must be made to create
awareness even before flight operations start. Thirdly, once ät the site the buyer
must trust that payment and personal integrity is treated appropriately. Here the
brand is again playing an important role which is costly for the Airline especially
Dembrower, Maria. & Grenblad, Daniel (2003).
21
in the beginning. The Airline's Proprietary Web otherwise cannot expect to get
any sales. For the reasons above it sums up to large upfront marketing costs. One
advantage is the lower channel cost per sold ticket. Also, since the Airline has
direct contact with the buyer it can result in better customer ownership (Grenblad
& Rosén, 1999).
All respondents were aware of the difficulties of entering the Airline märket and a
majority of them believed that there were entry barriers for a new Airline in terms of
selling tickets. Even those who answered that there were no entry barriers, mentioned
different kinds of aspects that could be seen as barriers:
> Travel Agents choose to cooperate with established actors to limit there own risk
of damaging their own brand.
> Limited financial resources. Not only for the flight operations, but also for
building the brand. Another aspect for the new Airline to consider is how to
establish a credible image so that customer dears to choose the alternative. As a
next step a strong brand could also help in creating loyalty among customers and
make them return as travelers. A question can be raised about those statements.
The jargon in today's populär business jargon includes several words which are in
fashion; "brand" is often used in all sorts of contexts. Caution is therefore called
for and it is not certain that the brand is the real solution. It could also just be one
of those "catch all" Solutions perceived among the general public to take care of
more things than it actually does.
> Creating appropriate technical system for the selling of tickets. Integration with
CRS could be an entry barrier if the initial costs to adjust the technical systems
are high in the beginning. When integrating with the CRS system it's not self
evident to get good sales if the company hasn't a well known brand yet.
> An Airline that has an innovative business model could find that it is difficult to
use the CRS based channels. The CRS:s were created by and for the traditional
airlines to support their business models ät that time. Legacy IT systems,
especially complex ones as the CRS are härd to change. Therefore the new
innovative airline might be forced to create its' own proprietary solution for the
sales function, such as a Proprietary Web.
> Having sellable products could call for interlining, which in turn is said to require
agreements with other Airlines. The standard industry regulations are not
covering all aspects.
> Cutting through the noise in the CRS system, i.e. having enough shelf space
presence. Large Airlines with many departures between destinations, especially
Dembrower, Maria. & Grenblad, Daniel (2003).
22
those with code share, get many listings presented in the CRS system when a
search for a ticket is made. One possible entry barrier not mentioned by the
respondents is due to the CRS position in the network as discussed above, see
chapter 6. Because much of the value resulting from the sales activity is
positioned inside the CRS:s in the shape of higher relative profits, it could mean
that other actors they get unfavorable terms of the business. If these terms were
more diversified among the different actors it could be easier for all the actors
operating in the network and especially for new actors trying to enter the industry.
More even profit distribution could help the new actor to get the financial
resources which have been a problem for all the actors in the beginning.
The network changes found have been involving all the other actors but the CRS:s. What
the CRS has done is only to structure their business. The entry of Web Seller has not
weakened their position since many of them choose to connect to a CRS. While the other
actors in the network are going through large changes since actors in a network depend
on each other it is possible that the CRS will be affected eventually and forced to change
their process and strategy.
Dembrower, Maria. & Grenblad, Daniel (2003).
23
8. Conclusion
In this paper we have found that there are barriers to entry with regards of sales of tickets
which fall into three broad groups. First, access to channels is hindered: The Airline's IT
system requires adaptation, Travel Agents that distribute the tickets select which Airlines
to prioritize, and Airlines might limit the code sharing agreements to a few actors.
Second, resources limit sales performance: Financial resources are often limited for a
new actor, which means less possibility to create a strong brand and receive necessary
attention. Third, network structure impact return of investments: The central position of
the CRS in the sales network means a barrier to entry. Much of the value that the sales
channels add results in relatively large profits for the CRS. It means that it is difficult for
Airlines to internalize this value and get returns on their investments in sales channels.
This is ät least true for channels using the CRS, which still is common practice even for
Proprietary Webs.
Dembrower, Maria. & Grenblad, Daniel (2003).
24
9. Future Research
> To get generalizable results on the issues of sales barriers in particular, a survey
would be suitable with more actors included and perhaps also more respondents ät
each actor.
> The industry changes would be interesting to follow with the perspective of
markets-as-networks approach. Will structuring take place where use of activities
and/or resources is refmed to attain better efficiency? Or, will a Heterogenization
process nappen where new ways of combining resources result in increased
effectiveness?
> An area not covered in this paper is about the distribution of tickets that are sold.
Similar research could be made on this aspect to see if it could be an entrance
barrier, e.g. does e-ticketing make it more easy or difficult for new Airlines? What
are the resources needed and what are the difficulties in getting access to them?
> The dominating position of the CRS could be interesting to study and to see if it
could affect the entrance of new airlines. So far much of the competitive impact
of the CRS:s has been analyzed in relation to the incumbent companies, see for
instance the US Department of Trade.
> This paper can be an input and starting point for analysis of competition in the
Airline industry and forces limiting competition. Sales and revenues are important
factors to a company and this could be a future research question to include in the
competitive analysis.
Dembrower, Maria. & Grenblad, Daniel (2003).
10.
25
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6f.3
i
Work in Progress paper to be presented ät the IMP conference in Copenhagen, 2004
Preliminary, do not quote
Maria Dembrower'
Susanne Hertz
Lärs-Gunnar Mattsson
Restructuring the Swedish märket for regular passenger flights after
deregulation- small firms and the dynamics of network interdependence
Abstract
This paper concerns the restructuring of the Swedish domestic märket for regular passenger
traffic after the deregulation in 1992. We especially focus on how smaller firms entered,
developed and sometimes exited this märket. Special emphasis is put on their network
connections. After the deregulation in 1992 SAS monopoly on some destinations was
challenged by entrants, also on some major routes. SAS tried to preserve its domination on the
domestic märket e.g. by alliances and acquisitions and also by refusing inter-line agreement
with a competitor. After rulings by the Märket Court concerning interlining and the use of
S AS's frequent flier program, competition again increased and S AS's dominance somewhat
declined. Still in 2003 the combined märket share of SAS and its partner Skyways was around
75 %. During the period 1992-2003 more than 30 firms have been active in regular passenger
flights of which half the number have left or being acquired in 2003. A combination of entry
and exit of firms characterized the quite turbulent development. Small firms entered from
nearby air businesses and became members of alliances, mostly operational ones. The
domestic development has to an important extent been influenced by SAS's restructuring and
alliance with Skyways and generally by the international development.
Introduction
In 1992 the airline märket in Sweden was deregulated. The political intention was to create a
more competitive and effective märket for domestic regular passenger flights. The public
policy purpose to open up for competition on previously monopolized märkets, is not only to
1
All ät Stockholm School of Economics, Box 6501,11383 Stockholm.
Corresponding author Susanne Hertz, e-mail: dshe@hhs.se
get price competition but also to stimulate entrepreneurial and innovative activities related to
production and to services offered.
Before 1992 SAS and Linjeflyg had split up the routes between them. In early 1992 Linjeflyg
was acquired by SAS. There existed a few minor routes in remote areas left to small
operators. The deregulation made it possible for established and new firms, with the necessary
qualifications, to enter the märket and to freely set their prices.
It is important to first comment on the specific entry and development problems on the märket
that refers to the characteristics of the passenger airline business in S weden.
1. The customer base is small for most routes which makes it economically difficult to
have more than one operator on more than 6-8 routes in Sweden. Thus it is difficult for
an entrant to compete with an incumbent on more than a few existing routes
2. Customers on one route, to reach their final destination, often need connections to
other routes, international or domestic. An operator with few routes need some
cooperation agreement with other operators, e.g so called inter-lining agreements or
common pricing for journeys comprising more than one route. The "hub and spöke"
organization of route networks favours large incumbents and operators who cooperate
in alliances, including eg code sharing.
3. Customers' scheduling preferences makes it important for an operator to offer several
departures and arrivals per day on a specific route. This makes it difficult for a small
operator with initially few customers and limited resources
4. Customers generally prefer to fly with big rather than small aircraft. On major routes,
where incumbent operators fly big planes, entering firms are ät disadvantage because
of their initially smaller märket share.
5. Customers might be reluctant to use other airlines than the airline they usually fly, eg.
due to frequent flier programs.
6. Ät major airports, especially Arlanda, the number of arrival and departure "slöts" that
can be allocated to new entrants are quite restricted.
7. For some routes in northern Sweden that need to be subsidized by the government as
part of a regional development program, traffic for a period is awarded an operator
after a bidding process.
Since 1992 a number of small and medium-sized firms entered the märket for domestic
flights. The dominating firm, SAS, gradually changed its märket behavior. Competition and
cooperation developed. The märket was restructured. In the early years after deregulation
competition increased but a few years låter SAS was again sole operator on most major
routes. During the last few years, competition, especially price competition has increased
again .
Since the deregulation, growth and survival of the small firms have been in many cases
jeopardized and many have gone bankrupt or have exited. Various reasons for this have been
suggested. Most of them are related to the ability of SAS to meet competition due its scale
and scope advantages, its frequent flier program, its acquisitions and alliances. Important
reasons for the smaller firms ability to stay and develop on the märket are that they fmd
"niches" in the märket, develop new network relations, fmd new ways to cut costs and are
flexible in response to changing conditions. The change processes on the märket interact and
are of different importance över time.
Purpose and disposition of the paper
The purpose of the paper is to primarily to describe how the Swedish märket for regular
passenger traffic was restructured during the period 1992-2003. We will then specifically
focus on the role of inter-firm cooperation and network dynamics. We also offer some
analytical comments. First we will briefly present our analytical framework, then present
information from the empirical study and finally more generally analyse restructuring that has
taken place.
Analytical framework
We have a markets-as-networks perspective and for this paper we will specifically emphasise
reconfiguration of a märket in terms of actors and connections between actors. There is a
focus on the suppliers of a specific service (regular domestic passenger air transportation in
Sweden). The institutionell setting is changed ("deregulation") and the phenomenon we want
to understand is how opening up for competition initiates strategic actions by incumbents and
new entrants. Given specific attributes of the production system for these services that we
indicated above we focus on the resource dimension in the production system and acquisition
of such resources through cooperation, including alliances, mergers and acquisitions.
Cooperation and competition interacts in such a way that competition takes the form of
collective competition.
The network of actors involved in regular domestic passenger air transportation overlaps with
networks for passenger air transportation internationally and in other domestic märkets. This
network also overlaps with other air businesses like taxi flights, charterflights and airfreight.
The reconfiguration process as interdependent with such overlaps. Changes in such overlaps,
i.e. overlapping is a driving force in reconfiguration. Literature references for this framework
are Johanson and Mattsson, 1992; Hertz and Mattsson, 2004 and Gomes-Casseres, 1996.
Reconfiguration when two firms agree to cooperate is influenced by complementarity and
overlap between their services/products and geographical areas covered (Hertz, 1996)
The empirical study
Empirical data has been gathered from secondary sources about all the airlines operating on
the Swedish märket between 1992 and 2003. Some of these went bankrupt or were acquired
during the period. Personal interviews were made in 15 firms, with experts of the airline
märket and with employees from the Air Traffic Department of Sweden (Luftfartsstyrelsen).
The purpose of the study concerns small firm entrepreneurship and effects of deregulation.
However, in this paper we are not concerned with the entrpreneurship as such. It is also
important to keep in mind that our description is preliminary. We have not been able to fully
check the events and the dates.
We have divided the empirical material into a/ entry on the märket, b/ growth and
development and c/ alliances.
Märket entry
The firms that entered the märket directly after deregulation had a history in the air business
and were coming from nearby niches such as taxi flights, charter for businessmen and also
airfreight. The first four that entered routes to compete with SAS were: Malmö Aviation,
Transwede, Skyways and Nordic European.
-Malmö Aviation started with school and taxi flights and some airfreight in 1981. After an
early bankruptcy and change in ownership Malmö Aviation in 1992 began regular passenger
flights between Malmö and Gothenburgh, Visby and Stockholm-Bromma. While the first two
destinations were soon dropped the Malmö-Bromma route continued. A further change in
ownership occurred when the Norwegian firm Braathens bought the firm, thus bringing
Malmö Aviation into an established operatorns resource constellation.
-Transwede started in 1985 as a charterflight operator. It began regular passenger flights in
competion with SAS from Arlanda to Umeå and to Gothenburgh. Braathens became partowner in 1995 (and fully owned in 1997).
- Skyways' was established in 1992 through a merger between two small firms (Salair and
Avia). Its history dates back to 1940 when one of the founding firms was employed by the
Swedish Air Defense to fly "target aircrafts". Skyways employed from the beginning
personnell from SAS and Linjeflyg. It soon began to cooperate rather than compete with SAS,
taking över small routes that SAS wanted to discontinue. In 1995 Skyways and SAS signed a
general interlining agreement.
-Nordic European began as a charter operator and began regular fights on the ÖstersundArlanda route in 1995. There was a price war with SAS and SAS refused to agree on
interlining.
In the early years after the deregulation a few of the firms established in other air
transportation began regular passenger flights on minor routes. Airborne of Sweden (founded
1985) operated Mora-Arlanda and Sveg-Söderhamn-Arlanda. Air Express (1986) operated a
couple of routes from Norrköping, Falcon Air (1960) operated from the beginning in
cooperation with SAS and SKYWAYS. Flying Enterprise (1970) started to operate from the
Skövde Airport, that it managed on routes Skövde-Arlanda and Skövde-TrollhättanCopenhagen, Nordkalottflyg (1974) operated a few routes in the North, Holmstroem (1966)
also operated a few minor routes in middle Sweden, West Air Sweden (1962) operated
Gothenburgh-Sundsvall.
The deregulation stimulated a number of entries by firms founded after 1992. Entrants during
the first five years were Air Nordic, Braathens, Euroflight Polaris, European Executive
Express , Golden Air, Highland Air,Reguljär and Värmlandsflyg.
Air Nordic (1993) was owned by an international freight forwarder firm and flew two
domestic routes out of Borlänge. The Norwegian Braathens 'enterred the Swedish domestic
märket by investment in Malmö Aviation and Transwede, both becoming fully owned
subsidiaries. Euroflight Polaris (1996) had to disrupt its operations the same year because it
failed to fulfil government regulations. European Executive Express (1995) specializing in
taxi and charter flights also began some regular traffic. Golden Air (1993) began to operate
some routes from Skåne to Bromma. Highland Air (1995), with roots in Holmstroem Air
operated some routes originating in Småland and Västmanland. Reguljair (1996) emanated
from the failure of Euroflight Polaris and operated Skellefteå-Umeå-Sundsvall.
Värmlandsflyg
(1997) operated Torsby-Hagfors-Arlanda.
After the first five years a number of new firms enterred the domestic märket. City Airline,
Danish Air Transport, Direktflyg, Goodjet, Gotlandsflyg, FlyMe, IBA, Kullaflyg, Nordic
Airlink, Swedline Express Swedeways, Tryggflyg, Waltair, Wideroe.
City Airline (2000) acquired what was left (planes, hangar, terminal, licences and permits) of
the bankrupt airline JET 2000 and began to fly domestically Gothenburgh-Linköping. Danish
Air Transport, a Danish specialist in air freight participated in bidding for routes in Norrland.
Direktflyg (2002) flew Gothenburgh-Kristianstad. Goodjet (2002) was an effort to compte
with low prices on major routes in competition with SAS and Malmö Aviation. It soon went
bankrupt but FlyMe (2004) co-founded by one of the owners of Goodjet enterred the märket
with a similar concept. Gotlandsflyg (2001) challenged SAS and Malmö Aviation with low
price flights from Bromma and Skavsta to Visby. IBA (1998) started operations GällivareBromma. Kullaflyg (2001) sister company to Gotlandsflyg, using Golden Air as operator flies
Bromma-Ängelholm. Nordic Airlink (1999) operates in Norrland. It was acquired by Finnair
as an answer to SAS'acquisition of Air Bothnia. Swedline Express (2002) participates in
bidding for routes in Norrland. The founding of Swedeways was based on Holmstroem Air.
Flies mail during the night and passengers during the day:Östersund-Bromma, HudiksvallArlanda. Tryggflyg (1998) started Nyköping -Visby but withdraw from the regular passenger
märket the same year. Waltair (1998) located in Norrköping started to fly NorrköpingStockholm and Linköping-Göteborg. Finally, the Norwegian company Wideroe, owned by
SAS participated in bidding for routes in Norrland but did not win any such competition.
Above we have just indicated some characteristics of märket entry, taking place during
different years 1992-2004. As we have indicated, entry of some firms was dependent on exit
of other firms.
Growth, decline, development
After entry the types of developments included:
-total withdrawal from the märket, including bankruptcy, focus on other air business
-mergers and acquisitions
-growth on regular passenger traffic involving more domestic routes, international routes and
domestic routes in other countries
-decline in the regular passenger traffic but not withdrawal from the märket
We will comment on each of those but have no quantitative measures to report and can not
comment on volume or märket share development on specific routes.. There might also be a
combination of development types över time. Bankruptcy might be linked to a låter
acquisition of some resources by another company, growth might precede or follow an
acquisition.
Firms that withdrew from the märket during the period (without being acquired) were Air
Nordic, Euroflight Polaris, Falcon Air, Goodjet, Holmstroem, Nordic European, Reguljair,
Tryggflyg and West Air Sweden. However , for many of these firms some of the human (like
managers), immaterial (like licenses or routes) and material (like aircraft, hangars) resources
were transferred to other firms.
Several firms were fully or partially acquired by other firms and thus connected to other
resources. Important for the restructuring of the märket were two sets of changes in
ownership, both involving SAS.
The first is the development of Skyways and SAS part ownership of Skyways in 1995.
Skyways'acquisition or ownership investments during the period Airborne of Sweden, Flying
Enterprise and Highland Air increased its coverage of domestic routes. Skyways grew
considerably on the domestic märket through the alliance with SAS (including transfer of
routes from SAS that SAS considered unprofitable), extension of its domestic route network
through the above mentioned ownership investments, through cooperative agreements with
other firms (Golden Air, Waltair and earlier Falcon Air) and its take över of some routes
operated by firms withdrawing from the märket (Holmstroem, Air Express).
The second development involves Braathens, Transwede, Malmö Aviation and SAS. Through
Braathens' acquisition of Transwede (partly in 1995, fully in 1997), Braathens took över most
of Transwede's routes including Malmö-Bromma, Stockholm-Östersund, Stockholm-Umeå.
Then Braathens also acquired Malmö Aviation and extended its own domestic Swedish
operations to e.g. Stockholm and Halmstadjönköping, Sundsvall repectively. When SAS
bought Braathen's due to the latter's economic problems, Braathens had to sell Malmö
Aviation (to investors outside the airline industry) and withdrew from the Swedish domestic
märket.
A third development of importance was Finnair's acquisition in Nordic Airlink which
operated some routes in Norrland. Finnair's acquisition has been interpreted as a respons to
SAS purchase of Air Bothnia which operates in Finland and internationally.
Entries, exits and acquisitions are important aspects of the reconfiguration of the märket after
deregulation. We have also touched upon alliances and other aspects of cooperation.
8
Before turning to cooperation we will also comment on the development of the set of routes
that individual finns operate, bearing in mind that also this development often is related to
entries, exits, acquisitions and alliances. A general observation is that there is a löt of
flexibility.
This has been true both for major routes like between Stockholm and
Gothenburgh, Malmö and Umeå respectively and minor ones like between airports in northern
Sweden and between Stockholm and minor airports in southern Sweden.
Several routes earlier operated by SAS where were handed över to smaller firms, especially to
Skywys after SAS became part-owner. Ät the end of 2003 Skyways operated 32 domestic
routes and had a märket share of 10-15 %. But also Skyways left some routes that were then
taken över by smaller firms like European Executive Express.
International routes and domestic routes in other countries has been added to the operations of
several firms especially during the latter years. An early casels that Flying Enterprise operated
a Skövde-Trollhättan-Copenhagen route, dropped already in 1994. A late entrant, City
Airline, for which the international routes are more important than the domestic, operates
from Gothenburgh to Helsingfors and Manchester, earlier also to London and has an
interlining agreement with an American airline. Golden Air also operates domestic routes in
Norway and Finland. Direktflyg and Swedline Express flies to Lithuania, Waltair to the
Baltic countries and places in Russia. European Executive Express connects e.g. Mariehamn,
Arlanda and Oslo, and has opened traffic between Bromma and Helsingfors. Malmö Aviation
has developed the low-price concept "snålskjutsen" which includes destinations like Nice,
Brussels, Venedig but also the domestic Visby. Nordic Airlink, after its acquisition by Finnair
has expanded to some internordic routes. Skyways flies to several foreign destinations as a
partner to SAS.
A typical feature in the early years was that the activities of the firms enterring regular
passenger traffic covererd many air business activities such as taxi, freight, charter. A few
firms concentrated on passanger traffic when that business grew. Malmö Aviation abandoned
the freight business already in 1994. On the other hand, Falcon Air, being acquired by the
Swedish Post and growing in airfreight discontinued their rather small passenger transport
activities in 2003. Only some very small firms seemed to be able to handle a combination of
many different businesses with small volumes like taxi flight, charter, freight (like taking mail
to different regions) and some minor passenger routes.
Alliances and cooperation
During the period the International passenger airline märket has been characterized by a
somewhat unstable development towards 4-5 global strategic alliances of major airlines.
Related to this development these airlines have developed strategic alliances with smaller
feeder airlines in their own domestic märkets. SAS links to Skyways in Sweden, Widerö in
Norway and Maersk in Denmark are examples of this. Malmö Aviation through its owner
Braathens was associated to the global Wings alliance but change in ownerships (not only for
Malmö Aviation and Braathens) disrupted mat alliance. The large airlines now also have
begun to invest in smaller airlines in their competitors' domestic märkets. This is the case
with SAS for Air Bothnia and Finnair for Nordic Airlink. Also non-equity based cooperation
between large and small airlines have been developed during the period. Golden Air's
cooperation with Finnair, City airlines cooperation with an American airline and Malmö
Aviation's with KLM represent such developments.
This way the national, regional and even global passenger flight networks become
increasingly connected through cooperating groups of firms competing with other groups.
However, there are also less visible, but in individual cases important types of cooperation
involving regular domestic passenger flights. We mention some of those observed in the study
below.
-Flying Enterprise cooperated with Braathens about schedules and ticketing and with SAS
about total price for destinations involving flighjts with both firms.
-City Airline was in the beginning helped in the economic planning by Malmö Aviation but
not yet in synchronising the scheduling of flights from Malmö.
-Golden Air cooperates with Skyways in terms of ticketing and bonus program, charters
aircraft to Gotlandsflyg for Bromma-Visby and operates Ängelholm-Bromma for Kullaflyg.
-Falcon Air code shared its flights withn SAS and sometimes operated scheduled flights for
others
Wang & Evans ( 2002) have classified the different forms of passenger air line alliances into
route specific services, code sharing agreements, joint operations, marketing alliances and
finally the "open sky" alliances. The bilateral route specific services are seen as the simplest
form while the "open sky" is the most extensive. Code sharing is defined as "one partner
assigns its airline designator a code to the flight and its partner. Joint activities involves not
only code share but also baggage checks, honoring tickets between the partners but keeping
the identity of each. The the next stage marketing alliances includes global groups. This is
10
where Står alliance fits. An "open sky" alliance is broader commercial alliance that includes
the other types of agreements and also joint purchasing, maintenance, etc.
Outside of the regular passenger flights small firms reported cooperation in taxi flights,
charter flights and air freight with other firms in the region. E.g. when they were fully booked
or did not have the right size of plane they contacted or recommended a group of other small
firms offering similar services.
Few domestic passenger airlines have alliances with customers. Frequent flier programs,
agreements with local or international firms and other organisations obviously exist. The
recent agreement between the Swedish State and FlyMe is an example of how a big employer
tries to influence the choice of airline for its travelling employees. The airlines with the
majority of their business in taxi or charters flights seemed to have agreements with
customers more frequently. Alliances with customers are also common for airfreight. Many of
the small airfreight firms had alliances with larger freight forwarder firms like TNT, UPS,
DHL.
Discussion
Compared to the network structure before deregulation the reconfiguration has been
substantial. A large number of firms have entered, many have exited. There are now more
routes served and more routes with more than one operator. The dominance for SAS and its
partners is still considerable. In 2003 the combined märket share of SAS and its partner
Skyways was around 75 %. The märket share for the three largest operators (SAS,Malmö
Aviation and Skyways) was 90 %.
The restructuring process can be seen as dependent on
overlapping with entrants coming from other air businesses in Sweden and from other
passenger airlines abroad
-
dynamics of cooperation between airlines leading to more emphasis on collective
competition and coordination between domestic routes and between domestic and
international route
enforcement of norms in the institutional setting (court ruling about interlining and
about SAS Eurobonus, development of a bidding procedure for routes in little
populated areas
11
-
transferability of resources (including access to routes) from exiting firms or declining
firms to entrants or incumbents that aspired to grow. Entry and exits arerelated to each
other.
-
cooperation between small regional firms in overlapped networks (for airfreight etc.)
increased their resources for regular passenger traffic.
small firms were quite flexible in entry and exit from individual routes
Cooperation in various forms between the smaller firms were driven by lack of resources and
by the dominant firm by the need to preserve its dominant position and to become more
effective. In general most of the airline alliances could be classified as a combination of
complementary and overlapping (Hertz, 1996), since they were with other airlines but
covering different regions or being complementary helping each other in the same region.
The small operators developed within domestic regions but also to some extent within regions
in neighboring countries. The overlapping was in this sense also international for the small
firms. The small firms start and leave traffics rather quickly between or within
countries.depending on the situation. The firms seem to be very flexible in starting new direct
flights. These flight might sometimes compete or cooperate with the large monopolist firm or
some of the other large international airline. Therefore internationalisation is very flexible
during the period.
By the end of the period the low cost airlines have attracted new kinds of customers as well
taken customers from traditional operations. In this paper however we have not been able to
focused on the pricing issue or the influence of the international low-cost company Ryan Air
on the Swedish domestic märket.
References
Gomes-Casseres, B.(1996). The Alliance Revolution - The New Shape of Business Rivalry.
Cambridge. Harvard University Press
Hertz, S. (1996) "The Dynamics of International Strategic Alliances- A study of freight
transport companies." International Studies ofMangement and Organisation. Summer 1996
Vol 6 No 2, pp. 104-130
Hertz, S. & L.-G. Mattsson. (2004) "Collective Competition and dynamics of Märket
Reconfiguration" Scandinavian Journal of Management( in press)
12
Johanson, J & L.-G. Mattsson, (1992). "Network Positions and Strategic Action - An
Analytical Framework". In : Axelsson B. & Baston G (Eds.) Industrial Networks - A New
View ofReality . London, Routledge
Wang,Z.H. and M. Evans (2002). "Strategic Classification and Examination of the
Development of the Current Airline Alliance Activities." In Journal of Air Transportation Vol
7,No3
:
*#4-
Chapter 9
The growth of small and medium sized
firms in airline passenger networks
Susanne Hert^, Maria Dembrotver and }-jna Norden/öu>
Introduction
The lattet part of the 1990s saw an increasing numbet of airline alliances around the
world. The most important tnotive behmd the alliance frenzy was of course the gradual
liberalization of regulations in large märkets such as the North American and the European.
The deregulation was expected to initiate the growth of smaller firms and increase
competition and decrease the power of the dominating airlines. The airline alliances have,
however, rather caused an industry concentration on a larger scale leaving many of the smaller
forms outside.
Doganis (2001) mentions the main factors to be behind the push towards the
international aviation industry concentration: 1) A desire to reduce costs 2) A search for the
marketing benefits of large size and scope 3) the need to reduce competition and 4) the
"nationality-ruk" making the cross-border acquisitions and mergers virtually impossible.34
How will these factors influence the development of smaller airlines?
The first of the factors mentioned above is the most apparent driving force behind a
major airline wanting to align with a smaller one. This is the case as cost economies of scale only
exist ät the lower end of the size range. Alliances therefore enable the major partner to benefit
from the smaller partner's lower operating costs. As airlines increase beyond fifteen or twenty
akcraft there are no further significant cost economies, instead other factors become important
cost drivers such as size of aircraft used, level of wages etc.
Increased märket power is an important factor behind alliance formation in general.
Alliances can also have a beneficial impact on costs in a number of different ways: Higher traffic
volumes that can lead to economies of traffic density, e.g. through higher utilization of fixed
assets; Cost economies which may arise from possible synergies between the alliance partners
such as joint procurement of goods and services; Joint purchasing in many areas.33 In the aviation
industry alliance formation has been a way to bypass regulatory barriers due to the "nationalityrule". The fourth driving force, mentioned above, is not so often stated publicly, but a well
known driving force all the same.
These are all important factors for alliances in airline industry more in general and does
not necessarily apply to an alliance between a small and large airline. Just in the case of the furst
factor can interpreted as beneficial for the small and large ftrm alliances.
The general concentration of the industry into large multinational groups of alliances
forming world networks is not specifically advantageous to the SMEs in the industry. Since direct
competition with either of the groups would be too costly, the best alternative would be either to
stay neutral or to form alliance with either of the groups. However, in order to be competitive
the SMEs need to be able to tie into a larger network, which is difficult without forming any type
of alliance. Therefore it is common for SMEs is to form alliances with a larger airline. What
impact would this actually have on the development of the SMEs?
'Doganis, R. (2001) p.71
' ibid, p.76-79
117
•stt*^r*S¥ <3w xv*""*-i •
r&A^^%*"&**ffS£S&g!£iig&
We have not seen any research about how this will influence the possibilities and
problems of rhe smaller firms and to \vhat extent the smaller ftrms can take advantage of this
situation and actually grow.
The main purpose of this paper is to study how SMEs in an alliance with a large airline can
develop and grow, with focus on the problems, risks and opportunities attached to such a
relationship. There are particularly three questions that will be discussed in order to highlight the
purpose. What different forms of alliances do SME aklines establish? How do these alliances
change över timc? Could the smaller firms be a threat to the larger firms?
[lavc L\w Li~aj
background in charter as well as freight operations, l rus COUIQ ua
those that are involved with passenger transportation are very dependent on the larger äirjines;
they often feed traffic to the big hubs where the larger airlines take över. Secondly freight and
charter traffic often use jet-planes while the small regional airlines often use turbo-prop planes.
But competition on the Swedish märket can also be seen in another light, a battle between the big
worldwide alliances. (For more information about the alliances, see table l below). From l April
2003 also Spanair will be a member of Står Alliance and låter Swiss will become a member of
One World. Another interesting change is that Ak France actually has acquired the majority of
KLM. This would mean that even some of the smaller state airlines within EU might be in risk of
being acquked by the larger ones.
The Swedish märket for airline passenger transportation36
The aviation industry is a network in itself, with hubs and spökes. When studying a
particular märket the players' interconnectedness has to be remembered. The firms are
connected to each other in many different dimensions: the infrastructure is used by all airlines,
the regional airlines often feed traffic into larger hubs for further transport to other destinations,
many airlines own shares in other airlines, there are alliances between different airlines etc.37
Before the deregulation of the Swedish märket in 1992, SAS and Linjeflyg were the
dominating participants. SAS operated the heavily used routes between Stockholm and
Gothenburg, Malmö, Luleå and Kiruna while Linjeflyg rån those routes that SAS were not
interested in. Other than that there was a very limited regional flight service, with routes that
neither SAS nor Linjeflyg were interested in. The monopolistic situation that prevailed was not
established by law but a well established practice. To be able to start domestic airline permission
had to be granted by the government. Furthermore, it was forbidden for foreign operators to run
domestic routes. Prices had to be accepted by the the Swedish Aviation Authority
(Luftfartsverket). The enterprises were forced by the government to run a regular service,
covering the whole country, profitable as well as unprofitable routes. In cases of economic losses
the firms were entitled to governmental support.
The Swedish deregulation process actually started ät the end of the 80's. The competition
committee, that had been appointed in 1989 to investigate what regulatory changes that would
lead to increased competition, recommended that the eight or ten largest routes would be opened
up for competition. Due to capacity constraints ät Arlanda airport the government decided that
competition only was allowcd between SAS and Linjeflyg. A month låter SAS bought Linjeflyg.
This as well as the recession which had hit härd on the airline business forced the government to
deregulate the märket even further. The real deregulation began July l, 1992. All Swedish firms
wishing to start a domestic route were then able to, provided permission had been granted by the
government. The airlines were able to decide on their own prices. There were ät least seven
expectations linked to the deregulation and one of the most important was the hope for new
airlines to arise. In 1997 it was also decided that foreign operators were allowed to start a route
\\ithin the country.
The domestic airlines in the US have, since the deregulation, become competitors on the
larger routes. In Sweden, on the other hand, SAS main competitors have been those with a
j6
This text draws heavily on Hultén S, Alexandersson G. and Nordenlöw L. (1999) De avreglerade marknaderna
lör långväga kollektiva persontransporter i Sverige, En rapport med utvecklingsperspektivet år 2010, SIKA
Nordenlöw L (1999) Entreprenörskap i industriella nätverk -En studie av småföretagande i avregleringens
kölvatten, avhandlingsplan
" Button K.., Haynes K. & Stough R. (1998) Flying into the future - Air Transport Policy in the European Union,
Edward Elgar Publishing Ltd., Cheltenham, UK, p.9
Changes within these groups take place continuously and this would imply that there
would also be both relational and organizational changes of the regional aklines as well.
Theoretical framework
Alliances between firms have often been an important subject in business theory. The
focus in this study is on the development and growth within an alliance between a small and a
larger partner and its problems, risks, and opportunities. We will both use theory of alliances and
of entrepreneurship to understand this industry.
We start by discussing some basic concepts of the network perspective. Then after a brief
general discussion of the motives for alliance formation and development we bring in the
position in the network, development stages, power dependence, positive and negative
connectedness and uncertainty and risk. We will end with a short discussion about the
entrepreneur and critical characteristics that might influence the development of the firm.
An industrial network can be analyzed from four different perspectives. These are the
single organization, the relationship between certain actors, the net (i.e. a smaller group of
interdependent actors) and the total network. (Hertz, 1996) The aviation industry can therefore
be studied from the perspective of the single airlines, the relationships between two airlines, a
large alliance of several interdependent airlines i.e. an alliance between nets. Finally the whole
industry and their connected partners can be seen as the total network in this case.
Establishment of alliances initiates a process of change for the organizations involved in
the network. The company's embeddedness in a context and the opportunities it creates through
both direct and indirect relationships might even be more important for growth than the single
firm's abilities. In the aviation business with its necessity of creating interconnectedness this
seems to be even more relevant. Therefore this might be of interest to understand how the
alliance partner is connected in order to explain growth of the SMEs.
The motivations for forming or establishing an alliance has been subject to much
research. According to Gulati (1998) three main motivations broadly applicable are the
transaction costs of small numbers bargaining, enhancing the competitive position or märket
power and gärning organizational knowledge or Icarning from each other. Since the SME has a
constant lack ot resources all three morives would seem to be easy applicablc.
The rirnVs position in a network can be defined in terms of how it is related to other
firms of the network or as consisting of its portfolio of relationships and the activity links,
resource nes and actor bonds that anse from them. (Johanson & Mattsson, 1992; Ford, et al,
1998) Enhancing its network position m the net and in the total network is an important motive
as well as base of strateg)' for firms both in the net and total network. From the network
perspective it might mean to change from existing net to another net. (Hertz, 1996) The reason
tor startmg an alliance is not the focus in the network approach but rather how the alliance is
formed and how it develops över time. This has to do with the essence of the network view, that
relationships are normally long term. There is a combination of stability and change in the
existing relationships. Both are necessary for a relationship development. (Johanson & Mattsson,
1992)
Wc have also seen that relationships go through different stages in their development.
(Dwyer, Schurr, &Oh, 1986; Liljegren, 1987) Development of a relationship is normally a gradual
change that deepens and expands över time as trust develops and new possibilities to increase
etfectiveness and efficiency are revealed. The more the two parties interact the more they get to
know each other and the easier it becomes to transfer knowledge between them. Ät the same
time, the more closely related the businesses are the easier it becomes to get further involved,
creating tighter relationships. This increased integration as well as the unwillingness to change has
been seen by many researchers (Ford, et al, 1998). However, it often ends up in a stagnation and
institutionalization, which then might turn into a decrease in commitment and a break of the
relationship. The decrease in commitment is often a result of change in other relationships of the
network (Hertz & Mattsson, 2001).
Thercfore not only the small atrline but also the large firm would have to expect be an
increased depcndencc över time but also be many conflicts.
Wang & Evans (2002) have made studies of the large passenger airline alliances and have
calssified the difterent forms of alliances which shows different degrees of integration. These are
route specific services, code sharing agreements, joint operations, marketing and finally the "open
sky". The bilateral route specific services are seen as the simplest form while the "open sky" is the
most extensive. Code sharing is defined as"onepartner assigns its airline designator a code to theflight and
its partner1'(ibid, p 79). Code sharing often includes one airline buying block of seats from another
airline and reselling them. Joint activities involves not only code shares but also baggage checks,
honorouing tickets between them but keeping their identky. The the next stage marketing
alliances include global groupings. This is where Står alliance, Oneworld, etc fits in. The "open
sky" would be a much broader commercial allainces that include most of the other types of
agreements but also joint purchasing maintenance, etc.
However, these types of alliances are used between the large airlines. We do not know to
what extent any of these types be used in an alliance between a small and a large airlines.
As for the choice of partner, the firms' embeddedness in the network will hinder as well as
facilitate the formation of certain relationships and the organizations are therefore seldom free to
choose their partner. Most companies are already tied up in existing relationships and nets and
these will consequently have to be broken or changed in order to establish a new one. Through
the network the organization will also be able to gain information on another firm, through direct
or indirect relations. This advantage might be turned into a disadvantage in certain situations
when the network might realize what will happen in advance in based on the what information
they have from the network connections. (Johanson öc iviaussxju, i^~, *....
the relationship with a certain firm and maybe trigger reaction from other organizations to what.
is going to happen and maybe causing chain of reactions (Hertz, 1998).
Earlier studies of alliances have often distinguished among alliance structures in terms of
the degree of hierarchical elements and issues of control and coordination attached.
The formation of contracts and ownership are seen as vital for managing the behavioral
uncertainty. (Pisano, Russo and Teece, 1988) According to Pfeffer & Salancik (1987) the
uncertainly does not have to lead to ownership, but rather to make use of other ways to decrease
the uncertainly such as commitment through Board Membership. Being in a deregulated business
full ownership does not seem to be acceptable for the dominating firm so alternative ways would
be more likely in coping with the poiver dependence.
In the network approach, dependence is expected to be mutual and discussed in terms of
asymmetry or symmetry of an alliance. A very high asymmetry would imply certain problems in
the relationship. While the firm having little power or a less important position would have larger
difficulties in realizing the benefits the relationship would also be more difficult to manage.
(Easton, 1992) This would have implications for small airlines and their realization of the benefits
of the alliance.
In the network approach trust between the organizations is a vital concept that leads to
development of the relationships (Young, 1992). Since there can never be a total control and the
coordination the relationship organizations must trust their partner to voluntarily live up to the
demands set for the alliance. Coping with power dependence and building trust would be two key
issues for a small and a large firm forming an alliance.
In most cases, a joint venture is not recommended when there is a potential conflict of
interest between partners. (Gomes-Casseres, 1989) This seems to be important for the cases
where competitors are forming alliances. Furthermore studies show between competing firms
alliances have a high frequency of failure. (Bleeke & Ernst, 1995) Related to the question of an
alliance being complementary or competitive are the concepts of positive and negative mnmctedness,
which are important dimensions of networks. Relationships are positively connected to the extent
that exchange in one relationship increases the likelihood of for exchange in another relationship
while negative connectedness involves a decrease instead. (Cook, 1982)
The same reasoning is possible to apply to a net consisting of a large number of
interdependent relationships.On net level it is rather a question of complementarity or overlap in the
nets.
Partners are often chosen to cover a complementary geographical area or to have
different services in the same geographical area. (See figure 1) In areas of overlap there will be
conflicts of interest between the partners which could create problems for the alliance ending up
in its breaking if not solved. (Hertz, 1996) A typical example could be in the formation of an
alliance between two large International airlines. The partner's existing nets can be either
complementary or overlapping in services and/or coverage.
Different
Different
Geographical
coverage
Same
Same
organization in relations with others in tne auiance. iiicrciuic öu»-ii in.
background in the network and influential relationships över the years that is of importance.
Empirical part
Fully complementary
Complementary/
overlapping
Overlapping/
complementary
Fully
overlapping
Fig l Overlap and complementarity in networks (Source: Hertz, 1993).
Thereby we can expect overlapping organizations, which actually are serious competitors,
and less successful when creating an alliance than the others. The most common and dynamic
situation for alliances are a combination of complementarity and overlap. (Hertz, 1996) But you
can find examples of fully overlapping alliances in the märket like Står Alliance or OneWorld.
The effects and consequences of change processes in networks are totally different depending on
the situation of the partners and the their expected future changes. Is it moving towards a higher
degree of overlap or is it moving towards a more complementary type of overlap? The smaller
firm will probably have to adapt in order be more complementary and less overlapping in order
to have few potential conflicts.
Entrepreneurship
According to Tsang (1998) studying alliances of smaller firms, uncertainty and risk are larger
for small firms. Therefore they are more likely to use alternatives mat mean a lower resource
commitment. He also mendons that small firms also choose other types of alliance alternatives
than larger firms and that the possibility to absorb the knowledge from the partner is important.
A young organisation is often by definition small and lacks the financial means to take
risks. The entrepreneur is by definition an actor that seeks new and often unconventional ways to
develop the organization. Even though the entrepreneurship mostly is connected to technical
advancements (Schumpeter, 1989) much of what is done is also tied to the entrepreneur as a
person. The most common characteristics for a successful entrepreneur are to have good
knowledge and self-confidence, to have technical competence, capital, individualistic, a strong
ability to imtiate projects and so on. One question here is if these abilities are sufficient to reach
success in the airline industry? Maybe the most important thing here is to have the ability to
cooperate and to maintain the relations in the network, instead of just acting as an individualistic
sntrepreneur. Therefore when forming an alliance with a small firm by necessity has to include
trust and a good social contact with the manager of the firm.
To sum up, we have found particularly three elements that are of importance when
discussing different types of alliances using a network perspective: complementarity and
competition in the alliance, power dependence in the relationship and degree of integration. On
top of this there is a fourth factor that in a way combines all of the others when studying small,
newly established organizations as well as alliances. This factor can be referred to as
entrepreneurship and has to do with being able to see and use chances that are given to the
We have selected five early starters among 16 studied firms on the Swedish märket in the
deregulated märket and we have totally made 10 interviews with these companies between 1994
and 2003. In this study we have focused on their alliances with other airlines and the problems,
risks and opportunities met on their ways of growth. These firms have been studied in their
relations to the bigger firm SAS to describe the firm's situation on the märket. One of the firms
has now been bought by a larger company which could give us an interesting description of the
märket development. Many studies have been done on SMEs as well as on that of alliances but
very few have, combined the two. Many studies have also been done on the aviation märket,
particularly concentrating on the North American märket, but very few have focused on the
small firms operating in this field. Therefore our study has been based on a few case studies of
small airlines operating partly on the Swedish märket. All except one have a relationship with
SAS, the dominating airline on the Swedish märket. (These firms are presented below). The study
is focused on Sweden and airlines operating in this country, but also countries nearby and airlines
operating in the vicinity play a large role.
_
Hr m
Air Baltic
Air Botnia
Ire andair
SA S
Sk).ways
Tijrnover
1, 86 Msek 300
974 Msek
400 Msek 2000
51400 Msek 3 100(1
1500 Ksek 700
2003
11
250 000
18
50
29
1, 5 milj
17 milj
990 000
Table 2 A snört presentation of the studied airlines in numbers. Website information 2003-02-02
Air Baltic
Ak Baltic is a fairly small airline that operates in the Latvian märket. The home märket is
too small to harbor a large airline and to be able to enlarge the märket a partner is essential for
growth. When a privatization of the publicly owned Latvian airline was discussed in the
beginning of the 90's, SAS was presented as a possible partner. SAS' ambition was to find a
transitstation for traffic to Eastern Europé and Ak Baltic was interested in finding a partner. Ak
Baltic has therefore been a regional partner to SAS from the start in 1995 and is also owned by
SAS to 47, 2 %. The company's largest shareholder is the Latvian State with 52, 6 % and also
Transaero owns O, 2 %. Air Baltic represents SAS in Latvia and it feeds traffic in to SAS' main
hubs and is furthermore responsible for all transit traffic in the country.38
When the publicly owned Latvian akline went bankrupt it was decided that a swift
solution had to be found, an interim company was therefore set up. During 1993/94 discussions
started about privatizing the company and in 1995 a few investors (one of them SAS) had been
found that were willing to finance the project. Today the akline is still owned by those that
financed the privatization, with the Latvian Government and SAS as major shareholders. The
akline started out with four different destinations with Riga in the center, flying to Copenhagen
and Stockholm. Today these lines have been accompanied with several others, Warsaw, Kiev,
Helsinki, Tallinn, Vilnius, Berlin, Vienna and Prague (from June 1999).
What could SAS give them to put them into growth and enlargement of the märket? SAS
had a good financial situation ät this time, an organization with a good structure and a qualified
www.sas.se
administration. All these tactors helped them to tmd growth opportunities and to enlarge their
märket.
Air Baltic also had other partners apart from the alliance with SAS which give them good
growth opportunities. Accordmg to Air Baltic the most important one is Estonian Ak, that they
have dcvelopcd e.g. code sharmg agreemcnts3'' with, to F lamburg and Tallinn. But there are also
others that they code share with, with Lithuaman Air to Vilnius, with Tjeck Airline to Prague and
with Malov to Budapest. Anothcr important code share partner is Polish Airline LÖT.*
Moreover they have a few "pool"co-operations, which means that a few seats are reserved for
their passengers in the othcr akline's plane, with Träns/\ero to Moscow and with Aero Sweet to
Kiev, Riga and Scandinavia.
keland air
Iceland air was established right after the Second World War. In 1982 the two regional
airlines operating on Iceland, were merged into one larger business. Iceland air , which is a
mecliumsixed airline, has always been big on trips to the US and the akline has used the country's
position in the middle of the European and American continents in thek favör and created a
competitive product that has become thek major one. Iceland Air has been a member of IATA
(International Air Transport Association of European Aklines) since 1950, and has been a
member of AEA (Association Flight Safety Foundation since 1966.)41
Today the company operates 12 destinations, mainly in northern Europé and Scandinavia
as wc 11 as the US thanks to agreements with other akline companies. The company is 100 %
privately owned by about 5000 Icelandic shareholders and it's the largest privately owned
company, employing över 2000 people in Iceland. Iceland ak is one of those rather rare aklines
that exist almost without any partner. Iceland Air has one code sharing agreement with SAS
which means that they are able to offer passengers travelling to and from Europé to Iceland.
Othcr than that they have some special product agreements with a few aklines on certain routes,
e.g. with Braathens, Skyways, TWA, Lufthansa and British Midlands (overlapping networks).
Flying Enterprise
Flying Enterprise started as a subsidiary company within another fkm and somehow
along the way grew ancl became Flying Enterprise. The parent company was called Tipp &
Ivrantransporter which worked with transportation of e.g. cranes. The aviation part of the
bustness began as a flying taxi-service but was shut down in 1988. In 1992 when the whole akline
märket was struck by the heavy recession and ät the same time deregulated, Tipp &
Krantransporter decided to start its aviation business. Golden Ak, a small Swedish akline, was on
the edge of bankruptcy and the business was for sale. Flying Enterprise, which was the division
within Tipp & Krantransporter that handled aviation, had the opportunity to take över thek three
planes as well as thek route between Skövde and Arlanda. To be able to manage this, the hangar
had to be built ät Skövde akport. Flying Enterprise was then asked by the township of Skövde to
run the akport as a contractor. This development meant that Flying Enterprise was really into the
aviation business once again.
In the early 90-ties Fying enterprise found new growth opportunities on the märket. In
1993 this which resulted in the growth of two more routes - between Trollhättan and Arlanda as
w
Code sharing; A system by which two or more airlines agree to use the same "designator" or flight number for
a flight or series of connecting flights in order to attract more business by extending their partner carriers. This
cooperation ean include reciprocal sales, marketing parts, coordination of fares etc. Source; Collis Roger,
International Herald Tribune.
40
www.airbaltic.com
41
www.icelandair.com
well as between irounan.au auu ^j.^^^..»
_
Skyways. In 1995 two additional routes were introduced, Jönköping - Bromma and Jönköping •
Arlanda. In 1996 the route between Bromma and Visby, that Malmö Aviation used to have, was
opened. It now represented the largest route for the company with around 100 000 passengers.
Thek märket share was nearly 45% on that märket. The route between Halmstad and Arlanda
was also opened that year in competition with Braathens, but it had to be shut down in 1999. In
1997 the company was introduced ät the stock exchange where it succeeded in securing 24
million SEK. One of the largest independent operators in Sweden ät that time had started out as
an ak taxi service fkm. They found thek niche away from large operators taking on an offer
given to them a few years back to take över the management of a small regional akport from the
local authorities and some of the routes to and from that akport.
There were three factors influencing the development of Flying Enterprise. The process
developed as follows; fkstly they started out as an ak taxi fkm and focused on a number of
destinations which made them to growth very fast. Then they wanted to become more neutral
which caused them problems as they still competed with other akline companies. There were also
problems with cooperation with two partners ät the same time which mainly caused problems
with the double time table. To manage this they had to have more resources. Thkdly they talked
about cooperation with Finnak, which made them a threat to the other actors. These structural
obstacles in the envkonment made it difficult for them to manage thek business into the
dkection that was necessary for them to get the company into a successful position.
In year 2000 Skyways Holding AB acquked 900 000 A-shares in the akline company and
71 000 B-shares which corresponded 63 % of the 94 % voting rights. Ät a meeting in year 2000
the Board of Dkector of Flying Enterprise recommended to sell the shares to Skyways Holding
AB which now became the main owner of the company. The reason for him to sell was that "it
was the right time to sell after working in with the company for so many years".42 Through the
sale of the company, the "old company" could start to operate in a network of Skyways Holding
AB.
Air Botnia
The company was founded in 1988 by a few people that were kritated on Finnak for thek
insufficient amount of departures from a certain region of Finland. After a while the company
started to feed passengers into Finnak's hubs. In 1989 the company was sold to SAS. SAS had
defined the Scandinavian countries as thek home märket while Finland, the Baltic region,
Scotland, Iceland, the northern part of Germany and the northern part of England had been
defined as the vicinity. The Finnish märket was therefore considered very important but it was
felt that thek grip on the märket left more to be wished for. The Finnish akline, Finnak, that
used to have a close relationship with SAS had been on the offensive in Sweden and SAS
therefore reacted through the use of Ak Botnia. In March 1999 Ak Botnia's strateg)' was changed
and the new aim therefore was to develop the akline into a regional akline instead, feeding traffic
between points in southern and western Finland and in SAS's hubs in Stockholm, Copenhagen
and Oslo. As a result of these operations they started the cooperations with SAS. The new
strategy was fully implemented in November 1999. One of the problems Ak Botnia met was that
they became the competitors to Finnak as they ät the same time started to operate together with
SAS. In what dkections should thek relationship now develop and how should the Finnish
märket look like? Ät the same time there was a growth opportunity for them that SAS became a
potential partner for them and they could start hubbing destinations both in Finland and in
Sweden. Through these operations they could easily take larger märket shares in Finland. The risk
with starting cooperating with SAS was that they could become more dependent on SAS's
42
www.skvwavs.se. 2000-01-18
125
business and that their actions should have a strong influence on Air Botnia. Today Air Botnia
serves the destinations in Finland: Helsinki, Jyväskylä, Oulu, Tampere, Turku. In Scandinavia and
northern Europé: Copenhagen, Gothenburg, Oslo, Stockholm.43 The companv is owned by the
Finnish OY Nordair AB which is wholly owned by SAS. All flights operated by Air Botnia are
code shared with SAS and Euro bonus members earn points on these flights.44
Skyways
Skyways started during the 40's with activiries for the military. The company was then
called Salair after the founder Sven Sahlén. It was not until 1992 that the present history of the
business started. Three routes were then introduced that operated from Bromma Airport. The
year after the home base was changed to Arlanda, Bromma was certainly closer to Stockholm.
Still Arlanda was a traffic hub and had the ability to carry people further using other airlines.
Today Skyways is still mainly a family business, 72% of the shares are yet owned by the
Sahlén family. Along the way Skyways has overtaken smaller airlines, Highland AB in Hultsfred,
Airborne AB in Sveg, Air Express and Flying Enterprise (2000), which all operate in a small niche
of the märket. It now depends on three main lines of business. 1) Transit traffic, where
passengers are fed into a larger network, e.g. such routes as Linköping to Copenhagen or
Borlänge to Copenhagen. 2) Regional traffic, to provide a certain region with travelling service.
To fly might not be the only alternative but it is a time saver, e.g. Arvidsjaur to Arlanda or
Trollhättan to Arlanda. 3) Hub-by-pass, direct flights that are not provided for by the big hubs
using smaller and faster planes than usual, preferably Embraer jet planes. Such examples are
routes between Helsinki to Gothenburg and Brussels or Gothenburg to Paris.
In 1997 Skyways became a partner with SAS. Before that the airline had cooperated with
many different airlines, such as Sabena, KLM, Ak France and so on all but SAS. Earlier on
Skyways had asked if SAS was interested in cooperating, but Skyways had received a negative
answer. Suddenly this had changed and Skyways were contacted by SAS which now wanted to
cooperate. This time Skyways could set the conditions. There was one condition though that SAS
put up, all of the other cooperative agreements that Skyways had would have to end.4
The cooperation with SAS has involved many different levels in the organization, such as
co-branding, lounges, code sharing, ownership (25%), Euro bonus and so on but also e.g.
inventory service and computer systems. The partnership has worked very well according to
Skyways and together the two companies have tried to expand the märket instead of stealing
passengers from each other. Skyways has been able to take över such routes that SAS has not
found to be profitable enough, such as Wasa to Arlanda, Borlänge to Copenhagen and Kramfors
to Arlanda. Just now they are waiting for more routes that SAS doesn't find profitable enough.4'
The dependence to SAS could both give Skyways growth opportuniries and risks in their
business development. To be too dependent of another actor made Skyways both vulnerable and
sensible of how SAS is acting and every action could have consequences of Skyways' work. An
example of this concerns their tight cooperation with SAS:s bonus system, which even lead the
two companies to accusations of "cartel cooperation". This was put to a stop from Jan 2002 by
the Court in Sweden. Skyways tried to find growth opportunities when operating so close to SAS.
They had the possibility to develop their business through taking över routes that are not
profitable enough for SAS. Through this cooperation they can easily get new märket shares in a
discrete wav.
' www.airbotnia.com
www.airbotnia.com
' www.svenskallygbolag.com
46
www.svenskaflygbolag.com
SAS and cooperation with SAS
SAS was founded in 1946 as a consortium of the national airlines of Denmark, Norway
and Sweden. The three parent companies are owned fifty-fifty by private interests and the
respective governments. The main hub is Copenhagen Airport with StockholnYs Arlanda and
Oslo's Fornebu as regional hubs. During 1995-1996 SAS signed comprehensive, bilateral
cooperation agreements with Lufthansa, Thai Airways International, United Airlines and Air
Canada. And in May 1997 SAS and its four partner airlines established Står Alliance. In October
1997 the Brazilian airline Varig also joined the alliance. And in 1999 the alliance partners were
accompanied by Air New Zealand, Ansett Australia and All Nippon Airways. Together these
companies have flights to more than 700 destinations in 110 countries. For a relatively small
international operator as SAS, cooperation is vital. The company lacks the means to serve all of
those destinations that they presently attend, but with the help of a partner it is possible to build
a worldwide network. The primary motive for the global alliance network was to be able to offer
the business traveler a worldwide network of destinations, a "seamless"travel. Today the goal has
extended and, among other things, the alliance is said to have the following advantages: 1) More
and more destinations, offering a more dense net of places to travel 2) Acknowledgment, the
division into two separate categories of passengers makes it possible to recognize those
passengers that are in need of special attention 3) The passengers will receive bonus on more
trips 4) More special lounges for those that are members 5) Members have the highest priority
when checking-in or when put on a waiting-list.
SAS is also involved in other forms of cooperative agreements, with regional carriers as
well as with traffic system partners. These are not as far-reaching as contracts with the alliance
partners but they involve such matters as code sharing, Euro bonus, mutual check-in and
maintenance. SAS regional partners are; Cimber, Widerae, Skyways, Air Botnia, the Latvian
aviation Ak Baltic, Greenland ak and Maersk Ak. All these companies belong to the concept
"Well connected with SAS" which will quality-assure and harmonize with thek regional partners.
Traffic Systems partners are; British Midland PLC, the Spanish charter company Spanak, Iceland
ak, South African Airways, Singapore Aklines, Regional Aklines and Estonian Ak. Braathens is a
subsidiary in the SAS group.
The small regional aklines all have thek own contract with a står alliance partner.
Together these form a loosely coupled network with quite a few smaller regional aklines that feed
the traffic into the different hubs of the står alliance partners, e.g. Bangkok which is the main hub
for Thai Airways International and Sao Paolo which is Varig's main hub. The regional aklines are
therefore only indkectly connected to all other står alliance partners. An exception is Maersk Ak
that feed traffic to both Lufthansa's hub and to SAS' hubs.
The regional partners are free to decide on thek own activities as long as these are kept
within the boundaries of the cooperative agreement. A partner must have the best interest of the
cooperation in mind; no one can expand ät the expense of another partner's märket share. New
lines must increase the effect of the cooperation; they may therefore not compete with SAS'
lines. To ensure this SAS has been forced to buy a part of some of thek partners, such as the
affiliated aklines (less than 50% ownership): Ak Baltic 47, 2 %, Ak Greenland 37, 5 % and
Cimber Ak 26 %, Skyways 25 % and BMI 20 %. The subsidiary aklines (more than 50 %
ownership) are Spanak 74 %, Braathens 100 %, Wideröe 99, 4 % and Ak Botnia 100 %.
After the entrance of companies with low-cost concepts on the Swedish märket, SAS also
introduced a low-cost concept in 2003 through the subsidiary called "Snowflake". This subsidiary
has the same business strategy as the other low-cost companies on the märket (with low prices
and self-paid service onboard) and will offer non-stop flights to destinations in the southern
Europé like Athens, Barcelona and Alicante (with a main airport as a destination).47
Discussion
The discussion about the advantages and the disadvantages of the different forms of
cooperations, their problems, risks and opportunities will be focused on four basic dimensions
derived from the theoretical framework. These are the uncertainty and risk for the SME, the power
dependence between the alliance partners, complementarity and conflictl competition and the degree of
integration of the alliance. Based on these dimensions we discuss different types and effects of the
alliances befween the SME and the larger airline partner.
The combination of the four dimensions will also be utilized for identifying why a specific
typc of alliance is chosen and the problems, risk and opportunities with that particular type of
alliance. To what extent could they be tnfluenced by changes of the large alliances? Studymg the
dimensions more closely we find that the first two dimensions are mainly tied to the fäet that the
study focuses on SMEs in the airline industry while the other two are applicable to alliances more
in general. Our aim is therefore to formulate a number of ideas about growth and alliances of
SMEs and the effect in terms of problems, risks and opportunities based on our analysis in the
study.
Uncertainty and risk
We know from the empirical material that starting a new business in the airline industry is
much more expensive than imagined and more importantly it often costs more than what many
ot the entrepreneurs first expected. The main cost is not to lease the airplanes, to set up a
maintenance system, to create a safety system or find the right staff even though this can be very
expansive. It is rather to find the right slöts and to create a märket or develop a märket share. To
get a loyal customer group the small airline must be persistent in its marketing and accept losses
for a long period. The airline has to fly according to schedule even though there are very few
passengers on board. The estimated costs of starting an SME in the airline industry varies
between 50-100 million SEK according to our sources in the empirical study. In spite of this
many small airlines have tried to start with much less.
comparing the big and the small company but also the large world wide alliances compared tö the . •
small firms. SAS has in most cases acquired or tried to acquire ät least a minority share in the
SME alliance partner. This way SAS has been guaranteed a seat on the Board of Directors of the
SME airline and has therefore a possibility to influence the development of the company as well
as keeping informed about the development of the SME. Having a seat on the Board is a
common way used to influence an alliance partner (Pfeffer & Salancik, 1987). The dependence
on SAS and the network it represents is strong for the SME.
The most important question however, is perhaps not the power dependence as such but
how this dependence is handled both by the big firm and the SME. For SAS the close
relationships with some of the regional SMEs have guaranteed that their development coincides,
keeping the home märket calm. SAS is able to pkn together with their regional partners for
future marketing campaigns connecting the network even further together. For the SME the
alliance provides a märket without competition from "the large firm", on the other hand the
alliance put restrictions on operations and märket expansion plans. The weaker position of the
SME therefore also means that there will be some difficulties to manage expansion of the firm by
restrictions of the larger firm. (Easton, 1992). These problems get intensified when a small firm
wants to collaborate with larger airlines of another world wide alliance group.
Complementarity and competition
To what extent are the partners in the alliance complementary or competing? How can
you categorize the different types of alliances? Two important dimensions of complementarity
and competition concern the product/ services offered and the geographical area covered.(Hertz,
1993) In all cases the SMEs studied are offering similar types of services as SAS but in a different
geographical area. Thereby they are complementing each other geographically but overlapping in
services offered. The overlap in services is a necessity since the customers are supposed to
continue into the SME:s airline system from the SAS system to meet a similar service,
What will happen when the structure of the alliances changes and could the co operations
in alliances lead to higher competition or not? The main problem in a situation like this is the
SME's restricted position. SAS has demanded that What would happen if an SME like Air Baltic
or Iceland ak would start to compete with SAS geographically as well? What would happen to
their relationship?
The network approach underlines the need to form the right relationships in order to stay
on the märket. It is important for an SME to create a local customer base, which can be done
through the contact with some of the more important local companies. This cannot be done until
the operational and safety systems are in full order. Creating these systems and getting the right
certificates take a certain time during which existing competitors can work intensively on the
märket. Since the SMEs usually work on smaller and local märkets the risks are even larger since
the vulnerability is much higher. When the smaller firms not cooperating in alliances decide to
expand abroad the most common for them is to have a simple expansion strategy which means
that they try to find new routes just between two destinations helping larger firms to feed traffic
to main airports. This strategy puts the small firms in a risky and uncertain situation; they get
dependent on the larger firms which make them even more vulnerable for changes in the total
system. This is increased uncertainty and risk and need to creative in the type of alliances formed
are very much in line with reasoning of Tsang (1998).
Power dependence or asymmetry-symmetry and trust
The result of a study on the distribution of power between units is to a large degree
dependent on what focus that has been chosen. In this case we are not only discussing and
www.sas.se
One of the reasons given by SAS to cooperate with the SMEs was to increase the
geographical coverage and enlarge the existing network, which is a complementary situation
(Hertz, 1993). Often the alliance with SAS includes a package of different exchange of services
like handling agreement, booking, etc which in terms of Wang & Evans ( 2002) classification
would be route specific services. However, being a small dependent firm these agreement can be
of a more general type where the larger firm with its coverage can take on these services for more
than one or two routes. A problem connected to this situation is that the SMEs have to live up to
the promises made by SAS concerning different dimensions of quality such as punctuality and
service. They are therefore restrained from working with price as a variable in the cooperation. If
on the other hand, the quality (frequencies, punctuality, service on board, check in services, etc)
of the SME is much higher than the quality offered by SAS, each firm won't get credit for that
while they have a restricted part in the larger system. The function of one link will not change the
attitude of the network as a whole. The customer evaluates the entire system and not each one
separately.
An interesting phenomenon is that partners in a network play different roles in different
situations, sometimes appearing as partners and sometimes competing with each other. Iceland
air cooperates with SAS to and from Europé to keland but competes from Iceland to the US.
Furthermore Iceland ak is a supplier of the aircraft Fokker to many airlines including SAS.
SAS wants to manage the development of the SMEs, not only to hinder competition, but
also to kicrease competition with other large alliances. In the case of Air Botnia for example,
which is a wholly owned company by SAS, the company was bought to challenge of the attack of
Finnair ät SAS' home märket. Through Ak Botnia SAS could offer traffic to a reasonable price
on Finnair's home märket. This way SAS are creatmg regional smaller networks with itself as the
node of the network. These regional network compete and are overlapping with Finnak regional
network.
What are the problems, risks and opportunities? One problem is SAS' overshadowing size
and dominated position compared to other fkms operating on the Swedish märket and therefore
its position as märket leader. It manages and wants to continue to manage the Scandinavian
märket through regional alliances and part ownerships of the SMEs. The SMEs have limited
possibilities to develop into new areas and take on business where there is competition either
from other regional partners or from SAS. For more or less independent aklines this makes it
even more difficult to enter the märket. One of the few possibilities open for an SME in Sweden
is to expand abroad. This is also something that has been done by quite a few of the fkms. Both
Ak Baltic and Iceland ak have established International routes, some of which are outside SAS
sphere of dominance. This way Ak Baltic gradually becomes less dependent on SAS and can
develop indkect connections to other groups. Another way for an SME could be to feed traffic
into two of the large alliance partners like Maersk or SAS.
Degree of integration
There are a number of different types of alliances and the cooperation however might
cover many different areas. In three of the fkms that we have studied, SAS has acquked a share
of the company after a period of time. In the case of Ak Botnia for example SAS acquked a 100
percent of the firm, only a year after its establishment. This is different to the alliances presented
by Wang & Evans (2002) since SAS have in most of the cases tried to acquke ät least a smaller
part of the SME. It may not be a scale for increasing commitment but radier selected services
and code sharing and marketing in common.
Out of the five irterviewed companies, Ak Botnia is one of the smallest but ät the same
time the closest to SAS in terms of how its marketing is handled, thek booking systems, thek
traffic systems etc. Ak Botnia is highly integrated with SAS and the ties to SAS are very close, the
managkig dkector is still a SAS employee but has been lent out for a time to develop the new
firm, just as he did earlier with Ak Baltic.
The degree of integration between Ak Baltic and SAS is not realiy as tight as the alliance
berween SAS and Ak Botnia. SAS has been a part owner, 47, 2 %, from the start of the firm and
has also helped in the process of starting the fkm. In the beginning Ak Baltic lacked almost all
the necessary knowledge about akline business why managers were sent över to Latvia in order
to help the enterprise become a märket oriented company, to create the necessary safety system,
to ensure the quality level and to get the operation work efficiendy. Since the home country is too
imall to offer any domestic traffic the firm has developed internationally. In order for this, Ak
Baltic has developed relationships to other large fkms operating in the Baltic States such as
.ufthansa and Estonia Ak. Ak Baltic is therefore getting less integrated with SAS and more
ntegrated with other fkms. The dependence between Skyways and SAS is in a way increasing
iver time as the two companies work thek parallel märkets, Skyways working as SAS' subsidiary
)n the home märket. In 2004 Skyways is among the largest aklines in Sweden next to SAS.
As we can see the degree of integration varies for every alliance. It might include such • •
things as code sharing, bonus programs, freight service etc. SAS is however working on a more
standardized program for integration on the marketing side. Lower forms of cooperation are
adapting the time schedules to each other. Higher forms also include using the same systems,
having managers trained together, exchange of personnel, social contacts on all levels, handing
över information to each other etc. A strategic partner in an alliance group, such as the Står
alliance, is somewhat a different thing, the partners are equals and in that kind of alliance it is
more a question of give and take. Therefore what Wang and Evans ( 2002) called the "Open Sky"
will hardly ever be possible in the regional cooperations between the large international akline
and the small regional aklines.
Conclusions
In this study we have focused on the situation (roles) of the small fkms in the alliance
regarding problems, risks and growth opportunities attached to the relationships between small
and large firms.
All of the SMEs have different roles depending on the situation and the type of alliance.
The role of suppliers to SAS often concerns operations. An example of this is when Iceland ak
service SAS' Fokker akcrafts. The SMEs function as customers when they use SAS' service
systems for check-in, for booking, ground handling etc. This can be part of the partner deal but it
can also be a specific need of the SME that can be satisfied by other aklines equally well. The
partnership to a large extent deals with marketing issues. Examples of markering activities could
be advertising where the SMEs name is included offering code sharing in order to be well
known, making customer deals together, offer more efficient traveling through combining time
schedules, offering the same price packages etc.
Could the SMEs also function as competitors to a dominating actor as SAS? The SMEs
act as competitors when they establish new routes in competition with thek partner. SAS can on
the other hand make use of this alternative in thek role as alliance partner and offer this
alternative to thek customers by code sharing. Still we ask if working in alliances has given the
firms lower expenses and if there is higher competition between the operators on the märket.
Growth opportunities of an SME in the akline industry can enfold as follows:
First stage might include the development of a märket niche of its own. Normally the
SMEs have to find a suitable niche, a route can only handle two competing fkms if the number
of passengers exceeds 400 000 a year and there are quite few of those in Sweden. Finding a
suitable niche can be done via developing or talong över routes from another firm that are less
attractive for larger aklines like Skyways, establishing new direct connections between two
akports, this has been done by Ak Baltic, Iceland ak and Skyways for example. Finding new
akports and getting support by the local governments to expand the märket, is another way to
find a niche. The niche has to have a potential to grow so that the akline can expand its activities
and create a network of relationships with customers, suppliers, operating partners, etc necessary
for continued development.
Second stage might include the growth of the company that could make the new SME
attractive on the märket and of interest for an alliance. The alliance with a larger akline is then
formed based on the existing position and development of the SME niche. However, the
alliances vary with the type of SME. Some alliances are rather loosely connected from the
beginning developing with the relationship över the lifecycle, while others are based on a closer
relationship. The risk lies in the power dependence of the large alliance partner, which might
rcstrain thc smaller company's activities. Thercby forcing the company to stay small. Through
combining the different rolcs of customer, supplier, competitor and partner, the SME might be
able to increase both its know-how in marketing as well as operations and to establish a number
ni ne\v usctul relationships. Often the partnership means better marketing resources, more
markering activitics and more passengers, which implies a continued growth.
Third stage includes stronger posinoning in the network. If the SME is able to handle its
different roles the right way it might get a much stronger position in the network. This means
better conditions vvhen renegotiating the deal with larger party or a possibility to leave the alliance
and hnd a ne\v alliance partner. So far this third stage is just a speculation, even though we can
sce that some of thc partners have grown in size and importance över time and become
prohtable. This is not to say that the SMEs that we have studied are able or willing to break away
from SAS. SAS is a minority owner in most of the companies studied, except for Air Botnia and
Spanair, and are therefore not in full control of their actions. Through establishing operations
that are separate from SAS some of them are working on the creation of certain independence.
What we have seen herc is that the firms might develop through three stages, from
Jcveloping a niche and getting the company in growth, to putting the firm into a good position in
the alliance. A collaboration is needed between large and small firms in order to for the large
tirline to create a regional network and for the smaller airlines to be able to offer the passengers
:onnection to the large networks. Since the actors would be unwilling to leave their global
illiances, ways of influencing the larger alliances could be to cooperate and to operate in
regionally rather than try to be neutral like Flying Enterprise with minor collaboration to more
:han one large airline. This was costiy and turned out to be very risky. In the end they did not
;urvive.
(kooperation takes place on several levels and change gradually över time. Some firms
:ould change their position between different levels in the alliance, which could have
:onsequences to other actors in the alliance. Small firms' changes from one level to another could
x* threats to the larger fkms and their changes could even influence larger operations, which
•ould have importance for the whole industry. A practical example of this phenomenon is when
lew low-cost companies has »ntered the märket outside the alliance, taken passengers from the
raditional ones, and has influenced the larger firms to create new businesses with a similar
>usmess strateg}7 as the smaller ones. (Like the introduction of Snowflake in SAS)
The SME relation to the partner could sometimes complicate their performance.
komplex systems and rules emanating from the partner might complicate and deteriorate the
>MF, business performance. One way to increase efficiency and effectiveness in large alliances is
o have compatible and often standardized IT systems in order to gain econornies of scale and
cope as well as a guaranteed quality. The problem is that many of large IT systems used by the
irger airlines does not tit the SMEs. Therefore adopting such a sytem could cause serious
lamage to the SME through the need of large investments and lack of flexibility. Another
.roblem with the alliance is the lack of coordination between administration and production of
he SME and the much bigger marketing resources of the larger airline making it almost
npossible to plan future volumes. A successful marketing campaign might give too large
olumes. On the other hand a lack of interest would lead to no or very low growth. In both cases
he planning will be difficult. A risk related to this is that the märket size due to increased
olumes becomes so attractive that the large airline might want to take över or start to compete.
C'e see both opportunities and problems of an alliance between the large and small airline. On
ne one hand summary they get too dependent and too restricted in their expansion. On the
ther hand if the alliance work well as in the case of Skyways they can grow when the larger firm
; downsizing as a result of deregulation due to a tougher price competition.The smaller firms
have a different and more flexible cost situation of which the large airline couio tase auva..,.^.
This makes it possiblefor the SME to gain märket shares and grow.
In this study we have seen different kinds of agreements. In most cases SAS tried to
acquire the smaller firms in other cases when their SME partner grew bigger it acquired other
small airline.The specific route agreement and the code sharing are very common between large
and small airlines. However, the specific route agreement including handling, bookings, check ms
etc might be of a more general kind covering not just one route but several, which makes the
agreement more extensive. In our cases the SMEs all had a need to get access to the larger
network. In one case trying to stay neutral and getting access to several networks were too
expensive. Some type of agreements were tools to facilitate growing and concentrating resources
on creating efficient operations. In other cases the agreement were more long term involving
part ownership and /or joint marketing.
The situation for the SME to exist and grow within the ak transportation industry is
difficult due to the interdependence between the different märkets. The SME that want to grow
will most likely have to form some kind of agreements with larger airlines to gain access to the
large International networks. The alliances give obstacles for growth but managed the right way
they might also give growth. Finally, we have seen that a risk in being close partner to large
International airline that the SME will be used as a weapon in the competition between two world
widc networks.
<*,/. d
IMP Conference in Asia, 2005
Work in Progress
Maria Dembrower1
Susanne Hertz2
Lärs-Gunnar Mattsson3
Entrepreneurs acting in networks - small passenger airlines in Sweden
after deregulation
1
Royal Institute of Technology and Stockholm School of Economics
Jönköping International Business School and Stockholm School of Economics, corresponding author,
susanne.hertz(a>ihh.hj.se and dshe@hhs.se
3
Stockholm School of Economics
2
IMP Coaference in Asia, 2005. Work in Progress
Purpose of the paper
Entrepreneurs acting in networks - small passenger airlines in Sweden
after deregulation
W e aim to describe and analyse entrepreneurial actions by SMEs after deregulation of the
märket. To understand such actions is important, given that the effects of deregulation on
märket structure and performance depend on them. We will use a definition of entrepreneurial
Background
action that relätes to our markets-as-network perspective.
The Swedish domestic märket for regular passenger trafflc was deregulated in 1992. The
public policy purpose was not only to get price competition but also to stimulate
Some märket characteristics
entrepreneurial and innovative activities related to operations and to services offered.
Some characteristics of the passenger airline business in Sweden, that influence the
Before 1992. SAS and Linjeflyg (acquired by SAS in early 1992) had split up
the routes between them. Only.a few minor routes in remote areas had been left to small
opportunities and restrictions for emergence and growth of SMEs are important to consider:
a. The customer base is small for most routes. It is difficult for an entrant to compete
operators. During the period 1992-2003 more than 30 firms have been active in regular
passenger flights of which half the number left or were acquired during the period. Still in
with an incumbent on more than a few (6-8) existing routes
b. .Customers often need connections to other International or domestic route. The "hub
2003 the combined märket share of SAS and ils part-owned partner Skyways was around 75
and spöke" organization of route networks favours large incumbents and operators
%. In the early years after deregulation competition increased but a few years låter SAS was
who cooperate in alliances, including eg code sharing,
again sole operator on most major routes. After a Märket Court decision in 2001 ruling that
c. Variations in customers' scheduling preferences makes it important for an operator to
SAS could not use its frequent flier program on domestic flights märket entries and
offer several departures and arrivals per day on a specific route.
competiton increased. During the last couple of years, especially price competition has
d. Customers generally prefer to fly with big rather than small aircraft.
increased.
e. Customers might be reluctant to use other airlines than the airline they usually fly, eg.
The domestic development has to an important extent been influenced by SAS's
restructuring and its alliance with a fast growing SME, Skyways. A combination of entry and
due to frequent flier programs.
f. Ät major, hub airports, especially Stockholm-Arlanda, the number of arrival and
exit of firms charactcrized the quite turbulent development. Small firms entered from nearby
air businesses and became members of, mostly operatioal, alliances. Some airlines have
focused on low cost/low price while others mainly focused on developing new ways of
thinking and operating on the märket.'
departure "slöts" that can be allocated to new entrants are quite restricted.
g.
For some routes in northern Sweden that need to be subsidized by the government as
part of a regional development program, traffic for a period is awarded an operator
after a bidding process.
Points a-f imply major problems for new SME entrants to successfully compete with SAS on
major routes with similar services. Entrepreneurial activities by the SMEs need to be directed
towards finding opportunities to circumvcnt these barrirers. Point g. implies a risk that
investment in an awarded route can only be used during a limited period.
1
The period covered in this paper does not include the recent development of low price airlines operating
Swedish domestic routes.
Conceptual framework
We apply a markets-as-networks perspective. In this paper we will specifically emphasise
how small firms, entering a deregulated märket, adapt to and/or change the network structure
and network processes.
3
An entrepreneur is an actor (individual or organization) that seeks new and often
unconventional ways to develop the organization. Entrepreneurship is often related to aspects
of technical advancemcnts (Schumpeter 1989) but also to changes in economic and social
organization. Much research has focused on the role of personal attributes and social network
connections (Aldrich and Zimmer 1986) but also how industrial network relationships and
interdependencies influence opportunities for entrepreneurial action. Lundgren and
Nordenlöw (1992) discussed the influence of the industrial network structure in terms
tight/loose network structure. Changes in the network structure can affect the expected
amount of entrepreneurial activities. Deregulation is supposed to loosen the structure, thereby
increasing opportunities for entrepreneurial action by SMEs.
Given our network perspective, we regard entrepreneurial actions to be actions
that affect network structurcs and processes. Such entrepreneurial actions are concerned with
exchange between actors (Snehota 1990) and fits the definition of strategic action in networks
(Johanson and Mattsson 1992).
To enter the märket the SME needs to develop relationships to providers of
resources for operational and safety systems, including airports, to public and financial
institutions and to local customers (e.g. local businesses) that are potential users of the
specific route. It needs to develop relations to provide connections to other routes. For further
growth in the märket the SME needs to further develop old and new network relationships,
thus changing its network position.
Thus, the single firm relätes to individual other actors, dyadic relationships that
are more or less interdependent, all embedded in a wider network. Two airlines may e.g.
cooperate with each other in an alliance. More airlines might join thus forming a multi-firm
alliance. The wider network might contain several such alliances and competition might be
characterized as collective competition (Gomes-Casseres 1996; Hertz and Mattsson 2004).
The empirical study
This paper is based on a research project on entrepreneurship in industrial networks fmanced
by the Swedish Competition Authority, preliminarily reported in Dembrower (2005).
Empirical data has been gathered from secondary sources about all the airlines operating on
the Swedish märket between 1992 and 2003. Personal interviews were made in SAS and in 15
small firms, and with experts of the aviation märket.
Even if several studies have been made on deregulated aviation märkets, very
few have focused on the small firms. Furthermore only few studies have been done on SME
alliances. Below we have systematized from the empirical study, under eight headings, the
major types of entrepreneurial actions we have found, given our definition of this concept.
/. Creating new dtrect routes
To create a new direct route was a common way. Mostly these routes covered rather short
distances, between a middle sized Swedish town and Stockholm or one of the other larger
cities. This way the SME avoided direct competition with SAS. Since SMEs had a different
cost situation (e.g. use of small airplanes, use of employees for a variety of activities) they had
better possibility to profitably operate with a smaller märket base than the dominating airlines.
Major unexpected problems experienced, were not the costs to lease the airplanes, to set up a
maintenance system, to create a safety system or fmd the right staff but to find the right slöts
ät the larger destinations, especially Stockholm-Arlanda, and to develop demand. For new
direct routes involving smaller towns and rather short distances the potential customers
needed to change their habits, from the old alternatives travel ing by train or car.
2, Forming new regions
Forming a new region was another way to create a märket base. Some of the even put the
name of the region in their own name like West air, Värmlands flyg or Nordkalott Flyg.
Usually the regions comprised a number of smaller towns but no major city.
These regions did not have to be limited to Sweden but could involve also destinations in
other Nordic countries (like the northern parts of Sweden, Norway and Finland) or in other
Baltic states. These regions are sparsely populated but distances bridging destinations across
national boundaries in east/ west direction is often shorter than domestic flights in northsouth direction.
3. Combining air businesses
Many of the SMEs originated in other related businesses like taxi or charter flights, military
and educational applications and airfreight. Thereby they had a know how, a set up for the
technical and safety issues and an existing organisation. Sometimes, Skyways is a good
example, they combined several of these businesses to be bigger when they entered the
regular passenger business. Size helped when they recruited personnel from larger airlines. In
some cases combining related businesses, like airfreight and passenger flights were shown to
be problematic, since they had a different "logic" as regards operations and marketing.
However, being bigger in the entry period, seemed to have been positive for the survival of
the SME.
4. Using small airports
Most of the SMEs bad a specific airport as a home base, and also used small airports for many
destinations in their developing route network. These small airports were normally cheaper to
use, the service was better and good slöt times easier available. In a few cases, e.g. Flying
Enterprise, the SME took över the responsibility for operating the airport.
The main problem was Stockholm, due to lack of good slöt times (during peak
hours) and high costs. One of the firms entering directly after deregulation, Malmoe Aviation,
got the possibility to use Stockholm Bromma- (the old Stockholm airport, much smaller and
doser than Arlanda to Stockhom City) as a base. Even if this has been very positive for their
development, it has also caused problems to manage expansion.
In most cases the SMEs have had problems with Stockholm as a destination and have either
preferred to stan routes to the second and third largest cities in Sweden, or like Skyways,
allied with SAS to get access to SAS Arlanda hub.
5. Insourcing and outsourcing
The SMEs were very innovative as outsourcing and insourcing are concemed. The lack of
available resources made them outsource a löt of their activities, to other SMEs, to SAS
(mostly for Stockholm flights) or to specialist firms, depending on specific conditions.
Typical activities outsourced were booking, technical maintanence, check in, and luggage
handling. In one extreme case the SME outsourced both crew and planes. However, some
SMEs refiained from outsourcing because they wanted to be sure about quality delivered.
In cases when the SME had, or wanted to acquire, an attractive resource, it
might make it profitable by letting other airlines get access to it. E.g. an SME that had
invested in a good IT-system or a good technical support system, offered other firms, using
the same airport to get access to it. Some growing SMEs actually started education and
rraining programmes for other SMEs about operations, systems, etc.
Sometimes even SAS, for economic reasons was interested to use the resources of the SMEs.
A case in point is when SAS outsourced the operation of some routes to Skyways,
conditioned by SAS becoming part-owner of this rapidly growing SME.
Outsourcing and insourcing during the period studied developed rather
complicated connections of cooperation and competition in the network.
6. Entering and exiting new märkets
The SMEs have quite restricted financial resources and some of the märkets that they focus on
are new in terms of routes and networks served. (The estimated costs of starting an SME in
the airline industry varies between 50-100 million SEK but many have tried to start with
much less.)
Due to high costs and limited resources it is necessary for the new airline to
leam about the opportunities to develop on the märket as quickly as possible. The problem is
to be able to stay the necessary time to find out whether there is a possibility to be profitable
and to develop a loyal customer base. The SME must fly according to schedule even when
there are very few passengers, it must be persistent in it's marketing activities and be able to
accept losses for a substantial period..
SMEs have been quick and flexible in both entering and leaving specific märkets. Sometimes
they acquired the assets of bankrupt airline and took över the routes, thereby leaming by the
mistakes made by the first airline. Skyways added a number of routes left vacant by exiting
SMEs.
7.Forming alliances
Alliances and cooperative agreements were necessary to be able to offer the customers access
to a larger route network, to coordinate activities and to economize on resources. (Wang and
Evans 2001; Hertz 1996). Most of the firms needed to have an agreement ( a so called
interline agreement) with SAS in order to be able to offer the customers to continue in the
larger networks. After a decision in the Märket Court SAS was obliged to accept such
agreements. Thus this arrangement cannot be seen as an alliance in the same way as the codesharing arrangements that SMEs have with major operators but Sometimes also with other
SMEs.
Över time however, needing more resources and access to other märkets, SMEs
formed many new alliances. Some of them created a smaller network of firms e.g. helping
each other with extra capacity when needed or running joint frequent flicr programs. In other
cases the outsdrcing and insourcing activities developed into deeper alliances for combination
of skills. To form alliances was a necessity for growth. Skyways developed alliances with
some smaller SMEs and had in tura, a major alliance with SAS. In some case the SME could
use the fäet that there was competition between the large world wide airline alliances (Står
alliance, One World etc.) who used SME airlines as operators of small routes feeding
8
passengers into the major international routes. Speciflcally the fäet that Finnair and SAS
belonged to competing alliances made Finnair interested to cover some domestic routes in
Sweden and SAS to cover some such routes in Finland. These alliances soon developed into
acquisitions.
We have also observed problems for an SME related to alliances. Complex
systems and rules emanating from and adapted to a larger partner migbt be expensive, too
inflexible and not well fitted to the needs and operations of the SME partner. Other problems
are lack of coordination between administrative systems and SME operations. Furthermore,
the much bigger marketing resources of the larger airline partner makes it almost impossible
for the SME to plan future volumes due to unexpected volume changes for the partner.
All the SMEs in our study had a need to get access to a wider route network.
One SME that tried to "stay neutral" and to get access to several route networks found that to
be too expensive. Also, there were differences between the SMEs' alliance agreements in
terms of resources and activities involved and time perspective.
8. Acquiring and being acquired
Several firms were fully or partially acquired by other firms and thus connected to other
resources. Important for the restructuring of the märket were four sets of changes in
ownership. First, Skyways acquired or became part owncr of a couple of other SMEs, thus
adding routes and other resources and SAS became part-owner of Skyways. Second, SAS'
Norwegian competitor Braathen's entered the Swedish domestic märket by acquiring
Transwede and Malmö Aviation competing with SAS on major domestic routes. Then SAS
acquired Braathen's, saving it from bankruptcy. Malmö Aviation, due to competition law
restrictions for acquisitions by dominant firms, was acquired by investors outside of the
airline industry and continued as independent of SAS.
Third, Finnair entered Swedish domestic märket by acquiring SME Nordic Airlink
(following the alliance mentioned above) in respons to SAS purchase of SME Air Bothnia
that operated in Finland and intemationally. Fourth, there have been a number of acquisitions
involving SMEs without links to SAS or other major airlines.
We have focused on eight different types of entrepreneurial actions by SMEs in
their entry and growth processes after the deregulation. These were: creating new direct
routes, developing new regions, combining businesses, using small airports, insourcing and
outsourcing, entering and exiting märkets, formation of alliances, acquiring and being
acquired. These are to a large extent interacting, e.g creating new routes, developing new
regions, entering/exiting märkets, acquiring and being acquired, using small airports. Another
example is insourcing/outsourcing, forming alliances, creating new regions of interrelated
entrepreneurial actions.
Such interrelatedness is important to consider because it involves more actors in
the network, implies investments in the network and are important aspects of innovativeness.
Discussion
In the introduction we listed seven specific attributes of the passenger airline industry. We
will now see how SMEs have tried to circumvent these barriers to entry and growth. on the
märket, related to the eight types of entrepreneurial actions.
a.The customer base for most routes is too small for more than one airline. SMEs have
avoided such routes by creating new direct routes and new regions. It bas got access to such
routes by forming an alliance with, or being partly acquired by the incumbent sole operator
that tums this route över to the SME. Another way to handlc uncertain routes is to be flexible
in entering and exiting for the SME new märkets (new routes)
b.Customers oflen need connections to other international or domestic routes. This problem
has been handled by forming alliances (eg code sharing), by acquiring or being acquired and
to a small extent by forming new regions.
c.Variations in customers' scheduling preferences. When the SME has created a new direct
route it is likely that the customer base is too small for more than one or two
departures/arrivals a day. There are no competing schedules with more frequent flights, like
those that exist between major destinations where the number of departures/day might be 6-8.
Cooperation between airlines in scheduling flights may solve some of the problems.
d. Customers generalfy prefer tofly in big rather than small aircraft. Again, for the new direct
routes the customer base is too small for large airplanes regardless of the size or the märket
share of the operator. Also the use of small airports makes small planes the only altemative.
However, potential customers who strongly object to fly in small planes further diminish the
customer base.
10
e.Customers might be reluctant lo use other airlines than the airline they usuallyfly, New
direct routes created by the S ME have no incumbent airline competing on that route but a
passenger might perhaps have an indirect atternative with the airline they are used to. The role
of SAS frequent flier program for customer preferences radically diminished after the Märket
Court decision and some SMEs have their own program, alone or in cooperation with others.
Also acquisitions might diminish this barrier to entry as well as SME flexibility in märket
entry and exit.
/ "Slöts" that can be allocated to new entrants are restricted. Using small airports helps on
such destinations but not to get slöts ät major congested ones. For those alliance with an
incumbent or being acquired are more important.
g.Biddingprocess for some minor routes. Some of those routes might be related to new direct
routes, forming new regions the experiences of entering/exiting märkets as well as combining
air businesses.
We can thus conclude that a variety of interrelated entrepreneurial actions by the SMEs have
been directed towards finding opportunities to circumvent the barrirers. There are thus a
number of interrelated entrepreneurial actions by SMEs aimed ät getting, developing and
coordinating resources for growth on the deregulated märket, preserving flexibility due to
uncertainty and limited resources. Solutions to growth problems invariably involve
relationships to other actors or developing a network of cooperating firms, outsourcing certain
activities and insourcing others. Creating alliances, not only with other airlines but also with
local authorities and local enterprises is very important to get flexibility and the growth. Small
newly started airlines might be more unconventional than large incumbents with large route
networks. But a problem for the SMEs, being so dependent on other actors, including other
SMEs is that "their" network is more vulnerable (Tsang 1998),
A typical growth path for an SME after deregulation
SMEs that survive and grow during the period can be seen, typically, to develop in three
stages. In tfieftrst stage they find a märket niche, eg new direct routes or routes taken över
from a larger firm as part of the latter's restructuring of its route network. An SME might also
find a niche by using a small airport supported by local government and local business. The
niche should offer a potential for the airline to expand its activities and its network of
relationships with customers, suppliers, operating partners, etc. In the second stage the growth
of the SME makes it attractive as partner for other airlines. Alliances vary. Some are loosely
connected in the beginning while others are based on a close connection, implying restrictions
on the SME's activities and growth. Through combining different roles of customer, supplier,
competitor and partner, the SME might in this stage be able to increase its know-how and
resources in marketing and operations and to establish new useful relationships, leading to
further growth. During the third stage the SME can use a stronger stronger position in the
networkfor further growth and better outcome of negotiations with major counterparts such as
SAS.
The three stages are stages in the reconfiguration of the deregulated märket for
domestic flights in Sweden involving development of inter-organizational networks rather
than a set of individual firms. During that reconfiguration the entrepreneurial actions of the
SMEs are both vital for their own fäte and important the performance of the märket after
formål deregulation.
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View ofReality. London, Routledge
11
Lundgren, A & Nordenlöv, L.( 1994) Mellan teknik och marknad -Tekniskt entreprenörskapi
industriella nätverk In Hulthén.S & Mattsson,L-G ( eds) Företag coh Nätverk, Stockholm,
Publ Nerenius och Santérus,
Nordenlöw, L., (1994), Entreprenörskap i Industriella Nätverk, EFI Research Report,
Stockholm School of Economics, Stockholm.
Snehota, L, (1990), Notes on a theory qfbusiness enterprise, Doctoral Dissertation ät Uppsala
University l, Uppsala University, Sweden.
Schumpeter, Joseph, A., (1992), The Theory of Economic Development, Transaction
Publishers, London.
Tsang, E.W.K... (1998) "Motives for Strategic Alliance: A Resource-based Perspective" In
Scandinmian Journal ofMangement Vol 14 No 3, pp. 207-221
Wang, Z.H. and Evans, M (2002), "Strategic Classification and Examination of the
Development of the current Airline Activities", Journal of Air Transportation, Vol. 7 No. 3,
p. 73-101.
firm is downsizing as a result of deregulation due to a tougher price competition. The smaller
Aldrich, H. and Zimmer, C. (1986) Entrepreneurship through Social Networks, The Art and
firms have a different and more flexible cost situation of which the large airline could take
Science of Entrepreneurship, ed. D.L. Sexton and R.W. Smilor, 3-23. Cambridge, MA, The
advantage. This makes it possible for the SME to gain märket shares and grow.
Ballinger Publishing Company.
In this study we have seen different kinds of agreements. In most cases SAS tried to acquire
the smaller firms in other cases when their SME partner grew bigger it acquired other small
Doganis, R., (2001), The airline business in the 21st century, Routledge, USA.
airline. The specific route agreement and the code sharing are very common between large
and small airlines. However, the specific route agreement including handling, bookings, check
Gomes-Casseres, B.(1996). The Alliance Revolution - The New Shape of Business Rivalry.
ins etc might be of a more general kind covering not just one route but several, which makes
Cambridge. Harvard University Press
the agreement more extensive. In our cases the SMEs all had a need to get access to the larger
network. In one case trying to stay neutral and getting access to several networks were too
Ford, D., (2001), Managing & Marketing Technology, Thomson learning, USA.
expensive. Some type of agreements was a tool to facilitate growing and concentrating
Hertz, S. & L.-G. Mattsson. (2004) "Collective Competition and dynamics of Märket
resources on creating efficient operations. In other cases the agreement was more long term
Reconfiguration" Scandinavian Journal of Management
involving part ownership and /or joint marketing.
Hertz, S. (1996) "The Dynamics of International Strategic Alliances- A study of freight
Final comments
transport companies." International Studies of Mangement and Organisation. Summer 1996
The situation for the SME to exist and grow within the air transportation industry is difficult
Vol 6 No 2, pp. 104-130
due to the interdependence between the different märkets. The SMEs have been very
inventive in finding new ways and creating flexibility that would not have been invented if the
Johanson, J & L.-G. Mattsson, (1992). "Network Positions and Strategic Action - An
märket were not deregulated. It has however över time also been also difficult for the
Analytical Framework". In : Axelsson B. & Easton G (Eds.) Industrial Networks - A New
consumers since opportunities been shifting very fast as some firms entered and left the
View ofReality. London, Routledge
märket and some firms went bankrupt.
The SME that want to grow will most likely have to form some kind of agreements with
Lundgren, A & Nordenlöv, L.( 1994) Mellan teknik och marknad -Tekniskt entreprenörskapi
larger airlines to gain access to the large International networks. The alliances give obstacles
industriella nätverk In Hulthén.S & Mattsson,L-G ( eds) Företag coh Nätverk, Stockholm,
for growth but managed the right way they might also give growth. Finally, we have seen that
Publ Nerenius och Santérus,
a risk in being close partner to large International airline that the SME will be used as a
weapon in the competition between two worldwide networks. Further the deregulation is not
Nordenlöw, L., (1994), Entreprenörskap i Industriella Nätverk, EFI Research Report,
something that comes över night it takes a number of year before you can offer the newly
Stockholm School of Economics, Stockholm.
started firms a fair competition on the märket. The constraints take so many different forms
and shapes. This goes to begin with mainly for the small firms but över time also for the ex
Snehota, L, (1990), Notes on a theory of business enterprise, Doctoral Dissertation ät Uppsala
monopolist.
University l, Uppsala University, Sweden.
References
Schumpeter, Joseph, A., (1992), The Theory ofEconomic Development, Transaction
Publishers, London.
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