Originally Posted by cirrusdragoon

The first problem is that forecasts of the financial benefits of alliances may be optimistic. Much airline financial reporting is fiction anyway — there are too many accounting tricks and differences in international accounting standards for any figures to be regarded as 100% accurate. In particular, the airlines’ own ability to calculate alliance benefits is questionable.

Incremental cost and revenue calculations of any strategic move are very difficult, particularly when revenues and costs are being apportioned with another airline with different accounting periods, methodologies etc.Some airlines conveniently forget to calculate the tangible costs of an alliance, but there are many — for example the cost of IT systems’ integration, increased overhead, greater FFP redemption etc. And even if all the tangible costs of alliances are included in forecast figures, in most cases calculations do not include the non–financial costs of alliances.

These include:

• Loss of control. Decision–making in a global alliance is collective, not individual. And will one airline tend to dominate a global alliance over the long–term?
• Brand dilution. Airlines risk being only as strong as the weakest member of alliance, and a customer’s poor experience with one alliance member will affect the brand reputation of others.
• Exposure to problems at other alliance members. From union unrest to safety concerns, the principle of all for one and one for all also has a downside.
• A re–regulation backlash. Another cost of the increasing global alliance trend is regulatory concern about anti–competitive practices — e.g. the requirement for slot surrenders for approval of the British Airways/American link.
• Culture clashes. Will member airlines’ staffs be able to work with each other? This so–called “soft” aspect of alliances is often overlooked, but differences in mundane practices such as timekeeping, attitudes towards customers etc. between two airlines’ workforces can often lead to disparagement and resentment from one set of staff to another.

Of course, putting figures on these non tangible effects of alliances is an extremely difficult task, but it is one that must be undertaken if airlines want to make the correct strategic decision.

Another factor that may distort logical cost/benefit appraisals is the possibility that certain airline managements believe that joining an alliance will help paper over problems at their own airline. It may be easier to try to join a global alliance in the hope of achieving an instant boost in revenues rather than address fundamental problems at their own airline (almost always high costs and/or union problems). This may particularly be the case when an airline is going through a privatization process: joining a global alliance is sexy and appealing to investors; hard–bargaining with an intransigent union is not.