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Swissair finds itself at a competitive disadvantage: it is not a member of a global alliance. To illustrate this look at the following example. Profit margins are quite different for airlines in alliances when compared with airlines, which are not. Let's assume for a moment that the average profits in the airline industry are 15% and that 50% of air travel is performed by airlines in alliances (it is in fact 53% as the case states, but this way it will be easier for you to calculate). Question: given that the global alliances claim 80% of the profits, what do the profit margins in either category (alliance and non-alliance airlines) have to be in order to realize an average profit margin of 15%?

What is the structure of the airline industry (Five forces model)?
What different strategic alliances is Swissair involved in?
Should Swissair form its own (global) alliance? What does Swissair gain from its partners by forming the Qualiflyer alliance?
What are the trade-offs between control, commitment, and trust among partners in global airline alliances? How dominant will Swissair be in the Qualiflyer alliance?

#### Solution Preview

STEP 1

Profit margins of alliance and non-alliance airlines:
? For simplicity let us assume that the profits earned by the entire industry is 15, then the profit earned by the alliance airlines is 80% of 15 that is 12. Also, the profit earned by the non-alliance airlines is 15 -12 = 3. Now since 12 is earned by 50% of the industry, remember that the alliance industry is 50% of the entire industry. So, the percentage of profit earned by alliance industry is 12/50 x 100 = 24%. Similarly, the percentage of profit earned by the non-alliance industry is 3/50 x 100 = 6%. These are the required profit margins that are 24 percent and 6 percent.

STEP 2

Structure of the airlines industry:

? Threat of new entrants: The industry does not appear attractive for individual airlines to enter the industry but the real threat for alliances is the threat that new alliances would form and that they would be more powerful and predatory than their own. For example, ONEWORLD formed after QUALIFLYER did and this is the real threat of new entrants.
? Supplier power: The aircraft purchases are made from Boeing, Airbus and McDonnell-Douglas. However, the main supplier power was exercised by THY and TAP because both earned substantial and growing revenues from maintenance on Boeings. In addition, SairGroup's Non-airline Subsidiaries like S AirServices, S AirRelations and S AirLogistics jockeyed for a position in the share of the business. Swissair also exercised supplier power by insisting that the members of the alliance purchase Airbus planes or lease them from Flightlease.
? Substitutes: There are rail-based substitutes like Austrian Railways, UK Railways, Danish State Railways and Dutch Railways. On the other hand there are substitutes like Eurail, Euroline, Connex Central and public bus transportation that can provide competition, especially over short distances.
? Rivalry within the industry: This stems from two ...

#### Solution Summary

The solution explores the competitive position of Swissair, the industry structure, strategic alliances of Swissair and trust among the alliance partners.

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