Identifying Critical Risks In International Joint Venture Relationships In The Airline Industry

Benefits of International Joint Venture Relationships in the Airline Industry

Discuss About The Identifying Critical Risks Underground Rail.

The international joint venture has become one of the many preferred modes of entering the international market. However, cooperation resulting from joint venture alliances is a relatively new scenario in the international airline industry. Its success owes a lot to the fact that this kind of alliance is viewed as a success phenomenon according to airlines’ point of view. According to the legal standpoint, joint venture’s relevance results from the anticompetitive potential of any collusion from organizations’ rivals that existed (Islam, Ali and Sandhu, 2011, p.40). It is worth noting that the airline industry’s reasons for engaging in international joint ventures are based on two folds: the primary rationale of the alliance is to enable the airlines to exploit economies of scale as well as the scope. Like in all industries that are network based, there exists a palpable synergetic impact that can be achieved as a result of the increased scale of operations(Killing, 2013, pp.61). This is because it facilitates in lowering unit costs, hence enhancing an organization’s competitive edge. Also, having a functional fusion of the organization’s hub and spoke networks, particularly by coordinating schedules as well as setting agreements on sharing of codes gives the airlines an opportunity to cover a large territory.

At the same time, these airlines are capable of obtaining critical feed regarding long-haul routes. Nonetheless, a particular cooperation among the airlines may include other elements related to airline operations which include crew training, maintenance, regular buying of fuel, repairs, or overhaul(Stewart and Maughn, 2011, pp.651). Apart from the forms related to operations, the relationship in question may as well characterize components which are related to sales which include loyalty programs as well as regular marketing campaigns. Specifically, this paper addresses the international joint venture relationship in the airline industry.

Considering the brief outline, it is clear that relationships exist to serve as an essential vehicle to drive expansion. Mainly, this is due to technical reasons which result from the hub and spoke’s nature. This is because if an airline is to financially maintain intercontinental long-haul connections, there is essentiality in having feeder service that exists on both endpoints. Nonetheless, the best solution for this would be obtaining a local carrier since full-fledged mergers result in increased synergies compared to cooperation between two independent organizations(Fernhaber and Li, 2013, pp.319). As a result, this gives rise to the second rationale necessary for cooperation, which is the legal factors. On a practical point of view, protectionist barriers such as the Control and Ownership clause shield the local airline sector in every nation from foreign investment. These protectionist barriers are specific to a particular country. However, to a certain extent, the common characteristic is that the barriers have a restriction on the external capitals’ maximum percentage that is allowed in the local airline’s ownership structure (Tugores-García, 2012, 451). In addition, the legal factors restrict foreign nationals from efficiently gaining control or having an influence on the decisions made by the officials at the air carrier. Thus, joint venture relationships are normally considered to be an efficient second-best option in instances where a full-fledged concentration does not offer a solution resulting from control and ownership restrictions. Notwithstanding, joint ventures in the airline industry offer a greater level of flexibility compared to that of a formal relationship. Thus, to have a clear understanding of the international joint venture relationship in the airline industry, the following questions are investigated:

1. What structure exists in a joint venture relationship in the airline industry?
2. What factors drive the performance of a joint venture relationship in the airline industry?
3. What are the benefits and problems associated with joint venture relationship in the airline industry?

Challenges of International Joint Venture Relationships in the Airline Industry

Ho: there are very minimal benefits that are associated with joint venture relationship in the airline industry.

For a very long time, among the managers and the scholars, performance measurement has been a crucial issue. In the same manner, organizational performance in the international joint venture in the airline industry is also an essential factor (Stewart and Maughn, 2011, pp.314). An International Joint Venture is formed by two or more organizations who are expected to share dividends proportionally as compensation. This may include a partial acquisition or a greenfield investment.

 According to Larimo, Nguyen & Ali, (2016), it is essential for airlines that are in an international joint venture to adopt a suitable performance measurement since evaluating the performance of their operation is important in revealing the actual situation of the subsidiaries’ operations. However, the authors note that managers of the party organizations are continuously faced with the challenge of choosing the best indicator that they can use measure their joint venture relationship. When measuring the international joint venture performance, it can be considered from foreign partners’ point of view, view of the local partners, international joint venture’s management team, as well as the international joint venture’s shareholders view. The authors discover that a relationship exists between international joint venture’s evaluation from the partners, shareholders, and the management team (Sun and Lee, 2013, pp.13). The main factors that the authors outline in influencing the performance measurement of the international joint venture are the target country, the organization, as well as the factors related to investment. The performance measures are categorized into two groups according to their research: the first category according to the authors is the financial measures of performance which are made up of traditional indicators that include cost position, profitability, as well as growth (Chang, Chung and Moon, 2013, pp.321). The financial measures rely on the availability of cost information and the financial information, both of which are considered to have a short-term nature, as well as the availability of data on sales. This includes the sales volume, foreign sales ration to the total sales, as well as the growth in sales. These factors are used to provide guidance for efficient measurement of performance in the international joint venture in the airline industry as firms strive to achieve their objectives and targets. These measures are a direct reflection of the companies’ current profitability levels, operating efficiency, and their current earning potential.

Critical Risks in International Joint Venture Relationships

However, Larimo, Nguyen & Ali notes that very little research has been conducted on the performance measurement framework. Thus, this has become a critical problem for organizations. Additionally, the issue is complicated since there are several contradicting ideas regarding how international joint venture in the airline industry should be measured (Larimo, Le Nguyen and Ali, 2016, pp.880). Some of the authors argue that organization’s performance vary depending on the measure that is used. For instance, Abdel-Maksous, Asada, and Nakagawa (2008) suggest that using the traditional accounting measures do not present vivid data pertaining to an airline’s efficiency and competitiveness. Additionally, Ratnatunga and Montali (2008) argue that use of financial measures is inadequate when companies begin focusing on shareholder value as the organization’s long-term main goal. Mohr (2006) suggest that there has been no research that has clearly outlined the differences that relate to the manner which partners in an international joint venture should measure their business performance.

In addition, Stewart and Maughn, (2011) argue that joint venture of any kind give the participating organizations the opportunity to access the global market more efficiently and economically. The authors note that there are certain factors that make international joint venture an attractive solution. These factors include difference in currency, language, legal, and regulatory differences. International joint ventures allow the airline companies to enter the market quickly (Gutterman, 2009, pp.314). The contributions made by each of the partners in a joint venture are different, and they are based on each partner’s capability and nature of the joint venture. Despite the necessity for legal agreements in the creation and sustenance of an international joint venture, the nature of the joint venture should be practical, having both living and evolving relationships. After the formation of the international joint venture relationship in the airline industry, Stewart and Maughn argue that it is important to maintain a positive interaction and dialogue among the partners’ decision makers. The authors go a step ahead in determining the legal structure and attribute regarding the formation of the international joint venture (Ustaömer, Durmaz & Lei, 2015, pp.422). The relationship can be assumed as a contractual agreement between the airline partners whereby their basis of understanding and governing terms are included in their written agreement.

Depending on the selected joint venture, either equity or contractual, it demonstrates the intensity’s level with which the international joint venture is being pursued by the two parties. Where the investment levels are high and collaborations are close and long-term, the equity joint venture is used (Hovhannisyan and Keller, 2015, pp.95). However, regardless of the joint venture between airlines is contractual or equity, Stewart, and Maughn suggest that the relationship between the parties involved in the joint venture should be governed by a clearly defined and written agreement that contains all the essential term that govern the entire alliance.

Risk Management in International Joint Venture Relationships

 Stewart and Maughn, (2011) identify several benefits and challenges that are associated with the international joint venture in the airline industry. Some of the benefits outlined in their study include: first, airline international joint venture allows airlines to access foreign markets less costly and quickly unlike when starting a new venture or purchasing an existing airline (Zhao, Hwang and Yu, 2013, pp.561). Through IJV, there is quick access to the mediums of distribution as well as providing access for the non-resident airline to understand the local marketplace. This sustainably improves on the venture’s profitability success. Additionally, the resident airline already has an existing relationship with main customers and is proficient with the local language as well as the customs (Twarowska and K?kol, 2013, pp.1007). Through IJV relationships, airlines can move efficiently, faster, and credible as a result of the resident partner’s reputation. Notwithstanding, the airlines can as well take advantage of complementary lines and synergies that exist in the firm. However, Stewart and Maughn noted some specific challenges that are associated with the international joint venture. The joint venture may result to a frustrating experience and may result to failure it such a venture lacks enough training and strategy. Factors relating to development in the marketplace, issues to do with technology, uncertainties in regulations, downturns in the economy are difficult to anticipate, hence may have a debilitating effect on international joint venture relationship in the airline industry.

Also, according to Kociubi?ski, (2015), there exists a primary challenge when it comes to managing international airline joint ventures. This is because the alliance does not contain a uniform legal form. Additionally, the term “joint” is not regarded as a strictly legal term. Rather, the term “joint venture” is an umbrella category that comprises of varied agreements that function under different legal regimes. For the sake of analysis, the author emphasized that the term “joint venture” according to European Union law does not present any different legal category (Krishnamurti and Vishwanath, 2008, pp.90). The author takes a step further in outlining the basic structure that exists in an international joint venture in the airline industry. Certain provisions that are found in a business agreement between the airlines are confidential. However, it is possible to re-engineer the joint venture’s mechanism based on the parties’ strategic objectives. For the purpose of his study, Kociubi?ski assumed that all the parties involved in the joint venture were committed fully to achieving their common goals and they were not engaged in opportunistic activities.

Conclusion

At the very base of the airline, joint venture relationship lays the common interest that is to be attained. Operations costs on routes that are overlapping are “pooled” together, then they are divided between the partnering organizations, and they are modified by surplus based on the offering’s scale. Similarly, there is a proportional division of yields to the respective operation’s scale. The differences in the initial incurred costs lead to modification of the generic arrangements due to the use of different types of aircraft that have varying cost structures and class standards (López-Duarte and Vidal-Suárez, 2013, pp.2258). In addition, when the joint venture does cover which is not considered to be directly overlapping, the use of revenue share algorithm will result in complexity, but it would not deviate from its underlying principle (Yao, et al, 2013, pp.218). However, international joint venture partner’s revenue does not depend on which airline actually flies the passenger. This leads to the creation of a service whereby the ownership of an aircraft that is used in providing the passengers with the service does not dictate the airline’s revenue. This is due to the fact that all partners are interested equally in every air operation’s performance in an international joint venture (Meschi and Wassmer, 2013, pp.715). This is different from agreements that involve sharing of codes, which is most prevalent in relationships that involve the airline industry. In this case, most of the revenue is retained by the operating carrier while the marketing carrier is awarded only a small commission for being involved in the general operations of the operating carrier. If there exists a route that is commonly served by use of code-sharing among the partners, this means that the two airline carriers are interested in the performance equally. However, some of the commonality will not constitute a situation where an airline is a sole proprietor.

Additionally, Emsley and Kidon, (2007) examined the relationship that exists between control and trust during management of organizational uncertainties. Specifically, they focused on the essential role that is played by the management accounting system in the joint venture in the airline industry. Unlike previous researchers that treat trust to be part of a control system, Emsley and Kidon differentiate trust from control. Nonetheless, trust and control remain closely related since data obtained from the control systems is also used in assessing trust’s level (Emsley and Kidon, 2007, pp.835). The authors examine the role that is played by information obtained from three levels of control that include output, behavioral, as well as social in assessing the levels of trust which are competency and goodwill. In their study, Emsley and Kidon examined that at the competency trust in the operational level and goodwill trust at the executive level. From their research based on two airlines international joint venture, they deduced that information that reinforces competency trust at an operational level was based on the controls. However, goodwill trust is left at the executive level due to its vulnerability to goodwill trust’s betrayal.

References

Conclusion

In addition to the expanded networks which comprise the use of code-sharing flights, there exist many essential benefits that are associated with international joint ventures. They include enhanced seamless travel that is facilitated through application of airport terminals, an enhanced competitiveness that is as a result of frequent flyer programs, leads to sharing of facilities which include the airport lounges, as well as cutting on costs through the joint purchase of commodities such as the jet fuel. Nonetheless, joint ventures conduct a periodic reciprocal safety audit as well as helping the partners to deal with unexpected incidents (Ripollés and Blesa, 2012, pp.281). Regularly, joint ventures carry out drills and prepare themselves in initiating immediate action to deal with an emergency. Such actions include linguistic support, gathering data, as well as setting up customer support. Each airline’s global joint venture aims at enhancing competitiveness using the above strategies. However, the emergence of LCCs and other factors are continuously reshaping the landscape of airline industry. Despite competing with other alliances, airlines are now competing with LCCs which do not belong to an alliance, including the Middle East carriers. Also, it is observable that are many airlines that forming joint ventures with airlines that are in another alliance. As a result, the international joint ventures have resulted to intensified competition as well as complicating the route networks. More dynamic changes may as well take place in the future.

Nonetheless, analysis has indicated that there are many strong reasons for airlines to be involved in international joint venture relationships. At the same time, there is a piece of information indicating that there are many effects associated with such alliances to the consumers. Concurrently, such joint ventures whereby a rival begins to cooperate, have the possibility of harming the market. Hence, from the regulator’s point of view, it is important to have an efficient assessment mechanism(Yan and Luo, 2016, pp.613). On the legal basis, despite that the joint venture is very common in the airline industry, it may not meet all the criteria of full functionality, and one may argue that maybe the criteria does not suite the concerned industry. Thus, for any international joint venture in the airline industry to be successful, the parties should aim at a common goal and work towards attaining it. The airlines that are in alliance need only share resources, profits, and losses but also should be in a position to share technology, operations, trust, knowledge, and performance.

References

Chang, S.J., Chung, J. and Moon, J.J., 2013. When do wholly owned subsidiaries perform better than joint ventures?. Strategic Management Journal, 34(3), pp.317-337.

Emsley, D. and Kidon, F., 2007. The relationship between trust and control in international joint ventures: Evidence from the airline industry. Contemporary Accounting Research, 24(3), pp.829-858.

Fernhaber, S.A. and Li, D., 2013. International exposure through network relationships: Implications for new venture internationalization. Journal of Business Venturing, 28(2), pp.316-334.

Gutterman, A. (2009). A short course in international joint ventures negotiating, forming, and operating the international joint venture (3rd ed.). Petaluma, CA: World Trade Press.

Hall, D. (1984). International Joint Ventures: Pros and Cons. S.A.M. Advanced Management Journal, 49(4), 4-11.

Hovhannisyan, N. and Keller, W., 2015. International business travel: an engine of innovation?. Journal of Economic Growth, 20(1), pp.75-104.

Islam, S., Ali, M., & Sandhu, M. (2011). Partner selection criteria in international joint ventures: Perspectives of foreign investors from Asian NIEs of Malaysia and India. Asia Pacific Business Review, 17(1), 25-43

Killing, P., 2013. Strategies for joint venture success (RLE international business). Routledge.

Krishnamurti, C. and Vishwanath, S.R. eds., 2008. Mergers, acquisitions and corporate restructuring. SAGE Publications India.

Larimo, J., Le Nguyen, H. and Ali, T., 2016. Performance measurement choices in international joint ventures: What factors drive them?. Journal of Business Research, 69(2), pp.877-887.

López-Duarte, C. and Vidal-Suárez, M.M., 2013. Cultural distance and the choice between wholly owned subsidiaries and joint ventures. Journal of Business Research, 66(11), pp.2252-2261.

Meschi, P.X. and Wassmer, U., 2013. The effect of foreign partner network embeddedness on international joint venture failure: Evidence from European firms’ investments in emerging economies. International Business Review, 22(4), pp.713-724.

Ripollés, M. and Blesa, A., 2012. International new ventures as “small multinationals”: The importance of marketing capabilities. Journal of World Business, 47(2), pp.277-287.

Stewart, M.R. and Maughn, R.D., 2011. International joint ventures, a practical approach. Davis Wright Tremaine LLP. Seattle.

Sun, S.L. and Lee, R.P., 2013. Enhancing innovation through international joint venture portfolios: From the emerging firm perspective. Journal of International Marketing, 21(3), pp.1-21.

Tugores-García, A., 2012. Analysis of global airline alliances as a strategy for international network development (Doctoral dissertation, Massachusetts Institute of Technology).

Twarowska, K. and K?kol, M., 2013. International Business Strategy-reasons and forms of expansion into foreign markets. In Management, knowledge and learning International conference (pp. p1005-1011).

Ustaömer, Durmaz, & Lei. (2015). The Effect of Joint Ventures on Airline Competition: The Case of American Airlines, British Airways and Iberia Joint Business. Procedia – Social and Behavioral Sciences, 210, 430-439.

Yan, A. and Luo, Y., 2016. International joint ventures: Theory and practice. Routledge.

Yao, Z., Yang, Z., Fisher, G.J., Ma, C. and Fang, E.E., 2013. Knowledge complementarity, knowledge absorption effectiveness, and new product performance: The exploration of international joint ventures in China. International Business Review, 22(1), pp.216-227.

Zhao, X., Hwang, B.G. and Yu, G.S., 2013. Identifying the critical risks in underground rail international construction joint ventures: Case study of Singapore. International Journal of Project Management, 31(4), pp.554-566.