There are myriad of ways that businesses can merge to achieve a common goal. Among these ways is through a joint venture and strategic alliance. This paper will use a strategic alliance between KLM and Northwest Airline, as an illustration, to find out the rationale behind the alliance. For it to achieve this, it will try to identify the common interest between the two companies and the objectives of the alliance. Moreover, the paper will analyze the successes and the downfalls of this alliance and afterwards will draw lessons learned from it.
The rationale for KLM Decision to Form an Alliance and Northwest Airline
The European Court of Justice allowed free competition for the European airline industry in 1986 (Das, 2013). However, there were strict rules governing the airline companies flying to foreign countries. For instance, KLM was permitted to only six cities in the U.S. amid the snowballing demand in other cities. Consequently, KLM decided to settle for a strategic alliance with another carrier company so as to expand its market base and make business cost effective. For this reason, KLM settled for Northwest Airlines because of the following factors: Firstly, Northwest Airline had a huge market in the Pacific (Piercy & Chartered Institute of Marketing, 2012). Hence, forming an alliance with KLM would increase revenue in terms of ticket sales. Secondly, both companies had common interest since both dealt with cargos and passengers. Hence, forming an alliance would act in their advantage. Last and not the least, Northwest Airline was at vantage point since, at that point in time, it was the only American airline with international knowledge as far as airline industry was concerned (Piercy & Chartered Institute of Marketing, 2012).
Northwest Airline dominated Asia and U.S. market, but, it was less popular in Europe. Therefore, it needed a partner who could foster its market growth in Europe for it to remain competitive in the global market. For this reason, KLM emerged as the suitable partner since it faired quite well in the Europe market. In addition, it would not have been cost efficient and legally possible for Northwest Airline to acquire a new airline (Das, 2013).
Working out of the Alliance
Rules and Regulations Governing the KLM-Northwest Airline Alliance
The strategic alliance agreement between Norwest Airline and KLM was signed in September 1997. There was a raft of terms and conditions that entailed the agreement. Firstly, both airlines had to charge the same prices to all their customers. Secondly, there was to be an equal share of profits and losses. Thirdly, both airlines had to retain their independence. That is, both were different entities legally. Last but not least, the agreement/contract was evergreen in nature with the minimum term until 2010 (Piercy & Chartered Institute of Marketing, 2012).
The Success of the Strategic Alliance
The alliance managed to realize its objectives. These targets included increasing the returns in the trans-Atlantic market and enlarging its global network. The daily operation of the partnership doubled since 1986 where the co-operation recorded a 32 flight in 162 cities daily (Piercy & Chartered Institute of Marketing, 2012).
The Downfalls of the Alliance
Although the alliance experienced major milestones its operations, it also experiences equal share of its pitfalls. For example, in the year 1998, there was a one-month strike by cockpit crew from Northwest Airline (Das, 2013). This unprecedented occurrence affected the operations of the alliance adversely since only KLM aircraft were in operation. This resulted in low returns recorded in that period. The second blow to the alliance emerged in the wake of 9-11 U.S. terror assault. Consequently, this resulted in the airline industry to be closed for a while for security measures hence, leading to losses in the airline industry (Das, 2013).
Despite the many challenges that the KLM-Northwest Airline Alliance has experienced, a lot of lessons can be drawn from them. Firstly, being the first alliance ever been made in the history of the airline industry, and for that matter, without legal documentation, it proves that partnerships can thrive through mutual understanding. Secondly, we also learn that when two companies from the same industry form an alliance, they create a formidable force that helps them to soar high and transcend their challenges as in the case of Northwest and KLM alliance. This helps in complementing each other rather than competing with one another. There are more benefits than disadvantages in forming a strategic alliance with business (Das, 2013).
Das, T. K. (2013). Interpartner dynamics in strategic alliances. Charlotte, NC: Information Age Pub. Inc.
Piercy, N., & Chartered Institute of Marketing. (2002). Market-led strategic change: A guide to transforming the process of going to market. Oxford: Butterworth-Heinemann.