When deregulation and privatization started in 1978, the world airline industry has been through significant changes in its structure. The market was shrunk and consolidated as consequence of mergers and acquisitions. While large traditional carriers adopt hub-and-spokes system to gain cost efficiency and deliver a better network of routes for passengers, some smaller airlines deploy point-to-point approach, provide the most standardized services and thrive for offering low airfares. These so-called “low-cost airlines” are considered to have a strong competitive position and their entry poses a threat to traditional airlines. They are also seen as one of the reasons that causes the formation of strategic alliances among traditional airlines, besides other driving forces such as globalization, economics, regulatory regime, or increase in passengers’ demand of seamless air service.
Strategic alliances are agreements between companies to reach common goals. They were traditionally considered as a low-cost means of gaining access to new markets and local infrastructure as well as an effective tool to generate synergies. Airlines may benefit from the system of airline hubs, centralized airlines routes after partnering with their competitors and shared capital investment. Airline alliances not only depresses the competition and help airline members to defend themselves but also empower their competitive positions in their home market. Most of airline alliance’s members are traditional airlines, however, this global phenomenon seems to leave the low-cost sector out of its scope.
There are plenty of difficulties for a low-cost airline to form alliances, and most of them come from the differences in operation systems and the main focus they have of this particular business model. While other allied airlines want to provide high quality services and expect higher degree of integration in terms of knowledge/resources sharing and co-development from alliances, low-cost airlines mainly focus on basic service and economic efficiency of resource utilization. These disparities may lead to the impossibility to compromise and work towards common goals during collaboration, therefore, it is not strategic for low-cost airlines to be part of strategic alliances.

CHAPTER 1: Introduction 5
CHAPTER 2: Frame of reference 7
2.1 Strategy 7
2.1.1 Porter’s Generic Strategies 7
2.1.2 Porter’s Five Forces 9
2.2 Low-cost airlines 11
2.2.1 Historical background 12
2.2.2 Business model 18
2.2.3 Theoretical propositions in airline industry 20
CHAPTER 3: Strategic alliance 24
3.1 Strategic Alliances 24
3.1.1 Strategic alliances objectives and benefits 26
3.1.2 Strategic alliances success factors 29
3.1.3 Risks and concerns 30
3.2 Strategic alliances in airline industry 31
3.2.1 Objectives 34
3.2.2 Cooperation levels 36
3.2.3 Driving forces 36
3.2.4 Implications for low-cost airlines 37
CHAPTER 4: Analysis – Case study of AirAsia Berhad Airline 41
4.1 Company overview 41
4.2 Business model 42
4.3 Strategies 42
4.3.1 Cost focus strategy 43
4.3.2 Differentiation strategy 44
4.3.3 Strategic position 46
4.4 SWOT 47
4.4.1 Strength 47
4.4.2 Weakness 48
4.4.3 Opportunities 49
4.4.4 Threat 50

CHAPTER 5: Conclusion 56
5.1 Conclusion 56
5.2 Suggestions for low-cost airlines 57
5.3 Suggestions for AirAsia Berhad 59
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