Intra industry ties in the airline industry

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Intra industry ties in the airline industry

The effects of deregulation and liberalization on

the level of nationality diversity in Top

Management Teams within the airline industry

By: Nick Lulof

Student number: S1914154

Msc. International Business and Management

Groningen, March 2012

University of Groningen

Faculty of Economics and Business

Netelbosje 2, 9747 AE, Groningen

Netherlands

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Abstract

This paper focuses on the subject of nationality diversity within top management teams (TMT) within the aviation industry. The objective of the research was to answer the following question: “What is the effect of alliances in the airline industry and its specific characteristics on the nationality diversity in TMTs of airliners?” The research covered 42 airliners that were member of the three alliances that dominate the aviation industry, which are Sky Team, Star Alliance and One World. Among the sample 589 managers are active in the aviation industry of which 13.7% was a foreigner. When looking at industry specific characteristics one can say that alliances have a small influence on the level of nationality diversity but intensive collaboration for many years could be a factor of a higher level of nationality diversity. Next to this the country specific regulations make it hard for airliners to grow across borders. Due to this there is still a large number of state owned airliners and combined with country specific regulations the level of nationality diversity stays low. A more liberal open market like in Europe and some parts of Asia make it easier for airliners to grow by taking over other airliners. This shared ownership has a positive influence on the level of nationality diversity. In addition, interlocking directorates are not common in this industry but if it occurs it has immediate effect on the level of nationality diversity. Therefore one can say that a more liberal and open market stimulates airliners to grow and increase the level of nationality diversity. However this is still not the case in many regions which causes this industry to stay conservative for many years.

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1. Introduction

Research focusing on Top Management Team (TMT) composition is often paying attention to country or company level aspects and other characteristics that influence TMTs but hardly focus on industry level characteristics (van Veen & Marsman, 2008; Ruigrok et al., 2007; Heijltjes et al., 2003; van Veen & Elbertsen, 2008). These authors write about TMTs and nationality diversity as a consequence of increasing economic integration and cross border movement of products, capital and people (van Veen & Marsman, 2008). The actual goal of country based research is to find differences in governance regimes of the individual countries used in these researches. In addition, differences in governance regimes are used to see how this affects the TMTs of the companies in the various countries researched (van Veen & Elbertsen, 2008). Furthermore on country level, the level of nationality diversity within TMTs is researched to find out how internationalized TMTs are in comparison to the number of countries a company is active in (Heijltjes et al., 2003).

By focusing on the industry level one has the possibility to find trends which would not appear on the country or company level but could be specific for industries. An example of this is the effect of an industry on nationality diversity of TMTs, something which has not been researched thoroughly in academic research. Within industries, specific developments and characteristics could explain the effects which an industry has on nationality diversity. This paper discusses the effects of deregulation and liberalization of the aviation industry and alliance membership among airliners on corporate governance and TMT aspects like nationality diversity, different types of ownership and interlocking directorates. A research with a focus on the aviation industry has been preferred due to industry specific characteristics like alliances and a growing liberal and more ‘open’ market. The possibility to discover trends of what is presumed a national business due to government regulations but is growing global with the help of alliances, makes it academically relevant to research.

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A special focus in this research will be on board composition and especially on the level of nationality diversity within the TMTs of the airliners. Most of the airliners that participate in alliances focus on a global extension of their business. When continuing on this, one might say that having a board with a high level of nationality diversity is becoming the mark of the truly global corporation – or at least corporations with global aspirations (Staples, 2007). For the aviation industry this indicates that there should be a large number of boards with a high level of nationality diversity due to cooperation of airliners within and in some cases between alliances. Next to that the TMTs of the alliances of which the airliners are a member are expected to have a high level of nationality diversity.

The development of nationality diversity is a possible effect of deregulation of the industry by the national governments. As an effect of the deregulation, liberalization of the airline industry leads to a still growing global competition between airliners. Due to restrictions of governments in several regions, the airliners cannot compete fully on a global scale and need an open skies agreement for this. An open skies agreement is already implemented in Europe but is still in progress between for example Europe and North America. A solution to work together under these conditions is by forming alliances; the three largest alliances (Star Alliance, One World and Sky Team) have members from all over the world. As far for the three alliances it is interesting to find out how the TMTs of the airliners have developed since their participation in alliances. In addition, Within the academic literature (van Veen & Marsman, 2008; Staples, 2007; Heijltjes et al., 2003; van Veen & Elbertsen, 2007) the following aspects have been researched as factors of influence: mergers & acquisitions, governance regimes, international activities of the company, type of ownership, corporate governance structure, types of investors, interlocking directorates, internal labor markets and the economic integration of the country the company is based.

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important (Heijltjes et al. 2003). In addition, there are still many countries which have limitations on foreign ownership and foreign directors which make it hard for airliners to grow like MNCs in other industries.

When looking at the intensive collaboration between the airliners within alliances, possibilities of interlocking directorates might be expected. When looking at interlocking directorates Carpenter and Westphal (2001) suggested a contingent impact that director appointments to other boards have on the strategic board involvement. In the case of this research this could have an effect on the level of nationality diversity within a board of an airliner. This could have a large influence on the level of nationality diversity due to the large number of different countries represented within the three alliances. According to the results of Carpenter and Westphal (2001) heterogeneity of directorate ties fosters strategic board involvement in companies facing higher environmental instability. There are reasons to expect different impacts from differing kinds of interlocks. In particular, directors who engage in interlock ties to business partners such as competitors, suppliers, customers or banks may not be sufficiently independent and will face conflicts of interests. These conflicts arise between the interests of related stakeholders with those of shareholders, to whom the board is primarily accountable. Consequently, the impact of interlocks might vary across different kinds of ties (Mizruchi, 1996; Nohria, 1992; Pettigrew, 1992). Directors that are interlocked with business partners will only have restricted access to information and will be less involved in strategic decision making. This makes it harder for interlocking directorates to be found at one of the airliners which are researched. This especially counts for airliners from different alliances, within alliances there might be a chance due to the fact that the airliners here are not direct competitors.

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This leads to the following problem statement:

“What is the effect of alliances in the airline industry and its specific characteristics on the nationality diversity in TMTs of airliners?”

The sub-questions are derived from the introduction and the problem statement. The questions below will help to answer the main research question. The sub-questions are:

Does intensive cooperation between airliners lead to an increase in nationality diversity within TMT’s?

Since the foundation of the alliances, airliners started cooperating more on an international level. Airliners and especially “flag carriers” as national symbols are dominating the alliances. With this increasing form of internationalization the composition of TMTs when it comes to nationalities might have changed or might contain only the nationality of the country of origin, due to government or country specific influences.

Does intensive cooperation between airliners lead to interlocking directorates and how does this affect nationality diversity?

The result of a very intense cooperation between airliners within alliances might lead to interlocking directorates. As seen above, trends in other kinds of fields could also be found due to the cooperation. Interlocking directorates are in this case the ultimate way of showing that within alliances airliners are working together on TMT level.

What are the effects of the different types of ownership on the level of nationality diversity within TMTs of airliners?

Being a part of an alliance means that the airliners have obligations towards each other. The other airliners within these alliances are still competitors so a little more influence on this might help the position of the own airliner. When one airliner has a share in another airliner this could help the airliner with shares to gain more benefits. The TMT might then have a conflict of interest due to its share in a competitor.

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2. Literature review

2.1 Market developments and strategies of alliances in the airline industry

The airline industry is one which goes back many years in history. Since the start of the commercial flights of airliners, the aviation industry took a large step in offering more services to customers. Within Europe the air travel increased enormously since 1992 due to liberalization and ending bilateral agreements to ‘open’ the market. This meant that airliners were permitted to exercise traffic rights on routes everywhere in the EU. This was already the case in the U.S. since 1978. In other parts of the world there are not that many initiatives to deregulate.

To improve the service to the customers and offer more travel destinations the airliners started cooperating in alliances. According to Morrish & Hamilton (2002) an airline ‘alliance’ is any collaborative arrangement between two or more airliners involving joint operations with the declared intention of improving competitiveness with their competitors outside the alliance and thereby enhancing overall performance. The focus of the competitiveness will be more between airliners from different alliances then within alliances. Generally alliances are used as a strategy when for example internal development as means of growing is not possible. The airliner can grow further in this case by cooperating with fellow airliners in the alliance of which they are a member of. This counts especially for markets which are not open to foreign airliners and where airliners do not have the possibility to acquire another airliner. This means that by cooperating with other airliners it is still possible for an airliner to grow within the limitations and restrictions of its own market and country it is based.

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marketing reasons, one might not think of exchanging board members. When it comes to strategic reasons, one could share ideas by having for example interlocking directorates or hire experienced directors from other airliners in other countries.

The first alliances were formed in the end of the eighties. These alliances were the European Quality Alliance (SAS, Swiss Air, Austrian Airlines & Finnair), the Global Excellence Alliance (Delta Airlines, Swissair, Singapore Airlines) and the KLM/Northwest Airlines Alliance. Sometimes even if internal development as means of growing is possible, alliances are preferable as they provide quicker access to new markets. Alliances vary in degree of commitment from simple marketing collaboration to more advanced co-operations that could eventually lead to complete mergers or acquisitions (Kalligiannis et al., 2006). In the airline industry most of the largest airliners joined alliances. A majority of airline alliances is route based. Park (1997) distinguished two major types of alliances as being either complementary or parallel. The main distinguishing features are that complementary alliances have non-overlapping routes, whereas parallel alliance routes overlap. The three alliances which are currently active are all complementary. Apart from routes, the most common areas of cooperation involve code sharing, block spacing, shareholdings and franchising. Code sharing allows an airliner to sell seats on a partner’s flight under its own designator code, while block spacing is an agreement under which one airline allocates a block of seats on its flights to a partner. Park (1997) also found that a complementary alliance (KLM and Northwest) led to lower airfares while a parallel alliance (Delta, Swissair and Sabena) led to increases. In essence, parallel alliances create cartels on certain routes that allow price increases.

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network of different airliners. However, there remains some ‘parallel cooperation’ since airliners also rationalize inter-hub markets, where the network of several airlines overlap (Flores-Fillol, 2009). In addition, an extended service is provided to the customer by sharing business lounges and frequent flyers’ programs which are valid around the globe. Furthermore, improvement in connecting services is one of the benefits airline alliances can bring to the passengers. Leisure traveler’s benefits from deregulation have been mainly in lower fares, while business traveler benefits have been mainly in frequency improvement. Basically, airliners set frequencies for business needs and then try to induce leisure travelers to fill empty seats (Bailey, 2002).

With the growing importance of these alliances for airliners, it becomes more important to become a member. Therefore more and more airliners are joining the alliances, a few are leaving and some switch between alliances. Consequently, airliners had to look at a variety of strategies to improve performance. The importance of the alliances is also expressed in the fact that the three alliances together have a market share of about 75% of the entire industry (Alliance websites, 2011). With global expansion constrained by restrictive air services agreements (ASA), strategic alliances are seen as a strategy for growth. An example of this is given by a research executed for the IATA (2011) which states that “the bilateral air service agreements” (which are signed between two countries) that continue to govern much of world trade in aviation define the terms under which airliners will link their two home territories. These ASAs often frustrate market growth, force users to pay a price premium, and create a series of vested interests”.

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As for the other players on the market it is difficult to compete with airliners that are part of an alliance. Flores-Fillol (2009) explains by stating “the reason that explains this behavior is the considered competitive context in which partners and rivals interact and alliances typically harm rivals. In this framework, in small markets where economies of traffic density are not too intense, alliances unleash strong rivals’ reactions that turn them unprofitable”. One way to do this is to compete in a price war with a rival. This outcome helps to explain the present trend towards complementary alliance formation around One World, Star Alliance, and Sky Team, where airliners that do not participate in any of them either form a parallel alliance at domestic level or stay alone. Alliances are not the only route to survival. Some non-aligned airliners such as EasyJet, Southwest, and Ryanair have achieved growth through low-cost strategies and exploiting high traffic routes. This counters the argument of aviation journalist Flint (1999) that, despite the commercial and regulatory hurdles to overcome, it is essential to belong to a global alliance. In fact deregulation has meant that new ‘no-frills’ competitors have appeared within Europe, such as Virgin, EasyJet and Ryanair, and insofar as routes and airports have been genuinely deregulated, new competitors also from outside Europe are able to enter the market.

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producer surpluses. The airliners do appear to gain in terms of load factors and from a general rise in productivity levels, but these have been offset by increased flight frequencies and, more particularly, lower air fares”.

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2.2 Nationality diversity among TMTs within the airline industry

As far for the alliances it is interesting to find out how the TMTs of the airliners within these alliances developed due to their participation in alliances. The focus on specific characteristics like interlocking directorates and nationality diversity among directors gives an explanation of the development of TMTs. As described in the previous paragraph there is a benefit for airliners within alliances cooperating in the area of sales and marketing with the use of code sharing etc. By hiring people from different airliners or different countries one might help the airliner to grow and use for example different sales or marketing strategies to grow and expand. This might be a contribution from higher nationality diversity. When looking at the various characteristics which have an influence on the level of nationality diversity one can focus on various items. Within the academic literature (van Veen & Marsman, 2008; Staples, 2007; Heijltjes et al., 2003; van Veen & Elbertsen, 2007) the following aspects have been researched as factors of influence: mergers & acquisitions, governance regimes, international activities of the company, type of ownership, corporate governance structure, types of investors, interlocking directorates, internal labor markets and the economic integration of the country the company is based. Due to the fact that this study has an explorative character most of the above mentioned variables will be researched on its effect on the level of nationality diversity within the aviation industry.

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When looking at the way the aviation industry is organized, one should also look at the influence the directors of the airliners have. Tihanyi et al. (2000) describe that the background, experiences and values of corporate executives influence important strategic decisions enacted by these key corporate actors. They also suggested that observable characteristics such as age, tenure and functional experience might serve as useful proxies for the cognitive base that guides top executive decisions. When referring to the airline industry and the directors of the aviation companies, one can say that nationality diversity is an important factor when it comes to decisions made by the board. Van Veen & Marsman (2008) state about this that: “Nationality diversity within executive boards can be seen as an important and often neglected indicator for the degree of internationalization of an MNC”. Most of the airliners who participate in alliances focus on a global extension of their business. When continuing on this, one might say that having a board with a high level of nationality diversity is becoming the mark of the truly global corporation – or at least corporations with global aspirations (Staples, 2007). For the aviation industry this means that if this is the case there should be a large number of boards with a high level of nationality diversity due to cooperation within and in some cases between alliances. In addition, the internationalization of ownership is another factor that may influence the internationalization of top management teams. A noteworthy and important aspect is that especially companies listed on international stock exchanges will be confronted with a strong monitoring of their actions. In order to attract international investors, a trustworthy and international image is important (Heijltjes et al. 2003). Since a growing number of airliners participate in cross listing the number of airliners that have a larger group of shareholders also grows. This means that the group of international investors also grows. A possible consequence is a larger pressure on the companies to attract non-national directors, from both in or outside the airline industry. Van Veen & Elbertsen (2008) continue on this by stating that ownership by large block holders, such as families, the state, or financial institutions, are quite likely to dominate annual meetings, which reduces possibilities for outsiders to develop powerful positions.

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region, with 71 per cent of companies reporting non-national directors followed by North America where the figure is 60 per cent. For this research it is good to see how globalized the aviation industry is in comparison to others like mentioned in the Staples research.

One important conclusion of the Staples (2007) research is that most of the boards in the research became more globalized due to cross border mergers and acquisitions (M&A). Staples mentions that “at the same time, the evidence also suggests that, like a wide but shallow lake, board globalization does not yet reach very deep. Only a few of the corporations studied had more than 50 per cent non-national directors and a majority of 54.3 per cent had fewer than 26 per cent non-nationals”. In addition to this van Veen & Marsman (2008) state that “higher nationality diversity is supposed to be an important requirement for quality of strategic decision making, so increased diversity leads to better company performance”. In the airline industry a few airliners merged and a few airliners were taken over by others. An example of a merger with a diverse board as a result is the Air France - KLM merger, where there is a mix of French and Dutch directors. This is also something which is confirmed by van Veen & Elbertsen (2008) who state that especially in large cross-border mergers in which company sizes are not too different, new boards are often combinations of the two former boards, which usually implies an increase in the level of nationality diversity. An example of a company that did not focus on non-nationals is Linea Aerea Nacional de Chile (LAN), who started all kinds of subsidiaries in various countries in South America but still had no non-national in the board after years of operating in these countries.

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as this is a law this would have large consequences. Next to that the governmental influence on the airliners makes it interesting how international the board is. This will be discussed in paragraph 2.3.

Moreover, the research of van Veen & Marsman (2008) covering companies from 15 EU countries concludes that “the nationality diversity in European executive boards is not very high, but has a considerable variance. Although the EU is based on economic integration, this hardly extends to the labor market of top management. Foreigners have more access to executive boards in Liberal Market Economies (LME) than in Coordinated Market Economies (CME). The longer countries are part of the EU, the more time they have to exchange top managers, the higher the nationality diversity in the executive boards”. But this only count for the 15 researched countries in the EU, the span for the aviation industry is worldwide, but nonetheless results can be compared with the individual countries. Although researching a larger span of countries worldwide, a few variables which are the same should be taken into account. These are the governance regimes of the companies and the national business systems. This influences how easy it is for non-nationals to enter the board of an airliner from another country. Next to this the liberalized regions which could be compared to the LMEs are in the aviation industry Europe and the U.S. whereas the other regions could be seen as CMEs where Asia is bit of both.

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that: organizations select those for leadership positions who are perceived to be similar to those already in power. Comparable processes may hold for the acceptance of foreigners in senior management functions.

Concluding, next to characteristics of directors like their functional background, nationality diversity might contribute to the way an airliner can grow and how decisions are being made in the board. The cooperation within and between alliances gives the opportunity to influence the composition of the TMTs of the airliners. Cross listing, international investors and an international image could give a larger pressure on the airliners to attract or hire a more diverse staff. In addition, ownership by governments or families is affecting the boards in a more nationalistic way. Ownership will be discussed in the next section. Furthermore, mergers and acquisitions are also a way to diversified boards. Still demographic characteristics are associated with executive perceptions. Interesting is to see how this is divided between liberal markets like the EU and U.S. and other regions like Latin America or Asia. Furthermore, various researchers discuss if international work experience is also important, and although this is definitely interesting in the aviation industry this is something for further research.

This leads to the first sub-question which was also mentioned in the introduction: “Does intensive cooperation between airliners lead to an increase in nationality diversity within TMTs?” Continuing on this a few propositions were made to find out what the effect of certain characteristics on the level of nationality diversity within the aviation industry is. There is a large difference between the alliances in size, as stated in paragraph 2.1. The number of airliners which are member of an alliance could influence the number of non nationals working at airliners within these alliances. This comes forth out of the fact that airliners cooperate far more intense within an alliance then when one is alone. This cooperation is done on a marketing level but also on strategic levels. Due to this interaction between the airliners one could hire directors from other airliners for creating larger growth. These directors could be foreigners to the company hiring them and will therefore have an effect on the composition of the board. The size and number of different countries within an alliance could also have an effect on the level of nationality diversity due to the above mentioned cooperation within the alliances. Therefore the following proposition is formulated:

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Due to the different phases of liberalization of the aviation market in the various regions around the globe the level of nationality diversity should also vary. Within the EU the restrictions and limitations have been liberalized and there is a complete “open” market. This economic integration of countries makes it easier for airliners to merge and to take over other airliners. In other regions governments are more in control and regulate their aviation market more by for example ASAs. This and the combination with limitations on e.g. foreign ownership make it not easy for airliners or investors to place a non national in the board of an airliner. The differences in regions should therefore explain the various levels in nationality diversity. A for example high nationality diversity in Europe should be explained by the more liberal way of operating the aviation market. Therefore the following proposition is formulated:

P2: The higher levels of liberalization of regions where airliners are active in has a positive influence on nationality diversity within these regions

As mentioned by van Veen & Marsman (2008) in their research, the long term members of the EU have had more opportunities to exchange members and are more likely to have higher nationality diversity than newer members. The same could of course be valid for the airline industry. The first alliances started in 1997 and after that, alliances grew and year after year new airliners joined them. This was most beneficial for the airliners that joined in the early phase of the alliance. Airliners which joined in the early phase had more possibilities to work together and be more integrated in the alliance and with other airliners. Therefore airliners which have been more integrated in the alliance could have a higher level of nationality diversity. This leads to the following proposition:

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2.3 Shared and governmental ownership within the airline industry

The airline industry developed itself over the years with more and more airliners which are privatizing as a consequence of the liberalization of the industry. This all started with a transformation, Sjörgen and Söderberg (2011) state that the first step of the transformation of the airline industry appeared with the ‘‘big bang” liberalization of the US market in 1978. The European deregulation occurred gradually and started with bilateral ‘‘open sky” agreements as a response to a ruling by the European Court of Justice in 1986. Relatively limited deregulatory initiatives have been witnessed in other parts of the world. A market change which began since the deregulation of the airline industry is the shift from state to private investor ownership. This has occurred as response to the widely accepted economic principle that publicly owned organizations, relative to private ones, suffer from broad and ill-defined objectives, no bankruptcy constraint and an absence of a residual claimant (Savas, 1987; Blom-Hansen, 2003).

Ng and Seabright (2001) also find it plausible that the attitudes of national regulatory authorities in Europe towards market liberalization have been influenced by state ownership; countries where state ownership is high also have strongly resisted the introduction of competition. This may just be due to a correlation of attitudes towards these two facets of the industry, but it may also be encouraged by the fact that competition is more to be feared by inefficient state-owned carriers. One consequence of a liberalizing market was noticed by Bailey (2002): in the American market Southwest has successfully generated high traffic volumes in many secondary airport-pair markets and has pressured other airlines to lower their fares, this by using a low-fare strategy to save costs and increase efficiency. A good example of protectionism is the case of Air India. Due to the fact that this airliner was protected from competition for a long period, it did not have the ability to operate in such an environment. This harmed it so bad that is was not commercially viable anymore. This means that the cooperative benefits of alliances could also help state owned airliners in being more competitive. Protectionism, as the example shows, is not necessary better.

State versus private ownership

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privatization is beneficial (e.g. Ehrlich et al., 1994). Next to a selling model Sjörgen & Söderberg also focused on a producing model focusing on number of aircraft departures, number of personnel and fuel capacity in which state ownership is associated with increased productivity. There are three possible explanations to this. First, state-owned airliners use an inefficient amount of monetary resources to attain a high level of input utilization (e.g. by operating non-profitable routes to support rural communities). Second, it might be a reflection of the government’s opportunity to cross-utilize resources from its control of the airport infrastructure. The third potential explanation is the correlation between deregulation and privatization, which can cause unexpected estimation outcomes. On the contrary, shareholding (cross-equity holding) is usually subject to regulation if it involves an airliner from another country. Hamill (1993) suggests, ‘acquiring shareholdings in airlines of other countries allows airliners access to each other’s route network, cross border operations and improved customer service between long-haul and local follow-on flights’. This strategy also protects subsidiaries from being lured to join other alliance networks. While equity alliances may not have any significant effect on the share value of an airline, it was found they enhance the partner carrier’s market power.

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let go their airlines (TAP and Air Lingus) to reform their transport portfolios. Portugal has to sell TAP as part of €78 billion bailout whereas Ireland is selling its stake of 25% because the strategic arguments for keeping it do not apply anymore. This is something which could affect more state owned airliners from which their government has a hard time in this crisis.

When considering the above mentioned information, one might expect that especially in financially weak times more governments will let go of their airliners. With high productivity but also high costs they are on average loss makers. If privatized, one can see an increase in income due to a better selling model and more access to networks of other airliners by acquiring shareholdings. Within alliances the number of airliners that are privatized should be potentially higher because of benefits of cross-equity holding but due to the fact that cooperation between airliners within alliances already makes sure that airliners have access to a complementary network the composition of the alliances could be equally divided between private and governmental owned airliners.

Ownership rules

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article in 2010 how Qantas struggles with the government. He writes “the two caps slated to go under the plans are the 25% limit on ownership by a single foreign entity, individual or corporate, and the 35% cumulative limit on ownership by foreign airlines. These two caps, specific to Qantas, have been in place since 1992 when Australia was worried that British Airways or Singapore Airlines might dominate Qantas following its privatization. If these two caps are removed, Qantas will be on the same footing as other Australian carriers, subject only to a 49% foreign ownership cap”.

The last few years there were many discussions in the aviation industry and by aviation press concerning several regulations. In a news article from Schofield (2009) the airline industry, represented by the IATA and its members, believes that easing or removing restrictions concerning liberalization is necessary to ensure the industry's long-term health. This means access to capital, and ownership and control rules to foreign investors and competition. A good example is the ongoing U.S./EU open skies negotiations, where a deal concerning more operating freedom is proving elusive because of the difficulty in relaxing U.S. ownership laws. Within this negotiation to a complete open skies agreement the U.S. is very protective when it comes to their home market and airliners which are active on it. In 2010 a news article from Knibb concluded that everyone agrees that current ownership and control caps block airlines from merging across borders, and that anti-trust immunity for alliances is essentially the only way airlines have found to gain some merger-like benefits. The US Department of Transportation agrees, claiming that the commercial effects of an alliance are "similar to those resulting from a merger of airline operations". But still the US policy on this is not changed, which means that the foreign cap stays on 25% in the USA.

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Within Latin America there are other problems due to governmental restrictions on foreign ownership. The liberalization of the markets is not progressing like it is done in Europe. Airliners like Chile’s LAN are willing to expand but are hold back by the government. Due to the lack of progress towards real liberalization LAN has prompted a self-help solution Knibb (Aviation Week, 2011) writes, resulting in a form of liberalization through the back door. This is done by entering into cross-border joint ventures or setting up separate entities in other countries. In all of these, the lead airline or its owners hold equity stakes in their cross-border affiliates. Especially LAN extended their network by setting up entities in specific countries in Latin-America. This trend of expanding is also used in the Asian and Arab world. Although the member countries of the ASEAN are working on an aviation market for 2015, some Asian airliners are already expanding via gaps in laws. Like for example the airliner Thai which has various subsidiaries in countries where it is a minority shareholder but as is noted in the news article, they are in control. For the governments they have a local board which gets the instructions from the real experts. By acting this way there is nothing wrong in a restrictive manner; with for example no more than 49% of foreign ownership, for the government and Thai can work on a larger network for times when the market is more liberalized.

This trend is also found in Eastern Europe. The European aviation zone is expanding and more and more countries are joining the free open market. In one of the articles of Knibb the strategy of Wizz Air is described. He writes that they stay one jump ahead of liberalization, so that it can exploit the fruits of it as the common aviation area spreads. When a number of Eastern European nations joined the EU in 2007, for example, Wizz Air was already in place to take full advantage. It now operates to secondary airports throughout Europe from bases in Bulgaria, the Czech Republic, Hungary, Poland, Romania and the Ukraine. So every time a country is on the nomination to enter the EU this airliner already has the most favorable position in comparison to its competitors.

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foreign ownership the airliners now only cooperate in alliances to have merge-like benefits. This means that this also affects the possibility of having a large number of nationalities in the boards of the airliners. Most influence will come from home country shareholders who will probably have a preference for directors from the country of origin of the company.

This leads to the second sub-question which was also mentioned in the introduction: “What are the effects of the different types of ownership to the level of nationality diversity within TMTs of airliners?” Continuing on this a few propositions were made to find out what the effect of certain characteristics on the level of nationality diversity in the aviation industry is. The discussion above about governments restricting the number of foreigners has everything to do with the support they give or equity and shares they own in an airliner. This restriction means that the possibility on finding larger groups of non nationals at boards of airliners also shrinks. Therefore the number of managers working for these airliners is interesting to look at, and especially the number of non nationals working at these airliners. Therefore the following proposition is formulated:

P4: State owned airliners negatively influence the level of nationality diversity

When looking at the different regions around the world, there is a large difference when it comes to regulations and limitations of shared ownership. Due to governments with restrictions on foreign ownership or ownership by another airliner the differences may be large per region. When looking at for example Europe where there is an open market or Latin America which is regulated the differences seem enormous. This leads to the following proposition:

P5:Airliners which are originated in liberalized regions positively influence shared ownership

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2.4 Interlocking directorates within the airline industry

Interlocking directorships are defined by an individual who simultaneously sits on the board and/or management team of two or more companies. A resource dependency perspective sees such interlocking directorships as a mechanism of cooptation (Pennings, 1980; Pfeffer and Salancik, 1978). Interlocks are more often found in companies facing market constraints (Burt, 1980; Burt et al., 1980) and increasing environmental uncertainty (Boyd, 1990; Lang and Lockhart, 1990).

Until now research covering the area of interlocking directorates has primarily focused on country or company level. A good example of a country research is the one of Ruigrok et al. (2007) researching Switzerland for its board characteristics. Until now a research covering the airline industry on interlocking directorates has taken place by Lang & Lockhart in 1990. This research focused on the direct interlocking with financial institutions. It also showed that indirect board interlocking was focused among competitors and that the focusing increased with industry uncertainty and the distance between firms headquarters.

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Furthermore, when it comes to interlocking directors within airliners the discussion of their influence is one which is worth looking at. Pfeffer and Salancik (1978) write about a way of influencing due to interlocking directorates, that by having these direct linkages, acquisition of information about activities of the other organization is a benefit which can be used. In the aviation industry this means that it could help an airliner in a specific continent to grow just like its competitor or structure the company in a more efficient way. It is assumable that these interlocking directorates are also found in the airline industry. Therefore it is necessary to research if this is the case and if this is a factor of influence on nationality diversity and alliances.

This leads to the third sub-question which was also mentioned in the introduction: “Does intensive cooperation between airliners lead to interlocking directorates and how does this affect nationality diversity?” Continuing on this a few propositions were made to find out what the effect of certain characteristics on the level of nationality diversity in the aviation industry is.

Within the airline industry there are various ways for airliners to work together. It is possible to do this by joining an alliance, by shared ownership or smaller ways like code-sharing. By working close together a direct link could emerge between the airliners which could result in interlocking directorates. The links could be established by working together in the area of marketing or more strategic areas. This leads to the following proposition:

P7: The close collaboration between airliners positively influences the level of interlocking directorates

Next to this the link with nationality diversity is interesting. Due to the international character of the alliances the possibility of nationality diversity through interlocking directorates is quite high. Within the alliances there are not much airliners from the same country represented, which creates an excellent environment for a higher level of nationality diversity through the interlocking directorates. This leads to the following proposition:

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3. Research methodology

3.1 Research types

In this section the outline of the research is described. For this paper two types of research have been used to come to the results. The literature review will be on industry ties and functioning of TMTs, in this specific case on the airline industry with focus on alliances. Due to the fact that no researcher focused on the TMTs in the airline industry and with three alliances containing the major airliners the airline industry, it has an interesting side to look at. The TMTs are viewed at with the following variables: nationality diversity (dependent) among board members, ownership structure (independent) with the focus on shared ownership and governmental ownership, alliances (independent) and interlocking directorates (independent). These are all factors which might influence the problem statement. Due to this, the part containing the literature review can be described as explorative. According to Cooper and Schindler (2003) an exploratory study goes beyond description and attempts to explain the reasons for the phenomenon that the descriptive study has only observed. In an exploratory study the researcher uses theories, or at least propositions, to account for the forces that caused a certain phenomenon to occur.

In the second part of the paper the focus will be on the answers of the propositions which are formulated in the literature review. The propositions focus on the relation between nationalities of members of TMTs and ownership influences, influences of directors with or without interlocks and within or between alliances. This and more will be described in the part which can be considered as explanatory. Here after the data are collected, the next step is to explore visually or numerically for trends or groups. Both visual and statistical exploration (data visualization) can be used to identify trends (Cooper and Schindler, 2003).

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3.2 Data collection

For the construction of the database which involved a number of characteristics of airliners and their TMTs with its board members, a large amount of information was needed and gathered. This comprised various data on company level, region, with variables like the country of origin of the airliner, the alliance to which it belongs, the revenue data for 2008, total number of employees, board structure, size of the TMT, and ownership structures of the company regarding government and/or other airliners. Furthermore the database consisted of information on board level variables like, the name of the board member, year of birth, gender, the nationality whether its foreign or not, political background of this person, entry of the board and entry of the company, denomination of the board member and directorship of the board member.

All these variables are gathered to get a clear view of the airliners and to give the possibility to use this database for further research in the field of TMTs and the airline industry. For this research not all of the variables are needed to use but there is a possibility that some variables might influence one another which might lead to interesting results. One can think of the influence of years at the company and/or board on the gender composition of the TMT’s. Another possibility is to compare governmental owned airliners on employees and revenues with each other and relate this to the influence of board experience. By doing this, the data can be summarized and relations can be identified. Summarizing involves reducing a whole set of numbers to one or a few statistics that express something in general about the set. Identifying relations involves establishing the existence and strength of links between the variables in a study. The variables which are used in the research to gather the data are presented in Table I in the appendix.

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of the research is that the content of the data cannot be influenced by the researcher. The dataset is generated by using the SPSS 17.0 statistical package. When data was missing this was looked up and checked via several databases like ZoomInfo & Orbis. In addition, social media like LinkedIn and websites of newspapers like the Wall Street Journal, Bloomberg, Reuters and the Financial Times were used to verify specific information on directors like age, nationality and years at the company. It is in general important to know that relying on secondary data is not a complete 100% fault free. This means that there is always a chance that the information gathered is not completely reliable. The data was gathered in the period of the summer and autumn of 2011.

Moreover, it is worth to mention that when collecting this data, the end date of the financial year of the airliners in 2008 was considered as leading in the way of putting together the database. This means that there are small differences between the ends of the financial year of airliners but these have to be accepted to limit the chance on large errors in the dataset. Together with the database the literature review which is based on scientific articles and quality newspapers will be the complete basis on which the problem statement will be answered.

3.3 Sample design

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part of for example foreign board members there is probably more freedom and this could be good for the benefit of the research. Due to the fact that there are airliners from 45 different countries and even more nationalities this might give a good view on the internationalization of the airline industry. A longer period covering two or more years would not be feasible in the timeframe of this thesis. Table II in the appendix shows an overview of the three alliances with their 61 member airlines.

From several of the airliners used in the sample in Table II it was not possible to retrieve enough information to be valuable for the research. This concerns information about shareholders, board structures and sizes, revenues and specific information about board members. Due to the fact that this could harm the testing process and therefore the outcome of the results, these airliners were not used in the further process of the research. From two companies in one holding, Air France and KLM, the data of the airliners was not sufficient to use in the dataset, therefore is chosen to take the AirFrance/KLM Holding as one airliner in the dataset. Also for a few airliners the location of the corporate headquarter did determine the country of origin in cases when it was unclear. This was for example the case for SAS which was a combined airliner from three countries, Norway, Denmark and Sweden, but got assigned to Sweden. The same counts for AirFrance/KLM which was assigned to France. Furthermore the formation of boards was intriguing; especially when it came to Chinese and Japanese airliners where the structure of their boards was not clear. Therefore, and specifically in the case of Chinese airliners, various options from one tier till a combined one and two tier were chosen.

Furthermore, in cases when board members had two nationalities, the country in which the person was born was the one chosen as its main nationality. If in some cases it is still not known where someone comes from, guesses were made on biographical and other information like schools, career path and place of birth. For Japanese airliners the board structure was not univocal and therefore hard to determine. With all this information the number of non-nationals per board is calculated in percentage to see the diversity in nationalities. This was helpful in a large number of cases. Table III in the appendix will show the airliners where decisions were made concerning characteristics for the dataset. Next to that also the airliners by which not enough data was gathered are listed.

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The exceeding number of seats is the number of interlocking directorships which is a number of 7 in this database. These seats are hold by 7 directors. All together the data sample which was put together can be seen as legitimate and representative.

3.4 Variables and measurement

For this dataset there are multiple variables present. For the first part containing the propositions for the shared and governmental ownership and nationality diversity several choices need to be made to measure them in relation to other variables. The correlation between the variables needs to be tested. By doing this the amount of variance that is shared between the dependent and the independent variables is identified. For the combination of the nominal variables with a frequency distribution a cross tabulation will be used. In addition, it is decided to use a squared test which will provide answers to the hypotheses. The chi-square test of a contingency-table is used to determine whether there is enough evidence to infer that two nominal variables are related and to infer that differences exist among two or more populations of nominal variables (Keller, 2009).

To find the presence of directors which are interlocking with other airliners simple ratio level variables can be used. Every variable that makes a difference and affects the outcome of the results is used as a nominal variable. It is important to research if the variances between the variables are dispersed or not. Moreover a frequency distribution can be made to get a good overview of all the variables and link this to the interlocking directors.

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4. Results

The result section will start with describing various characteristics of the sample. This will be on all levels that are described in the three different sections of the literature. First the specific characteristics concerning the nationality diversity will be described followed by ownership and interlocking directorate characteristics. After this the necessary tests will be run to answer the propositions.

4.1 Sample characteristics

4.1.1 Foreigners in the airline industry

The sample consists out of 606 managers, from 20 of the managers it is not clear to which nationality they belong and therefore it is not clear if they are foreign or not. In these cases the cells are filled in with the code “missing”. The number of managers in the sample is therefore 586. Next to that the total amount of foreigners within the sample is calculated. From the 586 managers in the sample, 80 are foreign, which is 13.7% of the managers, which means that 86.3% of the managers have the same nationality as the country of origin of the airliner they work for.

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When looking at the differences between the alliances there is already a large difference in the number of members between the Star Alliance and the other alliances. In absolute numbers this also counts for the number of foreigners along this alliance which is 38, which is comparably higher than the 23 for One World and the 19 for Sky Team. Compared with each other Star Alliance has the largest share of foreigners with 47.5%, second is One World with 28.8% and last is Sky Team with 23.8% of the total amount of foreigners. When looking at the comparison between the alliances on foreigners to the total number of managers within their alliance the roles are changed. Among Sky Team’s 150 managers 19 of them are foreign, which is 12.7% of the total number of managers within Sky Team. Among the One World alliance are 23 foreigners working on a total of 160 managers, this is an effective percentage of 14.4%. In addition Star Alliance is employing 276 managers of the sample of which 38 are foreign, this means that 13.8% of their managers have another nationality than the country of origin of the airliner they work for. The Chi-Square test was done on the relation between the alliances and nationality diversity. The Pearson Chi-Square test needs to be divided by two to get a one-tail value. As .906 is not significant and not even close to the value of alpha (.05) the one tail value which is .453 (.906/2) is also not significant. By this it is clear that there is no real influence of the three alliances on the level of nationality diversity among the airliners. Therefore proposition 1 can be judged as false.

Foreigners Nationals Total

Sky Team 19 (12.7%) 131 150

One World 23 (14.4%) 137 160

Star Alliance 38 (13.8%) 238 276

Total 80 (13.7%) 506 586

Table 4: The level of nationality diversity among the alliances

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foreigners is Africa with 22.7%. To see how the percentage of foreigners is divided among the regions, the total amount of foreigners is looked at and most of them work in Europe (47.5%), then Asia (31.3%), Africa (12.5%), North America (7.5%), Middle East (1.3%) and Latin America (0%). The Chi-Square test which was done on the relation between the liberalized regions and nationality diversity resulted in the following. The Pearson Chi-Square test needs to be divided by two to get a one-tail value. As .015 is significant and far under the value of alpha (.05) the one tail value which is .0075 (.015/2) is also significant. By this it is clear that the liberalized regions have a positive influence on the nationality diversity within them. Furthermore there are real differences between the six regions when it comes to foreigners working at the various airliners. Therefore proposition 2 can be judged as true.

Foreigners Nationals Total

Europe 38 (17%) 185 223 North America 6 (6.5%) 86 92 Africa 10 (22.7%) 34 44 Asia Pacific 25 (13.4%) 162 187 Latin America 0 (0%) 31 31 Middle East 1 (11.1%) 8 9 Total 80 (13.7%) 506 586

Table 5: The level of nationality diversity among the regions

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1999 (28.8%) and 2000 (16.3%) have the highest share of foreigners (63.9%). The Chi-Square test which was done on the relation between the years of an airliner joining the alliances and nationality diversity resulted in the following table below. The Pearson Chi-Square test needs to be divided by two to get a one-tail value. As .001 is significant and far under the value of alpha (.05) the one tail value which is .0005 (.001/2) is also significant. In addition to this an Anova is run to find out if the results are equal for every alliance or if there is a difference between them. As the F = 0.801 which is close to 1 an indication is given that there is not much variance between them. Because the sig. = 0,456 which is higher than sig. = 0,05 this would mean that the results could be seen equal for every alliance. By this it is clear that the time which an airliner is member of an alliance has a positive influence on the level of nationality diversity. One can say that most of the foreigners now work at the airliners that joined the alliances in their starting phase. Therefore proposition 3 can be judged as true.

Foreign National Total

1997 15 (16.1%) 78 93 1999 23 (20.4%) 90 113 2000 13 (15.3%) 72 85 2001 4 (19%) 17 21 2004 0 (0%) 23 23 2005 1 (4.5%) 21 22 2006 8 (15.7%) 43 51 2007 14 (25.9%) 40 54 2008 0 (0%) 16 16 2009 0 (0%) 14 14 2010 1 (4.2%) 23 24 2011 0 (0%) 21 21 2012 1 (2%) 48 49 Total 80 (13.7%) 506 586

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4.1.2 Shared and governmental ownership

The following part focuses on the company characteristics of the sample which consists of 42 airliners. These airliners are from 33 different countries and are from all over the world. For testing the propositions, nineteen (19) airliners were not taken into account due to missing corporate information. Due to the variance in regulations in the airline industry when it comes to ownership the influence of the governments is a quite important factor. As mentioned in the literature there are several laws and rules on ownership which differ per country. In this part the influence of the governments by means of ownership will be shown in the section below. First the governmental ownership among airliners within the alliances will be looked at. The airliners which are not mentioned as governmental owned will be noted as privately owned. By researching governmental owned airliners it is of course possible that governments have a smaller share than the full 100% of ownership. Airliners that both have a private and state ownership were also taken into account. Within the three alliances there are many airliners which are owned by the government, among them Sky Team has the most members which have state ownership with 7 out of 10 (70%), within Star Alliance this is a smaller part of the alliance with 10 out of the 20 (50%) and last is One World with 4 out of its 12 members (33.3%). In total 21 of the 42 airliners used in the sample are state owned which is 50% of the total amount of airliners.

When looking at the different regions where airliners are state owned, there is very large difference per region across the globe. As mentioned above, 21 of the airliners are state owned, this divided over the regions as follows: within the Asian Pacific region 10 out of the 15 airliners are state owned which is 66.7% and in Europe 7 out of the 15 airliners are state owned which is 46.7%. The two smaller regions Africa and the Middle East have four airliners in totals which are state owned, so for both regions it is 100%. Within Latin America and in North America none of the airliners which are used in the sample are state owned. For the sample the regions Europe and Asia Pacific have the largest amount of state owned airliners. These regions and especially Europe are noted as liberalized regions, however this cannot be found in the results. North America and Latin America show more signs of a liberal market.

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Therefore the influence of state ownership on nationality diversity is tested. Within the sample 310 managers are found that work for airliners with state ownership, 46 of these managers, which is 14.8%, are foreign employees. The Chi-Square test which was done on the relation between state ownership and nationality diversity resulted in the following. The Pearson Chi-Square test needs to be divided by two to get a one-tail value. As .375 is not significant and not even close to the value of alpha (.05) the one tail value which is .1875 (.375/2) is also not significant. This means that even when there are various airliners state owned, this still does not influence the level of nationality diversity in the TMTs. Therefore proposition 4 is judged as false.

Foreign National Total

State owned 46 (14.8%) 264 310

Private owned 34 (12.3%) 242 276

Total 80 (13.7%) 506 586

Table 7: The level of nationality diversity among state and private owned airliners The following will show the number of airliners which have a shared ownership within or across the alliances. Among the 42 airliners, 5 of them (11.9%) are owned by another airliner. In addition to the above mentioned, the following airliners are affected by the ownership of other airliners: Air China which is for 18.1% owned by Cathay Pacific, Cathay Pacific which is for 17.5% owned by Air China, Iberia which is for 13.15% owned by British Airways, Kenya Airways which is for 26% owned by KLM and Swiss which is for 100% owned by Lufthansa. Among these airliners there are two of these which own each other and are also member of a different alliance (Star Alliance and One World) these airliners are Cathay Pacific and Air China. The airliners which are mentioned and are owned by other airliners are divided over the three alliances as follows, Sky Team has 1 airliner which is shared owned, One World has 2 and Star Alliance has 2 airliners. Within the alliances this means that within Sky Team 10% of the airliners is owned by another airliner, within One World it is 16.7% and within Star Alliance it is 10%.

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three airliners in Africa is shared owned (33.3%). The Chi-Square test which was done on the relation between the liberalized regions and shared ownership resulted in the following. The Pearson Chi-Square test needs to be divided by two to get a one-tail value. As .763 is not significant and not even close to the value of alpha (.05) the one tail value which is .3815 (.763/2) is also not significant. This means that even when there are some airliners in the “open markets” that are owned by other airliners, this number is way too low. Within the liberalized markets shared ownership is something which could occur much more due to the possibilities of the open market. Therefore proposition 5 is judged as false.

Shared owned Not shared owned Total

Europe 2 (13.3%) 13 15 North America 0 (0%) 6 6 Africa 1 (33.3%) 2 3 Asia Pacific 2 (13.3%) 13 15 Latin America 0 (0%) 2 2 Middle East 0 (0%) 1 1 Total 5 37 42

Table 8: The number of shared owned airliners per region

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value of alpha (.05) the one tail value which is .000 (.000/2) is also significant. This means that when there are airliners shared owned, this will positively influence the level of nationality diversity in the TMTs. Therefore proposition 6 can be judged as true.

Foreigner National Total

Shared owned 31 37 68

Not shared owned 49 469 518

Total 80 506 586

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4.1.3 Interlocking directorates

When looking at the interlocks among the airliners one has to focus on the directors working at one airliner and also being in the board of another airliner. This is possible within and across alliances. Due to the various forms of collaboration between airliners it is possible for directors to have interlocks with another airliner. There are in total 11 managers that have interlocks. The most interesting ones are between Swiss and Lufthansa, by which Swiss is owned by Lufthansa where Schlede, Aigrain and Mayrhuber have interlocks and between Cathay Pacific and Air China where Chen, Kong and Pratt have interlocks. Interesting in the case of Air China and Cathay Pacific is that they both own shares in one another, they both have interlocking directorates and Air China is also partially state owned. Furthermore there is a connection between KLM and Kenya Airways by the means of Mr. Peter Hartman. There is also a connection between Iberia and British Airways by the means of Mr. Maynard and there is a connection between Air Canada and Air France by means of Mr. Bernard Attali.

Company with a directorship related to director

Frequency Percent Valid Percent

Cumulative Percent

Valid 588 97,0 97,0 97,0

Air China Limited 4 ,7 ,7 97,7

Air France 1 ,2 ,2 97,9 British Airways 1 ,2 ,2 98,0 Cathay Pacific 4 ,7 ,7 98,7 Kenya Airways 1 ,2 ,2 98,8 KLM 1 ,2 ,2 99,0 Lufthansa 3 ,5 ,5 99,5 Swiss Airlines 3 ,5 ,5 100,0 Total 606 100,0 100,0

Table 10: Interlocking directors per airliner

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In addition to this the influence from interlocking directors on the level of nationality diversity is in this industry very easy to monitor. Due to the large amount of countries within the sample the chance that an interlocking director causes a chance in nationality diversity is quite high. The sample of 20 directors consists of 14 foreigners which is 70% of the directors. The Chi-Square test which was done on the relation between interlocking directorates and nationality diversity resulted in the following table below. The Pearson Chi-Square test needs to be divided by two to get a one-tail value. As .000 is significant and far under the value of alpha (.05) the one tail value which is .000 (.000/2) is also significant. This means that when there are interlocking directorates, this will positively influence the level of nationality diversity in the TMTs. Therefore proposition 8 is accepted.

Foreigner National Total

Air China 1 (25%) 3 4 Air France 1 (100%) 0 1 British Airways 1 (100%) 0 1 Cathay Pacific 3 (75%) 1 4 Kenya Airways 1 (100%) 0 1 KLM 1 (100%) 0 1 Lufthansa 2 (66.7%) 1 3 Swiss 2 (66.7%) 1 3 Total 12 (66.7%) 6 18

Intra industry ties in the airline industry