Question

The airline negotiations: A potential joint venture that did not get off the ground

The grand vision

The context for this case study was that the airline industry was seeking to recover from 9/11, the Sars outbreak and general uncertainty surrounding the Middle East. One industry response to these challenges was to look for opportunities to rationalise and grow through alliances.

European airline was seeking to develop a position in the growing China market. At the same time, an Asian airline was exploring how it might also get into China. The two CEO’s met and agreed that there was potential for cooperation between the two airlines; in particular they saw real potential for cooperation with regard to the provision of maintenance facilities. The two CEO’s articulated their vision and signed a memorandum of agreement to that effect. In the agreement they committed their respective companies to setting up project teams to explore and develop the proposed joint venture.

The project team negotiations

Each company established project teams (from mid-ranking executives) and the team from the European company flew to Asia.

The two project teams built up the negotiation relationship slowly. They spent time on informal social gatherings and in more formal meetings they discussed the possibilities offered by cooperation, though only in broad terms. This approach had (as was the intention) two positive outcomes, one relating to the process, the other to the issue. Firstly, the negotiators established good working relationships between the members of the two teams. This also included a level of interpersonal trust between the negotiators. Secondly, they gained a clear joint understanding about the potential nature and benefits of the proposed joint venture. By spending time just canvassing the issues the negotiators understood the potential for themselves rather than the driver being their CEO’s perception of the future.

As a consequence, the project team negotiators endorsed the MOU which had been signed by the CEOs; they agreed to continue further negotiations and they signed a confidentiality agreement. This document was necessary to provide protection for the two companies because the next round of negotiation would necessarily lead to an exchange of commercially sensitive technical and financial information. Perhaps somewhat paradoxically, the confidentially agreement was seen as an expression of mutual trust. Neither side would have been prepared to sign such an agreement unless convinced of the other party’s trustworthiness in keeping to it.

Both project teams then returned to their companies and reported favourable outcomes to their respective CEOs. The clear expectation was that the two companies were en route to a successful joint venture.

The development of proposals

Each project team then set about working out the practicalities of a joint maintenance system. In the airline industry the quality of aircraft maintenance is upheld through complex and rigorous systems that are embedded in the airline’s operations. 2

Not unexpectedly, the European project team developed a proposal around its systems, while the Asian company’s team based its proposal on its operating systems. In fact, the only commonality was the compliance with the aircraft manufacturer’s required safety standards though again the documentary systems were different.

It could be argued that, with the benefit of hindsight, the two negotiating teams should have worked as one team (as in the notion of ‘side by side’ problem solving) to develop a proposal. In reality, the task was too complex; each negotiation team needed ready access to technical and systems specialists. In addition, a new ‘joint’ solution would mean either each company then operates under two systems, the joint one in China but their own one in the rest of their operation, or both companies adopting the new system across their entire operations. Again recognising the reality of negotiation, although each project team headed back to their respective companies with the intention of exploring and developing proposals, the more they worked on the proposal the ‘tighter’ it became as they got into more and more detail. On both sides the ‘exploratory proposal’ became a ‘working solution’.

The second round of project team negotiations

The European team went to Asia again for the next round of negotiations. Based on the outcomes of their previous round of meetings, expectations on both sides were high.

At the first meeting, the Europeans put forward their proposal. Rather than discuss this, the Asian airline team put forward their proposal. In the ensuing discussion each side increasingly defended its own proposal and found more fault with the proposal coming from the other side of the table. The interactions became increasingly more difficult and tension rose. After a series of meetings it became clear to all concerned that no progress was being made, nor was it likely to be made. Each team was positioned solidly behind its own proposal and there was no apparent scope for movement towards a solution.

In fact, the negotiators did agree on one thing, that they should bring the round of meetings to a close before they got any worse. The Europeans returned home. There was no agreement on the issues. The high level of expected cooperation had not materialised; instead the negotiators now felt, such was the collapse in trust, they could not work together any more.

Aftermath and rebuilding

Both project teams returned to their respective companies and reflected upon their experience. The fundamentals had not changed even if the process had not worked. The importance of the issue remained high – they needed to meet their respective CEO’s goals and despite all that had happened, the potential for mutual benefit was still present. They realised they needed to try again, but how?

If they were to continue then there were basically three options. Firstly, the two negotiating teams could meet again and resume their discussions but this was not likely to be successful given the breakdown in the relationship. Secondly, the issue could be elevated to a higher level and handed back to the CEO’s to meet together again. Although they would probably be more able to clearly see the potential benefits of reaching an agreement they would be facing a win-lose scenario as a result of the outcome of the negotiating teams’ discussions. Thirdly, it might be possible to change the dynamics through involving other participants, in this case through an intermediary.

The European company had a good working relationship with a particular aviation industry expert who was Asian and he approached the Asian company and learned from them that they too could still see benefit in continuing discussions. So following a little shuttle diplomacy the further negotiations between the project teams were scheduled in Asia again. 3

The meeting was difficult. Each party outlined its goals and its proposal again. This either/or situation could only be resolved by one company conceding to the other. Progress was made only when this occurred. The Asian negotiators agreed to work within the European company’s proposal. As might be expected, technical and engineering departments in the Asian airline were not pleased with this decision to build the joint venture around the European airline’s systems. While not actively opposing the joint venture they are always ready with issues and concerns.

Over a succession of meetings, the negotiators made significant progress on the detail of the proposal. These discussions involved periods when they worked jointly to find ways around their differences. At other times they worked separately to develop revised proposals for further discussion. Through these processes of joint and unilateral problem solving they achieved solutions, which both parties were comfortable with and the negotiating teams returned to their respective companies with their agreement.

The closing stages

With broad agreement on the way in which the joint venture would work, each company then evaluated the situation it found itself in. The negotiations had reached the ‘end game’. The technical and cost arrangements had been worked out and all that was left to do was finalise the financial arrangements. Broad financial scenarios had been under discussion throughout the negotiation but the time had come to make these specific; in particular, the two companies had to commit to their respective investments into the joint venture and agree on the fine detail of the profit share arrangements.

As outlined above although the negotiating teams from the two companies had achieved agreement this was only possible at all because one party (in this case the representatives of the Asian airline) had made a significant concession. While the European company regarded the substance of the agreement as satisfactory and so was in a position to enter into the negotiations on the financials, the Asian company was not ready. Further internal discussions were necessary to address the concerns still being expressed within the airline over having agreed to work with the European system. It was against this background that the airline concluded it was willing to continue discussions on the financial aspects of the arrangement.

Aware of the concerns which were still being expressed internally within the Asian airline, the European company decided that although the joint venture was – operationally – a good one it would not proceed to conclude the agreement. Its analysis of the forthcoming end game was that in order to achieve an agreement it would have no option but to concede on price; that is, it would have to increase its initial investment and/or make concessions on its share of the expected profit if it was going to get the Asian airline to sign the joint venture agreement. The CEO conveyed the decision not to proceed to his Asian counterpart and the joint venture proposal was grounded for good.

Need help on the following question :

1) Define the scope of the negotiation. What exactly is being negotiated? &
Discuss what factors need to be taken into account. A strategic worksheet will
help. In your answer include the quality of the alternatives and their practical
implications.
2) Discuss what should be included in the negotiation script for each negotiation
party. What image do you see?

Answer 1

Answer 1:

Scope of negotiation:

1. Negotiation will help the companies of both the country’s airlines to enter in the Chinese market.

2. Negotiation will help both the airlines to effectively use their facilities so as to overcome the deficiency of each of their facilities.

3. Negotiation will help them in utilising the resources and expertise of each of their locations.

Negotiation involved:

Both the companies were negotiating on the terms and conditions for the joint venture between them so as to explore potential for cooperation with regard to the provision of maintenance facilities.

Both the companies should take into consideration the following factors:

1. They should clearly identify the present situation of the airline industry in the Chinese market.

2. They should also take into consideration the legal implications of their alliance and its impact on their internal environment and their external environment.

Answer 2:

Both the negotiating parties should include various considerations associated with their performances and should include the parameters on the basis of which their performances would be evaluated. They should clearly determine the various metrics on the basis of which they would determine the success of their contract. Both the parties should also include the rules and regulations that they are supposed to follow while performing the contract. Both the parties of negotiation should include the conditions on which they would be using the resources and expertise and the maintenance facilities of each other.