Nearly 20 years ago major network airlines began aligning themselves in formal groupings to leapfrog their competitors and offer their customers truly global connectivity that was impossible for individual airlines to achieve on their own. The antitrust immunity granted to Northwest Airlines and KLM in 1993 ushered in a new era in commercial airline partnerships, which saw the formation 15 years ago of the Star Alliance followed by the now-familiar names of oneworld and SkyTeam.
But as these groupings have evolved they’ve reached a new level of sophistication through the launch of joint ventures that allow airlines to so closely coordinate on selling, pricing and scheduling that the alliances have essentially become mammoth entities dominating traffic across the Atlantic, using anti-trust immunity to corral their dominance and create market leverage that is nearly impossible to match.
Carriers are now attempting to replicate the dominance achieved through joint ventures in Pacific geographies on a smaller scale through much younger immunised businesses. But even as alliances and their joint venture offspring have fostered unparalleled network access, they face increasing competitive threats from Middle Eastern power players. Also, it is not certain just how far they can stretch the boundaries to offer a seamless customer experience, while preserving the individuality of their own respective brands.
FOREIGN OWNERSHIP GO-AROUND
Global maturation of the airline industry has not coincided with loosening of stringent foreign ownership restrictions of carriers that governments have aggressively sought to preserve. The EU-US Open Skies treaty that took effect in 2008 gave partners in the three global alliances an opportunity to bypass those restrictions, and the creation of joint ventures allowed participating carriers to essentially combine their businesses and run them as a single entity in the markets where they have achieved anti-trust immunity.
The result was the creation of three comprehensive business ventures in the North Atlantic markets that comprise roughly 80% of the capacity offered on those routes, and in the case of the SkyTeam joint venture, total annual revenues of roughly $11 billion.
Richard Anderson, the CEO of SkyTeam anchor member Delta Air Lines recently remarked: “We’ve evolved our joint venture with Air France-KLM and Alitalia to the point now, where we are really seriously jointly planning the capacity at all the airlines together…where you really treat it as a single network.”
SkyTeam’s joint business venture is the most mature among the three entities. Partners Delta and Air France christened their immunised tie-up in 2007, and it later evolved to include the Air France-KLM Group, Delta’s merger partner Northwest Airlines and fellow SkyTeam member Alitalia.
Besides attaining the strategic benefit of pricing collaboration, another key advantage to the three entities running their transatlantic operations as a single business is jointly managing capacity to offer comprehensive schedules when business is robust, and pairing down their joint supply while preserving schedule integrity during times of economic weakness.
Being able to “coordinate on both ends of the cycle” illustrates how the joint business can benefit all partners, a Delta spokesman explains. He gives the example of Delta taking over operating the Seattle-Paris routing from partner Air France. Delta’s assumption of the route allowed Air France to make better use of its strategic asset – the aircraft – while ensuring there was no change in the service pattern or schedule. Conversely, Delta has opted to transition a daily seasonal Detroit-Paris flight to a year-round offering, joining a daily flight operated by Air France. The two daily departures offered at different times allow the partners to capture a healthy share of business passengers, and creates an opportunity to flow passengers from Paris in two separate banks across Delta’s network from its Detroit hub, says Delta’s spokesman.
Oneworld transatlantic joint venture partners American Airlines, British Airways and the latter carrier’s merger partner Iberia enjoy the same scheduling advantages after formally launching their new business pact in late 2010.
American and British Airways offer essentially an hourly shuttle service in the highly lucrative New York-London market after about 17:00 in the afternoon. American has also attempted to coordinate optimal scheduling patterns with its transpacific joint venture business partner Japan Air Lines (JAL), offering flights one-to-two hours apart from Chicago and Los Angeles to Tokyo Narita. A spokesman for American highlights the significant connection opportunities for passengers on those flights in Tokyo to destinations like Bangkok, Taipei and Singapore that American cannot provide on its own.
Through their immunised joint ventures, the oneworld partners have moved from competitors to collaborators, says American’s spokesman, noting the carriers split the revenue from the business “down the middle”. The major earthquake and subsequent tsunami that struck in Japan in March of 2011 did affect the spool-up of the transpacific joint venture between American and JAL that debuted about two-to-three weeks after the tragedy, but American’s spokesman remarks that traffic has rebounded as evidenced by JAL’s new Boeing 787-operated Boston-Tokyo service that began in April and the carrier’s new flights from Tokyo to San Diego beginning in December.
Revenue benefits from the joint business deal among Star partners Air Canada, Lufthansa and United appear to be in a evolutionary stage. Last year United had to make payments to its joint venture partners due to its outperformance relative to its outperformance in the joint venture. United chief revenue officer Jim Compton has often described the joint venture as a phased-in type of arrangement as the participants build familiarity with one another, “making sure that the right priced products are out there for our customers and they’re consistent”. The carriers also need to communicate among each other how they approach revenue management. “I think the lesson learned is that we’ll be more nimble, quicker to react based on getting to know each other,” says Comtpon.
He also applies the same logic to the transpacific joint venture United launched with fellow Star partner All Nippon Airways in April of 2011. He explains that teams from both carriers have been harmonising some of the pricing and learning about point-of-sale from both the US and Japan. “We learn a lot from ANA on the Japan point of sale,” he says, “but it is a phased approach and it is very early into the phase.”
A universal lesson learned by the alliance members that have opted to form joint businesses is the spooling up of those partnerships has taken longer than they originally anticipated. Previously, American said it might have overestimated the timing of achieving the benefits of joint sales with its oneworld partners in their transatlantic tie-up.
Long-time airline industry veteran Robert Mann, who heads RW Mann and Company, explains that aligning IT systems is one of the most difficult tasks in evolving the joint ventures among alliance partners. He believes the technical infrastructure to support joint corporate sales from those groupings is still under development. While in theory joint sales initiatives developed among the joint venture partners create cost savings and eliminates the historic counter selling that occurred among those airlines, with sales forces on two different continents the possibility of counter selling could still exist without the necessary systems in place to eliminate those counter proposals. “When one [joint venture] carrier approaches a multi-national corporation, it does not want to undermine its partners,” says Mann.
Delta’s Anderson recently checked off a number of technical milestones the SkyTeam joint ventures partners have achieved. “We now have integrated distribution on both sides of the Atlantic. We now have integrated yield management and pricing on the transatlantic both from US point of sale and European point of sale. So it is an evolution, and we’re just getting to a higher level of sophistication,” he says.
As the other two joint ventures catch up to the maturity enjoyed by the SkyTeam joint venture partners, the three large businesses are creating new competitive paradigm.
Delta’s spokesman notes it was key for the carrier to obtain slots at London Heathrow to serve the airport from its Atlanta, Detroit, Minneapolis and New York hubs as well as Boston. Noting the extremely competitive nature of the London market, Delta’s spokesman says: “We felt we needed a presence there.” As for the SkyTeam joint venture remaining competitive across the Atlantic he states the grouping will keep an eye on the other two immunised businesses and “make sure our network is competitive”.
LEARNING TO SHARE
Another by-product of the immunised businesses created by alliances is an ability to share best practices and engage in other types of coordination to enhance the customer experience.
Beyond co-locating at certain airports and offering the standard frequent flyer reciprocity, some joint venture partners are adopting one another’s onboard nuances to help create a seamless experience. American’s spokesman explains during the last six months the carrier has adopted British Airways’ first class turndown and pyjama service while its partner has adopted some of American’s first class signature offerings including serving hot nuts and hot fudge sundaes to its premium customers. Plans are also underway by American and JAL to engage in cross-cultural inflight training.
Similar to offerings from oneworld and Star, SkyTeam earlier this year debuted its branded ‘SkyPriority’ scheme, which ensures the alliance’s top tier customers are treated with the upmost exclusivity. Those customers have access to priority check-in, baggage drop off, boarding, baggage handling and accelerated security and passport clearance.
SkyPriority was launched in Taipei in March of this year and other airports that have come online include Amsterdam, Atlanta, Beijing, Guangzhou, London, Paris, Shanghai and Urumqi. SkyTeam plans to continue rolling-out SkyPriority throughout 2013.
Delta’s spokesman concludes that SkyTeam’s high-value customers truly appreciate the exclusive treatment, and hints that “you’ll see more and more coordination going forward”.
But Mann questions just how far alliances can reach in catering to the high-value flyers. Ultimately individual airlines will still prioritise around their own top-tier customers, and likely have varying proprietary treatment of those elite passengers.
In the Star Alliance only 20 of the grouping’s 25 members allow passengers to use their miles accumulated on various partners in the group for upgrades. Star member Singapore Airlines earlier this year eased access for redemption in its historically restrictive frequent flyer programme. Online frequent flyer expert site thepointsguy.com has stated Singapore Airlines in the past has blocked a huge number of flights from its members. But the site is encouraged by the steps the carrier is taking to loosen its redemption restrictions, but cautions that “how much availability is released to partners is yet to be seen”.
As the sophistication of the joint venture business among alliance members continues to evolve, the three large groupings continue to vie for dominance in various regions across the globe.
At the moment all eyes are intently focused on Latin America and the outcome of the battle between oneworld and Star in gaining the hand of the combined LAN-TAM after their merger is complete. LAN is currently a member of oneworld while TAM is in the Star camp. Speculation is growing that the merged entity will tilt its hat to oneworld, which could create a gaping hole for Star in the fast-growing Latin American market. For the first five months of this year IATA data show Latin American traffic increased 9.4%, which was higher than the 7% growth recorded in Asia Pacific, and 6.2 percentage points higher than the 3.2% increase in North American traffic.
TAM is the market leader on international routes from Brazil, and also one of the dominant players in the country’s domestic market. Should TAM make the jump to oneworld, it would solidify the alliance’s dominance in the region, making Star a distant second.
Star’s remaining ties in Latin America will be Panama’s Copa Airlines and the recently merged Avianca-TACA, both of which are still in the process of joining the grouping. Having both those carriers as members certainly benefits Star in comparison to SkyTeam, but neither has the international breadth of TAM, which is key for alliances in remaining competitive in achieving global network dominance. Conversely, the loss of LAN would be even more devastating for oneworld, since LAN and its affiliate carriers are the only South American member of the alliance.
Latin America remains a weak area for the SkyTeam alliance. Aeromexico is currently the grouping’s only member in Central and Latin America. Aerolineas Argentinas is a member-elect, but the carrier is one of the weaker airlines in Latin America as the Argentinean government continues its attempt reverse the carrier’s fortunes since the airline was re-nationalised in 2008. In order to improve its Latin American footprint Delta in 2011 made $100 million investment in Brazil’s Gol, and secured a seat on the unaffiliated carrier’s board. Gol continues to publicly maintain its stated goal of remaining unaligned, yet Delta’s influence could eventually sway the carrier into the alliance arena. Last year after Delta announced its investment in the Gol, the Brazilian carrier said it would end a codesharing agreement oneworld’s American in August of this year.
SkyTeam’s weakness in Latin America is somewhat balanced out by its dominance in the important Chinese market. Its boasts mainland carrier China Eastern and its Shanghai Airlines subsidiary as members in addition to China Southern, whose Xiamen Airlines subsidiary is set to join the group this year. Taiwan’s largest carrier China Airlines joined SkyTeam in last year, while the island’s second largest carrier EVA Airways has been accepted into the Star grouping.
Oneworld is the weakest alliance in mainland China as it remains without a partner in the country. The alliance attempted to recruit China Eastern before it opted to join SkyTeam in 2010, diminishing its hopes of gaining a foothold in the important Chinese market.
Hong Kong-based Cathay Pacific is a founding member of the oneworld alliance and its Dragonair subsidiary is an affiliate member of the grouping, giving oneworld some access to mainland China, but not to the degree enjoyed by SkyTeam and Star, which counts China’s second largest carrier Air China as one of its members. oneworld will have an opportunity to further expand its Asian presence this year after Kuala Lumper-based Malaysia Airlines joins the grouping. But in the mean time American has forged a codeshare pact with unaffiliated Hainan Airlines to gain access to the Chinese market. The move reflects the reality of “everyone having partners on the side”, says American’s spokesman, as carriers sometimes have to look outside of their chosen alliance to ensure they offer a competitive global network.
Efforts by both oneworld and Star to gain access to the emerging Indian market have been stagnated by the tenuous financial conditions of the country’s airlines. In 2011 Star suspended Air India’s pending membership after the carrier failed to meet minimum joining conditions the carrier agreed to carry out in 2007. Kingfisher’s entry into the oneworld alliance has been frozen due to the carrier’s financial difficulties.
MIDDLE EAST WILD CARD
This year Skyteam is welcoming Saudi Arabian Airlines and Middle Eastern Airlines into its fold, while Royal Jordanian has been a member of oneworld since 2007. But the powerhouse carriers of the Middle East including Emirates, Etihad and Qatar have largely chosen to remain unaligned, preferring to exploit organic growth.
Mann suggests based on the scale of operations and their ability to carriers to continue to create self-sustaining networks the major Gulf players, “they have a situation they can continue to exploit”.
But recent developments show those airlines might be warming to the idea of exploring alliance membership. The head of BA and Iberia’s parent company Willie Walsh recently made waves by complimenting Qatar, and remarked that internal discussions had taken place within oneworld over potential membership by Gulf airlines. Abu Dhabi-based Etihad in late 2011 increased its stake in Air Berlin to 29% ahead of the induction of Germany’s second largest carrier into the oneworld alliance earlier this year. The move certainly strengthens ties between Etihad and oneworld, but Mann suggests the investment could more likely be a hedge against gaining further access to Germany and Europe.
“There has been quite a bit of protectionist comment made by EU airline and political leaders, and this looks like a work-around or possibly an access or traffic collection strategy for what otherwise might become progressively more difficult,” Mann explains. Air Berlin has shifted its Middle East operation from Dubai to Abu Dhabi, which allows Etihad to access to Air Berlin’s European network. Etihad could benefit from increased traffic flows without formally joining the oneworld grouping.
While the bonds that hold alliance partnerships together seem relatively strong, the constant upheaval in the airline business could make any of those tie-ups vaporize as allegiance is wiped out by a myriad of factors.
Recent worldwide consolidation results in all bets being off for any lasting alliance relationships. The next chapter is being written in the US, and the transformation American Airlines undergoes in its Chapter 11 reorganisation. Star partner US Airways is aggressively moving to merge with American, which means either oneworld or Star could be without vital US feed in the coming years, setting the stage for a new round of alliance jockeying.