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Consolidation and competition is changing the global airline world and putting pressure on traditional alliances, explains David Churchill
TUCKED AWAY ON the Virgin Atlantic website is a small – albeit significant – announcement that from the middle of next month (June 11) the airline’s codeshare and frequent-flyer partnership with US Airways will come to an end. This means, for example, that connecting flights to US cities such Pittsburgh and Phoenix from Boston and Los Angeles (both Virgin hubs) will no longer be bookable via Virgin. And Virgin travellers will no longer earn frequent flyer points on US Airways flights. In the great scheme of world aviation, this may seem a relatively minor matter – of interest to a comparative few travel buyers and business travellers.
Yet it is one of the many intriguing ripple effects starting to be felt from the growing wave of a rapidly changing global airline world, as carriers merge, shed old alliances and create new ones, and jockey for position in an industry where, traditionally, change means more losers than winners.
REDUCED COMPETITIONBut while change in the airline world is a fact of life, there are clear implications for corporate buyers and travellers – not least the potential reduction in competition that consolidation and alliances can bring. “While it might be beneficial for the airlines to pool their resources, and optimise their operations and networks, it also allows them to control the number of seats available on their flights, as well as the price of these seats,” says travel buyer Anda Zarina, recently at Ignis Asset Management. “This means some routes may become effective monopolies which would reduce choice and increase the cost of travel, especially as consolidation means less profitable routes face having fewer and more expensive flights available, particularly those connecting to regional airports.”
Lynn Walker, travel buyer with Ball Packaging, agrees that consolidation can have an adverse impact on the competitive level on certain routes. “A reduction in competition is always less beneficial to the buyer of any product or service,” she points out.
Although Virgin cites its forthcoming transatlantic joint venture (JV) with Delta Airlines for the end of its US Airways codeshare and frequent flyer link-up, there is another major reason: the merger due to be completed this summer between US Airways and American Airlines, creating what is claimed will be the world’s biggest carrier group (by passenger numbers) with annual sales of US$40 billion.
American, of course, is the transatlantic partner of British Airways and also one of the co-founders – with BA – of the Oneworld airline alliance. Given the past 30 years of bitter internecine warfare between BA and Virgin, it was odds-on that the US Airways relationship would come to an end sooner rather than later.
In addition to the JV with Delta, Virgin is also selling the US carrier the 49 per cent stake in Virgin previously owned – since 1999 – by Singapore Airlines. And it is exploring possible JVs with Air France-KLM and Alitalia on routes to Asia, the Middle East and Africa.
REVIEWING STRATEGIESIf would be a mistake, however, to think all these events are just ‘Virgin-centric’. In reality, all three of the global airline alliances – the Star Alliance, Skyteam and Oneworld – are in a state of flux as airlines review their strategies.
US Airways, for example, is quitting Star for Oneworld once the merger with AA is complete. South American carrier TAM Airlines is also leaving Star next year following its 2012 merger with LAN to form LATAM Airlines, joining LAN in Oneworld, where it has been a member for more than a decade.
Despite these losses, Star remains the biggest (and first) airline alliance, dominated by Lufthansa and United Airlines, and is currently courting India’s Jet Airways as a new member. Skyteam, the second biggest alliance with key members including Delta and Air France-KLM, is also hoping Garuda Indonesia joins as planned next year.
And, of course, Virgin is widely expected to join Delta in Skyteam. Virgin’s chief operating officer Julie Southern, in a recent interview with TheFinancial Times, said: “I suspect in due course you may see us joining Skyteam.”
BESPOKE RELATIONSHIPSBut alliances are threatened by the growing willingness of some airlines to form bespoke relationships that are more suited to their needs, especially given the high costs associated with alliance membership. Veteran City aviation analyst Chris Tarry, who now runs his own consultancy, suggests that for smaller airlines in an alliance “the cost of membership will almost inevitably be greater than the accompanying benefits”.
This has been made graphically clear by the success of airlines such as Etihad Airways (see panel, next page) which has established a business model based on taking minority stakes in small strategic carriers – including Aer Lingus and Air Berlin – as well as extensive codeshare agreements.
“The traditional airline alliance has evolved into slow-to-respond, bureaucratic organisations which struggle to deliver added value to their member airlines, many of which are no longer compatible with each other,” suggested Etihad CEO James Hogan in a speech in Washington last month [April]. “If we look at the consolidation currently occurring throughout the airline industry, we are also seeing more fragmentation within the alliances,” he added.
These changes are being driven by high fuel costs and the slow pace of global economic recovery, as airlines continue to struggle to adapt to more competitive markets. But full-blown airline mergers are still something of a rarity given the protectionist stance many governments continue to adopt. Foreign takeovers of US carriers, for example, are blocked by law, which is primarily why US airline consolidation has all been internally generated.
And even within Europe, where cross-border mergers have been more feasible, neither the Air France-KLM nor BA-Iberia mergers have so far proved a conspicuous success, although Air France is still considering a formal tie-up with Alitalia.
Far better, it seems to some airlines, to opt for such vehicles as bilateral ‘joint business arrangements’. Finnair, for example, is joining the BA/Iberia-AA transatlantic JV in spite of all four carriers being in the Oneworld alliance, suggesting that the one-size-fits-all approach of traditional alliances may no longer work in all circumstances.
Oneworld CEO Bruce Ashby not surprisingly defends the alliance model. “If you look at the travel between the top 100 business cities worldwide, 86 per cent of revenue is on alliances, so that tells me we’re not quite finished yet,” he says.
Travel buyers are also becoming less certain about the benefits of alliances. “I think the influence on choice of carrier is more around customer preference, such as loyalty schemes which at times help us with compliance and, therefore, deal take-up,” says Margaret Birse, travel buyer at Serco. “The issue for me is that there is rarely any financial benefit to doing alliance deals, as each region/airline will look at market share and, therefore, the potential to affect this with pricing.” She also points out that “while we have not historically done a lot with American, they are more interested in talking to us now as part of the alliance with BA.”
Anda Zarina also thinks that “the bigger and more complex the alliances become, the more inefficiencies become apparent.” She finds it “extremely annoying in this day and age” that basic technology kinks still exist in the system. “With KLM/Air Baltic, for example, you can buy a flight with a connection via Amsterdam but you can only check-in online for the flight operated by KLM,” she explains. “Once you get to Amsterdam, a traveller needs to find a check-in machine to print out a boarding pass for Air Baltic.”
WORSENING BUREAUCRACYBut if buyers and travellers are worried now about apparent bureaucracy and inefficiencies in the current alliance and codeshare arrangements between airlines, then it is probably only going get worse as the demand for air travel surges – fuelled by emerging markets such as China and Brazil. Latest forecasts from the International Air Transport Association suggest that the world’s airlines will carry an extra 800 million passengers by 2016, to a total of 3.6 billion. You have been warned.
GULF CARRIERSWHEN QATAR AIRWAYS joins the Oneworld alliance – which it expects to do so before the end of the year – it will become the first of the fast-growing Gulf carriers to become a member of a traditional airline alliance. To many observers, the move is seen as a clear sign that the aggressive expansion over the past decade by the three major Gulf carriers – Emirates, Etihad and Qatar – has finally been officially recognised by the ‘legacy’ carriers of the Western world.
But, ironically, Qatar could become both the first and last Gulf airline to choose the alliance route to growth, at least for the foreseeable future. Qatar’s main Gulf rivals have adopted significantly different paths to expansion and, in doing so, have in effect provided a real-time case-study into the current wave of airline consolidation and growth strategies around the world. Both Emirates and Etihad are pursing policies which they believe can achieve not only most of the benefits of belonging to an alliance – such as a wide route network – but also avoid some of the perceived drawbacks (for example, extra bureaucracy).
Emirates made clear its intention to upset the established order when, at Easter, it orchestrated a spectacular flight over Sydney Harbour by two Airbus A380s, one decked out in Emirates’ livery and the other in the colours of Australian carrier Qantas. The flypast – which Qantas says was the first time two commercial A380s have flown in such a formation – was marking the launch in April of a codeshare tie-up between the two airlines.
The deal has meant Qantas switching its ‘stopover hub’ from Singapore to Dubai, providing it with an increased number of destinations in Europe, the Middle East and Africa. Emirates, in return, gets access to Qantas’s domestic passengers. The move by Qantas and Emirates, first announced last autumn, to link up in this way came as a major blow to British Airways and the Oneworld alliance of which Qantas is a member.
BA had for some 17 years also operated a joint venture agreement with Qantas and at one stage held a minority investment in the airline, with plans for a full merger before it decided to join up with Iberia. Now that the BA-Qantas joint venture has been usurped by the Emirates deal, BA has had to put a brave face on losing its direct Qantas links.
Rival Etihad has adopted a different approach: taking minority stakes in several airlines around the world to give it a foothold in key markets. Hence, it owns some 29 per cent of Air Berlin, 40 per cent of Air Seychelles, 9 per cent of Virgin Australia and 3 per cent of Aer Lingus – with the prospect of Etihad increasing its stake or making a full bid for the Irish carrier if Ryanair fails to overturn an EU ruling blocking its own takeover attempt. Etihad is also considering a rescue deal for struggling Serbian state airline Jat Airways, which could eventually see it taking up to a 49 per cent holding.
It is perhaps ironic that just as Qatar Airways gears up to join Oneworld that not only has Emirates caused a breach in the alliance with its Qantas deal, but Etihad is also potentially set to cause further schisms with its stake in Air Berlin – another Oneworld member. If it ever decided to launch a full bid for the German carrier, then that could be a real game-changer.