As airlines increasingly see their future in alliances, Charlie Pappas, managing director, alliance strategy for Delta Air Lines speaks to Tom Otley about the advantages for both airlines and customers...
Perhaps you could talk us through the different levels of partnership between airlines
The most advanced form is the joint venture-style business model: that is the deepest. It is an anti-trust immunised-enabled (ATI) joint venture. Delta, along with our partners in Europe, Air France and KLM have industry-leading competency in that kind of partnership, much of which dates back to the Northwest KLM relationship in the early 90s and we have that business model in mind for other partnerships around the world in the future.
Less than that in terms of legal complexity would be a strategic partner: a non ATI-immunised partnership with an airline with whom we have a deeply integrated operations and commercial activity. Alaska Airlines would be an indicative example of that. We work with them in a way that is not immunised, but it's as integrated as we can get short of having an immunised relationship. On the US west coast, Alaska is a large player, they operate a sizeable network north / south and the partnership allows Delta to utilise Seattle, Portland, and the other west coast gateways as effectively mini hubs serving the western region of the United States.
After that there are the more typical code share arrangements where we place our codes on an airline's network and they place their codes on ours in an effort to expand our respective service offerings. That's the most common form of partnership around the world. Typically they include a frequent flyer component because as a commercial proposition for our customers, any time we put our code somewhere available for sale, that creates an expectation from our customers that the full set of benefits of the SkyMiles programme will be available. In general, we think alliances ought to add value to the offering we make to our customers, certainly extending our network is good for them, and for us, since it creates a more stable network.
Why are alliances of this sort so important?
Alliances can achieve much of the similar outcome that merger and acquisition activity would otherwise seek to achieve. We bring the network offering and the market presence of two airlines together to create a more compelling outcome for our customers, the communities we serve and our employees. We use partnerships to extend the Delta business in ways that in other industries would have been achieved by merger activity. So the immunised joint venture relationships can be viewed as a proxy for an outright merger. Certainly the way we organise the business with AF/KLM is as if it were a single business entity. We manage it jointly, we have a single revenue management group based in Amsterdam. Within North America, Delta takes the leadership for revenue production - sales and pricing. Air France / KLM does the same in Europe.
What have been the concrete benefits of the alliance?
Well to give one example, the service from the US from Salt Lake City to CDG Paris would probably not be viable were we not able to take advantage of the Charles de Gaulle hub and the network beyond and take advantage of KLM and Air France's market presence in those countries. And since the JV model that we utilise has a full financial sharing mechanism whereby if we operate as Delta the flight the financial rewards of that flight are shared equally with Air France so they have as much incentive to sell it as they do their own flights. So we can treat the combined network on both sides of the Atlantic as a single entity, making routes that perhaps weren't viable, certainly viable.
For flights such as the new ones from JFK and Atlanta to London Heathrow, we were able to use some slots that Air France and KLM had at those airports and made available for us to share.
For the customer, isn't one problem with all of this the consistency of product across the different airlines?
On the major attributes of product we are closely aligned. One of the things we found at Northwest with KLM, customers didn't necessary want absolutely want total alignment, the differences of personality were appreciated. So loyalty programme policies, the parameters of the hardware in business class, 60 inch pitch, lie flat in business and so on are in fact are highly aligned, but there are differences in the delivery and design that reflect Air France's position as France's flag carrier. It's a French airline with French cultural influences and that's well appreciated. Delta is US and reflects the marketplace and US tastes, and we allow those differences to be evident, but the major touch points are aligned.
But Air France has both an international first class and is introducing a premium economy and you don't and aren't.
The number of markets where first class is a viable product is pretty limited - they operate it Paris to New York and they operate all the flights on behalf of the alliance on that route. That's the beauty of the joint venture - we can take the most efficient aircraft principle and optimise the network. Because NY has a demand for first class it makes sense for the AF aircraft to be on that route.
So you wouldn't introduce a premium economy?
We're constantly looking at changes to our product both for the portion of our network that we work with AF and KLM and the rest of the network. While AF is introducing this, we think the overall demand for premium economy is not to the point yet that it makes sense for Delta to invest it. But where Air France operates it to markets in the US we sell it as part of the joint venture, and since we sell their market as if it was our own, by default we do have a premium economy offering. And where we think there is a market for it, we make a decision jointly with Air France to deploy that fourth cabin.
In the case of code shares, how do you communicate to the customer what to expect?
We do a number of things to ensure customers understand who the operating airline is and as part of the marketing transaction with the customers at multiple different touch points we communicate the operating carrier.
How do you manage factors such as different baggage allowances and inconsistencies in the product offering?
We recognise there are those differences so it's on us to manage them so we don't burden our customers with them. We gather the executives together and work through these issues and challenges of differing policies and procedures and the outcome from that process is that we align where possible. Sometimes it's not possible to align because we operate in differing regulatory environments, or in some cases we might have differences in capacities and capabilities based on our aircraft or the systems we choose to utilise. Where we cannot align we put in place procedures to manage customer expectations so they know what the differences are and can plan accordingly But if you look at the preponderance of our partnership activity is on the transatlantic and on almost every major policy that impacts on customers we have aligned.
Will there be more alliances between airlines in the future?
There will. The Delta, Air France and KLM alliance provides a stable platform for the Skyteam Alliance. We are the two largest airlines in Skyteam. If you look at what oneworld and Star Alliance are trying to emulate our approach. The transatlantic is the core intercontinental market in the world, and because it's so big and there are so many airlines, airlines have realised over time that the overlap that is created by so many members in each alliance can only be managed through an immunised joint venture relationship it's not surprising you saw [in the Star Alliance] Lufthansa, United, Continental, Air Canada pursuing the same approach while in Oneworld you saw BA and AA doing the same with Iberia
Should the traveller worry that these alliances will ultimately reduce competition?
The three major groupings are vigorous competitors and the same will happen transatlantic. In fact, the stability will enable us to invest in fleet, product, and further develop the network - and be able to deliver a better service.
We're working through a number of implementation challenges that were also complicated by the fact that during that time Delta and Northwest were merging into a single entity. Now we have that merger behind us we can take the combined fleet of that entity of 1200 airplanes and more efficiently allocate aircraft to the routes, which is good for customers because it allows us to improve the network offering and the convenience of the service we offer, and it is good for the airline because it's a more financially favourable outcome. It also allows us to allocate aircraft to routes that previously we would not have been able to.