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Air India loses Star Alliance, SkyTeam may now be in the picture


It is now clear to all but those who do not wish to see it that Air India will not be joining the Star Alliance, at least in the near term. That leaves the Indian government with a dilemma. Having reportedly rejected a proposal by Star that both Jet Airways and Air India be permitted to join Star, the government may have overplayed its hand. This does leave it now with the option of welcoming SkyTeam to court Air India - and that might just be a sound next move. It might even open the door for Jet Airways to join the Star Alliance.

Star has never previously denied membership to an applicant

Markus Ruediger, Star Alliance’s Director of Media Relations yesterday told CAPA that the decision by the Star Alliance to deny Air India membership at this time was a first for the alliance and that, as such, future plans are still evolving.

When asked how a “suspension” of activity squares with the previous announcement that 31-Jul-2011 was a hard deadline, Mr Ruediger confirmed to CAPA that the joining process was now “on ice” and that nothing will be done in the near term, by either party, to change the airline’s Star Alliance  status.

The suspension does however allow either side to recommence negotiations at some future time if new evidence emerges that conditions have changed in a way that might make further discussion beneficial. The suspension in other words has no time limit. But, given the drawn out process that led finally to the 31-Jul "deadline", it is near-inconceivable that a restart will occur soon.

Either party is thus theoretically free to pursue other carriers or alliances without disturbing the ability to resume talks at some future date. Air India is free to consult with other alliances and Star is theoretically at liberty to talk to another Indian partner – but that is subject to negotiating a way through the now difficult diplomatic and practical issues, with an unhappy Indian government.

Star applicants must meet conditions as well as approval by other CEOs

As always in the Indian market, many different stories are circulating, with apparently conflicting messages from the Star Alliance and Air India.

Air India for example reportedly has said it has a document indicating that it had completed all necessary joining requirements. According to Mr Ruediger, the document Air India cited in this case was a report provided by a Star Alliance project manager, and not a valid confirmation that admission was assured.

Mr Ruediger reiterated to CAPA that the membership process is only complete once all the existing Star Alliance CEOs vote, each confident in their mind that all requirements have been met. He said that if the report gave the impression that accession was assured, he noted that was a misconception on the part of the carrier.

However, the clear impression remains that in fact Air India had ticked all the formal boxes that were pre-requisites to joining, even if some informal ones were lacking.

This raises another issue involved in joining the Star Alliance that has received little notice. That is that, apart from the candidate ticking all the boxes, each affected regional existing Star Alliance member must approve any new membership; every individual carrier has a veto if for example it feels its interests might be compromised - perhaps due to overlapping operations, or lingering concerns about some other issue.

According to some reports, as many as ten existing Star members remain opposed to Air India joining and voted to prevent it. That could be at least partly because Air India - and the Indian government - is insistent on wanting to expand the flag carrier's international network, using its own metal. It is also possible that some members retained concerns over Air India's intrinsic suitability for membership. Equally, it could also be because the clear preference for some members is to have Jet Airways as a member.

Air India's failed attempt is not because of financial or operational concerns

One of the biggest questions facing Air India is its precarious nature operationally and financially. On the question of whether this had contributed to the failed attempt, Mr Ruediger clarified to CAPA that the final decision on admission was based on completion of the list of joining requirements that was given to Air India in 2007. He told CAPA that, to his knowledge, none of those points bore directly on the specific problems that Air India has encountered of late.

But Jet Airways would be most welcome to join

The Star Alliance's keenness to welcome Jet is given some credence by the fact - confirmed by Star - that the Alliance was sufficiently eager to attract the carrier that it strongly made the argument that the Indian market is large enough to permit two Star members (as for example occurs in China - although that market is dramatically bigger than India's). It appears therefore that Star has effectively told the Indian government that if Air India were to be permitted to join, then Jet would have to be allowed also. Here apparently the government put its foot down. While Jet might have been acceptable in the medium term, Air India had to take preference.

The ideal alliance member in these circumstances is one which has a strong domestic network and little inclination itself to operate internationally, thus collecting traffic to deliver to its partners over one or two national hubs. Here, Jet would fit the bill nicely. It has a high quality domestic product and network, as well as operating a cost-effective low cost subsidiary. But it also is a private airline with a massive debt burden which will greatly hamper its stated short term international expansion plans, beyond its currently limited operations. Indeed, gaining full access to the Star network would be very valuable to Jet at this stage, offering it the virtual network it is constrained from operating itself. In short, a marriage made in heaven - but it would hardly help Air India's attempts at recovery and its parents are not yet willing to condone bigamy.

Meanwhile, though Star has apparently made no direct overture to Jet Airways, relations have been very cordial over the past couple of years. Jet's codeshare profile remains eclectic, but its Star ties are growing.

SkyTeam may be an alternative for Air India - but so perhaps is IndiGo

Though the Indian Government has stated that ideally it wishes to have only one of its major carriers in each alliance - and made it very clear also that Air India was its first preference for Star, the fact that the Star Alliance believes the Indian market is large enough to accommodate more than one would appear to set the stage for a more drawn out process of negotiation.

Doubtless, there is a great deal of speculation and manoeuvring under way as the global airline community resets on the basis of the 31-Jul-2011 decision. The immediate open questions now centre around Air India and SkyTeam, and Star Alliance and Jet Airways, which in turn has made no secret of its desire to join Star.

An approach by SkyTeam to Air India may thus be timely, once government officials concede that Star is off the map. The Indian government has a huge problem on its hands, with a flag carrier that is still clearly unable to stand on its own feet, indicating recently that it would need nearly USD10 billion in subsidy to see it through the rest of this decade. It is becoming patently clear that, even if Air India were eventually to be invited to join Star, it will be a very lengthy process - and Air India needs something to help turn around its fortunes sooner rather than later.

The current situation would certainly appear to place SkyTeam in a good position to negotiate Air India membership. And Air France would relish the opportunity to divert some of the heavy Indian traffic flows away from the predominantly Star Alliance-dominated hubs and over its own Paris Charles de Gaulle base, just as KLM would seek to enhance Amsterdam Schiphol.

Despite being at least temporarily denied the multilateral elements of Star membership (such as a common frequent flyer programme and many other benefits of participation), Air India retains extensive bilateral codeshare relationships with Star Alliance airlines. Over recent years Air India has inevitably drawn closer to the Star members on a bilateral basis. If the Indian carrier were to move to SkyTeam, its members would look to wrest those codeshare advantages away too.

And for the long-protected Air India, the world is quickly overtaking it. Home grown low cost airlines Spicejet and IndiGo have not only stolen much domestic market share, but IndiGo in particular is staking a claim for international growth, with one of the biggest ever orders of aircraft last year. As each month passes, the windows of opportunity for Air India are becoming shuttered and its potential for recovery darkens progressively.

Meanwhile, only oneworld is established in India, with Kingfisher

Another heavily indebted private carrier, Kingfisher Airlines, is however now already firmly on track to join oneworld in 2012, the only global alliance to have established a foothold in the Indian market. As this relationship deepens, it would increase the tension on Air India and Jet Airways to gain some certainty for the future.

The arranged marriage fails, so back to square one for Air India and its parents

Thus, as of 31-Jul-2011, the Indian airline market has one more question mark in its development, as the arranged Star-Air India marriage unravels.

In many ways, the owner of Air India is running out of options. India's government cannot afford to continue to pump a billion dollars a year into an airline that shows little sign of becoming a truly competitive player.

This week's effective rejection by Star is one more powerful warning that only realistic, probably dramatic, steps can possibly rectify the fading flag carrier's problems.

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