Global airline alliances: Where low-cost carriers fit into the picture – Part 3

This is an extract from a report that appears in the latest edition of Airline Leader, CAPA's airline management magazine. Go to www.airlineleader.com to download the full edition.

Sometimes the grass on the other side really is greener: LCCs and alliances

No independent low-cost airline has become a member of any of the three global alliances. Yet there are some very large and high quality LCCs operating in both domestic and international markets. The reasons for their absence from alliances are partly an overhang from the thinking that two distinct industries exist; but there are also practical reasons, such as lack of compatibility of product (seamlessness) and IT connectivity. And many simply do not see value in belonging.

The situation may change. In India, for example, which has several very healthy LCCs and three heavily indebted full service airlines, global alliances have held informal discussions with a range of possible airline partners. Also, as Virgin Blue has metamorphosed into Virgin Australia, it has formed the core of its own "virtual" global alliance (dealt with separately in this issue of Airline Leader).

This category of airline can actually benefit from not being a global alliance member. Such airlines are typically independent newer, low-cost non-network operators, which compete in their own domestic markets against one or more alliance member airlines. Forging international relationships provides these unaligned domestic carriers with often high yield feed traffic onto their domestic networks. These are very much tactical relationships, but that doesn't mean they are not valuable or durable.

The opportunity arises, for example, where only one alliance is represented in the domestic market, yet there is a strong and predominantly domestic airline, such as Star's Air Canada, with WestJet; oneworld's Qantas, with Virgin Australia; Star's TAM, with GOL; Star's South African Airways; with Comair; or SkyTeam's Aeromexico, with several LCCs in waiting. Meanwhile though, in Germany, previously unaligned Air Berlin is to become a oneworld member, as Germany's second airline has evolved into something closer to a network airline.

There is also a geographical subset of this type of relationship. Thus JetBlue's large presence at New York's JFK, which hosts numerous international airlines, but is poorly represented by US network airlines, positions the LCC well to provide a wide range of on-carriage opportunities. These are very much opportunistic, but provide an excellent source of additional traffic for the high quality LCC. A 19% holding by Lufthansa does not restrict the carrier's options, although JetBlue's website does display a link into Lufthansa's international network, offering the part-owner a valuable sales outlet.

On the opposite side of the US, the consistently profitable Alaska Airlines is also an active beneficiary of operating a niche network largely along the west coast, making it attractive for a number of international airlines to connect into, regardless of alliance.

Many of these connections from full service to LCC are not obvious from published schedules, for one reason or another.

A high point for this purely domestic model is the unique so-called "GOL Alliance". This highly opportunistic grouping now embraces six major international airlines: American, Delta, Aeromexico, Air France-KLM, Iberia and Qatar Airways. Each is in a bilateral relationship with GOL and, with Delta, GOL has gone a step further, establishing an MRO joint venture.

Having significant members of oneworld and SkyTeam alliances involved, along with unaligned Qatar, GOL is taking a very sophisticated approach to managing the demands of a large national market. The carrier is now seeking an Asian airline to complement its team.

This homegrown alliance also places it in a better position to manoeuvre effectively as the LAN-TAM alliance relationship is resolved over the next year. Meanwhile, TAM's membership of Star precludes partners for GOL in that grouping. If TAM shifts to oneworld - or not - when the LATAM merger goes through, GOL is thus still well placed to negotiate from a position of strength - making this "tactical" relationship also a strategic one. GOL is also arguably better off than if it were to join one or other of the alliances.

At the same time, each of the global alliances will be attempting to gain exclusive access to the bubbling Brazilian market, whether it be through GOL, or otherwise.

Many of the low-cost airlines involved in cross-alliance partnerships don't want to fly long-haul international themselves, or even to codeshare on their partners' services. There are substantial benefits even apart from the added domestic feed traffic. If they share mutual frequent flyer earn-and-burn access, the long-haul airline's FFP can offer real attractions to the domestic operator's own customers, as well as performing the financially highly important role of helping remove points from the domestic operator's debt bank.

Becoming one airline: the importance of seamlessness

As the global alliances attempt to consolidate their strengths in a common brand, ensuring the homogeneity of the product is an increasingly important goal. Star Alliance led the way in making each member paint at least one aircraft in Star colours, a lead the other alliances are following.

But the challenge is much more than skin-deep and, after some very bumpy experiences in the early days, seamless operations are becoming much closer to reality - even though some real gaps in service quality exist, and not just between big and small. Transferring from an Air France A380 first-class seat to a 30-year-old Delta DC9 can be a serious culture shock to a high flying financier.

But perhaps even more important than product variations, the even treatment of alliance passengers across different airlines is now being addressed. It is a more complex issue to address, however, as its roots run very deep. Much of this is the result of diverse IT systems, corporate cultures and management priorities.

As Professor Taneja notes in his commentary in this edition of Airline Leader, "While the lack of consistent policies across alliance partners is a factor in some cases, in reality, it is the lack of high quality actionable information that is the real root of the problem."

The edgiest implications of this are when things go wrong - something any regular traveller expects at all times - and for example different re-booking regimes exist between airlines. Most are anxious to treat their own high-value frequent flyers well, but the same systems are often not in place for partner airlines.

Nonetheless the alliances have made remarkable strides in this area over the past decade, a real benefit that consumers can be grateful to the alliances for achieving. That said, the members' goal remains a complex one.

Three-dimensional airline unions

Already one of the most heavily unionised industries in the world, the airlines that participate in global alliances have additional dimensions to operate with. Pilots' unions, in particular, will inevitably play a substantial role as airline alliances expand their influence. Since their message evolved from the often-simplistic alliance "safety concerns" themes of the late 1990s, the unions have adopted a relatively responsible posture, which guarantees them a place at the head table. To date, their influence has been mostly benign, but they have made no secret that they do retain considerable power and will not be afraid to use it to influence developments.

A further step in their evolution occurred in Bangkok in Apr-2011 at the first "Global Pilots Symposium", which brought together the International Federation of Airline Pilots' Association (IFALPA), with the three associations that have formed inside the global alliances: the SkyTeam Pilots Association, the Associations [sic] of Star Alliance Pilots, and the oneworld Cockpit Crew Coalition.

Simply the fact that the longstanding IFALPA felt it appropriate to share the spotlight with three relative newcomer alliance union groupings suggests too that there will be gravity shifts in the world order within the unions themselves.

At best, individual alliance member airlines now have to contend with three groupings: their own local chapter, often part of a wider national union; their alliance group; and IFALPA. This may not be a serious threat, but it is hardly an area where airlines would choose to have additional players.

The Apr-2011 symposium featured discussion themes such as:

• "The Gulf Carrier Revenue Dynamic", "which delved into the substantial competitive advantages state-owned airlines hold over their private-sector rivals … panel members discussed strategies to counter this challenge, drawing comparisons with the oil industry, where the largest private enterprises are dwarfed by the size of their state-owned competitors."

• "Trends in Harmonisation of FTL/Fatigue schemes", where it was noted: "Globalisation has not profoundly challenged the enduring national nature of citizenship … and any strategy to influence regulatory activity aimed at harmonisation must be both global and local in nature. The global pilot alliances have evolved into organisations with capability and worldwide presence. Is now the time for them to play a larger coordinating role in the regulatory framework?"

The latter of these questions - perhaps rhetorical - is surely a sign of things to come.