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SkyTeam plans new partnership platform to attract hybrids and LCCs, especially in Brazil and India

25-Sep-2012

In the past year, the global marketing alliances – oneworld, SkyTeam and Star – have found themselves facing two large dilemmas. First, almost all of the world's major airlines have become aligned to a global alliance, making it difficult to increase value. The standouts are largely low-cost carriers and Middle East network carriers. Second, internal segmentation has occurred as member carriers, under pressure to be smarter and more strategic, form tight relationships outside of alliance lines. That inverts the loyalty proposition: where carriers once associated themselves with a marketing alliance, now the primary association is often to key members, with the alliance alignment secondary.

SkyTeam's solution is consideration of a hybrid partnership platform. Details are being worked through but the framework would target the low-cost and hybrid carriers that largely comprise the unaligned standout carriers.

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The hybrid option would allow carriers the benefits of alignment without full membership costs, which the lean carriers may be unwilling to invest in, or rules, which could limit partnerships with outside carriers, many of whom will be targeting the LCCs and hybrids for their often powerful domestic market share. For SkyTeam, giving flexibility allows affiliation with carriers that would otherwise shy away from marketing alliances, increasing value at SkyTeam in a very quickly changing world.

Majority of airline capacity is aligned to an alliance

2012 has seen a shift in the representative power of the three global marketing alliances: oneworld, SkyTeam and Star. airberlin's Mar-2012 entry into oneworld saw, for the first time, more than half of global capacity (seats) affiliated to an alliance.

Global scheduled capacity share (% of seats) by alliance affiliation: 24-Sep-2012 to 30-Sep-2012

Global scheduled capacity share (% of ASKs) by alliance affiliation: 24-Sep-2012 to 30-Sep-2012

Subsequent membership entry from Saudia, Middle East Airlines, Aerolineas Argentinas, Copa and Avianca-TACA has further increased the ratio, and forthcoming membership from Xiamen Airlines, Shenzhen Airlines, Malaysia Airlines, EVA, SriLankan and Garuda will add to the capacity the alliances account for.
 
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Of the world's 50 largest carriers based on available seats, 18 are not a member or pending member. All but six – Emirates, Alaska Airlines, Hainan, Virgin Australia, Qatar Airways and Air India – identify as LLCs or hybrid carriers.

Unaligned carriers in the top 50 based on seat capacity: 24-Sep-2012 to 30-Sep-2012

Rank in Top 50 Airline Total seats
3 WN Southwest Airlines 2,963,545
5 FR Ryanair 2,170,854
11 U2 easyJet 1,420,842
17 EK Emirates 991,494
18 G3 Gol 981,695
22 JT Lion Air 792,018
26 B6 JetBlue Airways 635,600
30 AS Alaska Airlines 602,804
34 HU Hainan Airlines 543,167
35 DY Norwegian Air Shuttle 528,506
37 DJ Virgin Australia 498,950
39 FL AirTran 486,210
42 AK AirAsia 474,840
43 QR Qatar Airways 470,796
45 6E IndiGo 455,939
46 VY Vueling Airlines 455,616
47 JQ Jetstar Airways 447,462
48 AI Air India 429,660

Greater partnership value is being derived outside of strict alliance lines

Membership in a marketing alliance was once considered enough of an advantage against competitors, although Northwest and KLM were standouts for their early and successful trans-Atlantic partnership, which took others some time to replicate (in fairness, American Airlines and British Airways were initially blocked). "Nowadays," International Airlines Group director of strategy Robert Boyle said, "the competition is also played out in terms of the immunised joint ventures." The first anti-trust immunity JVs were, in short, facilitated by change of attitude in the United States to permit open skies agreements – which the US deems a prerequisite for ATI – and were wrought by increased competition and remaining barriers for foreign ownership control outside of intra-EU cases.

For more on on the evolution of ATI, see related article from CAPA's journal Airline LeaderGlobal airline alliances: transformed by antitrust immunity, but confronted by uncertainty

The initial ATI alliances were formed from within alliances: American Airlines, British Airways and Iberia across the Atlantic; All Nippon Airways and Lufthansa between Europe and Japan. Alliances facilitated ATI tie-ups, but now the benefits are spoken of not as those gained from the marketing alliance but rather ATI partners. This places the marketing alliances in the backseat.

A new trend is the development of ATI or deep partnerships without a marketing alliance playing matchmaker. Virgin Australia, unaffiliated with an alliance, spearheaded the recent wave, forming deep alliances with Delta Air Lines, Air New Zealand, Etihad and, most recently, Singapore Airlines, creating a global network in three years without adding a single long-haul aircraft.

Attention was scant globally but felt deeply at its competitor, Qantas. The Virgin-Etihad deal, with other factors, spurred Qantas to partner with Emirates. Emirates has also disclosed it seeks a deep partnership with American Airlines too.

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Ramifications from the Emirates-Qantas deal will emerge over time, and will be heightened by any other deal, such as Emirates-American Airlines or whatever is brewing between British Airways and Qatar Airways. A characteristic from these close partnerships is that they are deeply strategic. Carriers pick each other based on needs, rather than marriages of convenience that have resulted, for example, in Singapore Airlines and Thai Airways being in Star but competing with each other. Ultimately the future of these marketing alliances will be called into question, and indeed the early voice of such sentiments is found in Emirates CEO Tim Clark.

The marketing alliances find themselves needing to add strategic value, but lately they have grown mainly in sheer size, not strategic value. SkyTeam and Star had followed this to some extent, and the pending membership of SriLankan into oneworld suggests oneworld – once small in size but powerful in having carriers in key financial hubs – is also looking to gain size.

There are obstacles to adding members in growth regions: for oneworld, China is politically delicate and restrictive. India has been fluid as full-service carriers struggle, and most full-service carriers in another growth region, Latin America, are already aligned. 

Overlooked have been LCCs. They were once assumed to not have the infrastructure or will to make alliance membership possible. But that has begun to change as they hybridise to increase yields.

IT platforms now permit codeshares or interlines (for example, Air France-KLM sells Jetstar seats) and some LCCs even appear in a GDS (JetBlue). Frequent flyer programmes exist, and in the case of Gol are actively being pushed as a future revenue generator. While most LCCs do not have a strict business class offering, they do typically have some sort of packaged premium offering that includes additional space, either through leg room or blocking a middle seat – and, besides, most European carriers are stripping down their already diminutive short-haul business class.

Differences between LCCs and full-service carriers have shrunk, and LCCs have grown in their home markets. They now rival or exceed full-service carriers in terms of coverage, and can be as preferred and reliable. That gives them the dominant local position alliances seek to gain from a new member.

Even better for the alliances, the LCCs are typically short-haul with most concentrating capacity in their domestic market, giving an alliance all the benefit of domestic feed without creating competition on the long-haul flights that are lucrative to existing alliance members. Traditional integration into an alliance will not be possible for LCCs, and even if it were the LCCs would not want to confine themselves to a single grouping; their benefits will be in demand. And so SkyTeam is looking to write the rulebook for incorporating this new type of partner.

Hybrid partnership would not constitute full membership

SkyTeam is working through the details of what benefits would be included in this platform to promote affiliation with hybrid or LCCs, as well as what the joining criteria would be. But SkyTeam is clear on what prospective hybrid or LCCs seeking affiliation through this platform would be classified as. “We will not make them members of the alliance. They will be only partners but not members,” SkyTeam chairman Leo van Wijk remarked at the 2012 IATA AGM in Beijing.

Nor would SkyTeam consider reintroducing its "associate member" category. In 2010 SkyTeam converted associate members Air Europe and Kenya Airways to full members. While official nomenclature may set the hybrid or LCCs apart from member carriers, this distinction may not be clear to the market – and that has benefits. SkyTeam and its carriers could claim affiliation with the hybrid or LCCs, increasing scope and coverage. While SkyTeam may wish for such carriers to be full members, alliance membership would likely require more investment than such lean carriers are willing to make.

Alliance membership often comes with limitations on which other airlines a member can partner with. A hybrid or LCC with a strong domestic position would be attractive to any international carrier looking for local feed, and alliance membership would potentially restrict the carrier to one grouping of carriers. Virgin Australia for example has deep partnerships with one SkyTeam carrier (Delta and a second, Aerolineas Argentinas, is aiming to upgrade its existing interline relationship with Virgin Australia into a codeshare), two in Star Alliance (Air New Zealand and Singapore Airlines) and one independent (Etihad). Choosing an alliance could restrict its ability to pick the carriers that can offer the most to it.

Not being a member of the alliance would also mean the hybrid and LCCs would not have to spend the time and resources involved in alliance management, which can include meetings and working groups. Not partaking in those could find a carrier having to subscribe to rules it does not fully agree with.

The lack of distinction between "partner" and "member" has downsides, and the nuances between the two categories – such as when frequent flyer miles are earned, what checked baggage is free of charge, where lounge access is available – could catch segments of the market off guard. But SkyTeam does not see this as different to the current situation amongst full members where service and product standards differ. "With hybrid and low-cost carriers we have essentially the same issue that not each and every same product is available," the alliance said. "So in order to be able to offer [an] itinerary to a customer, sometimes you cannot always deliver the product. That is well understood, and if you make that process as seamless as possible to your customer, then I think you will have done at a minimum whatever is possible in that particular market."

Airlines and alliances are clear with their rules, but the rules are not always understood – or checked – by the market. Greater onus will be placed on the market to understand what benefits they do and do not have across partnerships.

Partners could select which SkyTeam members to work with

In addition to giving flexibility about benefits, SkyTeam says the hybrid and LCC affiliation platform would not require prospective hybrid or LCCs to work with all of its members. “We don’t want to be arrogant and say, 'Well this is our standard, it’s all or nothing'.” Rather the alliance with the platform is looking to give an "easy plug-in" for carriers, requiring deliberations over affiliation to be made at individual airlines instead of one sweep at the alliance level. The hybrid or LCC would also be free to partner with other alliances' carriers.

SkyTeam and oneworld have never been as tight a group as Star, led by orderly Lufthansa, but the proposed flexibility of SkyTeam's hybrid and LCC affiliation platform – as well as the deep partnerships occurring outside of alliance lines – marks the start of alliances being, or having to be, elastic and losing collectivity. It also represents how eager SkyTeam is to affiliate with these potentially valuable carriers, often driven by a need to catch up to the larger Star but also giving the possibility for inroads in new markets. 

Some prospective partnerships will not be new to all SkyTeam carriers, and indeed a focus of SkyTeam is to have all carriers use a common platform for hybrid and LCC partnerships rather than have each carrier develop its own for individual partners, a prospect that sees great redundancy in IT, adding considerable cost and complexity to an already IT-intensive industry. A common platform – IT at the heart and then agreements over service and product standards – would enable sharing of benefits as SkyTeam could build on one member's hybrid/LCC partnership and extend it to other members far more easily than if other members had to start from scratch with the hybrid/LCC partner.

SkyTeam notes an operational interface between a full-service carrier and hybrids/LCCs is not new; Delta, China Eastern, KLM and Korean Air codeshares with WestJet while Delta, Aeromexico and Air France-KLM codeshares with Gol, amongst other examples. But standardising this at an alliance level is new. It also allows SkyTeam to catch up with the developments its member airlines have made, and be an innovator amongst the marketing alliances for this.

Unintended benefit could be future-proofing

The membership platform is targetted largely at carriers in growth markets – “it’s not about Europe for the time being,” SkyTeam says – but the platform could prove to be relevant in developed markets as carriers form or expand LCC operations. While carriers in the United States dabbled with LCC spin-offs and in the end elected to close them and make their entire operations similar to a LCC, a different option is being pursued in Europe, where all three of the main carrier groups have low-cost subsidiaries: Iberia Express for Iberia (part of IAG), Transavia for AF-KLM and a new operation for Lufthansa.

Transavia's scope remains to be defined, but it is evident some integration with Air France will be necessary. Planning for partnerships in growth markets could allow SkyTeam to future-proof developments in its developed markets. Iberia Express was a oneworld affiliate from its Mar-2012 launch, and Lufthansa is likely to follow suit with its LCC plans.

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The platform could also permit existing members' LCCs to partner with other SkyTeam carriers. Kenya Airways is planning an East African LCC called Jambo Jet, Vietnam Airlines has taken a stake in Vietnam-based Jetstar Pacific and forthcoming member Garuda Indonesia has its own LCC, Citilink.

Affiliation between those LCCs and SkyTeam members will depend on what levels of cooperation exist between the LCC and full-service parent, a relationship that is still largely developing. A codeshare between the two would allow SkyTeam members to have network and frequent flyer access via the existing member, negating the need for the LCC to have an IT interface with SkyTeam carriers.

There is not yet a common rubric for lower-cost divisions in Asia, unlike in the US or, it appears, Europe. oneworld's Cathay Pacific and Star's Singapore Airlines have respective regional carriers Dragonair and SilkAir, although Dragonair is a oneworld affiliate while Silk Air has no affiliation to Star. Thai Airways in Jul-2012 launched its Thai Smile division, which operates on Thai's AOC with the TG code, allowing complete Star access to Thai Smile.

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Platform expected to be ready in early 2013 for trial with hybrid or LCC

SkyTeam hopes to have a platform finalised in early 2013 and to conduct a trial with a hybrid carrier or LCC, although it is not naming potential partners. Depending on the outcome of the trial, SkyTeam would consider expanding the platform.

The cornerstone of the platform will be IT integration. SkyTeam is not restricting partners to certain booking systems but the potential partner must be able to establish an interface with SkyTeam. These IT integration projects are the backbone of alliance memberships and setbacks often result in delays in membership joining.

An IT link will support product and service alignment, including frequent flyer recognition, through check-in service for connecting flights and baggage handling, which SkyTeam has set as the minimum standard of requirements for a hybrid or LCC to be affiliated. The alliance is looking to have optional benefits as well that hybrid or LCCs could adapt based on their availability.

If a carrier does not have access to lounges, SkyTeam says it could waive that but look to see if there are others lounges available to contract with. Baggage charges are typically the most common ancillary fee for hybrid and LCCs, so SkyTeam will need to have alignment. One possibility, depending on the carrier, could be to give a complimentary luggage allowance only to premium and elite passengers. But misaligned baggage policies this is not a new issue to SkyTeam or the other global alliances as each alliance has current members, particularly US members, that already charge for checked bags.

SkyTeam's targets are carriers in Brazil and India

SkyTeam is upfront in saying it is targeting airlines in Brazil and India with this new partnership platform. (This does not come as a surprise as the alliance previously indicated it was looking to expand in Latin America and India.) SkyTeam has been direct on who it has its eyes on in Brazil, repeatedly saying over the last several months that it is actively courting Gol. The alliance is confident that following Delta's USD100 million investment in Gol in late 2011, which gave Delta a minority stake in the carrier and seat on the board, it will ultimately succeed in its recruitment efforts at Gol.

Gol so far has remained neutral about alliance membership, but the SkyTeam platform is a "partnership" and not "membership". Gol already cooperates with a number of SkyTeam carriers including Aeromexico, Air France, Delta and KLM.

See related article: Delta’s investment in Gol has SkyTeam and broader US-LatAm strategic implications

Gol is the largest domestic carrier in Brazil, where the only carrier there currently aligned is TAM, in a close second place after Gol. Webjet, the fifth largest domestic carrier in Brazil, is also now in the process of being acquired by Gol and could end up along with Gol as a SkyTeam affiliate.

TAM is now a member of Star but will likely join new sister airline group LAN in oneworld within two years while Avianca Brazil is expected to join its sister carriers Avianca and TACA in Star. If TAM opts for oneworld (it is also considering unaligned status after leaving Star, which it must exit to meet a Chile anti-trust court requirement) and Avianca Brazil joins Star, Gol could be persuaded to reconsider its alliance neutral strategy. Gol's neutrality now allows the airline to work with several airlines from both SkyTeam and oneworld as well as other unaligned carriers.

See related article oneworld favoured with more at stake than Star in LAN-TAM alliance decision

Top Brazilian domestic airlines ranked on seat capacity: 24-Sep-2012 to 30-Sep-2012

Rank Airline Total seats
1 G3 Gol 933,404
2 JJ TAM Airlines 909,694
3 AD Azul 281,862
4 T4 TRIP Linhas Aereas 207,286
5 WH Webjet 140,304
6 O6 Avianca Brazil 121,272
7 P3 Passaredo 21,400

Some 95% of Gol's capacity is in the domestic market. More than half of Gol's international seats are to Buenos Aires, both the city's Aeroparque and Ezeiza airports, and its other 10 international destinations include Caracas, Montevideo, Santa Cruz and Santiago.

There is considerable overlap with SkyTeam's Aerolineas Argentinas, but Aerolineas and Gol have been working on implementing a codeshare. Indeed, rather than Aerolineas' existing presence being a potential block to Gol partnering with SkyTeam, the Aerolineas relationship could further push Gol to SkyTeam.

See related article: Aerolineas Argentinas tries to overcome troubled past and continued challenges as it enters SkyTeam

Gol top 10 international routes based on capacity (seats): 24-Sep-2012 to 30-Sep-2012

In India, IndiGo is the largest domestic carrier and, unlike some peers, is healthy. It is not only an obvious target but there have been discussions between IndigGo and SkyTeam.

Top Indian domestic airlines ranked on seat capacity: 24-Sep-2012 to 30-Sep-2012

Rank Airline Total seats
1 6E IndiGo 424,083
2 AI Air India 311,916
3 SG SpiceJet 302,454
4 9W Jet Airways 297,237
5 G8 GoAir 127,260
6 S2 JetLite 103,502
7 IT Kingfisher Airlines 64,770
8 IX Air India Express 11,340

IndiGo, however, exhibits towards alliance membership the very concerns SkyTeam hopes to overcome with its new platform. Cost and complexity of alliance membership are key concerns for IndiGo, which has a more simplified operating model than Gol, but SkyTeam's new platform reduces burden.

Some 93% of IndiGo's seats are in the domestic Indian market, which is the attraction for SkyTeam. oneworld was to have Kingfisher join the alliance in early 2012, but that fell through as the carrier became embattled. Likewise for Star, Air India was due to join the alliance but those plans fell through.

Star is positioning itself to accept Jet Airways into the alliance, leaving SkyTeam without a possible carrier. IndiGo will be careful to ensure SkyTeam affiliation is not limiting. With an approximately 7% share of the Indian market, SkyTeam is the smallest of the alliances in India. Before any affiliation is reached, IndiGo will want to ensure the standing of SkyTeam's willingness for it to partner with non-SkyTeam carriers in order to gain greater international access.

International scheduled capacity share (% of seats) to India by alliance affiliation: 24-Sep-2012 to 30-Sep-2012

Also of interest to SkyTeam would be WestJet in Canada, a market tied up by Star's Air Canada since Canadian Airlines left oneworld. WestJet is the second largest domestic carrier behind Air Canada, but arguably the strongest and with growth aspirations as it prepares to launch a regional network to bring competition to small but high-yielding markets that have primarily relied on service from Air Canada.

See related articles:

Top 10 Canadian domestic Airlines ranked on seats: 24-Sep-2012 to 30-Sep-2012

Rank Airline Total seats
1 AC Air Canada 531,731
2 WS WestJet 328,469
3 PD Porter Airlines 58,100
4 7F First Air 22,638
5 5T Canadian North 16,476
6 MO Calm Air 12,220
7 3H Air Inuit 10,536
8 8P Pacific Coastal Airlines 9805
9 PB Provincial Airlines 9197
10 JV Bearskin Airlines 9090

Hybrid and LCC affiliation will strengthen marketing alliances

This entry of hybrid and low-cost carriers into marketing alliances was foreseen by none other than the grandest marketing alliance abstainer. Mr Clark of Emirates remarked at the IATA AGM in Beijing that "alliance structures will loosen and become more flexible". In hindsight, he said this with the knowledge impending deals would force his prediction.

Any incorporation of hybrid or LCCs into alliances will be loose and not exclusive on both ends, raising the question what benefits affiliation with the alliance would have compared to affiliation with certain individual members, or if the standardised IT interface is enough. No doubt oneworld and Star would consider what cooperation between member carriers and LCCs is possible, with early indications from oneworld being that full membership is not a consideration.

Combined with ATI and deep partnerships, such as those Mr Clark is pursuing, marketing alliances will have to become flexible – but the end resulting form, if still in existence, will take some years to eventuate. What is certain is deeper partnerships including those outside of alliance lines will grow and that LCCs will become more important strategic partners. They must be navigated. Their impact will be tremendous.


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