A changing aviation world balance - it will happen faster than you think


On the eve of the US-European Union open skies agreement coming into effect, Air France-KLM has finally resolved the future of Alitalia. By buying the near-moribund Italian flag carrier, Air France-KLM will create an aviation axis across Western Europe, from Amsterdam in the north to the tip of Southern Italy.

There are greater prizes in aviation than Alitalia the airline, but gaining de facto control of the very large and affluent Italian market will add value to the Air France-KLM consortium in ways that no other purchaser could leverage. (The previous, failed merger between KLM and Alitalia also suggests that KLM long ago saw the value in a trans-Europe airline.)

On the other side of the Atlantic, Air France-KLM’s partners in SkyTeam (Delta, Continental, Northwest) are also exploring mergers, albeit primarily for survival rather than expansion reasons. Merger will be difficult in the US, given that country’s unwieldy anti-trust procedures and the effects of reducing local competition.

But all airlines in Europe and North America are now clearly focused on the changes about to be wrought by the transatlantic open skies agreement. This must inevitably accelerate the process of merger among carriers in that region.

The Europeans have always been more internationally conscious and the process of colonising global aviation is now in their sights, with weakened US airlines and a currency differential that makes buying into the US market a bargain at almost any price. Air France is well poised to buy into its alliance partners, once the time is right. With open skies imminent and the US in recession, that time is closing in. Lufthansa has already acquired its fistful of European airlines and a 19% share in JetBlue in the US.

Meanwhile, in Asia, mergers between competing flag carriers can generally be discounted. If even Qantas and Air New Zealand, operating in a single sky cannot get together, the prospects elsewhere are tiny. Singapore Airlines may be able to acquire a minority share in struggling China Eastern, but that saga has been enough to discourage all but the most persistent.

Organic expansion, through the use of cross-border joint ventures appears to be the most likely future for this region’s carriers – AirAsia in Thailand and Indonesia, and possibly Vietnam; Qantas/Jetstar in Singapore and Vietnam; Singapore Airlines/Tiger Airways in Korea. We can expect more of the same.

But that leaves this region out of the big league transatlantic combinations that are now forming. This does not spell a happy long term outlook for Asia’s flag airlines. Unless they move soon, the game will be irreversibly changed and they will be soft targets for takeover, as the Euro-American combinations eventually spread east. This commercial attack will be supported by bilateral agreements that work to pick off individual countries, in the absence of a regional body like the European Union.

Long-view airline managements in Asia Pacific will be actively looking beyond regional expansion. Options exist in the Middle East, but – although more difficult – partnerships with European airlines have to be the prime targets. Widespread nationalism and formal ownership restrictions do not help in such transactions, so the countries with greater willingness to relax protectionist rules now should expect long term survival and economic prosperity for their flag carriers.

The global balance of airline operations is going to move quickly over the next couple of years. The European aviation axis will soon turn global. Taking a long vision of the future is not easy when day-to-day turbulence dominates management attention. But waiting till next year may be too late.

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