Aer Lingus, pursuing sixth freedom strategy, seeks trans-Atlantic joint venture
Aer Lingus is finding success in its current hybrid model of connecting long-haul North American traffic to European points via its hubs in Shannon and Dublin, replicating a strategy from unaligned carrier Icelandair. Both are understood to have 80% of long-haul traffic travel beyond their respective home country, but Aer Lingus will break with Icelandair's mold by joining a trans-Atlantic joint venture by 2013 in order to boost traffic and profitability. If successful, this is the first time an unaligned carrier will join one of the joint ventures that are spearheaded by global alliances and dominate North Atlantic traffic.
The carrier not a newcomer to alliance dealings, having previously dabbled with them. Aer Lingus pulled out of the oneworld alliance in 2006 and established a limited joint venture with United Airlines for the Irish carrier's Madrid-Washington Dulles route. Most recently the carrier ended negotiations with the three global alliances, saying instead a joint-venture gives it revenue boosts but also freedom to make further partnerships. The new strategy comes as the Irish government and Ryanair look to sell their stakes.
Alliance plans abandoned for more focussed partnership strategy
Aer Lingus, a former oneworld member, confirmed at its recent board meeting that it does not intend on joining a global alliance in the short-term, a prospect it had been seriously considering for over a year and had been in discussions with the alliances about. The carrier saw joining an alliance an opportunity to increase its long-haul network, distribution, and passenger traffic, particularly in the lucrative long-haul business travel market.
CEO Christoph Mueller said the costs and complexities involved in global alliance accession and membership means alliances do not offer as much value to Aer Lingus as membership in one of the trans-Atlantic alliances. All three global alliances have anti-trust immunity on the North Atlantic, much to the chagrin of unaligned carriers on the routes, most notably Virgin Atlantic and Emirates, although the former is expected to align with other carriers in the market. Aer Lingus plans to join a trans-Atlantic airline joint venture by 2013, Mr Mueller said.
Aer Lingus plans to focus on just one long-haul market, the North Atlantic, where all its long-haul capacity is deployed and where it can better leverage its geography. Although the carrier has served Dubai and the west coast of the United States, its long-haul routes are now almost entirely concentrated on the east coast of the US.
Bilateral accords, which would see Aer Lingus carry connecting traffic to the hubs of partners, is another option under consideration, Mr Mueller said. Aer Lingus currently operates a Madrid-Washington Dulles service, its first outside of Ireland and made possible by the EU-US open skies agreement. Aer Lingus formed a limited partnership with United Airlines for the route, which became profitable within five months and has continued to perform well. Mr Mueller said he is in talks with “a few” European carriers about similar arrangements.
Aer Lingus’ decision to shun formal alliance membership has strategic logic. Alliance membership is not necessarily a solution to long-haul profitability or distribution problems and there are numerous examples where membership adds more cost than value to member airlines or their partners. Avoiding global alliance members allows Aer Lingus to maintain independence and freedom to partner with whoever is sees fit. For airlines that occupy a niche position and pursue a unique strategy, such as Aer Lingus, it is often better to favour bilateral agreements through partnerships as the primary means to achieve profit improvement with minimised cost and risk.
oneworld, SkyTeam or Star - which is the best fit?
By publicly announcing Aer Lingus' intention to join one of the three trans-Atlantic joint-ventures, Mr Mueller is ensuring the JVs know that if they do not form an adequate response to how Aer Lingus could be included in their JV, they risk Aer Lingus taking its base to a competing JV and bolstering the JV. With the JVs sharing revenue between member airlines, each JV will need to consider if Aer Lingus can bring enough benefits to the carriers and not just feed off of them.
oneworld and Star are obvious starting points for Aer Lingus as the carrier was in oneworld – pulling out only when costs were too high – and has experience partnering with Star's (and the world's) largest carrier, United.
Aer Lingus long-haul and European route networks (13-Oct-2011)
Star (Atlantic Plus-Plus)
Aer Lingus' geography – being able to hub out of Ireland, a crossing point for most trans-Atlantic flights – could help Star's trans-Atlantic joint-venture, Atlantic Plus-Plus that comprises Air Canada, United Continental, Austrian, Brussels Airlines, LOT, Lufthansa and Swiss.
The European members, who offer onward connections on the continent, are further inland in Europe, requiring backtracking to access the most western countries of Europe. Star members Spanair and TAP, on the Atlantic coast, are not part of the Star-led JV.
The oneworld-led JV includes American Airlines, British Airways and Iberia. Geography could also help oneworld by alleviating congestion at London Heathrow in favour of Aer Lingus' Dublin and Shannon hubs, although British Airways parent owner International Airlines Group has talked – threatened – of shifting capacity to fellow IAG carrier Iberia's Spanish hubs.
For more on the North Atlantic JVs, other JVs, and how anti-trust immunity is changing aviation, see related article: Global airline alliances: transformed by antitrust immunity but confronted by uncertainty
Aer Lingus - an airline in flux
Aer Lingus has been in almost constant flux in recent years, transitioning from a loss-making full-service alliance member to LCC and finally to its current hybrid model, where it has found more success than in its previous two strategies.
The airline will continue its demand– and yield-led approach to network development, it will cater to both business and leisure passengers, serve major airports and seek a balance flow and traffic to and from Ireland.
Aer Lingus’ focus on yield, rather than on load factor or passenger volume, will remain. This demand-led approach, where markets are “managed by margin” and investment is based solely on profitability, has been central to the airline’s turnaround. Maximising fare revenue per seat is the cornerstone of the airline’s revenue management strategy and the carrier has introduced a new revenue management system, which it claims will improve demand forecasting and revenue optimisation capability. Air Lingus plans to retain a flexible route network, allowing it to make tactical changes in capacity.
Cost savings keep Aer Lingus afloat
Cost reductions, largely the reason for Aer Lingus’ newfound profitability, will remain central to the success of the business going forward.
The “Greenfield” cost saving programme, which was launched in 2010 with the aim of slicing EUR97 million off the operational cost base by 2012, continues to strengthen Aer Lingus, making the airline more resilient in the face of demand shocks or cost blowouts in variable items, such as fuel. Aer Lingus stated in its 1H2011 report that it had passed through EUR74 million in total Greenfield savings, with a further EUR6 million to be taken out in 2H2011. The airline noted that seasonality had become the real challenge, which is demonstrated by volatile quarterly earnings. Aer Lingus said that further cost saving initiatives include cross-seasonal aircraft leasing and encouraging more seasonal working.
Aer Lingus maintains it is on track to reach to its EUR97 million target in FY2012, comprising EUR74 million in savings from staff and EUR23 million from non-staff sources.
Greenfield cost savings, 2011/2012 forecasts
Cautious outlook on changing ownership, but glad to see off Ryanair
Despite Aer Lingus’ newfound success, more major changes loom at the airline as its two major shareholders plan to sell out of the company. While Aer Lingus is hesitant about the government’s sale, is will be glad to be rid of Ryanair, which has become a vocal critic of Aer Lingus in recent weeks.
Aer Lingus has not yet made changes to its 2011 profit guidance, with the airline saying the second half’s strong forward bookings profile suggests the 2011 operating profit will be stronger than originally forecast. Second half revenue growth is expected to be broadly similar to the first half result (+14%), which leaves the company “more positive about the profitability of the business in 2011” than earlier guidance provided.
Aer Lingus very much remains a company in transition, with the airline still fine tuning its new strategy and new owners likely to come on board in early 2012. The airline is expected to ramp up its participation in partnership and bilateral deals ahead of plans to join a trans-Atlantic joint venture (which are based on global alliance membership), without actually joining the alliance, by 2013, which would be an unprecedented move and could set the precedent for a new type of airline co-operation.
More immediate, however, is the potential for Virgin Atlantic's alliance decision to change the alliance balance of power.