Air France-KLM's Asian partnerships: JAL codeshare ends, China Southern A380 & Xiamen to Amsterdam

AF-KLM wants tenure in Asia as it has on the Atlantic, as Asia becomes a larger market than North America

Air France-KLM's deep partnerships are across the Atlantic despite it having more capacity, measured in ASKs, to Asia. AF-KLM's priority is now to forge deeper partnerships in Asia. As CAPA previously wrote:

On its Asia network, Air France-KLM's 2014 ASKs and RASK were only slightly down on their levels of 2013, when it had increased capacity by 4.3% and RASK had fallen by 1.3% in the region. Tighter capacity management appears to have benefited unit revenues in Asia, also helped by the group's growing partnerships.

Air France-KLM has joint ventures with China Southern and China Eastern and a codeshare agreement with Etihad, but Mr de Juniac plans to increase the use of partners and JVs. "We have to have the same grip in the Asian market as we have on the North Atlantic", he said at the results presentation.

See related reports:

• Air France-KLM back to operating loss; warns lower fuel may be offset by low unit revenue & currency
• KLM looks to grow partnerships in Asia, which are becoming larger targets than North America's

Asia, comprising Northeast and Southeast, is AF-KLM's largest region based on ASKs. The region comprises 20% of its ASKs in Mar-2015, including 14% from Northeast Asia and 6% from Southeast Asia.

Air France-KLM international seat capacity by region: 2-Mar-2015 to 8-Mar-2015

Source: CAPA - Centre for Aviation and OAG

Based on seats, only China ranks in the top 12 markets of AF-KLM. But looking at ASKs, China, Japan and Singapore all rank. China is the second-largest market (after the US) outside of the group's France and Netherlands hubs. Japan is third.

AF-KLM international system ASKs by country: 2-Mar-2015 to 8-Mar-2015

Source: CAPA - Centre for Aviation and OAG

China and Japan are AF-KLM's largest markets by far, with the third largest, Singapore, some distance away.

AF-KLM Asia-Pacific ASKs by country: 2-Mar-2015 to 8-Mar-2015

Source: CAPA - Centre for Aviation and OAG

Japan is the focus of European partnerships in Asia, but Air France-JAL end key codeshares

The current crop of Europe-Asia partnerships are focused, and most intense, in Japan. Air France's close links with Japan Airlines are longstanding, but JAL has formed a JV with British Airways while Finnair was later included. All Nippon Airways has a JV with the Lufthansa Group. These are Japan's only two intercontinental carriers, leaving SkyTeam without an option in one of Asia's most mature (and high-yielding) markets.

See related reports:

• Finnair: Japanese JV to the rescue for the new nonagenarian following profit warning
• All Nippon Airways adds Austrian & Swiss to JV, and eyes acquisitions, as Japan & France liberalise

There was an increase in France-Japan capacity following the dispersal of daytime international slots from Tokyo Haneda. Changes were made in Mar-2014 and notably consisted of ANA growing and gaining significant market share (from 17% to 25% according to OAG data) while JAL and Air France decreased capacity through down-gauges.

Air France is the market leader with over 50% of capacity. Air France benefitted from this exposure but now, without the Air France codeshare between Japan and France, it is smallest carrier in the market.

See related reports:

• Tokyo Haneda slot allocations fail to generate new flights as Europeans replace Narita operations
• Japan Airlines' smaller gains from Tokyo Haneda slot dispersal dampen its short-term outlook

Japan to France (seats per week, one way, 3-Mar-2014 and 2-Mar-2015)

Source: CAPA - Centre for Aviation and OAG

Japan to France (seats per week, one way): 19-Sep-2011 to 16-Aug-2015

Source: CAPA - Centre for Aviation and OAG

Before the Japanese-Europe JVs came to fruition, Japan Airlines had a longstanding partnership with Air France. This did not extend to KLM, although KLM had hoped it would. The AF-JAL partnership comprises codeshares between Japan and France as well as beyond codeshares from each country. Schedules from OAG show Air France codeshares only on JAL's domestic destinations, including from Tokyo Haneda, Tokyo Narita and Osaka Kansai (Air France's three markets in Japan).

There are no KLM codeshares. JAL meanwhile codeshares on Air France's European network, stretching from Spain to Denmark to Turkey as well as domestic French destinations.

JAL and Air France's codeshares on Paris-Tokyo flights have been removed, and JAL confirms in a statement to CAPA: "JAL and Air France didn't reach a codeshare agreement for flights between Tokyo and Paris on and after March 29, 2015, regarding some factors in this agreement." There was no further elaboration. It would be reasonable to assume that this reflects JAL moving further away from Air France as the oneworld links expand.

The Paris-Tokyo flight schedule through Northern Summer 2015 according to OAG data is is:

• Air France daily between Paris CDG and Tokyo Narita (777-300ER). No JL codeshare
• Air France upwards of 13x weekly between Paris CDG and Tokyo Haneda (777-200ER/300ER). JL codeshare until 29-Mar-2015 on seven weekly flights only. The remaining six weekly flights do not have a JL codeshare
• JAL daily between Paris CDG and Tokyo Narita (787-8). No AF codeshare
• JAL daily between Paris CDG and Tokyo Haneda (777-300ER). AF codeshare until 29-Mar-2015

So of the upwards of 34 weekly services, 14 carry a codeshare. There are no publicly available figures on the importance of the codeshare. Beyond gateway access remains but it is unclear if rates have been changed, which could alter the value of the partnership more than the end of the Paris-Tokyo codeshare. There is undoubtedly symbolic value as the key codeshare dwindles, much like the end of the Qantas-British Airways joint service agreement that had little commercial weight in its final days.

JAL's Air France remaining links become vestigial

The Air France partnership was a legacy vestige as JAL partnered with British Airways. The partnership had some complementary elements as the BA-JAL partnership, while including beyond London access, was mostly focused on Japan-London traffic. That made the addition of Finnair logical, as the Finnish carrier's northern European hub had efficient geography to reach the rest of the continent (and Finland is popular with Japanese).

Although carriers in Europe-Japan JVs have spoken fondly of the arrangements, there is little public evidence of the commercial value participatory airlines have gained. No doubt it exists, with potential for growth, but Air France risks losing ground in Japan.

This is the reverse of the outcome it would have hoped for, with JAL ideally extending the Air France partnership to KLM. Should beyond access from Japan become problematic, the AF-KLM Group with Delta could turn to Japan's third-largest carrier, Skymark, although that airline still needs to get its house in order. Alternatively, LCCs could be an option, with Jetstar Japan already codesharing (albeit with oneworld members; the LCC is partially owned by JAL).

While Japan is the third largest foreign market for AF-KLM, it is the fourth largest foreign market for only Air France. As with the group, Japan is secondary to China when measured in ASKs.

Air France top 10 countries ranked on ASKs: 2-Mar-2015 to 8-Mar-2015

Source: CAPA - Centre for Aviation and OAG

KLM and Xiamen Airlines to partner. Amsterdam is the first long-haul destination for Xiamen 787s

KLM on 04-Mar-2015 announced the signing of a "memorandum of cooperation with Chinese carrier Xiamen Airlines and the City of Amsterdam" which is "designed to strengthen collaboration and accessibility between the Netherlands and China." Further details are not forthcoming and there is a degree of vagueness about the announcement:

"I'm pleased that signing this memorandum takes cooperation between KLM and Xiamen Airlines to an even higher level. In so doing, we're able to offer our passengers an even broader range of choices. Together with our Chinese partners, we connect Europe and China directly, as well as offering shorter transfer options to secondary airports within China."

-KLM CEO Pieter Elbers

On one hand, Chinese airlines generally like the principle of having cooperation, possibly giving this memorandum symbolic value above all else in the short-term. The agreement, also encompassing Amsterdam, could possibly include subsidies but this is unconfirmed.

Finally, the agreement could be seen as something of a truce, if perhaps an uneasy one, between KLM and its Chinese partners. KLM has been wary of over-capacity between Europe and China. This is especially true of secondary cities, like Xiamen Airlines' home hub of Xiamen.

Xiamen is expected to commence Xiamen-Amsterdam service in northern summer 2015, the first destination for its new 787 fleet (Sydney is expected to be second). This marks the start of Xiamen's long-haul network; previously it flew within Asia with its all-narrowbody fleet. Xiamen would be exceptionally challenged to offer Amsterdam service without KLM cooperation given the limited point-to-point market to Amsterdam. Even with KLM cooperation, however, the route will likely be loss-making for Xiamen. Even flying to Paris, a larger local market, would require Air France assistance.

See related report: Xiamen Airlines and Sichuan Airlines are China's latest airlines to fly long-haul; risks abound

KLM operates to five cities in mainland China, including three secondary points: Chengdu, Hangzhou and Xiamen. Xiamen in northern summer 2015 will be served with three weekly 777-200ER services. Xiamen Airlines' Amsterdam frequency is unconfirmed but is unlikely to be more than four weekly as capacity above a daily service would be far excessive. KLM says it will codeshare on Xiamen's service but does not indicate if Xiamen will codeshare on its Amsterdam-Xiamen service or beyond points, although both of these developments are expected. (China Southern, the majority shareholder of Xiamen, codeshares on KLM's Xiamen service.) KLM is the only European airline in Xiamen and the only airline offering long-haul flights to Xiamen.

There is still much to unfold with this partnership. KLM may not entirely support it but recognises there is no other choice; China is a long-term objective and KLM needs to return some of the beyond access it benefits from with its Chinese partners. Xiamen is one of SkyTeam's newest members, having joined in 2012.

China Southern A380 to Amsterdam would bring over-capacity

One of AF-KLM's existing Asian partnerships is with China Southern on the Beijing-Amsterdam route, which they both serve. The partnership does not extend to Guangzhou-Amsterdam, which China Southern serves and KLM does not. China Southern serves both routes daily with an A330-200 while KLM deploys a 747-400 Combi on Amsterdam-Beijing.

China Southern is likely to deploy an A380 on the Beijing-Amsterdam route in the peak northern summer period. This will complement deployment to Sydney during the peak southern summer period. China Southern's A380 fleet remains under-utilised during the off-period with only eight hours of utilisation per aircraft on average. China Southern had mulled a plan to put the A380 on its Guangzhou-New York JFK route, replacing existing 777-300ER service, but instead opted to offer more 777-300ER services, which increases frequency in a competitive market and allows for different connection times.

China Southern flies a 258-seat A330-200 without first class between Beijing and Amsterdam. The A380's 506 seats brings a 96% increase in capacity as well as the introduction of first class on the route. China Southern uses an A330-200 with first class on the Guangzhou-Amsterdam route, according to its website. This will exacerbate over-capacity between China and Europe, further testing AF-KLM's patience and willingness to tolerate short- and medium-term challenges from partners in the hopes of long-term gains.

Guangzhou is China Southern's main hub but Beijing is its second-largest. Beijing is mostly a domestic hub for China Southern but other international services are to Seoul, Hong Kong and Tashkent. China Southern had wanted to deploy its A380 on the Beijing-Paris CDG route but Air China, which already serves the route, opposed this. A proposed cooperation between the two with the A380 did not eventuate. Had it gone ahead, the cooperation also raised questions from SkyTeam.

China Southern top 10 hubs/bases/stations/focus cities ranked on system seat capacity: 2-Mar-2015 to 8-Mar-2015

Source: CAPA - Centre for Aviation and OAG

See related reports:

• China Southern Airlines may deploy A380 to New York City to accelerate US east coast development
• SkyTeam seeks clarity on proposed China Southern-Air China joint A380 operation

Malaysia Airlines could be a partnership option too. Other SkyTeam partners don't seem ready yet

It is a difficult time for AF-KLM's search for deepening partnerships. One potential - JAL - appears to have shrivelled, and in a key market for the Europeans. While the Xiamen Airlines partnership could count as meeting AF-KLM's objective for deeper partnerships in Asia, the partnership is anchored around a route that will surely be loss-making in its early days and drag down the yields of the market. Xiamen's majority owner China Southern also appears likely to challenge financial performance with over-capacity from its A380 deployment. Like Xiamen, China Southern would be unable to make its move without feed from AF-KLM.

KLM has a longstanding relationship with Malaysia Airlines and this could potentially be deepened. Malaysia Airlines will need to consider a wider partnership portfolio as it restructures. This is especially true in Europe, where MAS' position is unsustainable.

See related report: Malaysia Airlines restructure will need partners - perhaps Etihad, BA, Finnair or Qatar Airways

Within SkyTeam itself, the alliance's other Asian members remain seemingly ambivalent about partnerships. Aside from China Eastern, they would likely be able to generate little commercial value in the short term, although Vietnam Airlines and Garuda Indonesia in the long term could bring value. China Airlines is not a major player in Europe while Korean Air has a partnership with Czech Airlines, albeit one that seems weak.

What is certain is that AF-KLM's Asian partnerships are far from replicating the integrated and wide-reaching partnership AF-KLM has to North America, a relationship further characterised by capacity discipline. In Asia, it seems partnerships are seen as the solution to stemming (but not stopping) over-capacity, and reining in the excesses of partners - by way of contrast to partnerships being a platform for commercial growth.