17-Dec-2013 7:58 PM

Airline alliances - what future? Global, multilateral and bilateral partnerships are all evolving

Analysis

Have the global airline alliances been effective at generating cost efficiencies, or is their value limited to revenue benefits? Can bilateral partnerships be as effective as a branded global alliance? Do the immunised joint ventures within the alliances have a destabilising impact on those alliance members that are not also JV members? Should the alliances attract LCCs to join their ranks?

At CAPA's World Aviation Summit in Amsterdam on 26-27-Nov-2013, Professor Rigas Doganis led a discussion on these and other questions examining the state of the world's three global airline alliances. Panellists included the CEOs of two of the alliances and executives from an airline that is an alliance member, but not in a joint venture, and from a hybrid LCC that is outside the alliance system.

Summary

Global airline alliances have been successful in generating revenue benefits, but have not delivered the expected cost synergies.
Alliances have limitations in achieving cost synergies due to anti-trust regulations and the size differences among member airlines.
Joint ventures within alliances are seen as a way to transform and adapt, rather than destabilize the alliances.
Bilateral partnerships, with or without equity shareholdings, can provide similar or greater revenue benefits compared to joining a global alliance.
Global alliances often make bilateral codeshare agreements with airlines outside their alliance to expand their network reach.
There is a debate on whether smaller airlines within global alliances are side-lined or if they benefit from the global network and distribution provided by the alliances.

Alliances were a response to the need for mergers

The past 15 years have been characterised by structural instability. Now, we take alliances as a given, but they did not emerge in their current form until the late 1990s as a response to the need for mergers and the constraints on mergers arising from the nationality rule embedded in the bilateral system. The Star Alliance was formed in 1997, oneworld in 1998 and SkyTeam in 2000 (the latter effectively a merger of two smaller alliances, Wings and Atlantic Excellence). The downturn of 2001 created what Professor Doganis calls "a frenzy for alliances".

Perhaps now it is time to rethink the logic of alliances, in terms of their revenue and cost benefits. Are they a passing phase, a step on the way to real mergers, or are they being sidelined by new developments?

The first question posed by Professor Doganis to CAPA's CEO panel examines alliances' ability to deliver cost synergies.

CAPA World Aviation Summit Panel on Alliances
(L to R: Michael Wisbrun, SkyTeam; Ciro Camargo, GOL; Alex de Gunten, ALTA; Giorgio Callegari, Aeroflot; and Michael Schwab, Star Alliance)

Global alliances have generated revenue benefits - but have they delivered the promised cost synergies?

Michael Wisbrun, CEO of SkyTeam, reframes the question by explaining his view of the purpose of alliances: "[They] are not a target as such, but a migration platform. We are now moving the focus from the network to customer benefits linking the network. It's about seamlessness and efficiency". Specifically on the question of cost synergies, he believes that they have had some success in areas such as IT and airport lounges. As an example, he cites Sky Priority, a project to create one standard across SkyTeam for 800 airports.

Nevertheless, there are limits to the ability of alliances to deliver cost synergies. "We don't go as far as joint aircraft procurement", says Mr Wisbrun, "We are too big to create these kinds of traditional synergies, or, for example engine buying."

Michael Schwab, CEO of Star Alliance Services, concedes that there is a big gap between the revenue benefits and the cost benefits driven by alliances, but claims significant success in some areas of costs. For example, savings have been achieved in fuel purchasing "at airports where we have six to 12 carriers, the small ones in town, we combine, but not where we have a big presence, like Chicago," he says.

He also points to the cost benefits derived from co-locating all Star members in the same terminal at larger airport. At London Heathrow's Terminal 2, where all 21 of the airport's Star carriers are based, he highlights the cost efficiencies from pooling activities such as check-in, ground handling and lounges.

Alex de Gunten, executive committee advisor (and former executive director) to the Latin American Air Transport Association, ALTA, argues that alliances are limited by anti-trust regimes in their scope to achieve genuine cost synergies. "It is frustrating to have the anti-trust argument, especially when working against oligopolies in aircraft manufacturing, airports etc". Nevertheless, he feels that alliances could do more to push for cost benefits.

Giorgio Callegari, Aeroflot deputy director for strategy and alliances, is less equivocal. "No, alliances have not delivered the cost synergies expected. They have delivered some opportunities and tactical benefits", he says, although he adds that joining SkyTeam was the right choice for Aeroflot. Alliances cannot tackle all issues and "are not the end game", according to Mr Callegari. Moreover, different airlines have different experiences of alliances. When it comes to cost benefits, he says "US carriers are too big to share the benefits. Some small carriers are too small".

Can a network of bilateral alliances - with or without equity shareholdings - generate similar or greater revenue benefits than joining a global alliance?

GOL is not part of a global alliance, but has a bilateral partnership with Delta, which holds a 3% equity stake in the Brazilian carrier. Ciro Camargo, head of alliances at GOL, views this relationship very positively. "We are a LCC moving to a hybrid model," he says, "Like most of our peers, we have scarce alliance-related resources: our systems don't manage interlines etc and we still have a developing FFP. Focusing our resources on a single strong partner is very beneficial".

Mr Camargo adds that the priorities in the relationship with Delta revolve around looking at cost synergies, training, knowledge transfer, systems and distribution. For GOL, "strong bilateral relationships, often underpinned by equity, give the greatest value". Mr de Gunten also sees benefits from bilateral arrangements and argues that equity ties can push this further: "Equity is like a marriage".

Are the ATI-immunised joint ventures between alliance members undermining the cohesion of the three global alliances?

Perhaps not surprisingly, Star CEO Mark Schwab does not agree with the suggestion behind this question. "Bilateral relationships create value," he says, "and alliances create value on top of that. Joint ventures are based on alliances and there are a growing number joining." He cites Singapore Airlines and SAS as the most recent example.

Mr Callegari notes that it is not a coincidence that the SIA-SAS JV was developed after the break-up of the Lufthansa-SAS JV.

SkyTeam's Mr Wisbrun agrees with Mr Schwab that the JVs are a result of alliances, but, to the specific question posed, his reply is more nuanced. "If you define an alliance as 'everyone is the same', then the answer is yes," he says, "but, if you define it as a migration platform while mergers are not possible, joint ventures allow movement. It's not destabilisation, it's transformation."

Aeroflot's Mr Callegari believes that alliances should be looking forward, arguing that stronger bilateral or multilateral relationships are needed. He feels that the joint ventures are destabilising - but also inevitable.

This apparent dichotomy is summed up by ALTA's Mr de Gunten. "Big carriers say [joint ventures] are a stepping stone. Others give a different answer," he says, "Alliances still give benefits, but this creates a rift."

Why do alliance members need to make bilateral codeshare agreements with airlines not members of their own global alliance ?

As an illustration of how members of global alliances embrace non-members, and of the different degrees to which they do this, Professor Doganis notes that 14% of Star Alliance routes are operated with others, while for oneworld the figure is 38%. For SkyTeam's Mr Wisbrun, this is not a major issue. He says that this happens "to a limited extent, where SkyTeam is not the solution" and notes that SkyTeam traffic increased by 8% last year, whereas its members' codeshares with each other grew by 15%.

For Aeroflot, other relationships are as important as SkyTeam, according to Mr Callegari. Moreover, he adds, SkyTeam endorses co-operation outside the alliance. "If we get benefits we go with SkyTeam, or we go elsewhere," he says.

Describing himself as "an observer" of the global alliances, Ciro Camargo of GOL suggests that the alliances face difficulties in bringing benefits to Latin America. There is no contradiction in Mr Camargo's job title, head of alliances, at the non-aligned Brazilian carrier: its alliance focus is on bilateral relationships.

However, Mr Camargo says that "the market is fragmented. … US and European travellers should be the main focus [of the alliances]. Alliances have done a good job getting to the main markets, but cost and complexity may compromise their ability to bring the full benefits to Latin American carriers on a global scale".

Are smaller airlines just side-lined within the global alliances - just feeders to the big players?

The two alliance CEOs on the panel seem to agree that alliances offer smaller airlines things that they would not obtain on their own. "Why do smaller airlines join?" asks Star's Mr Schwab, before answering his own question with "a global network and worldwide distribution." They both admit that the different sizes of airline within the alliances can lead to tensions, but, says SkyTeam's Mr Wisbrun, the alliances are "a vehicle for smaller airlines to join with bigger airlines" and they provide them with options.

Mr Schwab rejects the suggestion that mid-size carriers in an alliance suffer more. Asked whether SAS, for example, is not a happy member of Star, he is clear: "SAS is a vital part of Star. It serves a part of the world we can't serve without it". Giorgio Callegari, Aeroflot deputy director for strategy and alliances, takes a different view, underlining in particular the tensions that can arise between alliance members that are part of an immunised joint venture and those that are treated as being more peripheral.

He gives SkyTeam member CSA Czech Airlines as an example. "There is one market, they need to fight against full service carriers and LCCs. They have chosen to lower their costs, but they need feed to survive. They don't get JV benefits, but the JV [within SkyTeam on the Atlantic] wants to draw as much traffic as possible from Prague".

ALTA's Mr de Gunten attempts to reconcile the differences in opinion, suggesting that all the panellists are "saying the same thing." He elaborates on this: "There are a few core airlines that really manage an alliance. Their priorities are not the same as for the little carriers. … As long as there is some benefit to small carriers, they will remain".

Should and can the global alliances attract the larger low-cost airlines?

For GOL's Mr Camargo, the only LCC represented on the panel, the answer is clear. "Yes," he says, "alliances have value for those migrating to the hybrid world, for example GOL, Southwest Airlines, Air Asia. It is good to have access to global corporate accounts. There are lots of high yield passengers crossing South America."

Nevertheless, for now, GOL sees more value in developing strong bilateral partnerships than in joining a global alliance.

Global aircraft fleet by alliance as at 17-Dec-2013

From the point of view of the two alliances represented on the panel, Star and SkyTeam, the question touches on a number of complexities. Nevertheless, they appear receptive to the idea of including some LCCs under certain circumstances.

SkyTeam's Mr Wisbrun explains: "In some markets, a hybrid LCC is the only option available." Star's Mr Schwab agrees: "There are a number of important, fast growing markets where availability of full service carriers is limited. Eventually we will see some form of connectivity with LCCs". Indeed, says Mr Wisbrun, some SkyTeam members are already co-operating with LCCs.

However, Mr Wisbrun sees only a limited form of co-operation: "We don't want complexity. I am thinking of simple operational interfaces and gateways to offer SkyTeam Connect to LCCs. I don't see them becoming members per se…". He adds that the focus of his alliance is "to create seamlessness" and raises the question "who is taking care of the customers?" in the event that LCCs become alliance members.

Mr Schwab highlights the need for new alliance members, LCCs included, to bring something new to the alliance. "In Europe, Ryanair or easyJet doesn't add anything. We need to provide flows beyond the gateways". He points out that most LCCs have a point-to-point focus and says that it is hard to understand the value in linking point-to-point to an alliance.

There is another crucial difference between most LCCs and the global alliances. As SkyTeam's Mr Wisbrun says, "LCCs are generally continental-based, but alliances are global. If LCCs fly intercontinental, that's far away from where we are now."

There is also the question of information technology and the IT differences between LCCs and FSCs. "It is complicated and expensive to connect all platforms", says Mr Schwab. His Star Alliance decided to move towards a common platform, but "the reality is technology has moved beyond this. You can create an interface at the centre."

The alliances still have other priorities before integrating LCCs into their midst. "Getting the basics right is not that easy," says Mr Wisbrun, "it is still far from done".

Are alliances shaky and, if so, what is the next move?

Mr Callegari believes that the global alliances are strong, but that they do not represent the future. "The alliance interpretation of the basics is determined by the big carriers," he says, "The future is split up in smaller groups". The panel is in broad agreement that alliances have done a good job on the revenue side and that they are effective marketing and commercial tools. There will be further adaptations and this should embrace more synergies on the cost side.

SkyTeam's Mr Wisbrun, understandably, is an advocate of the alliance system for the time being. "As long as global consolidation is not allowed, co-operation on a global platform will be the name of the game. Members decide the shape," he says. Star's Mr Schwab predicts that consolidation will follow the path laid down by the joint ventures: "We will see much deeper integration of the JVs, eventually global, to run their businesses like most of the businesses of the world".

"There is a good reason why 60% of capacity is under alliances - it works."

The panellists represent a wide range of experiences of, and attitudes towards, the global alliances, each with different opinions on a number of related issues. However, there is broad agreement on some key points.

Alliances shares by seats flown: 16-Dec-2013 to 22-Dec-2013

The three alliances are strong, but still evolving. (The evolution is perhaps the thing!)

They have been good at revenue generation, but less effective in realising cost synergies.

There is room for bilateral relationships, both within the alliances and outside the alliances, and there could be scope for interfacing with LCCs.

In some circumstances, equity can deepen bilateral relationships. There can be tensions between members, particularly when members are excluded from the joint ventures that form an alliance within the alliance.

The last word falls to Star's Mr Schwab: "There is a good reason why 60% of capacity is under alliances - it works."