Alliance or Independence: The Strategic Crossroads Reshaping Global Aviation

Transcript

Jens Flottau:Welcome to the Alliance panel. Let me just introduce my panelists to you first. Kate Lee, VP Corporate Affairs at SkyTeam. Özlem Özcan, Senior Vice President International Affairs and Alliances at Turkish Airlines. Turkish Airlines. We've got Jiri Marek, CEO of Air Serbia, and David Gunnarsson, CEO of DOHOP. Thanks for being here. I have obviously questions prepared, but I'd like to remind you that you can also ask questions through Slido. They'll be here on the screen, and I'll try to address as many as I can in the time that we have. So, Yes, this is the alliance panel, but I think it's impossible to ignore the issues that we've all been talking about all day today, or this morning at least, and all day yesterday. I want to start with the jet fuel questions and the consequences of them. Jiri, you mentioned yesterday that you're not hedged, Air Serbia. What are the consequences? Are you cutting back on capacity or are you just going—

Jiri Marek:I actually mentioned yesterday, we're actually adding the capacity.

Jens Flottau:You're adding capacity?

Jiri Marek:Yeah, because like, you know, to cut capacity before the summer season, where is the only period where you can really make some money and demand is strong, that will be a bit contradictory to cut the capacity.

Jens Flottau:Okay, let me rephrase the question. When will you cut capacity? In the winter?

Jiri Marek:Look, we showed our approach to the market. We always see some opportunities. We are agile to react on them. Nobody has the answer to the million-dollar question when this will end, but we will definitely enter with a strong balance sheet and we will adjust if necessary.

Jens Flottau:Özlem, how about you? What's the plan at Turkish Airlines?

Özlem Özyön:Actually, in terms of capacity, we are managing our capacity dynamically, actually considering the market conditions and fuel prices. We cannot say that we are cutting capacity, but we are managing very dynamic and agile way. If we see more demand, more revenue, more opportunity there, we adjust our capacity on that market. That's how we feel, and there is no significant capacity How is Turkish hedged at the moment? Actually, as a policy, Turkish Airlines is using a layered hedge policy, as far as I know, and for the year-round, the ratio is roughly 3% to 8% currently.

Jens Flottau:At what price?

Özlem Özyön:I don't know.

Jens Flottau:Okay, no worries. Cate, you just told me that you just came back from a SkyTeam board meeting a week ago, and obviously, I assume that you were discussing the future of Turkish Airlines. I assume that fuel was a topic there. What did your members tell you about potential fuel shortages and how they deal with the situation?

Jiri Marek:Yeah, absolutely.

Cate Leigh:I think, yeah, as you say, we spoke with all of our 18 members just last week, and they were more concerned about fuel scarcity than they were about fuel price. Obviously, they are worried about fuel price. What they're finding is that they can adapt their capacity to routes that are working for them. But what they're very concerned about, particularly the long-haul international airlines, is how do they know that when they network plan that there's going to be fuel for their aircraft to come back again to their base hub? What we're trying to work through with them at SkyTeam is collecting all the data we can as actually where the fuel fuel is at the moment and which parts of the world might not have the fuel in place to operate some of these routes.

Jens Flottau:SkyTeam is helping, trying to collect the data and the information for its members in this case?

Cate Leigh:Exactly, yeah, using the members' knowledge as to basically knowledge sharing within the community that we have.

Jens Flottau:That kind of brings us into the alliance topic in the middle of it, and I want to start with Jiri, again, because you are a really interesting case, if I may say so. You've been a board member on all of the 3 global alliances, SkyTeam, STAR, and Oneworld. So you know a bit about them. Yet, Air Serbia has decided to not become part of an alliance. So what does that tell us?

Jiri Marek:Well, there need to be some black sheep always, right? But maybe after the panel, the ladies will convince me to change my mind. But, you know, I think the We've been very clear on voicing our position. We are a small regional airline which is developing very fast. We are 70% above pre-COVID levels, and we don't want to be limited by somebody telling us with whom we can cooperate and with whom cannot. We have here a representative of 2 alliances, and we have very good cooperation with airlines members of all of them. That's where we are in our stage of development at the moment.

Jens Flottau:Which can change at some point?

Jiri Marek:Look, it can change anytime as long as we get the value from the alliance at the at least equal level what value we will bring in, then that would be the fair sharing. I don't have that view at the moment that small airlines are treated equally in the alliances.

Jens Flottau:You have some long haul out of Belgrade itself, but you feed into Turkish?

Jiri Marek:We have very good cooperation with the Turkish airlines. We have very good cooperation with Air France-KLM. We have also— we had and we still have, but now they are not flying with Qatar Airways as Oneworld, with BA. Basically, with all alliances. When I was in other airlines, smaller ones, there was always somebody told, oh, you can codeshare with these guys, you cannot codeshare with these guys. You have to feed this hub, not this hub. That's not how we see it.

Jens Flottau:The geography of where these hubs were were obviously important to you. You needed one big one in the—

Jiri Marek:Eastward traffic? Look, at the end of the day, we don't want to force our customers in which hub they should connect. It should be the free customer choice that we offer as much opportunity and connectivity, and the customer will have a free choice if he wants to go through the Eastern hub, Western hub, Northern hub, whatever. That's what is the role of, I think, smaller regional airlines to provide the connectivity, and customers should be free to choose. We don't want to force them to some hub, at least if we are not paid for it.

Jens Flottau:Özlem, you represent a huge airline that is growing very fast. Why do you even need an alliance?

Özlem Özyön:Actually, once we joined the alliance, Turkish Airlines is not big. It's an obvious fact. But currently, still, even we are big, I think currently in terms of ASK, we're the 2nd largest sole airline in the alliance. But still, we are having much more opportunities for being an alliance member. Still, we see values, so we can connect and we can cooperate with alliance members. In general, today's environment, I believe that alliance is much more opportunity for customers, not for the airlines indeed. Hence, the customers are still benefiting, enjoying the alliance. I still— there's a big value in alliance currently that we're also enjoying as Turkish Airlines.

Jens Flottau:David, you're not an airline, obviously. You're also not an alliance, but you are kind of an alliance, or you're building kind of one-trip alliances for customers, right?

David Gunnarsson:Yeah, in some ways. I mean, I think, and, you know, if we think about this question of alliance versus independence, right, it's probably not so much a binary choice anymore because you have, like, to your point, Jiri, I mean, you have the ability to build sort of tech-enabled partnerships with anyone you'd like. That's exactly what our philosophy centers around, which is about creating that customer choice and not constraining people within a certain set of carriers. I think alliances are, from a historical standpoint, probably phenomenal in terms of a wrapper for loyalty and status and having that accessibility within a group of carriers across the entire world, but this isn't necessarily what everyone is looking for. You have to always cater to everybody who is in the areas and every— all of the customer segments that you're looking at. And that's the partnership space that we are in with—

Jens Flottau:The customers that book through you or that use your services, who are they?

David Gunnarsson:I mean, they are— so we work with a lot of airlines in the low-cost space. So we do a lot of LCC interline basically without the legacy constraints of interline. And then operate essentially the bridge between the low-cost and the full-service carrier world. We also, I mean, obviously, we have a great partnership with SkyTeam and have had for many years, and that revolves around, or is starting to revolve around more around air-to-rail, for example, which airlines are— we see a bit of a spike in sort of interest in that given the current situation.

Jens Flottau:So, Cate, again, if I may say so, you're also an interesting case. Because you come from—

Jiri Marek:Personally?

Jens Flottau:You come from Virgin Atlantic, which obviously has a history of being a very independent airline that was on the other side fighting the big guys, BA in particular. And now you're at SkyTeam. I mean, Virgin is, and you personally are. How does it feel on the dark side?

Cate Leigh:Great. It's super interesting seeing how the alliance operates on the inside versus being a member, and particularly, like you say, a new member, relatively small member airline. At SkyTeam, we have 5 value streams, and just listening to my colleagues here, we really have to make sure that we give our members the equitable value, whether that's through revenue generation— obviously, that's the foundation that we have— for the network connectivity, for network reach, or its cost savings. A really good example with the cost savings side is— and the competition side that we can provide our members is the— what we've just launched this week, which is the new lounge at the Frankfurt Airport new terminal. Really interesting business case for our members. Individually, they wouldn't put a lounge in one of their destinations. It's hubs that you have your lounges in. And so, but collectively, when the members come together and they all operate into the same airport and we have a lounge there, particularly when it's in a hub of one of our competitor alliances, it really adds that value creation for our members.

Jens Flottau:I'm actually going to go to one of the first audience questions, which is similar to what I was going to ask Özlem as well. Do you feel sometimes constrained inside Star? Because not everyone in Star likes the growth of Turkish, I assume, because it's—

Özlem Özyön:I already heard that.

Jens Flottau:You haven't, or you have?

Özlem Özyön:No, we don't have, actually.

Jiri Marek:Yeah.

Jens Flottau:So the question here on the screen is, you know, you are partnering with Air Transat and IndiGo, which are not Star members. How do you get away with it?

Özlem Özyön:Actually, as to today, airline environment, airline industry is so tough. You need to find ways to generate incremental revenue, even within airlines or without airlines. That's what Turkish Airlines is doing currently. We have good cooperation with our current alliance members as well, like Air Canada in this example. Apart from that, if we see value or incremental revenue without partners, Star partners, we do. Currently, Star Alliance have that flexibility for current members to allow cooperation out of alliance, which is currently fine and should be the case, I believe.

Jiri Marek:Okay.

Özlem Özyön:I don't foresee or I cannot define that being alliance members constrains us, I can say. I think it's a great example. I mean, Turkish Airlines is a great example for that. With and without alliance, we can cooperate with any member.

Jens Flottau:Are the big alliance members, the Uniteds, Lufthansas, and so on, are they willing to share the benefits of being in the alliance in a fair way with the smaller airlines?

Jiri Marek:Jiri. Well, I cannot talk on top of that, but I would say through my past, I can see that the— except the one world, like the 2 remaining, they've been very rigid up to, I think, 2010, where there was not allowed at all to cooperate outside of the alliance. There was a bit of, I would say, opposition and revolution by smaller carriers in both, and they create something which is called flexibility tool, where it's allowed certain percentage of ASKs to do it outside of the alliance. Still, you have certain paradoxes that even within alliance, you have the, let's say, JV partnerships, which basically, especially let's say if you look transatlantic, you have alliance members which are not allowed to be part of the JV, but at the same time, they are not allowed to co-chair with somebody else. It's like, This is, again, from our perspective as a smaller carrier, it's forcing customer to certain choices, and those choices bringing the higher cost to the customer. We don't want to be part of that force as a smaller carrier. I especially like what you guys doing, or yesterday, Kiwi was mentioning there. It's really paradoxes is modern technology and virtual interlining that you might have 2 airlines which actually have no cooperation together. They are competitors, Through these platforms, customers are still buying that choice. I think that yesterday, I think Michael told as well, everything in airline evolved to put the customer in the center. As long as I agree with what you told, that there is a value for the customer in loyalty and other things, but I think the customer should be in the center and he has to have free choices how he wants to move. That's what we do as airline. We provide the mobility. So why we will be forced to direct the customer to certain flows? As long as this kind of restriction remain in alliance, I believe that the smaller carrier is better off without.

Jens Flottau:Like the other 2 alliances, you have a big joint venture across the Atlantic within SkyTeam, Virgin being part of it. How do you manage the benefit distribution discussion inside We have a—

Cate Leigh:actually, we have a wonderful dynamic within SkyTeam between our large members and our smaller members. What we're seeing is that when we want to have some form of innovation, the larger members have the employees, have the creativity, have the analysts that can really study what that should look like long-term, particularly for the rest of the members. But they're large legacy carriers that have lots of red tape, have difficulties sometimes actually then delivering that product. And what we do within the alliance is we reach out to those smaller members like Virgin Atlantic, SAS, or Aeroméxico, that are far more dynamic, far more agile, willing to take a risk on a new product that we're going to do. And so the innovation that the large members have the ability to develop we then share with the smaller members to actually try it out. A good example is our seamless check-in type services. The smaller airlines are able to do that. In the meantime, the large legacy carriers that have multiple layers to get the approval of this can see whether it works or not. If it doesn't work, we pull back, we try something different. If it does work, we allow all of the members to use this product.

Jens Flottau:We have a question here for David. When will DOHOP Interline offer a checked back-through connectivity product, and what's the hurdle in doing that, for doing that?

David Gunnarsson:Good question. Well, where obviously kind of where we come from is, like I said, in the sort of low-cost interline space or the low-cost partnership space. So you often, we often work with airlines that have no concept of, no previous concept of partnerships. Or through checked bag. Now, in order to emulate, shall we say, you know, alliance or interline agreements, although I might slightly disagree with the comment that this is always seamless within alliances, it isn't.

Jens Flottau:I agree with you.

David Gunnarsson:But obviously, the bag needs to follow the passenger and a transfer that where you need to go landside and you have to recheck your bags and these things, that's complex. However, that is something that we have been working on pretty significantly over the past 2 years, and we've launched the first of that— first partnership between Air India Express and Scoot with a through-checked bag. And then we are— the next step there is launching with a low-cost carrier that has no previous concept of through-checked bags to be able to transfer bags along with the passenger and allow the passenger to stay airside. That's a critical kind of I'd say, a turning point in this evolution.

Jens Flottau:Again, another question on the JVs, and I was going to ask the same, actually, or more or less the same. Have— so the big players have become bigger, the joint ventures have come in, they've created another layer in the alliances. Have the alliances lost their appeal to these big guys because they're much better off inside the JVs, and they have no incentive to share the benefits of these JVs with the non-JV airlines inside the alliance. Özlem, do you have anything?

Özlem Özyön:Actually, as we don't have any current JV, I cannot have a deep comment on this. Again, my point of view is currently alliances is an alliance and offer for customers. As JVs are only limited pair of airlines and for certain regions, it's again, alliance creates value for customers and I believe it will still keep on their promise.

Jiri Marek:I will be maybe the devil's advocate again. If you look, definitely I agree with the statement. I think it's more important for if you create the JV, definitely it's more value for you. from the JVs and from the alliance. The alliance, you degrade that a bit. You definitely, you have even the JV which are, or equities which are cross-alliances. That's definitely one thing. I think if you look at the evolution, it's like you can easily see last, let's say maybe 10 years, how many new members actually enter an alliance. I think Hawaiian entered Versus basically swapping the alliance because of the equity changes or JV changes, and how many actually left airlines by bankrupting and so on. The question is, is there really proposition for the new members or it's already like it has its maturity?

Jens Flottau:Shouldn't we take it even one step further and say, if you're a member of the JV, it's not only not in your— I mean, It would be actually a mistake to share the benefits because you— why do the JV if you share it anyway?

Jiri Marek:Well, you told very transparently how is it. If you would like to tell it politically correct, you will not tell it that way. But you are completely right.

Jens Flottau:David?

David Gunnarsson:Yeah, nothing to add to that.

Jens Flottau:Nothing to add to that. Cate?

Cate Leigh:Yeah, absolutely. I mean, the joint ventures, the 3 major joint ventures that we see are obviously transatlantic joint ventures. How I see the evolution of alliances is that we're going to see more joint ventures growing between our Asian friends in the East. And something that Sir Tim Clark mentioned yesterday with the Gulf carriers about how they're connecting West and East, I really think that there's this new phase coming here where the West joint venture and the East joint venture will actually need the global alliances connect them to compete with the, the Gulf carriers and going, going forward in the future. And the joint ventures really are focused on profit sharing, revenue sharing, that, you know, they're commercially driven. How I see the, the complementary side of the global alliances is the, the customer experience, as you say, as well. And the knowledge sharing is absolutely paramount. And particularly with the sustainability side that all airlines recognize that we need to, you know, think about. At SkyTeam, we have the Aviation Challenge, which is now open to any airline, any airport that would like to join us. It's a really friendly competition that creates this knowledge sharing of anything that's sustainability Orientated.

Jiri Marek:If I just may, because it sounds to me like it's resonating the previous interview, like, you know, that we have the topics for the panel discussion. Like, you know, it's impressive what Ryanair is doing, and those 200 million-plus passengers which they transport, they don't care about any alliances or with whom we cooperate or not. And it's again, like, you know, the world changed. The customer is the one who is choosing where to travel. It's not us deciding or alliances deciding with whom you cooperate, with not. I think that's what should be put in the focus in everything and build it around that. Then there will be the true value.

Jens Flottau:I live near Frankfurt, so I fly mostly Star Alliance, little choice. Sorry, Lufthansa. As a customer, I find it impossible to—

Jiri Marek:We fly Frankfurt as well. Yes.

Jens Flottau:I'm only one destination.

Jiri Marek:To Balkan and that region, you know, be our guest.

Jens Flottau:Thank you very much, I will. But I find it impossible to navigate different rules even inside the alliance, right? I mean, I'm kind of, as a Lufthansa frequent flyer, can I have access to the lounge at that airport? And maybe the answer is yes here, but it's no on another, and it's completely intransparent to me. what my privileges are. Do the alliances need a reset to become, you know, more transparent, more customer-friendly again?

Jiri Marek:Definitely, definitely. You know, if there will be a reset, most likely we will be the member already. But, you know, I like when I was in the SkyTeam, like, I left like 7 years ago, I was in Alitalia at the time. This idea with the lounges, SkyTeam lounges, is great, but it's again, it's not taking till the end because not all members of the SkyTeam actually use that lounge. And now many airports where you have the SkyTeam lounge and the members use another lounge. So it's like you have to take it till the end, all these rules which you also mentioned in the frequent flyer program. There is a value, but I believe if you will ask, let's say, every member is at alliance, they don't even know which card and which access have the other member airline because there is no standardization because of the cost-cutting transformation and all these kind of things. Everybody changed those rules. I think the only one which actually still have those rules valid across is, is Oneworld, and it's super simple for the customer to understand it.

Jens Flottau:Is that on your radar?

Cate Leigh:Absolutely. So just for your information, 8 of our members fly to Frankfurt, so Please.

Jens Flottau:Enjoy your terminal.

Özlem Özyön:In the new terminal.

Jiri Marek:You have the lounge.

Cate Leigh:Welcome to the lounge. Yes, from the SkyTeam perspective, we really recognize that every member's brand is individual. What's happened with pricing, bundling fares, what's going to happen with modern airline retailing, all of our members are at different phases. What we've managed to do at SkyTeam is have a baggage calculator on our SkyTeam website. So if you're traveling in upper class on Virgin Atlantic connecting to an economy on one of our other member airlines, it will tell you exactly what your free baggage allowance is. We don't control what the members want their baggage allowances to be, but what we can do is make sure that our customers are knowledgeable on what that is. I think the, the second thing that we have is the the loyalty, the earning and burning, how much are our high-value customers going to earn if they travel on this. We have a calculator on our website. And the final thing that I know that is difficult for passengers as well is their baggage. I think many airlines don't even know where their own baggage is. And so one of the core things that we're doing at SkyTeam this year is making a baggage tracking system available to all of our members so that we can see, particularly on those mixed metal connections, they know, was their bag actually collected by the airport? Is it going to turn up at their final destination after they've made 2 or 3 connections to the other side of the world? We know that that makes our customers anxious.

Jens Flottau:That's something that some big carriers are introducing in the apps, right? I flew United the other day and they— you could trace your baggage on the app live, basically. So that was a new feature that I thought was valuable to me, at least, because I disrupted flights. So that helped. We do have a few more questions here. One, I guess, for Özlem. Air Europa, you just invested in Air Europa. It's also, you know, One of the other shareholders is IAG. Should alliances be more cautious about airline ownership in terms of compliance?

Özlem Özyön:Actually, yes, we are trying to complete our equity share transfer. Currently, they're not completed, so we don't have any deep negotiations or we are not enhancing our current cooperation with Air Europa. In terms of principle, actually, as alliances currently do not mandate to, or we don't talk commercial things, we are still competitors even we are on the same alliance. I don't foresee with those limited shares will conflict or contradict with the current compliance issues actually with that percentage, roughly 30 or 25%. I don't predict actually to create any compliance issues because, as I mentioned, currently there is no mandate to deeply cooperate within alliance in terms of the values or the standards that we will— we need to ensure. That shouldn't be the case actually.

Jens Flottau:Do you know there is an airline for sale here in Germany Obviously, referring to Condor, maybe not right now, but soon. Any interest, or is that another collision with your partner, Lufthansa?

Özlem Özyön:As far as I know, there is not any ongoing discussion, or it's not on the table. That's what I can say.

Jens Flottau:For DOHOP, I guess, if there are Lots of cancellations due to fuel shortages or any other reasons. Are you, are you handling reimbursement, passenger reimbursements?

David Gunnarsson:Well, we are a tech enabler, so we sit— yes, we sit between, we create a layer between the 2 airlines, but the passengers ultimately hold tickets and transact with the airlines in question. So we are not in that sort of in that reimbursement phase. So we, those, all of those reimbursements come directly back to the passenger. And that's, that really is where I see as part of the value here is building, being a tech enabler for these relationships without that somehow involving being part of that transaction.

Jens Flottau:And that wouldn't be something for which you would offer insurance or something?

David Gunnarsson:We, I mean, we obviously, we, that's where we operate. So tech enabler plus service provider of picking up a disrupted passenger. And when there's mass disruptions like this, like we went through COVID and we've gone through previous crises. We've been around for a few years. So that's something, you know, that is quite common, and we understand how to operate inside.

Jens Flottau:So when I started covering airline alliances in the late '90s or something, when Star Alliance was founded, I think '97, Christy, or— yes, '97.

Özlem Özyön:Yeah, okay.

Jens Flottau:So almost 30 years ago. There was talk about all sorts of things, joint common IT systems, or at least IT hubs in the middle that would connect everyone seamlessly, joint procurement initiatives. A lot of these initiatives have gone really nowhere, right? I mean, there's no joint procurement as far as I can tell. The IT issues are alliances are still dealing with or struggling with. Let's talk about joint procurement. Where are we there and why hasn't it happened?

Jiri Marek:I can start. I remember at the time I was in Málév Hungarian when we joined the Oneworld, like 2000, I believe, 8 or something like that. It's already a long time ago. I remember those night calls because of the time difference between Asia and US. Where we were discussing if these plastic cups in the plane, what kind of shapes they will have and these kind of things, and how many times an effort was spent on that. At the end of the day, it always turned out that it's more expensive than the big guys can achieve. If they achieve a better price, why they will share it with their competitor? That was always the end of discussion at the end. I think you've been completely right. You have alliance, but within alliance, Okay, you have the JV, but the rest of the guys are competitors. They have no interest to share. If they have the economy of scale value, why they will share it with their competitors?

Jens Flottau:Cate, any procurement initiatives that we should know of?

Cate Leigh:I think with procurement, it's quite difficult because of the so many regulations globally. What SkyTeam's concentrating on at the moment is SAF and how our member airlines are are looking at SAF. Interestingly as well, on the cargo side, obviously we're the only alliance that has a cargo arm as well, and they're looking at the joint procurement of straps. It's amazing. I'm such a passenger.

Jiri Marek:How long they are looking into that?

Cate Leigh:What colors you have, what, like, the thickness, all of this.

Jiri Marek:It's very complex.

Cate Leigh:Very complex. Joint procurement is complex, but—

Jens Flottau:As are alliances, it seems, as a whole. We've run out of time. Thank you on the panel. Thank you for your questions. And I guess off to the next one. Thank you very much. Thank you.

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