This week’s proposed combination of Brazil’s TAM and the multi-hub LAN is making waves across the industry. In creating what will be a world force, it would also create a regional dominance unprecedented in any other geography. The cross-alliance merger of LAN (oneworld) and TAM (Star) also raises major issues for each of the global alliance; and the opportunities for negotiating a powerful position in one of the global alliances could become a key part of the LAN-TAM merger moves. But then the role of anti-trust immunity enters from stage left…
An alliance equation which remains dynamic
The LAN-TAM situation is further complicated by persistent rumors that Avianca and its TACA partner are in discussions to join the Star alliance, a decision that would have more substantive import now that the new LATAM partnership’s allegiance becomes uncertain. As yet Avianca, the other South American carrier with significant aspirations in the region, has been silent on the development.
Should LATAM (the LAN-TAM combination) opt for Star, the entire Latin American region would become a Star bastion, with few options amongst the remaining carriers to have a real presence in the market. If Avianca/TACA also joins, the Star sparkles.
This - unlikely outcome - would be the most dramatic shift of influence seen in the decade-plus existence of alliances, as the current powerful Latin American presence of oneworld would be erased. The alliance is already seeing a weakened presence with the problems at Mexicana, which, whatever happens, is sure at best to emerge a weakened force.
If on the other hand LATAM opts for oneworld, the alliance’s present strength in the region would be further enhanced and the need for Star to capture Avianca would be considerably increased. It would also make Brazil the unrivalled champion of alliance confusion.
Avianca is also in the equation, as Star courts the Colombian carrier
The now defunct Varig was a founding member of Star and gave the alliance a powerful initial presence in South America. But the airline’s failure soon gave oneworld’s combination of American, Iberia and LAN a dominant position in these markets. The 2010 Star admission of TAM redressed that situation and put that group back into contention.
One potential is that SkyTeam might try to pry the new group away from both its present affiliations; but that would require both parties to realign (with the possible need to penalty payments).
More likely is a full press to try to change Avianca’s preference; thus gaining its own representation and completely shutting out one of its rivals.
Whatever the outcome, the backstage negotiations will be heated as the stakes are high. Unlike the battle over the bankrupt JAL, this fight involves healthy carriers that dominate not just a country, but a large region. Until alliances are replaced by full cross-border ownership on a global scale, the membership mix of each alliance will have discernible effects on traveller loyalty - especially among those prized road warriors that bring inordinate value.
The current balance of power on key routes
Intra-South American traffic, with its still-limited intra-regional trade patterns, is currently less important than domestic and intercontinental routes. Consequently, by looking at the existing North American and European destinations, and their alliance possibilities, it is possible to see some of the factors and considerations that may come into play as decisions are made. Avianca is consequently still very much part of this equation.
The following is a comparison of the key strategic city pair links that each of the alliance partners holds:
- JFK serves as a hub for oneworld’s American and SkyTeam’s Delta. The New York presence for Star is at Newark with Continental.
- TAM connects JFK with both Rio and Sao Paulo.
- The LAN group has a significant presence at JFK with non-stops to Lima, Santiago and Guayaquil as well as a one-stop through flight to Buenos Aires.
- Avianca flies to Bogota, Medellin and an onwards one-stop service to Cali.
- Miami is dominated by American both domestically and in the international sector but it is also the primary and preferred point of entry for many South Americans, so that it is a vital inclusion in any network.
- TAM flies to Rio, Sao Paulo and Manaus.
- LAN is again well represented with flights to Quito, Santiago, Lima and Buenos Aires.
- Avianca provides non-stops to Bogota, Cali, Barranquilla and Medellin.
- Avianca to Bogota only.
- Nobody’s hub but a popular destination served by TAM from Sao Paulo.
- United’s primary East coat hub and served by Avianca from Bogota.
- Claimed by United but unsupported by traffic figures, it is also a focus city for American.
- Avianca connects LAX to Bogota and LAN flies to Lima with onwards service to Santiago and a connecting bank across South America.
- United’s West coast anchor and recently opened by LAN to Lima with connections.
- Like North America, direct European services are limited to a few primary cities and feed is supplied by partner carriers.
- Iberia’s oneworld home base is on virtually every South American carrier’s route map and Iberia’s coverage from Europe to Latin America is unrivaled.
- LAN flies to Madrid from Guayaquil, Lima and Santiago.
- Avianca flies from Bogota.
- oneworld’s anchor airport is served by TAM from Sao Paulo and Rio.
- Though one of SkyTeam’s primary hubs, TAM flies from both Rio and Sao Paulo.
- One of Star’s largest hubs and served by TAM from both Rio and Sao Paulo.
- LAN operates over Madrid to Santiago.
- Despite being in the SkyTeam camp, the large expatriate Italian population in Brazil warrants a TAM non-stop from Sao Paulo. However, Lufthansa Italia is also available at Milan for alliance feed.
Most long haul Latin American services are constructed on pure O&D flows
While there is some synergy at foreign gateways, many of the networks appear to have been built with O & D traffic from South America as a primary concern. Only LAN and oneworld have an edge when it comes to feed traffic from alliance partners at Miami, New York (and Madrid) - all key destinations.
TAM’s goal in joining Star was to use the partners’ services as a primary global network. Through that affiliation it gains service to Chicago, Washington, Newark and Houston in the US as well as Toronto, Zurich, Frankfurt, Munich, Istanbul, Johannesburg, Oporto and Lisbon. TAP’s links are especially important as TAP flies to more destinations in Brazil than does TAM to Europe.
This is a global reach that would be difficult to duplicate for the Brazilian carrier, especially since the Portuguese speaking country would benefit little from oneworld in Spanish speaking Madrid. Star carriers are virtually absent from Bogota, Lima and Santiago other than via Continental and the US.
The LAN group has multiple links to Madrid both with its own services and those of Iberia. However, the other European oneworld members bring little to the party. BA has no service to Santiago, Lima or Bogota, meaning that the rest of Europe requires minimally one connection. BA serves Brazil but the other European members are not linked to South America, meaning a significant drop in non-stop destinations with oneworld. While Iberia’s links into Central America are among the most lucrative of the carrier’s routes, this halo does not flow over into southern parts.
Now is SkyTeam’s time to make its run
SkyTeam remains the outlier and long shot in the equation, but with nothing to lose, it will be tempting to seek to lure one or more airlines into the group. This week SkyTeam announced its main priority was to “increase the scope and reach” of the alliance’s network, notably, among others “in Latin America”. This was before the LAN-TAM announcement and that priority will now take on a keener edge.
From the US, Atlanta is the grouping’s primary and almost sole connection to the continent. Korean operates a 3x weekly service from Seoul via Los Angeles and Detroit will soon have a non-stop to Sao Paulo. From Europe, KLM flies to Lima and Sao Paulo, while Air France ties Paris to Rio, Sao Paulo, Bogota and Santiago.
This is a slightly broader European offering, but the vital connection to Madrid would be an orphan stop for South American carriers and the connections via all-important Miami are at stake. These two deficiencies will make inroads by SkyTeam all the more difficult. The group needs a southern partner.
LAN-TAM decision will be a turning point – for all
From a strictly logistical standpoint, Star currently has the upper hand. With a single connection in Sao Paulo, five European (and one African) destinations are accessible. Star also provides the greatest number of US gateways, though it lacks comprehensive coverage from Miami on the US member side.
Should LATAM eventually go with Star (and, at the initial announcement of the merger, TAM talked of an unlikely period of up to two years to make a decision), Madrid would maintain lots of service from Latin America and Spanair might provide some connections across Europe. But if, as appears more likely, the LAN/oneworld influence prevails, Star would lose a vital advantage on the continent.
If cultural alignment and regional dominance are important, oneworld’s Miami and Madrid hubs provide the best fit for Spanish speaking South America. Unfortunately, for Portuguese speaking Brazil, the alliance is far less favorable.
Also, with Brazil as the largest, most economically powerful nation in the region, with the fastest growing aviation sector, its attractions make it the prime attraction – and as Rio will be host to both the Olympics and the soccer World Cup in the middle of the decade, the pull becomes stronger. Geographically as well, Brazil is a better connection point from Europe than either Santiago or Lima. Bogota, however, has a great spot for traffic distribution.
SkyTeam therefore cannot be ruled out of the running by any means. The size of the potential of the South American markets make it far too big a prize to ignore. There will be extraordinary efforts made by all of the alliances to court the key players over coming months.
... as LAN-TAM becomes a very powerful negotiating force
But these forces will not merely be external. Both TAM and LAN have integrated their systems to work effectively with Star and oneworld respectively. Quite apart from any possibility of poison pill pressures from Star, TAM would need to ensure that it can leverage its network effectively if it did make a transition to oneworld, just as LAN would need to do if the reverse applied.
But, as the carriers will be quick to realise, if they hadn’t previously, and the phones run hot from London (oneworld), Amsterdam (SkyTeam) and Frankfurt (Star), they are suddenly the most attractive items on the continent.
If the LATAM team wishes to leverage this negotiating power to the maximum – and why would it not? – it will be conducting its own beauty contest.
If so, that does mean that there will be a very serious process of competitive courting by all three alliances – and that no outcome can be taken for granted.
....and ATI becomes a vital factor
One important ingredient in this whole process, as it was in the recent JAL beauty contest, will be the significance of gaining US (and EU) anti-trust immunity to entrench the value of alliance relationships. The power of going one step further than mere alliance partnership has been loudly sounded in both trans-Atlantic and trans-Pacific ATI applications. There is vastly more upside to be gained in a joint operation than a mere – albeit valuable – alliance.
The US alliance members in particular will be pressing this consideration. A South America-wide alliance monopoly would stand little chance of gaining anti-trust immunity, no matter who the US partner was.
Hence, Latin America now offers the prospect of refining a new phase in the evolution both of the bidding process and of the role of anti-trust immunity in determining who partners with whom.