American Airlines' recent pursuit of China Southern, and Norwegian’s partnership discussions with Ryanair, reflect the multiple changing dynamics that airlines operating across all business models must face as they maximise network connectivity to remain relevant and competitive. American had to drift outside oneworld to gain an important foothold in China, while Norwegian stresses that traditional airline partnership structures are not viable for its business model.
But despite American’s attention grabbing decision to take a small equity stake in China Southern, the agreement appears to be a one off event. American has no plans to join rival Delta in pursuing stakes in airlines around the world to attain network longevity. American's position is that its current and prospective joint venture agreements provide anchors in the most important global regions.
For Norwegian, a potential tie up with other low cost airlines allows the company to offer network breadth to the pool of passengers it intends to stimulate with new narrowbody service to the US, but without the frills and expense inherent in more complex airline partnerships.
American Airlines' China Southern investment is a one off to gain coveted China access
During the recent CAPA Americas Summit in Orlando, Florida, executives from several airlines participated in a wide ranging discussion of topics, which covered from the evolution of alliances and partnerships to the new breed of low cost competitors shaking up the North American trans-Atlantic market.
Panel Session: Airline Leaders: New Leadership, New Challenges
American’s decision to pursue a small USD200 million stake in the SkyTeam carrier China Southern triggered questions about the effects the partnership would have on its fellow oneworld partner Cathay Pacific, and its trans-Pacific joint venture partner Japan Airlines.
The deal American reached with China Southern was driven purely out of necessity, rather than from a dramatic shift in strategy. Air China is a member of Star and codeshares with its fellow alliance partner United, while Delta spent USD450 million in 2015 for a 3.55% stake in China Eastern. American needs a partner in mainland China to ensure a certain level of viability in one of the world’s fastest growing aviation markets.
Speaking at the Summit, American VP of alliances and partnerships Joe Mohan said the investment allows the airline to create an anchor in the fast growing Chinese market. Historically, American has not pursued equity investments in other airlines, concluding that its joint venture businesses provide blanket global coverage, and that equity investments are not necessary. That remains the company’s guiding philosophy in navigating global partnerships.
But in an interview with CAPA TV, Mr Mohan stated that had been shut out of the Chinese market, and when the company had an opportunity to enter a “very limited” codeshare with China Southern through an equity investment, it was exciting for American to partner with China’s largest airline.
CAPA TV interview: Joe Mohan, American Airlines VP of alliances and partnerships
American’s presence between the US and Asia has grown 30% during the past two to three years, part of which was driven by the airline’s attempts to gain routes rights in China – the latest of which is Los Angeles to Beijing, scheduled to begin in Sep-2017. American already serves Beijing from its Chicago and Dallas/Fort Worth hubs, and Shanghai from Dallas, Chicago and Los Angeles.
American now has a 9% seat share between the US and China, just shy of Delta’s 10%. United has the largest airline presence of those operating between the two countries, with a 21.5% share.
United States of America to China (seats per week, one way): 18-Apr-2016 and 17-Apr-2017
|Airline||Week of 18-Apr-2016 seats||Week of 18-Apr-2016 percentage share||Week of 17-Apr-2017 seats||Week of 17-Apr-2017 percentage share|
|Air China||16,393 seats||19.86%||16,525 seats (0.81%)||18%|
|American Airlines||7,888 seats||9.56%||8,568 seats (8.62%)||9.33%|
|China Eastern Airlines||14,222 seats||17.23%||15,576 seats (9.52%)||16.96%|
|China Southern Airlines||9,464 seats||11.46%||9,722 seats (2.73%)||10.59%|
|Delta Air Lines||8,714 seats||10.56%||8,858 seats (1.65%)||9.65%|
|Hainan Airlines||6,383 seats||7.73%||9,610 seats (50.56%)||10.47%|
|Hawaiian Airlines||882 seats||1.07%||882 seats (0%)||0.96%|
|Sichuan Airlines||n/a||n/a||1,076 seats||1.17%|
|United Airlines||18,605 seats||22.54%||19,746 seats (6.13%)||21.51%|
|Xiamen Airlines||n/a||n/a||1,255 seats||1.37%|
|Total||82,551 seats||100%||91,818 seats (11.23%)||100%|
American assures that its loyalty to Cathay Pacific remains intact
American and China Southern participate in two different alliances – oneworld and SkyTeam, respectively. Mr Mohan explained that the two airlines would be limited in their cooperation in the initial phase due to the hygiene rules of SkyTeam. As the two airlines look at deepening their ties, “...we would have to look at the alliance situation”, he stated.
American’s new relationship with China Southern has raised obvious questions about the relationship between American and its oneworld partner, Hong Kong based Cathay Pacific.
Mr Mohan explained that American had consulted with both Cathay and JAL before the airline made the decision to partner with China Southern. The day after American announced its planned equity stake in China Southern, the airline sat down with Cathay to reiterate its desire to work with Cathay in a collaborative way.
Now that American is planning to partner with China’s largest airline by seats, its strategy for Asia is to let its current network mature, taking advantage of its new partnership in China, its joint venture with JAL, and other partnerships in the region, said Mr Mohan. American plans to reapply for approval of a joint venture with its oneworld partner Qantas since the US DoT, under the previous administration of Barack Obama, rejected the tie up on the grounds that the two airlines would hold too much market concentration.
See related report: US DOT rejects Qantas-American Airlines joint venture under pressure of unchecked consolidation
American believes alliances and JVs remain relevant in global landscape
Delta’s equity stakes in the non SkyTeam partners Virgin Atlantic and Gol during the past few years – and other tie ups that have included Qantas and Emirates, and now American’s plans for cooperation with China Southern – have fuelled questions about the role of alliances as global airline dynamics shift.
Mr Mohan's view is that there is still a place, and necessity, for global alliances to provide a global footprint, particularly with frequent flyer reciprocity that allows customers to earn and burn miles. Opinions about frequent flyer schemes vary, and the dynamics of redeeming miles with alliance partners differ depend on the grouping, but Mr Mohan remarked that loyalty programmes are largely attractive to a small subset of very valuable travellers.
Hierarchies within alliances have evolved, said Mr Mohan, with three different tiers emerging: codesharing with alliance partners; immunised joint ventures; and equity investments (Delta is the most active in this regard, having recently firmed up an increased stake in its SkyTeam partner Aeromexico). Mr Mohan stated that American has a key partner in every area of the world, and everyone one of those partnerships involves a joint venture.
In addition to its joint venture with Japan Airlines, American has an immunised trans-Atlantic JV with IAG, and is in the process of working to extend the deal, Mr Mohan explained.
American and IAG are utilising the joint venture to compete with new low cost airlines in the trans-Atlantic market. IAG’s new low cost, long haul arm LEVEL will debut in Jun-2017 and will be included in the joint venture with American and IAG. LEVEL will operate on flights from Barcelona to Los Angeles, Oakland, Buenos Aires and Punta Cana. Mr Mohan stated that LEVEL would launch using the Iberia code, and although that does not preclude LEVEL from using its own code in the future, as an umbrella business of Iberia, “we’ll share in that revenue”.
LEVEL is competing directly with Norwegian’s long haul widebody services from Barcelona to Los Angeles and Oakland. The ability of American and IAG to offer LEVEL’s lower fares, and a denser network throughout Europe, is a low risk way for American to compete with new trans-Atlantic competitors. Those airlines' routes to Los Angeles and Oakland also offer a test to the theory of passenger stimulation with lower fares or, conversely, could also serve as a painful lesson of market overcapacity.
Norwegian looks for cost effective ways to forge airline partnerships
Norwegian is also examining different types of partnerships to ensure it can offer customers broad network utility. But its approach is obviously different from those of its full service competitors.
The airline has been in partnership discussions with Ryanair, and Norwegian senior vice president of sales Lars Sande told CAPA that Norwegian believes it will “be able to see where we are going with that” by the end of Jun-2017. He stressed that cooperation with Ryanair would not be done in a traditional way. More mainstream interlines, codeshares and joint ventures increase headcount, he stated.
CAPA interview: Norwegian senior vice president of sales Lars Sande at CAPA Americas Aviation Summit
Mr Sande cited the evolution of self connecting passengers, and the ability to book connections online as easy methods of cooperation.
Obviously passengers using the connections fostered by a potential partnership between Norwegian and Ryanair will not enjoy the benefits of a more sophisticated alliance partnership, but the logic is that those price sensitive travellers do not focus as much on perks as on price. Connecting onto a broader network at a lower price is a selling point for the airlines, and Ryanair has a strong position at all the airports Norwegian Air International is serving, with 737 MAX narrowbodies.
Ryanair international seat share at airports where Norwegian is launching narrowbody flights to the US
American and Norwegian cite the game changing specs of long range narrowbodies
Despite the adoption of different business models, both American and Norwegian expect growth opportunities to develop their global networks. American believes some growth exists in Latin America as the region’s economy starts to rebound, and plans to take advantage of its status as the largest airline serving the region, said Mr Mohan.
American is also aware of the competition that new long range narrowbodies will create for the airline. Mr Mohan remarked that some of those new aircraft have a range of seven hours, which makes it possible to operate from South Florida to almost any destination in South America.
jetBlue, which is the largest airline operating from Fort Lauderdale, is considering acquiring the Airbus A321LRneo, which would be capable of those missions, possibly adding new competition for American in Miami (which is 38km from Fort Lauderdale). Spirit also is an all Airbus operator, and is headquartered in Fort Lauderdale. “It’s coming [new competition]”, said Mr Mohan. “We [American] will compete vigorously.”
Norwegian has 30 A321LRneos on order, scheduled for delivery in 2019, and Mr Sande noted that the airline “could really go long” with single aisle aircraft, citing Europe to Seattle as an example.
At present the Norwegian Group is operating 124 aircraft on all of its subsidiaries, said Mr Sande. The company has 252 aircraft on order.
Norwegian Group fleet summary as of 20-Apr-2017
|Aircraft||In Service||Inactive||On Order*|
One of the biggest impediments to Norwegian’s growth is “lot of regulations out there, which in our mind are ridiculous”, Mr Sande said. Those regulatory schemes prohibit Norwegian from growing in some places.
He cited the example of a regulation established in 1956 that prohibits Norwegian from flying over Russia, whereas SAS is allowed overflights. As a result, Norwegian’s long haul operations from Europe focus mostly westward. Those types of regulations limit competition, said Mr Sande.
Norwegian is not unfamiliar with regulatory and protectionist challenges to its growth. Norwegian Air International endured a three year long approval process to launch new narrowbody long haul service from the US to Europe. Usually, similar types of approvals take on average 60 days; but Norwegian faced strong opposition from US labour unions and other airlines, yet ultimately prevailed to usher in a new competitive era in the trans-Atlantic market.
American and Norwegian got outside the partnership box to achieve their goals
In many ways American is using its existing partnerships to navigate new competitive dynamics in the trans-Atlantic market created by Norwegian, while Norwegian, in turn, looks for creative ways to build inexpensive network breadth.
Broader moves by each airline show that even as the traditional global alliances retain ample relevance, certain markets necessitate thinking outside the constraints of alliances, codesharing and traditional interlining.
American and Norwegian will soon find out if their approaches will bear fruit. In the meantime, consumers should benefit from more travel options tailored to their pricing tastes.