The death warrant for global alliances is routinely issued. It takes only a squabble between members or one airline’s partnership with a member outside the alliance to see the entire value of global alliances come into question, with a prediction of collapse, disbandment and obliteration.
Yet in reality, reports of their demise have been greatly exaggerated; global alliances have been busy creating a new life.
This report looks at the three global alliances’ evolution of strategy and recent changes in management. Alliances are being tasked with three pillars to facilitate and support: joint-ventures, unbundling and how to grow membership, mostly in the LCC/hybrid space. Low-cost alliances are briefly considered.
The opportunities for global alliances to bring together and support member airlines and their passengers are in some ways greater than ever before. Yet cohesiveness at some airlines will require exclusion with other members. This will create casualties. The resulting changes have the potential to lead to alliance membership musical chairs.
It is unthinkable that the current allocation of airlines to alliances can remain intact
But rather than an airline leaving an alliance and becoming independent, it is more likely to switch alliances, something that has seldom occurred so far for strictly strategic (and not consolidation) purposes.
Very public developments at global alliances are still to come. But overall alliances will take more of a backseat as airlines exert their brand, backed by their own growing loyalty programme and the network footprint of their closest partners.
The backseat may not be attractive or attention-getting for alliances, but it helps create long-sought sustainability for airlines. Alliances accommodate passengers but answer to their member airlines. Airlines are in control of the future direction; the metamorphosis of the alliance is their oyster.
The oldest of the alliances, Star, turns 20 years old in 2017
The intervening two decades have seen profound re-direction in aviation, yet global alliances, despite their many changes, have not followed in pace.
Global alliances are seeking greater relevancy to the member airlines they serve. This ownership is often forgotten: alliances are not in pursuit of capitalism and self-promulgation; alliances serve the members they represent. A branded alliance has no utility if it has no member airlines.
Member airlines of all three alliances have some common developments for alliances to factor into their new strategies, which have come under review following recent leadership change at all three alliances. Alliances that are to be successful in the future will not just accommodate changes but support them and the new business activities of member airlines.
The most prominent and controversial need for alliances is to support joint ventures. When JVs are created amongst an alliance’s members, questions persist if the alliance is needed since members are forming ties amongst themselves that sometimes exclude other members. When JVs are created between a member and non-member, the purpose of global alliances comes under even greater question.
Global alliances have typically been the foundation for multiple-airline JVs; they are the platform for partners to take their relationships that step further. Global alliances can facilitate the invisible back end functions that link the members. This role has the potential to take on greater scope as airlines leverage the market and passenger data they have ignored for so long. On another level, these new areas of activity raise competition issues and need to be accompanied by ring-fencing and regulatory compliance.
All main members of global alliances are full service airlines yet they are increasingly unbundling, taking on the nature of the low cost revolution. Alliances were originally designed to connote to passengers a certain level of standards.
Alliances will not persevere in getting airlines to reverse charges for baggage, but they can help to communicate better and reset passenger expectations. More ambitiously, they might see if there is opportunity for multi-tiered levels of service for passengers connecting from long haul to short haul on either the same operating carrier or multiple carriers.
Of the last major initiatives, alliances are still in some markets pursuing their initial objective of establishing presence and gaining market share. The white spots vary for each airline but they tend to be large domestic markets where prospective partners adhere to a low-cost or hybrid business model. All three major alliances are exploring how to interface with such airlines.
If global alliances were created today, they would look very different from the original framework
This is because it dates back to the environment of the 1990s. Today there would be greater provision for airlines to command flexibility: their world has become larger while aviation has become leaner and more.
Creating a new global premium alliance is one hypothetical scenario, but given the changes in the marketplace since the 1990s, how has the ideal role of alliances altered?
When the alliances were established, Etihad, with its unique form of airline association, did not exist, Qatar Airways had only a few aircraft and Emirates was still considered small. Ryanair did not have a website; Mark Zuckerberg was in high school; LCCs did not capture much attention outside the US’ Southwest Airlines; Chinese airlines did not launch three new international long haul cities in a single week. Aviation was more fragmented, with numerous airlines, no major group holding structures, and restructurings were few.
For Alliances to adapt to these changes and establish a foundation for the future is a similar task to those its member airlines are having to undertake. Some airlines have come further than others. Successful responses do not follow a single recipe. Alliances must find their space in this new order. To complicate the task further, their member airlines bring approaches that not only differ but continue to evolve rapidly.
No alliance is more synonymous with a single airline than Star Alliance is with Lufthansa
Star has traditionally been the more integrated and less flexible alliance. Member airlines that bemoan restrictions also concede they receive greater benefits than they likely would in another alliance.
Lufthansa is captain of Star; oneworld and SkyTeam have a few first officers. The Lufthansa-Star relationship highlights the changing role of alliances. Lufthansa was dogmatically against the existence of Gulf airlines and for a Star airline to have a significant partnership with one was unfathomable.
So it became a shock to the other partners when Lufthansa recently cozied up with Etihad.
The Etihad relationship is still indeterminate, but it does illustrate vividly the need for pragmatism in partnership relations. There is a limited codeshare that so far places Etihad code on Lufthansa’s beyond network while Lufthansa only codeshares from Germany to Abu Dhabi; Lufthansa is not codesharing on Etihad flights beyond Abu Dhabi and thus embracing the fundamental strategy (central hub) of Gulf super-connectors.
This could change with time; there is much for Lufthansa and Etihad to patch up at a time Etihad’s management is changing, while Lufthansa must be sensitive to excessively controlling unions. Alternatively, this partnership may be what is necessary to solve the problem of Etihad’s loss-making European airline investments including airberlin in Lufthansa’s home market and now-bankrupt Alitalia in one of Lufthansa’s key source markets.
Whatever the balance of benefits, it is difficult for Lufthansa to maintain its old anti-Gulf talking points to Star members
If Lufthansa can extract some benefits, even under quid-pro-quo, other airlines can too. Air Canada and SAS (amongst other Star members) have Gulf codeshares, despite their rhetoric, Copa sought a partnership with Emirates for the Dubai-Panama City route now on hold, and some propose Europe-Southeast Asia’s Thai Airways should form a JV with a Gulf airline as it struggles to adapt to the future.
The Gulf carrier interplay is much stronger in the oneworld alliance. It is the Qantas-Emirates partnership that first shook up global alliances and remains the most significant JV impacting alliances. The Qantas-Emirates partnership was – “illogically” - followed a few months later by Qatar Airways being announced as a member in Qantas’ oneworld, closely aligned to IAG. American Airlines has grown its partnership with Etihad even after Qatar joined oneworld.
SkyTeam has fading Gulf links. Delta, the main protagonist in the US troika anti-Gulf campaign, has nothing to do with Gulf airlines (it even cut off interlines, and United did too). Air France-KLM was looking to expand its Etihad partnership, but Air France, constantly trying to assuage militant unions, has been nearing a state of animated suspension.
Oneworld faces a complicated scenario in China. Its members have ties to the four big airline groups, yet do not have a common partnership. Having lacked a mainland Chinese member, oneworld airlines have sought their own individual paths. Cathay Pacific has greedily benefitted two-fold: it has cross-ownership with Air China while running an extensive mainland China network from Hong Kong. This would be an ideal (but not single) hub for oneworld airlines, but Cathay intentionally restricts basic interline access so as to curtail intra-oneworld competition.
Qantas has formed a JV with China Eastern while American Airlines invested in China Southern
And JAL meanwhile has a longstanding codeshare with China Eastern. BA hoped for more with China Eastern, but China Eastern appears to be distancing itself from oneworld following American Airlines investing in China Southern. China Eastern and China Southern are both members of SkyTeam, and it appears China Eastern wants to shore up SkyTeam loyalty following China Southern’s American partnership.
An American Airlines-China Southern JV is presumed at a later date (US-China open skies must occur before this will be possible). American’s partnership with Hainan Airlines, which has stagnated in recent times, seems likely to end following American’s China Southern investment. American was always the more reluctant of the two, but Hainan is rapidly occupying a stronger fourth force position in China.
Alliances have protocols on accommodating codeshares with outsiders - for example, only a certain percentage of an airline’s capacity may have non-alliance codeshares, and/or the alliance may need to approve of an outside codeshare. Even with this framework, outside codeshares are difficult. More complex are joint ventures, within and outside the alliance.
Intra-alliance JVs are comparatively easy to manage compared to outside JVs
But they still create significant challenges within the alliance, as not all members are allowed into the exclusive groupings. An alliance-based JV may exclude members: airberlin is not part of the oneworld-led trans-Atlantic JV while LOT and TAP are not part of the Star-led trans-Atlantic JV. Incidentally or not, those three airlines are all expanding their own services in the trans-Atlantic market.
Exclusion from a JV carries other impacts: airberlin had to cancel a proposed new route to Dallas, apparently because airberlin could not secure the codeshares it needed from American at its Dallas megahub. Airberlin required beyond-Dallas access to make the route work, but American had no incentive to help a competitor – despite being a oneworld partner - when such traffic could more profitably flow over its network/JV.
In another example, LOT struggled to access beyond-Tokyo codeshares on All Nippon Airways for its new Warsaw-Tokyo flight. LOT’s problem was that ANA’s JV with Lufthansa forbade ANA from cooperating with another European airline without Lufthansa’s approval. Lufthansa approving LOT-ANA cooperation, even if small, could impact the Lufthansa-ANA JV.
Air India joined Star after a long courtship but then found the partnership was handicapped
Air India wants to improve its position in North America, but key prospective Star partners Lufthansa and United Airlines prefer to carry US-India traffic on their own via their JV. EVA Air has bet the farm on North America but hardly has beyond gateway access on United Airlines; United prefers to carry Asia-North America traffic on its own or as part of the ANA-United JV that functions in some Asian markets outside of Japan.
These are uncomfortable situations for alliances, which take the view the basic required cooperation is basic (interline) and further cooperation is up to individual members. But alliances may seek to informally arbitrate, or in the future find a way for JVs to better support alliance members while restricting other competitors. The fact that it is invariably the larger members, and smaller ones argue they are being undermined from inside, as the JV members are allowed to “conspire” on how to compete better with all comers; that includes other Star members.
A growing issue for alliances and alliance-based JVs is member airlines forming subsidiary airlines
These are mostly in the long haul low cost space. Air Canada’s rouge and Lufthansa’s Eurowings are excluded from the Star-led JV while IAG’s new long-haul LCC named Level will partake in the JV. (It is unclear if this is a conscious decision that will remain, or a reality of Level initially operating under Iberia’s IB code.) IAG’s Aer Lingus, which may be termed an effectively priced airline somewhere between full service and low cost, is in the trans-Atlantic JV and will re-join oneworld. Air France has a proposed long haul “lower” cost carrier (its unions seemingly won’t tolerate low cost) subsidiary in Boost, but details are few.
The next issue is integrating JVs, especially in the fragmented Asian market. As JVs are stitched together, the airline proposition will seem to shift further from global alliances to an airline’s individual offering. The ANA-United JV may grow to incorporate Air Canada and Asiana. An Air China-United JV eventually seems inevitable.
In SkyTeam, Delta’s proposed JV with Korean Air will need to later accommodate a presumed Delta-China Eastern JV. Likewise American-JAL faces the question of what occurs should and when American and China Southern become closer.
IAG and Qatar have announced a JV, yet it is unclear how this impacts American Airlines. Traffic from North America to the Middle East/India/South Asia and even Southeast Asia could flow under the American-IAG-Finnair JV or IAG-Qatar JV. Should American consider a JV with Qatar, there is the question if or how an American-Qatar JV could be incorporated with the IAG-Qatar JV.
Incorporating LCCs is a common objective for the three global alliances
Not to do so would be a rank denial of reality. The compelexities raised are different from JV and partnership alliance dilemmas yet are complex in their own way. Global alliances are seeking to flesh out their footprint in certain places, with mostly domestic markets high in the priority list - China and India for oneworld; Brazil and India for SkyTeam; and Star is seeks more presence through members in Brazil and India.
In these markets, LCCs are most prominent (SkyTeam is courting Indian full service airline Jet Airways while Star in India may target Vistara, the full service unit partially owned by Singapore Airlines).
There is generally a broad mutual interest in cooperation from the alliance and prospective LCC, but agreeing the details have thwarted any deal so far. LCCs would need to make significant IT investments to interface with alliances and are often not convinced the benefits are worthwhile. There are also discussions about exclusivity and whether an LCC would have to work with every alliance member.
Star Alliance has been the first to implement an LCC platform
South African Airways’ Mango LCC unit was the first announced “Star Connecting Partner” but the project was placed on hold following Mango’s management change and deterioration at parent South African Airways.
The first member instead will now be Shanghai-based Juneyao Airlines. Juneyao is not strictly speaking low cost but Star is allowing Juneyao to join as a Connecting Partner, essentially offering that status as a half-way house. Juneyao is mostly a domestic Chinese airline and needs to be convinced of Star’s full benefits and the hefty membership price tag associated with that. Juneyao’s planned long haul expansion with 787s makes full membership likely.
This is a way of securing the future relationship for Star.
Star’s platform does not require a Connecting Partner to work with every Star airline. Where the Connecting Partner does cooperate, it is only for transfers between the Partner and full Star members; point-to-point itineraries on the Connecting Partner do not fall under the partnership scheme. Critics say this will be confusing for passengers, but it may be merely a holding position for Star.
Welcoming LCCs into the realm of global alliances raises passenger experience questions relevant as full service airlines reduce service, from charging for bag fees to hot water to sharply curtailed frequent flyer arrangements.
For airlines, these elements may be small details in their overall business. To passengers, they are core to the experience, in a deteriorating service environment.
LCCs are also forming their own alliances
In Asia Pacific there is now the Value Alliance and U-FLY Alliance, with cooperation possible through software from Air Black Box developed under IATA’s New Distribution Capability. Although christened alliances, the two LCC groups are a vastly different form, more an expanded marketing operation.
The Value Alliance seeks to gain strength among a number of Asian LCCs, essentially to combat the AirAsia Group that has LCC units across Asia. U-FLY is mostly a grouping of HNA Group’s LCCs and arguably is as much as about passenger benefits as it is bringing the fragmented HNA Group together. Both alliances are worthwhile initiatives but members expect potential benefits to equate to no more than a few percentage points of revenue. If this seems small, the tradeoff is that costs to partake in these alliances are exceptionally low. And the cooperation offers potential for greater opportunities.
Global alliances are growing in complexity but does this matter to passengers?
One view is that global alliances are a customer proposition, an arrangement for an airline to have to supplement its core offering. In this view, passengers are often loyal to their home airline and follow that airline’s partnership rubric. Thus the quirks of alliances have limited relevance to passengers: a Delta passenger is not concerned by KLM’s Etihad partnership; a Qantas passenger may not know airberlin codeshares on Virgin Australia; a Cathay Pacific passenger is unaffected by Japan Airlines partnering with China Eastern.
This “customer proposition” approach is akin to ignorance being bliss. What a passenger does not know about other partnerships will not impact the passenger. But the growing complexity of alliances and increasing prominence of JVs mean some passengers are shut out of better options, whether they know it or not. It is up to their home airline to effect change, or more radically leave the alliance. Yet with global alliances offering a core customer proposition, even if not encompassing or perhaps equal and fair, the tradeoffs are relatively small.
There is growing relevance for global alliances to support member airlines better. Joint purchasing has not progressed very far, but common lounges – even terminals – are sprouting up (and can however become a focus for partnership complexities). Star has a central IT hub in which airlines interface with the single alliance platform rather than all members’ individual IT systems.
If the customer proposition continues to be more complicated, alliances will need to continue to generate new value elsewhere. The death of global alliances may be exaggerated, but sustaining themselves and flourishing is not guaranteed. As always in aviation, compromises will needed and pragmatism will flourish.