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Star Alliance connecting partner model evolves as Juneyao Airlines replaces Mango as first member

Star Alliance's connecting partner model is evolving beyond a proposition for low cost airlines. In Oct-2016 Star disclosed its intention to add Shanghai-based Juneyao Airlines. Although Juneyao is full service, the semantics of full service versus low cost have proven irrelevant: the core concept of Star's connecting partner platform is to secure transfer options in key markets. The Star benefits for a connecting partner are only realised when connecting on the same itinerary to a Star member. Unlike the situation with full membership, Star benefits are not offered on a connecting partner when the itinerary is only point-to-point.

Juneyao gives Star a partner in China's financial hub and replaces Star's former Shanghai partner, Shanghai Airlines, which left when it merged with SkyTeam's China Eastern. Juneyao is the second announced member after the South African Airways LCC Mango, but Juneyao will be implemented first in 2Q2017. As Juneyao grows and plans intercontinental 787 flights, the airline may transition to a full member.

The connecting platform was not in existence when Star and Juneyao started discussions three years ago. The connecting partner platform can further evolve to incorporate the LCCs that are rapidly taking over the flying of some of Star's members – such as Lufthansa's Eurowings – and thereby preserving some of Star's relevancy. All-new growth – such as adding an LCC in India – is still hoped for.

Juneyao Airlines to become Star connecting partner, concluding long membership discussion

In Oct-2016 Star Alliance announced that China's privately owned Juneyao Airlines would be Star's connecting partner model. Juneyao is only the second partner to be announced, and the decision somewhat breaks with Star's stated goals in Dec-2015 to add LCCs that are subsidiaries of existing Star members, or in Star parlance: "friends of the family".

Juneyao is, with a degree of association, a friend of the family: being based in Shanghai, Juneyao is of strategic interest to Star member Air China. Juneyao offers Beijing-based Air China an ally in the key Shanghai market, where Air China is small and SkyTeam's China Eastern dominates. Star defaults to Air China for matters in greater China, and Star's two anchor members – Lufthansa and United – have relationships with Air China.

So as much as Juneyao makes sense for the alliance, and brings little concern to any member, Juneyao's Star partnership is also about bringing Juneyao closer to Air China so Air China can achieve its own strategic goals far broader than alliance matters. Juneyao received unanimous approval from all of Star's member airlines to join as a connecting member. While full Star membership requires a unanimous vote, connecting partner membership does not.

The unique circumstances of Juneyao mean that a future candidate that is not of such a strategic interest to an existing Star heavyweight (as Air China took in Juneyao) may not be granted the flexibility Juneyao appears to have been given. Then again, Shanghai was a special situation with no alternative.

Star and Juneyao were in discussion for three years at the urging of Air China, which wanted Juneyao in Star. Initially the discussions were for full membership. It was only in recent times that Star's connecting partner model became an option to bring Juneyao into the alliance fold without it paying the significant full membership fee and making significant changes.

While there are mutual benefits, Star Alliance is probably the main beneficiary, with access to Shanghai

As Juneyao is a regional airline that is primarily domestic, and carries outbound visitors to short haul Asian destinations, it does not have an imperative to require partners to de-feed its services. The initial benefit to the Juneyao-Star tie-up is tilted towards Star. Although Juneyao receives incremental revenue from connecting passengers, for now it is probably more important for Star members to have a partner in Shanghai.

Both parties become elevated; as Star Alliance CEO Mark Schwab said of regaining a Shanghai member: "We're back where we belong". Amid a flurry of Chinese start-ups and Juneyao competing with another Shanghainese private airline – the very visible LCC Spring Airlines – Juneyao appears to gain needed weight. Juneyao, despite being on a similar growth trajectory as Spring, has consistently shunned the limelight and been under the radar. Now Juneyao's approach is to head towards the establishment. As the children remain in school learning about Chinese aviation, Juneyao is matriculating and preparing to join peers in the adult world.

A Mar-2016 CAPA analysis outlined: how Juneyao was easily Star's best option to regain a foothold in Shanghai; what the market share shifts mean; and how Star Alliance members have almost as much capacity into Shanghai as they do into Beijing, despite not having a member in Shanghai but having Air China in Beijing.

See related report: Juneyao Airlines considers joining a global alliance: it could fill Star Alliance's gap in Shanghai

Foreign airline long haul seat capacity into major international Chinese hubs, categorised by alliance affiliation: 14-Mar-2016 to 20-Mar-2016

Juneyao Airlines expected to replace SAA's Mango as first member implemented

Juneyao is the second announced member for Star's connecting partner model following the Dec-2015 announcement of Mango. Juneyao is now expected to be the first member implemented, with a target of 2Q2017. At the time of Mango's Dec-2015 announcement Star expected Mango's offering to be online in 3Q2016. That deadline is now past.

The setback with Mango is due to a combination of broader country affairs and events at the airline, and parent company. Mango CEO Nico Bezuidenhout departed the airline for the pan-African LCC fastjet in 2016. Mango's owner South African Airways is once again in crisis while South Africa is facing new challenges. Altogether this environment means that airlines are focused on survival and not evolution.

The departure of Mr Bezuidenhout is a particular setback as he had been CEO since Mango launched in 2006, and had twice been the acting CEO of South African Airways while SAA had leadership crises. SAA management has turned over, and now Mango's leadership has too. There are concerns that the effective "suspended animation" of SAA will be replicated at Mango. Against this environment, Star needs to restart the process with Mango.

Star and Juneyao are already planning with Shanghai airports on how to accommodate Juneyao-Star transfer passengers. There is a particular interest to have through-check of baggage for outbound China trips. Inbound China trips require passengers to bring their luggage through customs at first point of arrival and then recheck it. This is standard in other (but not all) markets, yet for Star there is the opportunity to smooth the recheck process.

Juneyao will also need to establish links with three Star members. None of the three have been disclosed yet. Connecting partners are not required to partner with all Star members (full members are required to partner with all), and the connecting partner has flexibility in partnerships with non-Star airlines. Juneyao currently receives more codeshare passengers from China Eastern than Air China.

CAPA's previous analysis went into the details of the necessary IT links for the connecting partner membership, and how Star aims to ease the process with centralised IT.

See related report: Juneyao Airlines considers joining a global alliance: it could fill Star Alliance's gap in Shanghai

The Star connecting partner model offers multiple uses, showing alliance flexibility

Star's connecting partner model has an outcome of securing transfer options for member airlines. In the short history of the connecting partner programme Star is showing some flexibility in how it achieves that outcome. Or rather, for an alliance that is anchored around orderly and process-oriented Lufthansa, Star is not getting caught up in how it achieves its pragmatic objectives.

Previous Shanghai member Shanghai Airlines left Star for SkyTeam in 2011. Although Juneyao might be backfilling Shanghai Airlines' presence, enough time and growth have passed in Shanghai since Shanghai Airlines' exit from Star that there has essentially developed a new normal, and Juneyao adds new options rather than replacement options.

Star and member airlines will need to educate passengers on Juneyao's presence since "Shanghai Airlines" clearly portrayed its home market. Although Juneyao enjoys some local support, China Eastern and Shanghai Airlines are intertwined with the Shanghainese government. Juneyao will not enjoy the preferences – from slots, to aircraft, to innovation – that Shanghai Airlines might have had if it had still been in Star.

Mango Airlines has meanwhile been a blend of new and old growth as the LCC took over routes and frequency from South African Airways as part of a growing dual brand strategy.

See related report: Mango taking a larger role in South African Airways' dual brand strategy. Considering premium cabin

Star plans to add more members selectively, and says it is not in active discussions with other airlines. Lufthansa's Eurowings is an obvious candidate. Although Eurowings has a long term ambition to create growth for the Lufthansa Group, more immediately its bigger focus has been taking over higher cost Lufthansa services.

In this instance, Star is losing customers as flights and passengers switch from Star-Lufthansa to unaligned-Eurowings. Adding Eurowings to the connecting partner model would be logical as it preserves Star's connecting abilities. Star's full footprint for intra-European services will not be restored since the connecting partner model does not cover point-to-point flights. This will of course depend firstly on Lufthansa itself wanting to see its subsidiary in the Alliance.

Of other Star members with LCCs, Japan's All Nippon Airways has two LCCs – Peach and Vanilla Air – but neither is likely to have any strong need to join the connecting partner model.

Peach and Vanilla are so far adding new leisure-focused services on markets already served by ANA. ANA is not transferring services to Peach and Vanilla the way Mango and SAA are, or to the extreme that Lufthansa and Eurowings are.

Star still hopes to have a second airline presence in Brazil and India. Brazil will be more of a backfill as Avianca Brasil does not have the footprint of TAM, which departed Star for oneworld as part of a merger with oneworld's LAN.

There are further question marks over the direction of Avianca now that SkyTeam's Delta, along with Star's United, are the likely final bidders for a stake in Avianca. In India Star has Air India but would like an LCC – and ideally the market leader IndiGo. Star does not have targets for how many connecting partner members it would like to have, and notes that there are more airlines showing interest to Star than Star is likely to accept.

Star's connecting partner model is a tidy evolution for LCCs/hybrids/regional airlines as well as global alliances. It is a welcome show of flexibility at Star, which will increasingly need to weigh its cohesiveness as new partnerships and business models pervade, while JVs take precedence with members internally.

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