Airline Alliances Face New Cooperative Forces

By Jens Flottau, Cathy Buyck
Source: Aviation Week & Space Technology

“Ultimately, the key weakness of the alliance model was relatively little economic incentive to deepen cooperation. This changed dramatically with the emergence of immune joint-venture groupings within alliances,” says John McCulloch, senior principal at the Seabury Group. “With the economic incentives in place, these have quickly developed into the 'clubs within a club.' The latest joint ventures with unaligned carriers are an extension of this—carriers will follow the economic imperative, and if this is not within the alliance, the traditional alliance model will not hold them, unless it is flexible enough to accommodate.”

Star CEO Mark Schwab says alliance membership “signifies that you want to cooperate with like-minded members and deepen the ties within the alliance. But realities change over time.” He does not see the emergence of joint ventures as competition to the alliance concept. “Star is worth billions to our carriers. That is the foundation. Then come the bilateral agreements and the joint ventures. It is no coincidence that the joint ventures are happening within Star.”

SkyTeam CEO Michael Wisbrun remarks that despite the publicity generated by the Qantas/Emirates or the Air France-KLM/Etihad deals, they affect a relatively small market segment and are essentially a “borderline issue.” Some members forge tactical bilateral relationships outside the alliance, and these can be relevant for certain gateways, but “the dominant [traffic] flow of inter-alliance cooperation is exceeding any growth of working with non-members,” Wisbrun asserts. The number of ASKs code-shared with another SkyTeam member grew 15% in the 2012-13 winter timetable compared to the same period a year ago, Wisbrun says.

He insists he is “more than OK” with the formation of joint ventures under the umbrella of the alliance. “Airlines that have consolidated within their continents will look more and more toward creating joint ventures for their activities between continents. The transatlantic [joint venture] was the first mover, and this is now expanding to the transpacific and between Europe and Asia. If, in a couple of years, we have five joint ventures operating under the umbrella of SkyTeam, we are ready for that,” Wisburn says.

“It has never been clear to me that the role [of alliances] has been articulated specifically,” says Oneworld CEO Bruce Ashby. “So it is difficult to define where they stand.” To Ashby, the alliances are still about a “mutually supportive” way to improve members' network scope, thus creating an incentive for business travelers “to pool their money with you.” He argues that joint ventures “don't make that obsolete,” as they are not covering entire networks and cannot offer worldwide reach.

Schwab concedes that the rise of joint ventures “does create some tension in the alliance, because there is some concern among carriers that are not part of them.” While no airline has left Star after entering into a joint venture, “we talk about it, we worry about it,” he says. On the other hand, the math is not simple because “you are going to walk away from a lot of revenues.”

Even if it seems to hurt the common cause, Ashby says he understands the rationale behind Qantas's move. “If you are a Qantas passenger and want to get to continental Europe, you always had to do two stops: Singapore (or Bangkok or Hong Kong) and London. With Emirates, it is only one stop, so Oneworld could not match that. We were not carrying those people anyway.”

But is it really as simple as that? Alliances have always allowed their members to forge relationships outside of the groups, particularly when they did not compete with another partner. Yet, it still seems that some are pushing the boundaries. Air Berlin joined Oneworld in early 2012 and almost simultaneously brought unaligned Etihad on board as its largest shareholder. Largely because of Etihad's backing, Air Berlin now code-shares with Air France and channels most of its Asian traffic through Abu Dhabi. But Air Berlin competes with Air France for European feed and Etihad is a fierce rival of future Oneworld member Qatar Airways.

Industry executives close to Star say those arrangements would never be allowed in its camp. But Willie Walsh, CEO of International Airlines Group (IAG), says it is perfectly understandable why Air Berlin acted the way it did and hints that without Etihad the airline would not be around anymore. Walsh has also been very tolerant of the Qantas decision to terminate a 17-year-old joint venture with British Airways, part of IAG, in favor of Emirates.


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