Mergers Start To Impact Alliance Composition

By Jens Flottau, Cathy Buyck
Source: Aviation Week & Space Technology
April 29, 2013
Credit: Ted Fahn Star Alliance

The three multilateral airline alliances have pursued an aggressive expansion policy since their launch, and now their global footprints are almost complete. Their new challenge will be to retain members and fill in the few remaining gaps in their coverage, possibly through deals with hybrid-model airlines and low-cost carriers (LCC), whose growth outpaces that of network airlines.

Oneworld has trailed its bigger rivals, SkyTeam and the Star Alliance, almost since the global alliances started their rise 15 years ago. The smallest of the three groups was jolted when Japan Airlines (JAL) filed for bankruptcy protection in January 2010 and reviewed its alliance strategy as part of its restructuring. JAL considered leaving Oneworld to join SkyTeam, and played the alliances against each other for its own benefit. Because the stakes were high for Oneworld, alliance members American Airlines and British Airways led a concerted effort to keep JAL in the group, and SkyTeam remains the only global alliance without a Japanese partner. All Nippon Airways (ANA), the largest airline in Japan by passenger numbers, has been a core member of Star since 1999.

However, SkyTeam has cemented its place as the leading alliance in China and Taiwan, where it has four full members: China Southern Airlines, China Eastern Airlines, Taiwan's China Airlines and Xiamen Airlines, which joined at the end of 2012. China Eastern became a member in June 2011 together with subsidiary—and former Star member—Shanghai Airlines. SkyTeam has 39% of system-wide seat capacity in China and Taiwan, according to Innovata, whereas Oneworld has just 8%, despite the membership of Cathy Pacific Airways. Star, which counts Shenzhen Airlines and Air China as members, has 20%. Overall, aligned carriers account for almost 75% of all available seat kilometers (ASK) in China and Taiwan, well above the global average of 61%.

“There are parts of the world where some alliances have a very strong position, while other alliances have a smaller footprint—Russia [and the Commonwealth of Independent States] is an example,” says Mark Diamond, principal at aviation consultancy ICF SH&E. “In certain countries, such as India, or continents, for example Africa, they represent a minority of seats offered and they offer additional opportunities for alliance growth.”

Other changes in the alliance environment and regional market shares will come from mergers and acquisitions, notes John McCulloch, senior principal at the Seabury Group. “The traditional alliance footprints are just about done now, with the exception of India and Africa, and we will see more adjustments from one alliance to another as the game is played out with mergers.”

Oneworld suffered the demise of Mexicana in 2010 and Hungarian flag carrier Malev in 2012, as well as the bankruptcy filings of JAL and American Airlines parent AMR Corp., but it will soon narrow the gap with Star and SkyTeam thanks to two high-profile mergers: the tie-up of LAN and TAM Airlines in Latin America and the combination of American Airlines and US Airways.

Oneworld's gain comes at the expense of Star, which will lose TAM in Latin America and US Airways in North America. US Airways accounted for 9% of the entire alliance's ASKs. “We will miss the volume they have,” admits Star CEO Mark Schwab, though he is quick to point out that “we lose 28 small and medium-size destinations, so it is not that big of an impact.” Both alliances have assured each other that they are “committed to a customer-friendly transition,” he says. And Star does retain its biggest member, United Continental.

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