Mergers Start To Impact Alliance Composition

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

But Star has to rebuild its presence in one of the fastest-growing and largest markets in Latin America yet again, having already lost Varig to bankruptcy in 2005. Besides TAM, there are only two sizable airlines left in Brazil, low-fare carrier Gol Linhas Aereas Inteligentes and hybrid Azul Airlines, and these are not ideal fits in terms of Star's business model. Gol is not a candidate anyway, given that Delta Air Lines has been clever enough to invest in a minority stake and tie it to the SkyTeam camp, and Azul is based at Viracopos International Airport in Campinas and simply serves secondary markets.

So Star is betting on Avianca, the second-largest airline group in the region, combining Avianca, Grupo TACA and Aerogal in Ecuador. The alliance hopes to turn Avianca Brazil, a small but rapidly expanding operator with a 6% market share, into as much of a feeder as possible. But Avianca CEO Fabio Villegas is taking a cautious approach to the potential closer integration of Avianca Brazil. “We have a lot of projects coming up,” he explains, referring to the consolidation of TACA and Aerogal into Avianca, the deepening of its relationship with Star, and dealing with constraints at Bogota's El Dorado International Airport. Nonetheless, Villegas concedes that a merger is something “that has to be explored.”

Meanwhile, none of the alliances have members in another emerging market, India. Star suspended the inclusion of Air India following multiple delays. And Kingfisher Airlines stopped the countdown for its Oneworld membership only months ahead of what looks like its permanent grounding. The only major airline left for potential alliance membership is Jet Airways, which is in need of new equity. It has been talking to Etihad Airways about the acquisition of a minority stake, but Etihad's board is seeking assurances on the security of its investment. So far, Etihad appears to be the only foreign airline to be prepared in principle to inject capital into Jet Airways, which puts the airline in a strategic dilemma.

“Network-wise, we only have one major white spot, India. We have no immediate solution to address this,” says SkyTeam CEO Michael Wisbrun. He claims the alliance is not actively looking to add new network members in other parts of the world, “but we are interested in making agreements with hybrids or low-cost carriers to support our members in particular gateways.”

The hybrid option provides carriers the benefit of alignment without full membership costs, and it allows SkyTeam affiliation with carriers—and their often strong domestic market share—that would otherwise stay away from alliances. “We can offer them a simple set of operational connectivity services, such as through check-in of passengers and baggage, via our IT SkyConnect hub,” Wisbrun notes. 'The low-cost segment is where the growth is, and we see selected opportunities here.” The concept is being tested with WestJet Airlines in Canada and Gol in Brazil.

One highly contentious issue has been whether the alliances should accept the three Persian Gulf carriers, if they wish to join. Qatar Airways is in the process of joining Oneworld; it will be a full-fledged member by early next year. Oneworld CEO Bruce Ashby argues that the addition of Qatar gives Oneworld access to “a lot of interesting Asia-Africa flows where we are quite weak.” The alliance also hopes Qatar will boost its presence on routes from Latin America to Asia or from Asia to Southern Europe. Qatar Airways CEO Akbar al-Baker says he selected Oneworld because it was the only alliance giving him unlimited freedom to grow.

Star's Schwab, by contrast, sees “enormous value for [Persian] Gulf carriers to join the alliances, but it takes away value from the other carriers. They have no home market, no frequent-flier programs. The arithmetic is simple.”

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