December 5, 2013

Alliance Reliance: The Pitfalls and Possibilities of Air Carrier Partnerships

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Written by: Douglas Wint
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Airline consolidation has been on the rise in the past decade. Since 2003, there have been five big mergers in the United States alone, including the upcoming marriage of American Airlines and US Airways. From the perspective of an airline, acquiring a competitor may be the best way to gain access to their aircraft fleet, routes, staff, and loyal passengers. However, the associated costs of acquisition sometimes render such an action financially unfeasible. Alternatively, the thought of “if you can’t beat ‘em, join ‘em” might play itself as the next best option. That is, entering an alliance, joint venture, or codesharing on flights.

Small airline alliances have been in place since almost the dawn of commercial aviation but largely gained popularity in the past 20 years. Realizing an opportunity to access the benefits of each other’s respective networks, the now-defunct Northwest Airlines and KLM Royal Dutch Airlines strengthened their existing codeshare by beginning a joint venture operation in 1993, sharing passengers and profits on virtually their entire network (both the United States and Dutch governments made this relatively easy by granting antitrust immunity and an open skies agreement between both countries). According to a June 1996 Fortune Magazine article, the alliance ultimately increased the airlines’ transatlantic market share from 7% in 1991 to 12% and provided KLM with 30% of its profits. There were benefits to the passenger as well. To illustrate, if someone needed to travel from Grand Rapids, Michigan to Saint Petersburg in Russia, they need only book their travel itinerary with Northwest Airlines for all three segments of their trip: Grand Rapids to Detroit (on Northwest), Detroit to Amsterdam (either Northwest or KLM) and then a KLM flight from Amsterdam to Saint Petersburg. The traveler is spared the hassle of trying to compare costs for each segment, flight schedules, and the possible complications of making the connection to the third flight in Europe. Plus, if that passenger is a member of either airline’s frequent flyer program, they would earn miles for the entire trip regardless of whose metal carried them to Russia.

Both carriers would share the profit (or loss) of that passenger from Grand Rapids. This seemingly perfect union was not without its problems. Like any conventional business partnership, it was subject to differences in the management styles of the airlines. According to the same aforementioned Fortune article, the leadership of one airline rarely trusted their counterpart and there was the constant threat of partial deconstructing or a complete defection from the alliance, to a competitor. Still, it’s difficult to argue the financial success of this tie-up and it consequently led to the creation of the three largest global alliances: Star Alliance, SkyTeam, and oneworld.

Star Alliance, the first and largest of the three major alliances, is based on the original framework of the Northwest/KLM union; only it originated with five different airlines (Air Canada, Lufthansa, United Airlines, Scandinavian Airlines, and Thai Airways International). Today, it has grown to 28 members (soon to be 26 with the 2014 departures of TAM and US Airways) serving nearly 200 countries in six continents and sharing revenue, facilities, and allowing customers to utilize the benefits of flying within a network. Typical benefits for travelers include cross-program mileage accrual, use of a partner airline’s airport lounges, and expanded destination choices. Just about everywhere on the planet can be reached while traveling within the Star Alliance, SkyTeam, or oneworld networks.

Notwithstanding those same pesky irritations that were evident in the Northwest and KLM deal, attention has been brought to what some analysts believe is an archaic system that will ultimately lead to a breakup of the traditional alliance system. As noted in an article from The Economist titled “SkyTeam and the World of Tomorrow,” both the CEO of Etihad Airways and International Airlines Group (parent of British Airwarys) believe that alliances are a “poor substitute” for mergers and prefer a system based on enlarging subsidiaries and building cooperation under one corporate umbrella. The argument being that this would all but eliminate the lack of cohesiveness and political bureaucracy that is evident in the global alliances as we know them today. Proponents of this alternative are quick to point out that the growing trend of airline mergers and/or acquisitions around the world is evidence that the number one hurdle-a push against airline consolidation from governments and other consumer advocacy groups-is slowly turning tide. Within the past year, Delta Air Lines purchased a 49% stake in Virgin Atlantic Airways, essentially giving the former a commanding voice (alongside Sir Richard Branson) as to what operational and financial decisions are made for the British carrier. There are no immediate plans for Virgin Atlantic to join the other 19 members of SkyTeam, instead opting for the joint venture and codeshare relationship with Delta and Virgin’s other partners. At this time, the joint venture does not carry over to Delta’s larger SkyTeam alliance members-Air France and KLM, for example. Again, this may point to the fact that it’s easier to steer a ship with as few as possible at the wheel.

The benefits and drawbacks of airline alliances are evident and yes, consolidation has been on the rise. The constant flux within the airline industry continues as well as the debate as to what all of it means for the carriers and the consumer. Of course, only time will as to where the industry trends.

Doug Wint is a freelance writer and aviation enthusiast living in New York. You can check out his blog at douglaswint.blogspot.com and follow him on Twitter at @WintChocolate.

About the Author

Douglas Wint
Doug Wint is an aviation enthusiast based in New York City. You can follow him on Twitter and LinkedIn.



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