As the alliances build ever more wide-reaching networks and become truly global, their attention is turning to finding ways to cut costs in new areas, and from some unexpected sources
The global airline alliances were allied long before they were global, but now they each have true global reach, few unaligned carriers remain truly independent and the alliances can be said to be close to full up. Some even have waiting lists.
Continental Airlines chairman Gordon Bethune used to say of alliances: “You’re either all the way in or you’re all the way out.” This is very much the case in the region that gave birth to the first modern alliances – Continental/SAS in the late 1980s and KLM/Northwest Airlines in the early 1990s – and that has been their most hotly contested battleground, the North Atlantic. Between the USA and Germany more than two-thirds of capacity is flown on alliances, while an analysis of OAG scheduled data for July shows that over 80% of North Atlantic traffic moved on alliances last year .
Now that they carry well over half of world passenger traffic , alliances are fighting their battles not just in the international arena but in their homelands. In the USA carriers have found international routes one of their only outlets for growth and one of their sole reliable sources of profit.
For this month, international capacity will grow by almost 6% while US domestic will be flat, according to American Express travel data. And as carriers like American Airlines or Delta Air Lines have put most of their mainline growth into international flights, they have also found that alliance flyers are major sources of revenue in the otherwise dismal domestic picture. For Delta, Northwest and Continental alone, the domestic portion of an international journey can add more than six percentage points to load factors.
Whether they bring enough in revenue is another question. Revenue was, after all, the seed of the alliance concept. For the first half decade of their lives, alliances were revenue machines. The early theory was simple: we may not be able to merge but we can grow revenue through the next best thing, an alliance, preferably one that enjoys immunised pricing. At one point, alliance thinking was literally blue sky thinking: they would buy aircraft together and bring down prices, they would discipline airports with their muscle and they would enjoy operational and customer service “synergies” across the world.
Roach and Sbarra consultant Alan Sbarra says: “Revenue synergies at first were real, but now the alliance game is more modest.” He notes that alliances have largely muted their claims of substantial incremental revenue gains and says they have backed off ambitious plans such as joint aircraft purchases after Star Alliance efforts revealed how difficult this will be.
SkyTeam points up the challenge. Air France president Pierre-Henri Gourgeon says: “It has been mentioned, but we do not see a conjunction in timing that would make it feasible to co-ordinate fleet investment.” Joint purchasing has largely been a local effort, limited to purchases of fuel, engineering services or parts. In the airport game, the alliances have in some cases waited for new construction – as at London Heathrow and at Madrid – to co-locate. Teal Group analyst Richard Aboulafia says: “It has always been tough to harmonise airline requirements, and airlines have unique needs.”
Survival strategies
One need has been universal rather than unique in recent years – survival. “Our main focus has been on helping our members navigate through these turbulent times,” states oneworld. Now instead of looking at “hard-side” savings, such as buying items jointly, the alliances are looking at “soft-side” savings through direct sales and distribution, ticketing and scheduling. Key among these is electronic ticketing and indeed the entire joint use of IT. This has begun slowly, with distribution seen as an area ripe for savings.
Star already had a major IT platform on which to build, the Starnet project, but it is moving way beyond this. Starting from an initiative at founding member United Airlines, Star is seeking alternatives to the four primary Global Distribution Systems (GDSs). United’s Graham Atkinson, senior vice-president for sales and alliances, says Star carriers collectively spend roughly $2 billion annually on GDS fees. Cutting back on this will see carriers begin to use alternative distribution systems. United, which supports these Global New Entrants or GNEs, such as G2 SwitchWorks and ITA Software, believes the savings will be substantial. “These two companies estimate a cost per ticket of $2-3 to the airlines,” says Atkinson. The GDSs on average charge $12 per ticket.
The alliance’s efforts aim to “enable Star to set the pace and help form how this new technology will look,” he says. “Star will issue a single request for information to vendors with the intention of defining the standard of the alliance’s next generation distribution technology.” Atkinson stresses that United and Star cannot break away fully from the traditional GDSs, and nor should they. In parallel with the GDS initiative, Atkinson sees a Star-wide move to tackle credit card processing fees in a step to save on settlement costs. These costs track GDS fees with a “surprising congruity”. He says many alliance corporate customers already ask for direct billing to help save on this.
Oneworld and SkyTeam certainly will look at distribution, but neither has any major plans at present to follow Star in developing a common IT platform. Says Gourgeon: “IT is a subject for thought and we are working on what to do in the future. Not for one common platform, but we do see a need to reduce the number of platforms.”
The Star GDS development sparked by United represents a significant shift in the alliance dynamic: change upwards from the members rather than down. In their earlier years, the alliances spurred their constituents to change, presenting challenges and higher standards. At the same time, alliances were a way to find cost-cutting techniques that moved downwards. That is changing as members, especially in North America, have been compelled to cut deeply and now are using cost-saving techniques as gifts to the larger alliances.
Race to e-ticketing
Distribution, and in particular electronic ticketing, is seeing fast development in all three alliances. The race to become the first to achieve full e-ticketing was settled with oneworld’s announcement in April that it completed the final connection among its 28 pairs of partners. Interlining among oneworld airlines generated total revenues annually of more than $1.5 billion for the eight airlines, says the alliance. SkyTeam and Star are not far behind. Hans de Roos, KLM’s senior vice-president of alliances and member of the SkyTeam steering committee, says: “E-ticketing is a moving target, but SkyTeam expects to finalise it by end of year.”
Although each of the major technology providers has formed a strong relationship with one or another alliance, “it remains important that we remain independent and so can go to each alliance,” says Amadeus vice-president for strategic airline & partner programmes Hans Jorgensen. Amadeus supported the oneworld e-ticketing initiative, while SITA underlies Starnet, but has also undertaken Air France/KLM projects.
Although the alliances work together electronically, they are sometimes loosely bound to each other. This would seem set to change as new carriers, in the form of affiliate or associate members, join. The largest second-tier growth is at SkyTeam, which launched its associate membership programme this summer. It will welcome Air Europa, Copa Airlines, Kenya Airways, and Tarom. Following these four carriers will be Portugalia, a Portuguese regional carrier. Each associate member will have a sponsoring carrier. At Star, regional members must also have a sponsor, and its new second tier members include Adria, Blue1 and Croatia Airlines. The alliance grabbed a major new recruit recently when Swiss was accepted through its new ownership by Lufthansa. South African Airways joins next April.
The membership drives see SkyTeam preparing to welcome Aeroflot and China Southern Airlines, while oneworld picks up Hungary’s Malev as a full member next year. Oneworld, which has consistently limited growth in the past, is actively seeking to use Cathay Pacific’s stake in Air China to launch into mainland China, and may use relationships between Air Sahara and both American and British Airways to move into India. An on-going project is to persuade Japan Airlines (JAL) to come on board. “JAL is and always has been a key target,” says oneworld managing partner John McCulloch. “It is a long process of discussions and explanation.”
The alliances manage their affairs differently, with Star’s 70-strong team the largest and most “company-like” organisation. SkyTeam insists that it has no plans to change its long-seated aversion to setting up a centralised management committee, says KLM chief executive Leo van Wijk. “Creating an overhead structure is something you should not do,” he says. “You have a group of people who are disconnected from the front line. It’s bureaucratic overlap.”
But as the number of SkyTeam partners grows, Air France vice-president for alliances Patrick Bianquis says: “There is a bit more of a top-down approach. Before it was more bottom up. The initial focus is coming from the chief executives.” There will be little change at oneworld, however. “We have deliberately kept our focus on running our business effectively. One of the benefits in this is it provides us with a manageable size,” states the alliance.
New relationships among members will drive the most significant alliance challenges. SkyTeam had since its formation revolved around a single pairing, that of Delta with Air France, but as each of these two major network carriers has evolved, it is pushing up against one of the last remaining legal barriers. Air France, solidly within the ambit of a European Commission that believes consolidation is inevitable, has gone far deeper into a partial merger than its US counterparts with its takeover of KLM. But in the USA, regulatory authorities remain sceptical about mergers and more importantly financial markets make them all but impossible.
Now, though, the domestic alliance of Continental, Delta and Northwest could rise to unparalleled heights if the US government grants a request for antitrust immunity by six SkyTeam members – Delta and Northwest in the USA, and KLM, Air France, Alitalia, and CSA Czech Airlines in Europe.
The Air France takeover of KLM will inevitably mean changes to SkyTeam and in particular the long-lasting KLM-Northwest link-up. The grouping now wants to take on the world. With pricing immunity, SkyTeam sales efforts would “dramatically improve”, says KLM’s de Roos.
Gateway competition
But, Sbarra says, change is wider than just this SkyTeam development. “The alliances have evolved beyond their anchors. The balance of power has shifted to the European partners as the US allies struggle financially,” he says. The moves at SkyTeam raise the major issues that will unfold this year. For a start there will be stronger pressure on London Heathrow from two of Europe’s other major gateways, Amsterdam and Paris. The question is whether that competition will be enough to overcome US reluctance to immunise alliances without open skies. This suggests that the merits of pricing freedom will play off against the inherent network merits of an alliance. Oneworld does not have any wide antitrust immunity because, say US authorities, the US and the UK do not have a liberalised air services pact.
As each alliance grows, will that optimise its network? As America West absorbs US Airways but retains the US Airways name, it will negotiate to join Star, keeping it the largest alliance. However, Delta’s chief executive Gerald Grinstein predicts SkyTeam will overtake Star in terms of market share, but adds that the expansion “will not be for the sake of it”.
Sbarra thinks that Skyteam antitrust immunity, if granted, would change the balance of alliance power. He adds that even with widespread pricing freedom, “the alliances essentially are competing for the same high-yield, long-distance traveller, and they are shifting market share back and forth”, although low-fare international competition may change that, he warns.
Delta’s Grinstein believes some fundamentals will determine the future. He says: “An alliance can’t grow without three key ingredients: Mutual trust, a common vision, and an ability to grow and willingness to invest.”
DAVID FIELD/WASHINGTON
Source: Airline Business
