Not all airlines are flocking to join one of the three global alliances some prefer the freedom of staying non-aligned. Is it better to be a team player or a solo artist in today's challenging environment?
Olympic athletes are either team players or solo entrants, with each category requiring a different set of skills and aspirations. The same analogy can be applied to airlines: some carriers prefer the security and support network that comes with being part of a global alliance, while others would rather strike out on their own and remain independent. Is it better to seek safety in numbers, or is there more merit in remaining free to pick and choose your own bilateral partners?
The decision to join an alliance or remain non-aligned can be a difficult one for airlines, and it involves constantly weighing up the pros and cons of both scenarios. One carrier that has done the calculations, mulled over the advantages and disadvantages, and decided after years of being non-aligned to take the plunge and join one of the three global alliances is Brussels Airlines. The carrier has narrowed its choice down to Star Alliance and oneworld, and aims to make its final decision by the end of this year.
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© Jan Severijns/AirTeamImages.com |
"The key reason for joining an alliance is profitability," says Brussels Airlines vice-president alliances and codeshares Peter Cornillie. "In January and February we carried out an elaborate study on the estimated revenues and costs [of joining an alliance]. Our estimated revenues were cross-checked with information from the alliances and we consulted an external company, and all these sources confirmed a range of revenue benefits we could enjoy if we joined an alliance."
It all boiled down to the estimated revenue gains outperforming the costs related to joining an alliance, and this is what swung it for the Belgian carrier. "On the revenue side, you may expect to gain at least twice what it costs to join an alliance," says Cornillie. "But it all depends on how intensely you want to play it and how in-depth you as an airline want to be involved in an alliance. There are airlines that are very active in an alliance and others who see it as just a frequent flyer tool. Brussels Airlines plans to be very active. Being a small airline we have every reason to be as active as possible to position ourselves between the big boys."
Nevertheless, there are several elements that Brussels Airlines will miss about being non-aligned, chiefly how fast it is able to react to the changing environment as a standalone carrier with nobody to answer to. "The main advantage of being non-aligned, especially as a small carrier, is speed of action - the rapid way you can change your commercial behaviour and business model," says Cornillie. "Brussels Airlines, being small and non-aligned, can make decisions very quickly we don't need to reach a multilateral agreement. If there is one thing we have to take seriously as a potential negative element it's the speed of action."
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"You need to be unencumbered to do what you need to do, when you need to do it"Keith Longstaff |
Longstaff also believes the geographical location of Dubai makes the need to join an alliance less pressing than it is for airlines based in other parts of the world. "We see Dubai as being the centre of the world, and our hub and spoke system has been extremely efficient and successful," he says. "The need to be aligned is not so important here."
An airline's age is another factor to take into account when deciding whether to continue going it alone or join a grouping. For instance, India's Jet Airways, which launched scheduled operations in 1995 but only branched into international services in 2004, prefers to stay non-aligned as it builds up its network. "At this point in time, as a fledgling airline that's going about expanding itself, we feel it's too early to join an alliance and it's better to work on developing bilateral relationships," says Jet senior vice-president alliances and interline distribution Guarang Shetty. "We will join an alliance at the appropriate time. Now we are more focused on expanding our current network. Our philosophy as an airline that's growing is to go through the bilateral approach and work with all the alliances."
Abu Dhabi-based Etihad Airways, which celebrates its fifth birthday this year, also mentions age as one of its reasons for remaining non-aligned, although it does not rule out the possibility of joining an alliance in the future. "We never say no to any opportunity to improve our business, but strategically we're not knocking on the doors of the alliances," says Etihad chief executive James Hogan. "As a relative newcomer it requires a considerable investment to join an alliance. Before you embark on one of those three [alliances] you have to ensure that it's the right direction for your business. As a new airline we're keen to build our bilaterals and we work with carriers in both Star and oneworld."
While Hogan concedes that being part of an alliance offers "commonality of systems and the ability to joint purchase", he says there is a downside for late-joiners. "There's a slip side when you're the last one in. It's like when there's a family of 10 children - the oldest two children get to sit at the top of the table with mum and dad, whereas the younger children are further down the table. For us coming in, the question would be, will we have a voice? Joining an alliance is a long-term strategic view from both sides - once you go in it's very hard to come out."
ALLIANCE STRUCTURES
Jet Airways is partly holding back on joining an alliance because it wants to wait and see how the structures of the three main groupings evolve as member airlines form closer and closer partnerships with one another. This is particularly true of the transatlantic market, where there have been several recent alliance-led antitrust applications lodged with the US authorities, as well as the signing of joint venture agreements between carriers on both sides of the Atlantic. "We need to bear in mind the sea change that's happening in alliance structures," says Shetty. "Looking at the current flux it may be more prudent to wait and watch, particularly on the US side."
Hogan agrees that alliance structures are changing and that these changes could become more pronounced going forward. "One of the drivers of the alliances is that due to ownership and control laws airlines haven't been able to take control of other carriers," he says. "It will be interesting to watch what happens with British Airways and American Airlines. The question is, are the alliances going to be the same in five years' time?"
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"Due to strong pressures, the global alliances are evolving from their original structure"Abdul Rashid Khan |
One long-haul carrier that is conspicuous in its absence from the global alliances is the UK's Virgin Atlantic, which remains steadfastly non-aligned despite having Singapore Airlines as a big shareholder. It's commercial director, Edmond Rose, explains why: "We regularly look at the pros and cons of alliances, but we've found the best approach has been to form bilateral partnerships with selected airlines which can add the best value for us and our customers. Our partnerships work well for us and our partner airlines by increasing revenues from feed traffic, while customers benefit from more destinations, more schedule options and more opportunities to earn frequent flyer points."
With the non-aligned carriers all in agreement over the importance of forming bilateral partnerships with other airlines, it is worth delving into these deals and finding out how they are changing and evolving. Is the traditional codeshare still as relevant with market conditions becoming ever more challenging? Or are non-aligned carriers looking towards forming stronger relationships with their bilateral partners, such as revenue-sharing pacts? Jet's Shetty is keeping his options open on this one: "If tomorrow there was a market where a partner said 'let's have a different relationship to a traditional codeshare', we would look into it. For example, if a meaningful revenue-sharing relationship came up, we would consider it. Ultimately, the customer should benefit."
Rashid Khan of MAS says the way in which airlines co-operate with their bilateral partners is changing. "Commercial co-operation between airlines is evolving and the logical step after a codeshare is joint services/operations. This type of co-operation has been successfully done on some routes and the most successful is the Northwest Airlines/KLM joint services agreement between Amsterdam and US points," he explains. The bilateral agreements that MAS has are mainly in the form of codeshares, both free sale and block space, and joint services.
Etihad and Emirates are keeping an open mind when it comes to deeper bilateral ties. Hogan highlights BA's joint services agreement with Qantas on the "kangaroo route", and says that if an opportunity emerges for Etihad to engage in a deeper bilateral co-operation with another airline, "if it's a win-win situation, of course we'll do it". Likewise, Longstaff says that while he "can't see us going into revenue-sharing pacts", other forms of bilateral co-operation would be considered. "If there's a sound commercial proposition we'll look at it. We'd never say no, but at the moment we're not looking at any joint ventures. I'm not saying no to anything that's a sound commercial proposition."
For more on alliance-led transatlanticco-operation pacts, go to: flightglobal.com/mergers
Source: Airline Business
