Airline analysts are not alone in anxiously awaiting signs of how the global alliances may change the industry's landscape. There are hopes and fears among service providers too over how the groupings may begin to use their new-found buying power and what change they may hold for the future of outsource markets.
The fears are fairly simply put. Alliances have been talking about starting to flex their not inconsiderable muscle to grind down procurement prices and that could eventually extend to contract services. Alternatively, there are siren voices to promote internal solutions, collecting together their ancillary businesses in areas such as maintenance, ground handling, catering or information technology (IT).
The hopes, at least for those suppliers now busying themselves in building global businesses, is that alliances will offer fast track opportunities towards worldwide outsourcing deals.
More opportunities
The jury is still out on which model is more realistic, but the current betting is that there are, at this early stage, more opportunities than threats on the horizon. This is borne out by the recent study The Future of Airline Alliances, carried out by Gemini Consulting in conjunction with Airline Business. That included detailed interviews with more than 30 key executives charged with making the global alliances work, together with their opposite numbers on the supply side.
Gemini vice-presidents Graham Howarth and Thomas Kirsebom, who led the study out of London and Munich, concede that the general impression was one of caution. "No one knows exactly where it is going to lead, so they're feeling their way forward and selecting areas where there seems to be an opportunity but which aren't life-threatening," says Howarth.
The SAirGroup and its Qualiflyer alliance have perhaps moved most swiftly to establish a dedicated joint purchasing arm, and were early in setting up a joint team to buy ground services. The KLM/Alitalia virtual merger is looking to follow suit. Elsewhere, the moves are a little more tentative. Star has talked about turning its joint purchasing committee into a holding company - but not yet done so - while oneworld settles for a quarterly procurement meeting.
To date, these committees have tended to concentrate on sourcing less sophisticated items, where savings are easily realised. Star has recently discussed a goal of $150 million in annual savings, although that represents just 0.1% of expenses for the whole alliance.
The caution in part stems from the stage of integration at which the alliances currently stand. The Gemini study sets out three broad models, ranging from simple co-ordinated services through to deeper strategic sharing and finally to unified operations. This last, effectively represents a "virtual" merger. At present, most operations are closer to the level of collaboration and co-ordination, despite the ambition of alliance executives to progress along the chain (see Airline Business October, p78).
Clearly the cost gains will rise as the co-operation deepens. Joint action on areas like network and fleet planning, for example, would seem to be a prerequisite for those hoping to reap the full economies of scale to be had in areas such as maintenance or handling. Gemini estimates that those alliance members who are prepared to pool their management of "external services" could hope to cut some 3.6% from their overall expenses, compared with only 1% at the co-ordination level (see chart). But there are some major psychological and emotional hurdles for alliance partners to overcome on the way towards that level of integration.
Easier cost gains would seem to come from a more pragmatic case-by-case approach, such as that instituted by Star, taking advantage where the geography makes sense or the fruit is low-hanging.
For the time being, alliances remain more revenue-driven, focused on the gains to be had from joint marketing to customers. And as one ground handler points out, joint branding is not an issue on the ramp. Bruce Harris, director of alliances at United Airlines, is typical in steering discussion sharply away from the delicate issue of merged operations. "We've begun to look at joint purchasing, but our main focus has been on the passenger," he says.
Even where obvious vehicles exist in which to pool alliance services, such as the giant Lufthansa or SAir maintenance, handling and catering operations, there is a reluctance to limit options by tying too closely to one grouping. Despite being born out of an alliance, the AirLiance spares business, created when three Star members pooled surplus parts, was keen from the outset to stress that it is open to all comers.
Alliances may, however, already be helping to accelerate the trend towards consolidation among service providers and Gemini believes that the very process of alliance-forming may also, indirectly, be opening minds to the advantages of outsourcing. Kirsebom says the very fact that alliance members are sitting round a table discussing costs and economies of scale focuses thinking on the need to tackle sub-scale in-house operations. "Through the alliance discussion and thinking, the advantages of scale are so much to the forefront that the pressure to outsource increases," he says. "And once the discussion begins it is self reinforcing."
| Alliance cost reduction opportunities as % of airline cost base | |||
| Airline cost type | Alliance Model | ||
| Co-ordinated | Shared | Unified | |
| Financing and utilisation | 0.1% | 0.7% | 2.6% |
| Airline internal operations | 0.8% | 2.3% | 5.2% |
| Externally supplied and managed | 1.0% | 2.6% | 3.6% |
| Total | 1.9% | 5.6% | 11.4% |
| NOTE: External operations include ground handling, maintenance, catering, charges, fees. Internal operations may include small subcontracts. Source: Gemini Consulting/Airline Business study The Future of Airline Alliances. | |||
Third party suppliers
Kirsebom adds that third party suppliers may also have a role to play as honest brokers: "One of the more difficult issues that alliances may have to deal with is in choosing between their existing solutions. So if someone comes along with a new solution from outside, it is easier than selecting one from within, especially in IT."
John Boedecker, senior vice-president of sales at Sabre, reinforces the point. "Alliances have a hard time agreeing among themselves," he says, questioning the likelihood of members voting to leave key IT functions in the hands of just one of their number. "That's a very heavy lift, a long arduous process, and it would be hard to bring an agreement forth." Despite obvious links with sister company American Airlines and therefore oneworld, Sabre is keen to demonstrate "greater independence" to the market, he adds.
SITA, with the benefit of its industry lineage, is also busy positioning itself as an impartial provider for members within an alliance as well as between the competing groupings. "We want to be seen as much as possible by all as a neutral party," says Léon Perelman, who heads SITA's outsourcing business.
Another, less tangible, issue which may influence the course of alliance decision-making is simply the sheer volume of tasks facing a relatively small management team. As one alliance director observes, there are only so many hours in the day. "There is heavy competition for air time with a huge agenda of issues," says Howarth, and the need to prioritise inevitably leaves gaps. With the game on to find savings, there may be virtue in suppliers being proactive, he suggests. "Alliances have only so much thinking capacity and management time. People who come to them with thought-out solutions and new ideas could be pushing on an open door."
Global services
Some are already beginning to take advantage. Independent ground handler Servisair has been angling for alliance service contracts, with a series of wins at airports in northern Europe for the Qualifyer and, more recently, the KLM/Alitalia groupings. For its part, it is looking for longer-term commitments and better volume, but as yet the contracts have been by airport rather than in the form of sweeping global deals.
The main focus for the airlines, says Servisair sales and marketing director Keith Purdom, is to be seen by the customer to act as a single airline, with smooth transfers through the airport. "They don't want the joins to be too obvious," he says, adding that outsourcing can bring the benefit of flexibility. "We are big enough. We can take the swings up and down in our stride. We can handle the full package."
Purdom believes that major alliances will be "happier dealing with major suppliers". He questions the role of the smaller independents or captive suppliers as alliance buying strategies become more co-ordinated and sharper battle lines are drawn. "I think logically, over time, there will be some polarisation."
Sabre, too,is "advanced in discussions" with the major groupings, says Boedecker, who believes the alliance logic is taking hold, albeit slowly. "There are a lot of examples where they have selected two or three of our software packages and they have all agreed to run them," he says adding that the next phase is about providing core platform solutions for several airlines in common.
"I don't think it's happening as fast as we all thought it would. We have spent an awful lot of time on alliances and we haven't gained the fruit that we want from that, "he says echoing the thoughts of many service providers. "But we think we're positioned real well."
Source: Airline Business
