In the wake of 11 September, Airline Business collaborated with Cap Gemini Ernst & Young on a survey of the global alliances as they reassess their role in a changed world
When airline global alliances first began to take shape five years ago, they promised a wealth of opportunity for enhanced revenues and cost reduction. Through the boom years the groupings delivered on the revenue gains as their network reach expanded. But today, in a very different climate and with the alliances no longer in the first flush of youth, the pressure is on for hard cost savings too.
This raises the question of whether global groupings, built around network reach during the boom, are also the right vehicles to deliver on costs during the bust. A new study from consultants Cap Gemini Ernst & Young (CGE&Y), carried out in association with Airline Business, suggests that, on the present alliance business model, the case is doubtful.
The project centres on a survey of nearly 30 airlines and regulatory groups, carried out in the second half of last year under the shadow of the industry's worst-ever crisis. In fact, the initial project meeting took place on 11 September as terrorists struck in the USA.
Nigel Wicking, who led the study as the head of the aviation practice with CGE&Y in London, acknowledges that the crisis has taken some of the focus away from the alliance building that took place in the boom. However, he points out that it may do the groupings no harm if the participants reassess their own priorities. "Partners are pulling back from the alliances post-11 September, while they sort out their own businesses, but it could strengthen the alliances if they return with a greater sense of clarity," he says. "There is a very clear need for alliances to think about their rationale: about what the alliance is for and what the benefits are to their members."
As the study demonstrates, nearly two-thirds of airlines grumble that alliance benefits have not yet lived up to their initial expectations. Admittedly, some of the disappointment is due to regulatory hurdles. The inability of British Airways and American Airlines to gain antitrust immunity on the North Atlantic has continued to hamper delivery of benefits within oneworld. But the most consistent complaint is over lack of delivery on cost benefits, and it is these that have now come into sharpest focus.
However, savings are not a new issue. There were clear ambitions to move ahead on cost areas back in 1999 when Airline Business first collaborated with Gemini Consulting (now merged into CGE&Y) to survey the global alliances.
Yet two years later, virtually all members continue to cite revenue as the main, and in some cases only, source of alliance benefit. "Revenue is still where the gains are being made and it remains the focal point," says Wicking. One carrier surveyed enthuses about "tremendous" benefits, with 15-20% growth per year. It also seems that the majority of revenue gains are still coming through the classic channels of codesharing and loyalty schemes, closely followed by feeder opportunities and joint sales in third markets.
Joint purchasing
Where cost savings have been achieved, they have largely focused on joint purchasing, with an honourable mention for handling, distribution and marketing. "Nobody is happy with the progress on cost reduction," says one airline executive, while another suggests that cost benefits are seen as a "bonus" rather than a core reason for joining.
Even where joint purchasing has occurred, there has been a tendency to collaborate on the smaller and less controversial items. Office stationery, blankets or even economy headsets may be on the list, but most alliances have avoided items which touch too closely on product differentiation. So while SkyTeam may have a global agreement with Coca Cola, it has not with Airbus or Boeing. "There has been no significant strategic purchasing. When it comes to big items they haven't made any real progress," says Wicking, adding that the trouble with the lowest hanging fruit is it also tends to be the lowest yielding.
In practise, carriers have turned to other purpose-built groupings through which to combine their buying power. Membership of e-business procurement platforms such as Cordiem or Aeroexchange has cut across the global alliances. And when carriers sought to combat the online travel agencies, they split along geographical lines through Opodo, Orbitz and Zuji. Even the AirLiance spares management company which span off from three Star members has acted strictly as an independent.
The logic is clear enough. Bilateral deals or specific alliances based on a single issue, service or region, should, by definition, offer better focus and potential synergies in their chosen area. Perhaps the global alliance could come to be seen as a special interest group focused on marketing and network reach.
For the global alliances to push beyond these limits would require a much broader and deeper level of integration among the member businesses than most have so far shown a willingness to take. There are also questions over the practicality or desirability of taking all members along at the same speed.
The integration issue had already come to the fore as a key finding of the original alliance study back in 1999. It mapped out three levels of integration: "co-ordinated" operations; "shared" strategy; and "unified" virtual merger.
The degree of potential cost savings rises in line with the level of integration, hitting an estimated 11-12% at the stage of a merged structure. But the hurdles rise too, and the study argued against the attempt to impose a "one-size-fits-all" solution across a whole alliance.
For the inter-continental relationships, such as those across the Atlantic, the main benefit centres on market access which can be delivered through co-ordinated services. In any case, merger is not an option. By contrast, within a deregulated market such as Europe, the real benefits could indeed come from crunching together national carriers to help dominate markets and achieve economies of scale. That philosophy was apparent as Swissair attempted to pull together Qualiflyer into a unified group, including its own merger with Sabena. Alitalia and KLM were following suit. The failure of both those deals, along with the outright collapse of Sabena and Swissair has since sounded a warning note.
Changing priorities
Two years on from the original survey, it is obvious that integration has not been as fast as expected. The latest study shows how the priorities of the alliances today are more focused on scheduling, marketing and IT, with ambitions to link on operations and purchasing having moved down the list (see graphic page 44).
Wicking believes the alliance players will need to redefine their objectives around achieving revenue and marketing benefits. They will also have to adapt to the different needs and roles of their members, he adds. Major carriers, which are the powerhouses of the alliances, should use the global groupings for revenue enhancement, but look to regional or bilateral relationships for cost reductions. Already the majors are acting as centres of gravity within the regions, potentially taking the lead on developing shared services and systems with local partners. For their part, the smaller players within a region, such as second-tier national carriers, can tap the resources and global network of the major.
Other intercontinental players, such as those in Asia or Latin America, may be less interested in the opportunities for integration or fringe relationships, using their alliance membership to enter the key markets of Europe and North America. For example, when Cathay Pacific was being courted by the leading two alliances in the late 1990s, it says it was put off by the size of Star and the potential complexity of a mass of bilaterals. It chose oneworld with its more straightforward links to BA and Qantas.
Despite the recent industry emphasis on cost savings, Star and oneworld stress they are broad marketing tools rather than centralised bureaucracies. Earlier this year, Star chief executive Jaan Albrecht made clear that the alliance's role is to facilitate rather than dictate a "single policy applied to all members". Complaints had already started to surface as members moaned at the pace of decision-making. The sheer size of Star, consisting of a dozen airline groups, with three more set to join, would seem to rule out the old notions of reaching a detailed consensus on each issue.
In response, Star adapted its governance model at the turn of the year to allow for more flexibility in launching projects. A handful of members may now sign up for a project and leave others to follow in their own time, but only if they so choose. The model is more that of a forum which is, as Star says, "useful to explore synergies". Oneworld too talks of its role in terms of "relationship management", a view reflected by Peter Buecking's title of "managing partner" rather than chief executive. "We don't want to be seen as dictating from the centre. We are leading members rather than forcing them," he says.
Buecking, like Albrecht, concedes that post-11 September, the focus has shifted to opportunistic cost reductions with "short-term payback". Both alliances are still in search of longer-range savings, although many, such as joint lounges or ticket offices, are a spin-off from the infrastructure established to enhance the joint sales and marketing. Earlier this year, oneworld set up top-level groups to search for cost savings in cargo, engineering, flight-training, insurance and revenue accounting, although these are, as yet, still at the exploratory stage.
Cost reduction
"When you've developed a significant alliance infrastructure, you naturally ask what other value you can recognise," says Wicking. "Cost reduction could be considered one of those opportunities, but the restrictions in getting to that when your alliance has been established on a different premise makes it a lot more challenging."
He concedes it is possible that alliances could choose integration and seek to centralise costs, or even take a third-party provider route. However, that would mean a shift in mindsets that airline managements seem reluctant to take. SkyTeam, with its sharply focused transatlantic core, has gathered momentum and scores highly on integration in the CGE&Y study. Time will tell whether it can turn that into a clear differentiator.
In conclusion, CGE&Y outlines a nine-step approach to forming a successful alliance, drawing on lessons learned from the study. It starts with a clear definition of the benefits that members hope to achieve at the outset. "You have to set out your benchmarks up front. It's very difficult in hindsight to evaluate what the benefit has been," says Wicking.
Those objectives should in turn dictate the shape of the organisation and governance structures, avoiding the risk of becoming bogged down in unnecessary detail and complexity. Wicking also stresses the need for a measurement system to track benefits. "Partners need to understand where the benefits are coming from and be able to track the results coming through," he says. The final step is to evaluate the outcome and feed that back into the cycle. But above all, it seems the lesson for airline alliances is to stay focused, flexible and adaptable.
Source: Airline Business
