The spotlight is on something new at British Airways - alliances. 'What was a sideshow is now centre stage,' states BA's director of alliances John Paterson. With the appointment of the former director of strategy in June to this newly created post British Airways is making this point crystal clear.
At presstime BA was impatiently awaiting conditions for the clearance by the European Commission of its tie-up with American Airlines. Based on the expectation of an 8 July decision by the Commission, it 'will take us into the autumn before we finally see our ability to do what we want', says Paterson, listing the regulatory hurdles to be overcome in the US after a Brussels decision.
But Paterson's agenda is not entirely filled with the transatlantic issue as he presses ahead with getting the British flag carrier's European alliance strategy off the ground.
For while the two-year old BA/AA saga has been grabbing the headlines, British Airways has quietly been building links on the old continent to combat the competitive threat in Europe.
BA has seen Lufthansa firm up its Scandinavian presence by pulling SAS into the Star Alliance and both these carriers have made strong inroads into eastern Europe. Meanwhile Alitalia's move into the KLM camp weakens BA's hold in the Italian domestic market and transfer traffic to the North Atlantic.
To remedy the situation BA is drawing partners in on its northern, eastern and southern flanks to help build hubs in Helsinki or Stockholm, Warsaw and Madrid. Two of BA's partners, LOT and Iberia have, separately but conveniently, been building closer links with American. Although hoping to reap the benefits of a transatlantic partnership, each of BA's European partners insists they are pursuing an alliance with BA regardless.
What they all want is not uncommon. They want: to tap into BA's international network, market presence and clout and, as one airline analyst puts it, to get to those top two pages of the global computer reservation system.
With Iberia, LOT Polish Airlines and Finnair all slated for partial privatisation over the next 18 months, and Malev also looking for a strategic equity investment, BA may need to fork out considerable sums to seal its European alliance strategy.
But according to Paterson, equity 'is not at the top of every agenda.' Instead, 'doing business' is.
If Asia is stage three, says Paterson, 'Europe is very much the second stage in the creation of any alliance.'
'Its not about the UK to the States, it's about Europe to the States. That means we have to have more hubs and be able to draw traffic from places where we don't at the moment.'
A link with Iberia was 'a very logical first move' following the American tie-up, says Paterson. He hopes that talks with Iberia for a wide ranging cooperation agreement, which 'may or may not' be sealed with BA or American taking a minority equity stake, will be concluded by the summer.
'Iberia is a keystone on the European side of the formation of an alliance with American,' he explains. 'You've got a potentially major hub at Madrid that can do very nicely feeding South America and draining out of all points in Europe.'
James Halstead of Banque Indosuez seconds Paterson: 'British Airways has the opportunity to gain access to a secondary hub in Europe. Madrid/Barajas is one of the few airports in Europe - along with Paris/Charles de Gaulle and, to a lesser extent, Milan/Malpensa - with the potential to grow. BA gains access to a major niche operator in South America, Madrid is ideally placed as a hub and the fact that Iberia is linked to American is ideal. That it is also linked to Aerolineas Argentinas; even better.'
Iberia is discussing 15-16 areas of 'possible' cooperation with BA, including 'all possible synergies from price and capacity co-ordination, a frequent flyer programme, and joint purchasing, says Guillermo Serrano, vice president of strategic planning at the Spanish flag carrier. Serrano states that the two carriers are 'pretty close' to sealing a 'basic agreement'. Iberia is looking to get 'critical mass'- market share and geographical coverage - and a 'higher profile' in Europe though a tie-up with BA, he adds.
In LOT, BA finds another American Airlines partner and the flag carrier in eastern Europe's most dynamic air travel market. BA has a memorandum of understanding with LOT which encompasses a wide area of 'possible' cooperation. Its first concrete step was a block seat arrangement between London/Heathrow and Warsaw begun in March.
LOT is unprofitable in the protected domestic market and the international arena - it lost Zl135.7 million (US$40.3 million) in the year ending December 1997 - but is hopeful that its alliances will help revenue growth outstrip cost increases on international routes to produce a net profit of some $7 million next year.
The Polish flag carrier already faces 'very tough' international competition from Lufthansa and KLM, says commercial director Krzysztof Ziebinski, and began competing with British Midland in July with a London-Warsaw service.
Ziebinski remarks that the 'tendency to lower and lower fares on the North Atlantic has to stop somewhere'. He is pinning his hopes on attracting more business class passengers, which currently account for around 20 per cent of LOT's traffic.
Ziebinski says the three and a half year old codeshare with American between Poland and the US brings in 'additional revenue to us without additional costs' and believes that adding an alliance with BA will allow LOT to increase yields on the North Atlantic and Europe as well as retain market share in Poland.
If the American link works because the US carrier previously had no access to the Polish market, BA is a partner which 'was not right outside our door'. LOT is 'hopeful' that the American/ BA deal will go through.
The Polish airline aspires to create a 'minihub' in Warsaw, which is 'very well positioned to serve the Balkans, Belarussia, Ukraine, eastern Germany and the Czech Republic', says Ziebinski.
Currently waiting for approval for Warsaw-Manchester and Gdansk-Gatwick codeshares, LOT is also seeking further access through BA to the UK domestic market. Ziebinski sees 'no harm if BA takes equity' in the airline, although he points out that this is only a 'possibility'.
According to Frank Wade of consultants SH&E, BA can 'use Warsaw as an additional hub much as it is using Munich [with Deutsche BA]', and LOT 'will boost overall revenue for American and BA'.
'LOT could very well look after us in the former Soviet Union and act as feed for us into London/Heathrow, as well as [allowing us] to exploit the Polish market which is under some pressure from Lufthansa,' says BA's Paterson.
'In lots of markets we feel very good, but in others, where Lufthansa has got an advantage, we are trying to deal with it via relationships with Finnair and central European carriers like LOT,' says Paterson. LOT and Finnair in their turn, look to BA because they 'feel threatened' by competition from Star Alliance, he adds.
In March, BA inked a codeshare and frequent flyer agreement with Finnair between Finland, Sweden and the UK.
Finnair is facing a tough challenge in Scandinavia from former ally turned Star Alliance member SAS, which recently acquired Finnish Air Botnia to signal a challenge in Finnair's home market.
BA sees the Finnish link as offering the potential of building a 'third hub', either in Helsinki or Stockholm, and the chance to tap into a wealthy, if small, market. 'Our contribution will be northern European traffic,' says Finnair executive vice president marketing Leif Lundstrum.
'But in addition to that we have a niche in long-haul,' he says, pointing out the great advantage of the relatively short distance between Helsinki and Tokyo and San Francisco, compared to other European hubs.
After being in bed first with Swissair's European Quality Alliance and then with Lufthansa, Finnair 'seriously hopes this alliance is the one', says Lundstrom. He says revenues and cost savings could run into the 'tens of millions' of Finnish marks annually. So far the alliance with BA has allowed it to cut back on capacity, and 'rationalise' schedules and aircraft, he adds.
Lundstrom has 'great hopes' that the alliance with BA and its partners will become 'more dense in texture' to include joint marketing and sales and joint purchases. He also sees cross-utilisation of aircraft as a longer term objective.
He believes an alliance with BA will not affect yields, although he adds there is a possibility that linking into BA's Executive Club frequent flyer programme could lure high yield passengers away from the Star Alliance.
As for Malev, previously part-owned by Alitalia, BA's Paterson states that 'we and others have talked to them'. He will not reveal the contents of the discussion, but trumpets the merits of allying with the carrier.
'Malev is nicely placed - geographically separated from Britain - and therefore the ability to bring feed from central Europe and the Balkans into Heathrow and Gatwick is advantageous.'
Chris Avery, analyst at Paribas, sees Deutsche BA and BA's French subsidiary Air Liberté as BA's 'most important partners' in Europe. Although BA's investment in the two subsidiaries was 'higher than orginally expected', he estimates that BA will start seeing the 'fruits' of the investment 'in a couple of years'. BA's 'aggressive' establishment of positions in 'other people's markets', means Lufthansa and Air France do 'not have a massive amount of room' to penetrate each other's markets, he adds.
But BA's problems in Europe lie in the 'need to make proper sense' out of them in network terms, according to Halstead of Indosuez. 'They are standalone operations that don't really connect with BA's operations,' he charges.
Finnair points out, for example, that although it is codesharing and carrying out reciprocal ground services with Deutsche BA, Finnish-French links are frustrated by Air Liberté's being based at Orly while Finnair flies to Charles de Gaulle.
Italy 'is the weak spot in BA's strategy', says one European airline consultant, who speculates that an alliance with Air One - which started codesharing with Swissair in June and is finalising arrangements for the Swiss carrier to buy an equity stake - is still on the cards.
Paterson concedes that strength in Europe demands that 'you need to be in the French, German, British and arguably the Italian market.' The German and French subsidiaries have provided BA with a headstart in Europe, and he claims their 'track back to profitability is discernable' and 'in line with our expectations'.
'[In Italy] our geographical position vis à vis the North American market has been a traditional strength,' he says, while at the same time tacitly admitting weakness: 'We have embryo plans to deal with [the Italian market].'
Another worry lies in recent tie-ups between US carriers. 'Delta linking up with United means there are several carriers in Europe [currently in different camps] that might finish up within the same alliance. That will involve the Swiss and the Germans and the Scandinavians all being in the same alliance,' says Paterson, adding that closer ties between Delta and Air France could put 'the French in there as well'. Intriguingly he adds, 'I'm not sure if that is viable. It is in that context that we have got some plans for the Italian market.'
At first glance, BA's moves in Europe might appear to just add up to a series of bilaterals. But the fact that Finnair codeshares with Iberia and LOT, Iberia has a dual flight prefix arrangement with Malev and LOT is planning codeshares with the Spanish carrier, as well as BA's partly owned Australian partner Qantas, appears to point to a multilateral arrangement.
'You don't need to do all the things that you do separately, you can do them together,' he says, listing joint purchasing, joint check-in desks, joint sales offices and joint telesales centres.
Paterson says all its codeshares are all profitable and 'revenue flows from trying to make the passenger's journey easier'. Income will be generated from new traffic and by attracting it from elsewhere.
'With many of the things that facilitate revenue gains you can give the customer better value - better fares or better schedules,' he adds.
While Star Alliance is ahead in terms of structure, BA's strength in Europe's key markets offers great possibilities. Paterson is philosophical. 'Our main competitors have got immunised agreements with bilaterals in place across the Atlantic; we've not got that. That puts them in a strong position.'
But BA is not about to throw down its lance. 'Its right to say [that Star is ahead]. But, at times the Dutch have been in front, at times everybody writes off the French, at times the Brits have been in front.' For BA the joust has barely begun.
Source: Airline Business
