Global alliance-forming is nearing its endgame
Chris Jasper/LONDON
The dominant trend in the airline industry in 1999 was the continuing expansion of global alliances, taking place against a background of varying financial performance: the USA faring well, Asia beginning to recover from its slump, but Europe suffering a downturn.
Over the next 12 months alliance-forming will continue as the process reaches its endgame, most major carriers having committed to one alliance or another, while Asia looks set to continue its financial rebound and some European airlines are on course for a sharp fall in profits.
The Star Alliance and oneworld are still relatively new constructs, yet seem to have been around for many years, so successful have the two major alliances been in sweeping all before them. Lufthansa/United Airlines-led Star's membership is now well into double figures, shattering a cap on numbers the alliance had set, and it has relaxed its opposition to investing in potential new recruits.
Oneworld, led by British Airways and American Airlines, has also added members, so that other planned alliances trail in the wake of the big two.
The alliance forming around KLM of the Netherlands, Alitalia and Northwest and Continental Airlines of the USA, dubbed "Wings", has moved some way down the path to going global. KLM and Alitalia have launched plans for operating almost as a single airline in some respects, and Northwest should be brought into the alliance on the same basis next year.
Continental remains a problem for the alliance, however, with US regulators having scuppered plans closer links with Northwest. Wings must in any case commit to a full launch in 2000 or risk being left behind.
Air France and Delta Air Lines, the two largest carriers which had failed to commit to an alliance, announced a bilateral deal of their own in 1999, and declared that it would form the basis of a new global grouping. Progress has been slower than hoped, however, with British Midland electing to join Star despite heavy overtures from Air France - a loss for which the signing of Aeromexico was hardly adequate compensation.
Although Air France/Delta must choose from the ranks of carriers overlooked by other alliances - including Korean Airlines - they too need to launch as soon as possible and will probably do so early in the New Year.
The future of the fifth major alliance seems set to buck the expansionist trend. The Qualiflyer Group was in reality always a European (rather than a global) alliance, and was exposed as such when Delta, to which alliance leader Swissair was linked via the North Atlantic Excellence Alliance, pledged its future to Air France.
That move caused Swissair and its part-owned subsidiary Sabena to quit the Delta relationship and hammer out codeshares with American, in turn prompting Austrian Airlines and its cohorts Tyrolean and Lauda Air to jump ship and sign with Star. Qualiflyer is now little more than an SAirGroup "club", THY Turkish Airlines providing the only link beyond Swissair's extended family.
For Swissair, 2000 will be a year of hard decisions. The national carrier is still determinedly ploughing its own furrow - investing in South African Airways for example - yet its new deal with American Airlines appears to increase the possibility of its joining oneworld.
As the big alliances solidify, the fault lines between them are becoming apparent. Austrian's defection was followed by a more spectacular clash between Star and oneworld over control of the Canadian airline industry.
Flag carrier and Star member Air Canada's bid for a partial takeover of ailing Canadian Airlines of oneworld was initially fought off by American with the aid of the Onex investment group.
With the Onex bid thrown out by the courts, however, Air Canada won the day with a cut-price offer. To maintain competition, Canadian is to remain a separate entity and even looks set to stay in oneworld, while some of the two Canadian major's regional operations may be spun off to form a new domestic carrier. Further inter-alliance clashes can be expected in the coming year.
In 2000, the global alliances will also seek to shift their strategies beyond the arena of marketing, where groupings help maximise revenues, to that of cost, with the aim of decreasing overall expenditure. Joint purchasing is now just around the corner, and the first major joint aircraft orders could be seen before the end of the year, although such an act would still be a bold one in the absence of equity ties.
For those airlines still outside the alliance loop, such as Virgin Atlantic and Emirates, the pressure to join increases by the day. True, they can make a profit from operating high-yield point to point services - but as alliances become more efficient, the implications of staying out in the cold will become more apparent. These carriers, too, will likely join alliances in the end, but will resist for as long as possible.
Financially, the ravages of the Asian slowdown are being left behind - in Asia, at least. Most Asian airlines report month-on-month improvements for the bulk of 1999, so the region's leanest operators, such as Cathay Pacific, can be expected to bounce back strongly in their 2000 results. Basket cases remain, however, and Philippine Airlines and the carriers of Indonesia continue to look weak.
Different picture
In Europe, however, the picture is different. Little more than a year ago its airlines were congratulating themselves on having ridden out the Asian crisis almost unscathed.
Several are looking down the barrel of a worsening financial performance, with British Airways, once most competitive of all, flirting with a probable loss.
Europe's carriers have been hurt by over-capacity on the transatlantic market, seats having been transferred in from flagging Asian routes. This trashing of the market has seen price wars erupt and led to a significant fall in average yields in what is normally regarded as the industry "golden" market.
The USA has sustained growth, albeit with several fluctuations. Analyst Kevin Lynch of Roland Berger & Partners believes the industry there is entering a period of stability after decades of liberalisation, with the battles to establish hubs and guarantee market share now largely over.
Recent moves by many US majors to guarantee feeder traffic by tying feeder carriers into their own operations, leading to significant consolidation, may be the final phase in this development, Lynch suggests, with the Delta purchase of Commair the most spectacular example.
On both sides of the Atlantic, but most frantically in Europe, efforts are under way to rescue yields by reining in capacity. BA has led the way with a radical plan focusing on high-yield passengers and switching to smaller aircraft across its network. Its main European rival, Lufthansa, has adopted a different plan, aiming to grow capacity and target market share.
Only one of these strategies can succeed, and by late 2000 it should be apparent who has called the market correctly. If BA's plan works, it could solve the perennial problem of falling yields. If not, it could be in deep trouble.
A factor which will once again affect airline performance is the cost of aviation fuel. Analysts Merrill Lynch report that fuel prices soared 111% in the first 11 months of 1999, contrasting with a 25% decline over the same period in 1998. Struggling carriers have been quick to blame the increase for their financial failings, although, as the accompanying charts show, a 25% hike in fuel price equates to a rise of only three points in fuel as a percentage of direct operating costs.
More significant for airlines than fixed pricing is the degree of hedging they have against rises. Some carriers have hedged up to 80% of their requirements, but others set aside far less, and it is these that are feeling the pinch.
For major carriers, regulatory issues will continue to loom large in 2000, with the European Commission expected to continue its fight for air services negotiating powers. A new US-UK bilateral remains on the agenda, but the revision of Bermuda 2 seems more likely than its wholesale replacement.
Low-cost airlines will continue to make headlines, with the sector expanding to cover more destinations in Europe, but more casualties (joining 1999's Debonair, Color Air and AB Airlines) are also possible as majors look to respond. In the USA, JetBlue will launch into a sector low on activity in recent years.
In developing airline markets, the signs look fairly positive. Latin America escaped the worst of the Asian flu (Peru suffering most), but there is still slack to be taken in, with a thinning out of airlines anticipated in Brazil in particular. Lan Chile, though, has shown what Latin America can do, although a lack of capital means the industry there is still likely to rely on outside investment for some time.
Worldwide, the International Civil Aviation Organisation expects airline traffic to grow at 5% in 2000, one point ahead of 1999, with Asia growing fastest.
Source: Flight International
