Cost savings rather than revenue gains have emerged as the priority for global alliances as they come to terms with economic crisis and an uncertain future. As fortunes fluctuate, which groupings will gain ground in 2003?
Global alliances have always been a fast- moving game and the latest round of alliance summits demonstrates just how quickly fortunes can change. For much of the last year the momentum has remained with Star, while SkyTeam has been rising quickly after its late start. Meanwhile, oneworld had sat in a state of virtual limbo after years of frustration waiting in vain for the core British Airways/American Airlines tie-up to be blessed with antitrust immunity. But in an uncertain world, could the momentum be about to shift?
While Star remains a clear leader in terms of both breadth and depth, its board meeting in Brazil in November was dominated by worries over financially troubled host carrier Varig, the pending bankruptcy filing at United Airlines, uncertainties over the future ownership of Air New Zealand (ANZ) and some private rumblings from founding member SAS over the need to see more direct benefits from the alliance. Only days later, the oneworld board, gathering in Madrid, was able to talk of steady progress, with a string of bilateral relationships developing between key members.
At the same time, SkyTeam has been quietly consolidating its gains in Europe and could yet pull off a major coup if Delta Air Lines succeeds in its plans to ally with Continental and Northwest Airlines. That, too, could have serious implications for the eventual fate of Northwest partner KLM.
For Star, the most immediate issue is support for a founding and leading member, United, but the question is whether the support should be moral or material. United's new chief executive, Glenn Tilton, went cap in hand to his first alliance meeting in Rio de Janeiro, looking for friends and family to offer contributions. At first, Tilton hoped Star would help backstop the federal loan guarantee he was expecting, but when the application was turned down, United began looking to members for a possible handout.
United they stand
Although the alliance as a whole said it would not give United financial aid, individual members might lend support to the beleaguered carrier.
Star's founding father, Jürgen Weber, attending what could be his last alliance board meeting before stepping down as Lufthansa chairman, said the German carrier would aid United directly if it could, because "if you have a friend, it is only natural for a good human being to help". He said United had never been better operated than it was today, but he added Lufthansa was not ready to commit to outright aid and later stressed it would make no offer unless it had solid guarantees backed by collateral.
However, Lufthansa has moved to bolster its ally directly by advancing its transatlantic co-operation into a unit that will more tightly co-ordinate pricing and sales and align scheduling, service and marketing. The new co-operation - already approved by Brussels - should increase United's annual revenue by $90 million. The two carriers codeshare on 330 daily flights, and Lufthansa executives dismiss speculation that it will seek out American Airlines as its US partner as United's troubles continue.
Air Canada will also help United if it can, says chief executive Robert Milton. He stresses that Air Canada would probably not exist were it not for the support it received from Star in 1999 when it faced a hostile take-over attempt by Canadian Airlines. To ward off the take-over - which would have brought Air Canada into the oneworld fold - Star members United and Lufthansa provided more than $300 million in liquidity, bought an issue of preferred shares and arranged A-330 leases in a $270 million package.
Milton said that without the alliance aid, "I would not be here now. No one should underestimate the value of the relationship."
United is far from being the only Star uncertainty. The alliance's Brazilian member, Varig, is enduring what amounts to a technical bankruptcy. Its problems have led to speculation that Star would turn to oneworld member LanChile for Latin coverage, especially as United pares back its services in the region.
Star chief executive Jan Albrecht, however, says the airline grouping is committed to Varig, and is not seeking a South American alternative. "We've been co-ordinating with Varig, meeting with them twice in the last six months. We've done this to co-ordinate support to Varig from the rest of the Star partners to see what assistance they can provide." But as with United, no hard financial or other support has emerged.
Some much-needed help for all Star carriers will come from alliance-wide cost-savings, which Albrecht says will be aided by a recent streamlining of rules, including joint purchasing of fuel, ground-handling services and ground-handling equipment. Thai's vice-president for alliances, Wallop Bhukkanasut, says this will bring his carrier deeper into the alliance. Thai alone has saved about $45 million in fuel costs over the last quarter through co-ordinated purchasing, says Bhukkanasut.
Star executives are tight-lipped about SAS's rumoured dissatisfaction over the benefits it has derived from alliance membership so far. But Lars Lindgren, SAS senior vice-president for airline executive co-ordination, plays down talk of friction with Lufthansa. "Of course we do disagree from time to time," he says, adding: "We have niches that need to be protected." Those niches are routes "beyond Germany".
Lindgren describes Star as a multilateral system based on a series of bilateral relationships that benefit both sides. "There is no doubt that Lufthansa is the most valuable partner for SAS, and there is also no doubt that SAS is a very valuable partner for Lufthansa," he says, adding that Lufthansa is the reason SAS joined Star in the first place and that Germany is Scandinavia's most important trading partner.
Two-way traffic
But Lindgren argues that traffic needs to flow "both ways" for the relationship to work, saying that while Scandinavian passengers may connect through Frankfurt or Munich, German passengers should equally be fed through SAS's Copenhagen hub. He adds that both sides must work to keep the arrangement mutually beneficial.
Lindgren notes "it is only natural that Lufthansa has significant presence in the Scandinavian market", but points out that Copenhagen is "ideally located" for some of the key East-West routes such as to the USA and Asia.
While Lufthansa and United have established a joint venture across the Atlantic, SAS has kept out of this relationship and has no plans to join for the time being, says Lindgren. United does not even fly to Scandinavia, although Lindgren says co-operation between the two is "very strong" and includes various codeshares behind and beyond gateway routes. He says SAS must "realise that Scandinavia is not big enough to justify a full intercontinental programme", but adds SAS is looking at ways of developing its long-haul relationships with its Star partners.
Lindgren is keen to stress that SAS is determined to make the alliance work. He says that since SAS has started putting its new higher-capacity Airbus A340-300 and A330-300s into service, it has seen more feed from Germany. He claims the joint venture between the two carriers is "the best example" of its type in Europe. Although the tie-up between Lufthansa, SAS and bmi british midland has not performed as well as expected, says Lindgren, this is because of market conditions.
Meanwhile in Asia-Pacific, the plan by Qantas to acquire a 22.5% stake in ANZ appears to mirror the struggle between oneworld and Star in Canada three years ago. On that occasion, Star's Air Canada eventually won out by acquiring the weaker Canadian Airlines, which left oneworld without a foothold in the country.
This time the tables appear to be turned, with Star on the defensive. ANZ's ambitious expansion into Australia ended in September 2001 with the failure of Ansett and the near-collapse of the parent ANZ group. Singapore Airlines (SIA), a third Star member, was also damaged by the affair, seeing its ANZ stake dwindle to 4% as the New Zealand government stepped in to save its flag-carrier.
By contrast, Qantas, a founding member of oneworld and 17% owned by BA, has been putting in one of the world's strongest performances. There is no guarantee its proposed offer to take a stake in ANZ - a deal that still has to clear competition hurdles -would force the New Zealand carrier to leave Star. When the deal was announced on 25 November, ANZ said no decision would be made "in the near future" and it "should not be assumed" that it will leave the alliance.
However, most observers expect ANZ will quit Star to join Qantas in oneworld. The alternative would require Qantas to break its long-standing and lucrative relationship with BA, which is backed by a joint service agreement as well as the equity link. Although SIAwould doubtless prove a willing buyer of any available Qantas stake, BAhas shown no sign of being a willing seller.
Kept informed
When the oneworld board met in Madrid, the Qantas/ANZ announcement was still not public, and even since then the alliance has refrained from much comment on the deal. For its part, Star says ANZ has kept the members "well informed about the rationale behind its considerations"and the implications for membership.
However, BAmakes no secret that the Qantas link is its deepest relationship within oneworld and both airlines have indicated they will apply to extend the Australian regulatory approvals for their joint services when these expire in July 2003.
In the present climate, oneworld, like Star, is placing a lot of emphasis on cost-saving. It estimates the alliance has made its members about $2 billion since its inception over just over three years ago - a figure that includes revenue gains as well as cost savings.
Peter Buecking, managing partner at oneworld, makes it clear that the current priorities place hard cost savings through efficiencies ahead of activities aimed at revenue enhancement. One example is the development of common specifications across engineering and maintenance activities which should bring savings through bulk buying or sharing of parts. Collectively, alliance members spend $5 billion on engineering annually, excluding labour costs.
"We are beginning to differ from other alliances," says Buecking. "Oneworld is deepening the level of co-operation rather than going out and adding tranches of new members." This is a clear reference to the latest Star additions of Asiana, LOTPolish Airlines and Spanair. "This is not to say we are not going to add new members," he says. "But we are looking for real value, which means quality of service and geographical reach."
It is clear some oneworld partners are lukewarm at best on the idea of Swiss joining the alliance, although Buecking acknowledges the carrier is "willing and interested in joining". He says it is "essential" that Swiss forms bilateral agreements with "all the key partners"before it joins. Although Swiss has codeshare agreements with American and Finnair, it has not yet forged the necessary link with British Airways.
However, it is clear oneworld is keen to see KLM join its ranks. "We would welcome them as a member of oneworld if they choose that option," says Buecking. KLM has been talking with the SkyTeam Alliance on the back of proposals for some form of tie-up between Delta, Northwest and Continental.
The relationship between KLM and Northwest is the most integrated of the transatlantic alliances, operating on a joint venture basis. KLM's unwillingness to ditch its long-time partner added to the issues that eventually scuppered merger talks with BA in 2001.
If Northwest gets regulatory approval to team up with Continental and Delta, this would seem to boost the chances of a SkyTeam tie-up for the Dutch flag-carrier. Even so, this may not be the certainty it seems.
"We do not believe that KLM will join SkyTeam automatically and it could still end up merging with BA," says Andrew Light, analyst at Schroder Salomon Smith Barney in London.
Light notes that Delta's proposed USalliance is designed for domestic routes only because it is essentially a response to the United plan to link with US Airways. He believes a link between KLM/Northwest and Air France/Delta would have to be conducted at arm's length rather than on the basis of antitrust immunity.
Bilateral relationships
In the meantime, oneworld is busy developing the bilateral relationships that have underpinned the alliance. "You can expect further deepening of bilateral relationships in the year ahead," says Buecking.
BA and Iberia are awaiting approval from Brussels for competition clearance, while American and BA have applied to Washington for immunity on behind and beyond gateway services and some transatlantic routes, which notably do not include London.
As the global groupings start the new year, there is still all to play for and no sure sign which of them will gain momentum in the next phase of the alliance game. But for certain, in the present economic climate, the aim is to demonstrate cost savings rather than the revenue gains of old. n
REPORT BY COLIN BAKER IN MADRID AND DAVID FIELD IN RIO DE JANEIRO
Source: Airline Business
