Throughout the entire exercise, rumours abound. Will Northwest and KLM split up? Is BA really considering a link with KLM and American? Will Delta and United receive antitrust immunity for their transatlantic alliances with Swissair and United, and what conditions will be attached? Will Alitalia sell its stake in Malev or increase it?
The airline business seems to be becoming more incestuous than ever. With 389 alliances in our survey, and more announced every week, the number of alliances has leapt by almost 40 per cent in two years. Only one major airline, TWA, has eschewed the alliance movement.
Most alliances are highly specific, targeted affairs with little strategic significance. They are introduced as a means of serving a new route more efficiently, or as an alternative to withdrawing from one. They do deliver some marginal benefit to their participants, but inevitably, they come and go with the market.
But even the major strategic alliances are in a state of flux. As carriers like Lufthansa and Delta build global alliances, other relationships such as Northwest/KLM and BA/USAir show signs of faltering.
The alliances which work best are those which make sense in the marketplace - by filling a strategic gap in an airline's network, cutting costs or enhancing revenues. Those which fail tend to be the ones which have been entered into without market justification - in short, alliances of fashion rather than substance.
Oddly, the factor which introduces the most instability is the desire for ownership and control of a partner. It used to be fashionable to go out and buy a stake in another carrier, and then think about possible synergies to justify the investment. Nowadays, market needs are considered first.
Equity used to be thought of as the glue that would hold an airline marriage together. These days, it seems to be the wedge that drives otherwise happy couples apart. Northwest and KLM appear to have a successful transatlantic alliance, but the struggle for control of Northwest threatens to nullify the gains they have made together. BA and USAir have also achieved market benefits, but further progress is threatened by USAir's domestic priorities.
Cross-equity holdings were supposed to provide a sense of permanence to an alliance, and bind managers and employees into a cohesive unit. Yet several alliances involving equity have collapsed, including Air France's with Sabena and CSA Czech Airlines. Iberia has sold stakes in Aerolineas Argentinas and Ladeco (under pressure from the European Commission). Continental Airlines has reduced its stake in America West, and Air Canada is selling its shares in Continental as it becomes closer to United.
Limitations on crossborder airline ownership needed to be removed to enable airlines to address global markets, said the theorists in the late 1980s and early 1990s. Yet most carriers are now finding other ways of going global, through internal expansion or looser marketing alliances involving codesharing, block space agreements or frequent flyer programme links.
So far, experience suggests that equity holdings tend to be a distraction from the main business rationale behind alliances. They mean nothing to passengers or freight shippers, and almost nothing to airline employees. If an alliance provides access to new markets with better service for customers or lower costs, it will probably succeed, with or without equity.
Of course, this could change again. Generally, an airline can purchase only a minority holding in a carrier based in another country. This creates a sort of halfway house, which often defeats the original purpose of the deal. The holder of, say, 25 per cent of an airline's shares has made a significant investment and wants some clout on the board, yet as a minority shareholder has little authority.
This effect is rarely present in other businesses. Generally, companies take each other over, merge or stay separate. When true crossborder mergers are permitted in the airline business, equity links might assume more importance. This has happened within the domestic markets of countries like the US, UK, Canada, France and Australia. But even then, mergers will only succeed if they meet the needs of that much talked about and least understood phenomenon - the marketplace.
Source: Airline Business
