Playing for position

The Big three global groupings continue to jockey for position in an alliance contest where the stakes remain high.

After another year of frenetic alliance activity, it is tempting to ask what, if any, net progress the industry has to show for its effort? On the face of it, the answer may be not much. Mergers have more often remained stuck on the tarmac than taken off. And while some global alliances may have soared, others have been losing altitude fast. However, such tussles for relative advantage are all part of the alliance game and the failures can prove just as significant as the successes, especially for those standing by to pick up the pieces that spin off.

That alliance activity has been frantic is hardly in doubt. The latest Airline Business survey, now more precisely focused on the world's top 200 mainline passenger carriers, details over 500 bilateral agreements, which mainly come in the form of codeshares. Over 80% of carriers now have some form of substantive alliance link and new or revised deals are being notched up at the rate of around 70 a year.

And while there may not have been many decisive match plays of late, there has been some interesting manoeuvring among the global groupings which dominate the landscape. By almost any measure these five contenders - Star, oneworld, SkyTeam, KLM/Northwest and Qualiflyer - represent more than half the world transport market. In terms of passenger traffic, they already hold close to a 60% world share - and that figure excludes regional affiliates. Even on a conservative estimate, the Star Alliance members alone account for more than 20% of world passenger traffic. Other alliances are rushing to catch up, although mathematics dictates that not all can survive. This is precisely what makes even the positioning play so interesting to watch: with Qualiflyer and KLM/Northwest on the ropes, can an ambitious SkyTeam or a reinvigorated oneworld step in to take advantage?

Clearly, Star has long been the alliance to beat. The oft-quoted rating established by US investment bank Merrill Lynch shows Star achieving a score of close to 77%, based on measures of network reach, market size, financial strength and regulatory freedom. Not too far behind is oneworld with 69%, while SkyTeam hits 54% and smaller KLM/Northwest lags with just over 50%.

Star's lead billing is well justified. It is not only the oldest and largest of the alliances but has proved remarkably durable. So far, Star appears to have been the net beneficiary of the upheavals which have accompanied industry consolidation. In Europe, it had already lured Austrian Airlines away from Qualiflyer and won out in the bid to secure bmi british midland. Now SAS is in the process of taking over Braathens in Norway, previously an ally of KLM. If Finnair were ultimately forced to take the same route - as many speculate - then Star's dominance in Central and North Europe would be all but complete.

Meanwhile, the bmi addition has given Star some real options to start creating a hub presence at London Heathrow, with control of around 27% of the airport's slots. Sir Michael Bishop, bmi chairman, has made clear his desire to make Heathrow the site of Europe's first direct battle between two alliances.

In North America, too, consolidation has gone similarly, with Star's Air Canada emerging victorious in its battle to acquire oneworld's Canadian Airlines. Whether United Airlines can pull off its proposed merger with US Airways seems less certain, and even if it does the spoils must anyway be shared with American.

To date Star has also managed to keep hold of gains in Asia, although speculation remains feverish about the possible next step for Thai Airways following the arrival of Singapore Airlines (SIA) in the alliance. With its interests in Air New Zealand (ANZ) and Ansett, plus a 49% stake in Virgin Atlantic, SIA clearly has global ambitions of its own and is a player to watch in its own right as the game unfolds.

The global alliance grouping - traffic/revenue totals and world market share
	Passenger traffic (RPK)		Passenger numbers		Group revenues
	Billion	Share*	Million	Share*	$ Billion	Share*
Star Alliance	647	21.4%	314	19.1%	80.6	23.0%
oneworld	488	16.2%	198	12.0%	50.5	14.4%
SkyTeam	301	10.0%	178	10.8%	34.6	9.9%
Northwest/KLM	223	7.4%	90	5.5%	20.2	5.8%
Qualiflyer	116	3.9%	64	3.9%	17.4	5.0%
Total alliances	1,775	58.8%	844	51.3%	203.3	58.1%
NOTE: Figures are for 2000 wherever available but revenues follow financial years. Shares are estimates of world market share based on ICAO traffic totals and Airline Business projections. Passenger figures are based on mainline scheduled traffic totals excluding regionals.

 

A question of momentum

Meanwhile, Air France and Delta Air Lines have been busy putting some momentum behind their alliance. Although they were late into the alliance game, only launching SkyTeam a year ago, the grouping has impressed many with the speed with which it has since been making up ground. Perhaps its greatest asset centres on the hub at Paris Charles de Gaulle (CDG), that rarest of all things: a modern European connecting hub with room to grow. Air France is also ready to take Alitalia's hand as soon as the Italian carrier's state parent gives assent.

SkyTeam also touts the new Incheon hub of alliance partner Korean Air as being an engine for growth in Asia along similar lines to CDG. This is still to be proven, but the alliance does not lack ambition, even if it does lack members.

Brock Freisen, vice-president for strategic management at Star, has to admit that when the alliance looks in its rear-view mirror it sees SkyTeam as the threat charging up fastest behind.

Potential for oneworld

However, the biggest gains could still fall to oneworld if, as now looks possible, it too can gain new impetus. The alliance spent a lengthy stretch with its long-term strategy on ice, as British Airways first hit losses, then shed its chief executive and finally entered potentially alliance-killing merger talks with KLM. With those issues now apparently out of its system, BA has refocused on its oneworld ties and, in particular, begun a fresh drive to gain antitrust immunity with American Airlines. This has been on hold since 1997 when the European Commission (EC) set a level of slot surrender at Heathrow which priced the deal too high for BA.

Until recently there seemed to be little prospect of new movement on either antitrust immunity or the related UK-US open skies bilateral. Yet there have been signs of late that the stalemate might be breakable. "We are quite optimistic about our partnership with BA developing into a more fulsome partnership," says American. chairman Don Carty. "I think we've created an atmosphere where there is a greater probability in the interests of us, BA, the UK, the USA and the EC coming together someplace where a deal can be reached."

A couple of things may play in his favour. First, almost the entire cast of players has changed since BA and American last applied for antitrust immunity. Carty, a mild-mannered Canadian, and BA's Rod Eddington, a pragmatic Australian, could prove a more accommodating pair than their predecessors. There is a new competition commissioner in Brussels and the USA also now has a more conservative pro-business Republican administration. Notably, its new leader, President Bush, hails from Texas, home of American Airlines.

A second factor is the new Star presence in Heathrow, which gives BA an answer to EC charges that it would dominate too heavily on the Atlantic. In fact, bmi is putting up just such an argument in the hope that, with the antitrust inducement back on the table to tempt BA, the UK will finally sign up for open skies with the USA. Then bmi could finally launch its long-awaited transatlantic services out of Heathrow.

While the waiting continues, American's acquisition of TWA should add weight to oneworld in North America and there is hope too that Japan Airlines will eventually commit. These moves alone would more or less bring the alliance up alongside Star in terms of hard traffic figures.

There may be some further opportunities to spill out of Qualiflyer this year, as the lead Swissair Group looks for some radical solutions to repair the damage to its accounts and its reputation. It has already begun to disentangle itself from the minority stakes built up as part of its acquisition spree under the old "hunter" strategy. The company is likely to extend this separation policy to Sabena unless the losses in Brussels end. The next logical step would be for Swissair, and other Qualiflyer members, to seek refuge within a global alliance, with oneworld - with whom Swissair already codeshares - the early favourite.

Although KLM and Northwest are still together, they too have some thinking to do after their respective failed marriages to Alitalia and Continental. KLM has also had to reflect on the failure of its merger talks with BA.

The game plan can switch almost overnight, but for the immediate future the alliance race would seem to centre on whether oneworld and/or SkyTeam can gain enough momentum to catch up with Star.

Source: Airline Business