Stellar orbit

After a lean spell in the aftermath of 9/11, alliances are back in vogue. Following a period when management attention was on other areas and there was an urgent need to save cash, airline boardrooms are once again focusing on alliance strategies.

The most notable example of this renewed interest is Japan Airlines (JAL), which has decided to take the plunge and join oneworld - a significant move as JAL was one of a handful of mainline carriers that had opted for independence. Virgin Atlantic Airways and Emirates now stand out as the two largest carriers still going it alone.

There are also signs that alliance involvement is deepening. Star expects to announce shortly that two new airlines are committing to its common IT platform. "Now that the product is ready, we are about to work with carriers that were not part of the leadership process," says Star chief executive Jan Albrecht. The common platform was developed by Lufthansa, United Airlines and Air Canada, although the latter dropped out of the project at a late stage as it battled its own internal problems.

The groundbreaking scheme has been hampered by the tight rein on alliance and IT expenditure, but was finally given the go-ahead last year, with Lufthansa planning to migrate in 2007 and United in 2008. Albrecht adds that new alliance member South African Airways is already using some aspects of the Amadeus-led platform.

In terms of membership, China and India are the two main hot spots at present. In China Star has developed what it terms a "two-hub strategy", with Air China and Shanghai Airlines due to come on board in 2007. "By covering Shanghai and Beijing, we are giving our customers more options," says Albrecht, adding the two carriers, in addition to the existing services from alliance members, will give coverage across China.

SkyTeam has also bagged a Chinese partner in the shape of China Southern. "SkyTeam is working on the adherence process for China Southern, which is due by the end of 2007," says Patrick Bianquis, vice-president alliances for Air France. SkyTeam has been courting China Southern for some time. It sees the carrier plugging the gap in the grouping's South-East Asian coverage.

Oneworld, meanwhile, already has Cathay Pacific Airways on board. John McCulloch, managing partner at oneworld, says another Hong Kong-based carrier, Dragonair, could also become a member once its takeover by Cathay is complete. This will provide enough strength to ensure a one-hub strategy for China will work. "Everybody needs to look at Shanghai and Beijing, but I am confident we can cover this through our members' networks."

Indian coverage

Recruiting members in the dynamic Indian market has proved more of a challenge, but Albrecht says Star is confident of an­nouncing a "preferred partner" this year. With three alliances chasing what looks like two possible partners, the jockeying for position is competitive. The planned merger of state-owned Indian Airlines and Air India is set to create one alternative entity if and when it happens, while the shape of the second option of a merged Jet Airways/Air Sahara is unclear after their proposed tie-up was called off.

McCulloch says the collapse of the merger was a blow, as oneworld had been courting both carriers. "When the merger fell apart, we were back to square one," he says. Not all are confident that decisions in India are imminent. "We are monitoring the situation, but it is fluid, and will take some time before entering talks there," says Bianquis.

This activity comes as carriers look to a possible Open Skies deal between Europe and the US that would remove many barriers to closer co-operation, and even allow cross-border mergers. Such a deal will open opportunities for alliances - the most obvious being anti-trust immunity for oneworld partners American Airlines and British Airways once London Heathrow has been opened up. Alliances would also be able to operate more flexibly. "Air France could fly out of Germany, for instance," notes Bianquis. "There would also be more options. Air France could codeshare on Delta Air Lines flights operating to European countries other than France, while our US partners would have access to Heathrow."

A more liberalised aviation environment would also open the way to further mergers along the lines of those already seen at Air France/KLM and Lufthansa/Swiss. But, once barriers come down, will the industry turn its attention from alliances to full-scale mergers?

A study by Dr Kostas Iatrou, partner at AirConsulting Group in Greece, suggests that alliances will continue to have a crucial role to play, even as the industry edges towards further consolidation. The study, which polled the views of executives in 31 alliance members, suggests a relatively small 17% believe they expect their future focus to be on mergers, while 37% expect alliances will broadly stay as they are and 26% expect closer alliance integration without this proceeding to mergers.

However, airlines clearly recognise that mergers can bring economies of scale, with corporate planning, financial planning, IT and maintenance synergies seen as the main benefits. Nearly 90% of carriers see advantages in corporate planning through mergers, compared with just over 10% through alliances.

The study also found that airlines have worries about the possible negative impact of mergers - around 80% are concerned about labour cuts, with the resultant threat of industrial action, and a similar percentage are concerned that the weaker, second carrier could disappear. Around 70% also have concerns about the reduction in traffic that would result as networks are rationalised around alliance hubs.

Nearly two-thirds of carriers believe transatlantic Open Skies is a prerequisite for consolidation in Europe and North America, but most of the likely pairings picked out by airlines in the survey are intra-regional tie-ups. Some 20% of respondents cited BA and Iberia as a natural grouping - the UK carrier already has a minority shareholding in the ­Spanish airline. Another 10% picked out Air France/Alitalia, Lufthansa/Austrian Airlines, and Singapore Airlines/Qantas as possible candidates. Two-thirds believe there will eventually be cross-continental mergers, with TAP's interest in ailing Brazilian carrier Varig a rare example.

Even if the industry moves towards mergers, 68% of carriers expect this to be with alliance partners and, for the time being, the focus is on alliance development, even if it means keeping an eye on merger possibilities later.

In the meantime, oneworld has hogged the limelight this year after a long spell of watching Star and SkyTeam build critical mass. Oneworld has commitments from JAL, Royal Jordanian Airlines and Hungarian carrier Malév to join in 2007, helping to compensate for the long-expected decision by Aer Lingus to leave as it moves towards a budget-carrier business model.

It is the prospective membership of JAL that has really changed the alliance dynamic, however. "It is the last big carrier," says McCulloch. JAL had finally concluded that the benefits of alliance membership outweighed any negatives, he says. "They came to the opinion that no matter how big you are as a network carrier, it's hard to stay independent of the interline element of air travel. They were also interested in the ability of alliance members to learn from each other and share best practice, and their main competitor, ANA, is in an alliance."

JAL joins Cathay Pacific and Qantas to provide oneworld with a solid-looking line-up in Asia Pacific to go with a strong presence in Latin America through LAN, Iberia and American. The alliance continues to be the most bilaterally focused, despite its new membership drive. "We are trying to create an alliance where we have a lot of relationships bilaterally," says Enrique Cueto, chief executive of LAN.

Qantas chief executive Geoff Dixon, who has a reputation as somewhat of an alliance sceptic, described oneworld as "an alliance of independent minds", adding: "We've gone for like-minded carriers." Some point to the quartet of American, BA, Cathay Pacific and Qantas as a formidable bloc in a more liberalised aviation environment.

Of the other two new entrants, McCulloch says Royal Jordanian offers a footprint in a region that can be difficult to penetrate. The Jordanian carrier's growing regional network is a major attraction, he adds. It is also not a big competitor for sixth-freedom traffic on Europe-Asia routes.

Eastern European presence

On Malév, he says: "It is important to have a foothold in eastern Europe, especially as the situation in Russia is unclear." Of the three alliances, SkyTeam has taken the lead, getting Aeroflot on board this year, leaving oneworld and Star to play a waiting game. Star's Albrecht says there are concerns that government policy could lead to a stronger Aeroflot at the expense of competition.

As far as potential new oneworld members go, SN Brussels is still a prospect. "I have a great deal of respect for them," says McCulloch. "But they need to clarify how they present their brands." SN Brussels and sister budget airline Virgin Express are to operate under a single brand from next year.

Belgium, along with France, Germany, the Netherlands and Canada, is on oneworld's hit list. Oneworld sees Canada's WestJet Airlines as a potential partner, despite its low-cost background. "They haven't got an interline product yet, but they are developing one," says McCulloch. Another low-cost carrier attracting oneworld interest is Brazil's GOL. In both cases, the prerequisite would be an interline ability and acceptable product quality.

SkyTeam is also keeping an eye on the Brazilian market, with speculation that TAM will join. "Air France-KLM is a partner of TAM and we would like to see this relationship evolving at the SkyTeam level, but it is far too early to comment given the Varig problems," says Bianquis. SkyTeam is still working through a massive increase in scale in 2004 with the Air France-KLM merger and the addition of Continental and Northwest.

SkyTeam's immediate concern is to gain regulatory approval for KLM, Northwest and Continental to participate fully on the transatlantic. In June, the European Commission (EC) outlined competition concerns on what the alliance says is "a small number of routes". SkyTeam carriers are working together to answer the EC's concerns, and expect to go back to Brussels in September. "We will be prepared to negotiate remedies on a limited subset of the incriminated routes," says Bianquis, adding that the alliance hopes to get EC approval next year. The alliance has so far failed to convince regulators in Washington to grant transatlantic anti-trust immunity to KLM and Northwest.

Star has also been battling to extend its five-carrier immunity to include new European members TAP Portugal, LOT and Swiss. The travails at Brazilian carrier Varig have been a worry for Star, although Albrecht is confident the rescue package now in place will work, and that the alliance does not have to look elsewhere to strengthen its Latin American presence.

Star does, however, expect to add to its network of regional affiliates. Today this features Finland's Blue1, Croatia Airlines and Slovenia's Adria Airways. SkyTeam also plans to add six regional affiliates - Spain's Air Europa, Panama's Copa, Kenya Airways, Lebanon's Middle East Airlines, Portugalia and Romania's Tarom - by the end of 2008. Oneworld has eschewed this strategy - for now - as McCulloch voices concerns about product and brand confusion. However, Cueto of LAN is lobbying for his affiliates in Ecuador and Peru to become part of the alliance. Whether this strategy changes as alliances look to expand their coverage remains to be seen.

Meanwhile, Bianquis predicts the rash of announcements to subside after a busy first half of the year, although India could yet throw a surprise by the end of 2006. ■

Source: Airline Business