Alliances have again been making their presence felt over the last year or so with a spate of new members, a couple of defections and talk of new projects ahead
Although they may have taken something of a back seat during the crisis, the global alliances are now firmly back in the headlines. Not least, that is thanks to the growth of SkyTeam. Having entered the alliance game late, Air France and Delta Air Lines have been making up for lost time, with their SkyTeam grouping now on the verge of adding Continental, KLM and Northwest Airlines in a move which will see it leapfrog oneworld to challenge Star Alliance.
"SkyTeam is the comer, the one to watch, as inter-alliance competition increases," says Jon Ash, managing director with US consultancy Global Aviation Associates. Indeed, rivalry has intensified as each of the major alliances pursues the few remaining unaligned carriers or seeks to seduce a key player away from another grouping. Oneworld, for instance, continues to woo Japan Airlines (JAL) and possibly a Mexican partner, while Aeroflot is still due to sign up with SkyTeam. All are pursuing the big three carriers in China.
Even as Air Canada, United Airlines and US Airways struggle through some profound financial challenges, they have been keen to stress the value of Star membership. US Airways, for example, reports markedly rising revenues due to its codeshare with Star ally Lufthansa since the partnership started in October, says Bruce Ashby, US Airways senior vice-president alliances.
If individual fiscal struggles grab much of their management focus, the top ranks of airline executives remain committed to the alliance concept. This is demonstrated by Star's recent board meeting in Singapore before the IATA annual general meeting. Of the 15 mainline carriers then in the alliance, only Bruce Lakefield, then newly appointed US Airways chief executive, and Jorgen Lindegaard of SAS were absent.
Alliance structures
Star, as the largest and most mature of the global groupings, has now settled into a routine of twice-yearly board meetings to provide "strategic direction". Others, however, do not seem eager to follow Star's lead. Speaking on behalf of Skyteam, Paul Matsen, Delta's senior vice-president marketing points out that the Continental/Northwest integration into SkyTeam will be the single largest in alliance history. "It demonstrates that SkyTeam has a very clearly defined process for new members,"he says. "We don't think of the alliance structure as loose but rather as self-governing, as opposed to having a central corporate infrastructure."
If SkyTeam is less structured than Star, oneworld is even less restrained by central architecture. "The oneworld alliance has what you would call a skinny management structure and it doesn't take that much from us,"explains Mike Lenz, managing director of international planning at American Airlines. "I'd say we have two people on staff who devote most of their time to oneworld matters. With us, oneworld is an overlay, as opposed to a structure like that at Star, where it seems to be moving toward a master brand." Star itself has a full-time staff of around 70 people.
But oneworld makes a strength of what may seem a weakness. John McCulloch, oneworld managing partner, says: "Oneworld has a very limited infrastructure, perhaps 23 people, half in sales. We're not about numbers and we're not about getting to a certain number of members; each of the airlines in oneworld has to have a strong enough brand identification in its home country and around the world. So we don't have to be too concerned about filling regional gaps with new members."
Regional gaps, however, remain a key issue for some. Chew Choon Seng, chief executive Singapore Airlines, hosting the Star board meeting, pointed to a growing need for global coverage and a shrinking number of unaligned carriers. For Star, one of those blind spots - Africa - will be erased during 2005 with the addition of South African Airways. TAP Air Portugal, lured away from a relatively recent bilateral with Continental, will also join next year, boosting Star's presence on the Iberian peninsula. Yet-to-be filled blanks are China, India and Russia, says United chief executive Glenn Tilton.
Gaining a Chinese partner depends more on Beijing allowing domestic carriers to align. "With this number of existing bilaterals we will eventually grow into a situation where we will take on a Chinese partner," says Austrian Airlines chief executive, Vagn S¿rensen.
Chinese prospects
Oneworld too sees a Chinese relationships as a longer-term prospect. As McCulloch puts it: "China will sort itself out." For SkyTeam, Matsen says: "We are more than pleased with the way that the new Incheon airport in Korea has evolved as a natural alliance hub for north Asia and in support of routes into China. With the new US/China Open Skies pact, we see enormous benefits for SkyTeam as Continental and Northwest join." SkyTeam appears closest to enlisting a Chinese partner, with the inside track on bringing China Southern on board as an alliance member. The airline already has relationships with several SkyTeam members.
Russia and Aeroflot hold immediate promise for SkyTeam, and Matsen believes the Aeroflot commitment to enter the alliance confirms that the future of global aviation lies with alliances. When it signed the memorandum of understanding to join the alliance in May, Aeroflot estimated that it could reap at least an extra $200 million a year in revenue from membership.
One of the few unaligned major European carriers is Swiss. In June, its proposed oneworld tie-up failed when it withdrew from a partnership with British Airways. Swiss says its priority now is to push through a turnaround plan, not pursue alliance membership.
The biggest unaligned region is Asia and speculation has focused on Japan as well as China. A premier carrier in the region, JALseems determined to remain aligned but unallied, as it were. As Lenz of American says: "We try to tell JAL what a great fit oneworld would make every time we meet with them but they have held back."
The only major carrier to leave an alliance voluntarily so far is Mexicana, although Ansett Australia left following its closure. The Mexican carrier has swapped its Star membership and its extensive codeshare pact with United for one with American and both carriers have asked for a blanket codeshare agreement. Mexicana has also stressed that it retains codesharing with Lufthansa. This could pave the way for Mexicana's transition to oneworld. McCulloch says that Mexicana "would be very welcome".
Regional members
Such cases raise the issue of including smaller carriers in alliances to add regional coverage. Star Alliance chief executive Jaan Albrecht says: "The question is how to keep the costs and complexity as low as possible." Star's solution is for regional carriers to be sponsored and represented by one of the existing mainline members. For instance, Finland's Blue1, an SAS subsidiary, will become Star's first regional member in October. Further Star regional members are expected to be announced before the end of the year. Oneworld is developing a similar affiliate membership level but McCulloch says that may not be finalised until early next year.
Since Star began modern airline alliance growth in the early 1990s, debate has continued over how to measure the revenue-enhancing effect of alliance membership and the alliances are loath to issue estimates. But the extra connectivity and new city pairs that are added with codesharing show immediate gains, says Albrecht. "New airline members see a rapid rise in interline feed, as do existing partners," he says.
Ralph Norris, chief executive of Air New Zealand, says the carrier takes in "many tens of millions of dollars" of extra revenue through Star relationships. United's senior vice-president worldwide sales and alliances Graham Atkinson says the revenue-enhancing effect "adds at least $250 million" a year to the bottom line. "Essentially other carriers are milking Star for us," says Atkinson.
McCulloch cautions that most estimates of alliance benefits are vague because of the difficulty of estimating stimulated growth and the like. "Still, the savings have been real and the benefits have been real and we like to say that about $2 billion in value has been added over the life of the alliance," he adds.
SkyTeam is also reticent about overall benefits. However, Matsen argues that the three-way alliance that Delta has had with Continental and Northwest in the US domestic market for the last year has already "significantly exceeded our expectation, both in passenger numbers and revenue; we are at year-two levels at the end of year one". SkyTeam has developed a revenue-sharing programme for its transatlantic route network co-ordinating all four members that fly in the region. This will, it estimates, increase revenue by about $100 million a year for the members in its first years.
Indeed, as McCulloch says, early expectations of alliance revenue benefits were perhaps unrealistically high and, at some, the focus has shifted from "extra money", as it were, to cost savings. Star reports a similar shift. Just three years ago, 90% of its focus was on driving revenue benefits, with 10% of projects being cost-driven, says Albrecht. This has all changed. Now the balance is almost equal and is likely to remain so for the foreseeable future. Joint fuel-buying is a key Star project in which its own fuel company buys fuel for several carriers at several international hubs. It has saved carriers $50 million over the past three years, a figure that will grow past $100 million per year as the scope of the operation expands.
Purchasing power
Others though are not so eager to jump into co-ordinated deals. McCulloch says at oneworld: "The philosophy is that we don't do projects unless they really add value. When alliances were beginning, there was a lot of excitement bursting out everywhere about joint projects but we have come to realise that they add a lot of complexity; just having one more party at the table can add a lot of complexity. So we have not done things like joint fuel-purchasing because it doesn't add value. Each member had enough buying power that the savings would not justify the added costs of the project. Similarly, we have been quite sceptical about things like joint aircraft buys."
This last is an area where savings have not yet been realised. A much-publicised Star plan for the joint acquisition of regional jets - where Air Canada, Austrian, Lufthansa and SAS all potentially involved - has been put back for at least five years following independent decisions by Air Canada and Austrian. The project has, however, created a Star standard for Bombardier CRJ series and Embraer 170/190 regional jets. For now, individual carriers are leading the way: All Nippon Airways represents Star's effort to define a standard for Boeing's 7E7, for instance.
An easier and perhaps more natural area for alliance co-operation is in sales products. Oneworld, for instance, launched "businessflyer" web-based fares targeted at small and medium-sized companies in Germany and France. The scheme will also be offered in other European nations. It also offers an alliance branded-fare product aimed at the conference and convention market, called "eventflyer".
At SkyTeam, says Matsen: "For the 75 to 100 global accounts that are alliance-sized we can offer joint alliance response to corporate buyers, as others certainly can. We are advancing, especially now that Delta has begun negotiating sales on behalf of Korean Air in the USA."
Another area is technical and IT co-operation, here oneworld has the advantage that most members are on the Amadeus platform. It became the first alliance to include a member that offered interline ticketing with all of its global partners when American reached that milestone this year. It will offer alliance-wide interline ticketing by year-end. For its part, Star has worked hard in middleware to link its diverse members and has developed an expertise that may lead to service offerings outside of the alliance or, indeed, outside of airlines.
Other areas for mutual assistance include safety. For instance, a SkyTeam safety working group co-operated closely with Korean Air after a brief 2001 suspension of Delta's codesharing with the once-troubled carrier, which Matsen says "has made tremendous strides".
Progress among the alliances may not be without its hiccups. There may be changes at Star if problems persist at US Airways and at United; similarly, SkyTeam is watching the situation at troubled Alitalia closely and all Matsen will say is "they are going through their transformation, just as we are at Delta".
But change and growth are inevitable and may come in new areas. For instance, McCulloch says oneworld would not rule out an eventual relationship with a quality low-cost carrier. With alliances the thinking may tend to be long term but when the projects do arrive they certainly make headlines.
REPORT BY DAVID FIELD IN WASHINGTON AND MARK PILLING IN SINGAPORE
Source: Airline Business
