Global airline alliances are undergoing a period of significant change, with some members switching their allegiance and others working more closely with their partners to secure antitrust immunity
Profound changes in the structure and nature of global airline alliances are taking place as the groupings see loyalties and memberships shifting, and as the core of the alliances - immunised groupings - begin to emerge as the industry's next stage of consolidation.
In North America, mergers have failed to take off to the extent foreseen just a year ago, largely because the essential element - cash - is lacking. While Northwest Airlines is about to be swallowed up by Delta Air Lines, this is cashless deal, made possible by Delta's relative financial strength and resulting share price. And in Europe, the British Airways merger with Iberia is in a sense a completion of unfinished business after a number of acquisition attempts by BA, dating as far back as a 1990s failed takeover of KLM.
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© Iberia |
Now, with the expansion of the Star Alliance to embrace Continental Airlines in an immunised grouping and the pending request for antitrust immunity by American Airlines and BA , along with the formation of the Northwest/KLM, Delta/Air France four-way joint venture, each of the three major alliances has a North Atlantic core. The Star moves come against the backdrop of a long-expected and twice-rejected move by the core of oneworld, BA and American, to seek antitrust immunity for their North Atlantic operations. Iberia is expected to become part of this core.
The moves represent a major step in the industry's global evolution: "We have entered another stage of consolidation," says Henry Harteveldt, a senior analyst with Forrester Research. "The industry is moving beyond overlapping mergers and toward the creation of transborder carriers. The initial opening of US/European skies earlier this year has been the catalyst for the alliance changes."
This is a significant change in the 11 years since the first alliance was formed by Lufthansa and United. Since then most of the world's major airlines have moved toward alliance membership, and the most restrictive bilateral treaties have been relaxed.
Jaan Albrecht, the chief executive of Star, defends the basic alliance premise, saying: "Airline alliances have proven their value to their member carriers over the past decade of their existence. The fact that Star Alliance has grown from five carriers to 21 in 11 years is testimony to the success of this business model. Even with airlines facing more challenging trading conditions, the alliance business model will continue to allow individual carriers to reap benefits which they could never achieve on their own."
An immunised grouping within an alliance is free to co-ordinate schedules, set fares and co-operate in marketing in ways that would otherwise be barred by antitrust laws. Pursuing corporate travel accounts with the lure of a single point-of-sale, a proposition made possible by the antitrust shield, is central, according to Harteveldt.
Immunity moves the relationship beyond the simple codeshare or even the network-centred codeshare of an alliance and, over time, the joint venture created by the immunity takes on a life of its own.
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Ben Hirst, executive vice-president corporate affairs and general counsel at Northwest, says: "Our KLM alliance is so closely enmeshed a joint venture that we're the model. We are the lynchpin of the Air France/KLM alliance and we have the technology and the experience. So it's a question of the others getting caught up." Hirst himself will retain his job titles in the merged Northwest/Delta. The three alliances combined account for an 81.6% share of capacity as measured in ASKs between Europe and North America.
William Swelbar, a director of the MIT Airline project, says: "The carriers are progressing more rapidly than the regulators and politicians. They're setting the stage for transborder carriers, and with United bringing in Air Canada they're moving toward a North American airline just as the European airline is being born."
The Star Alliance partners are diplomatically arguing that bringing Continental into their core grouping, with its antitrust immunity, will not dramatically alter the landscape of competition among the three major global alliances. Instead, bringing the Houston-based carrier into the grouping of United, Lufthansa and Air Canada, the three Star members that now have immunity for their North Atlantic operations, would be "a balanced response" to recent changes at SkyTeam. The Star immunity, which applies to an earlier North Atlantic agreement dubbed the A+ Agreement, would be similar to the immunity recently won by SkyTeam's Delta, Northwest, Air France and KLM.
NETWORK STRENGH
United chief executive Glenn Tilton says: "We're going to progress from the Atlantic in what we're calling the A+ and we shouldn't leave Air Canada out of this. If you look at the revenue opportunities that the combination presents to us across the North Atlantic, and then you triangulate it into the footprint that Continental has in Latin America that candidly we do not, and then you go from there to the Pacific, I think that you can see the strength of the network opportunity."
The Star A++ group, as the expanded antitrust group is called, will have a 25% share of the seats between the US and Europe, the same as the SkyTeam immunised group. Oneworld has about a 19% share.
Winning Continental will finally give Star a gateway in the New York City area with the addition of Continental's Newark Liberty hub. SkyTeam has Delta's JFK hub, and oneworld has the BA and American operations at JFK. And Continental would bring 45 US communities to the Star network that United does not now serve. The A++ pact would also be a template for further joint ventures among the expanded Star partners. Extending the A++ joint venture to Latin America through Continental's Houston hub is also high on the list.
The relatively small percentage of transatlantic operations at oneworld belies the fact that it has a strong share of the premium segment of North Atlantic revenues, says oneworld managing partner John McCulloch. BA and American lead in London-New York premium bookings and have the market power which helped vanquish a new breed of all-premium transatlantic carrier they forced three of them - Silverjet, Eos, and Maxjet - out of business, and BA took over the fourth, Paris-based L'Avion.
American, BA and Iberia applied to the US Transportation Department for worldwide antitrust immunity in mid-August. "We believe our proposed co-operation is an important step towards ensuring that we can compete effectively with rival alliances and manage through the challenges of record fuel prices and growing economic concerns," says American chief executive Gerard Arpey.
McCulloch stresses that the factors which aligned against the last two attempts by American and BA have changed dramatically. New services at London Heathrow use the very amount and number of slots that had been demanded by regulators as a carve-out back in 2002, and some 16 new entrant services between the US and Heathrow are now underway or about to begin. "They managed to find the slots for those," he says.
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"As we grow, SkyTeam will now have a staff. The real challenge is to keep your eye on the ball"Glen Hauenstein |
MIT's Swelbar says: "This is clearly a way for oneworld and SkyTeam to differentiate themselves. Star is building itself into an alliance that focuses on major cities and gateways. SkyTeam, with its Delta/Northwest focus on secondary cities, shows it depends on those lesser gateways. Jackson, Mississippi, and Lyon, France, are as important as Charles de Gaulle in Paris. When Star adds Continental, it adds a very decent portfolio of secondary cities as well."
Hauenstein insists that changes within SkyTeam, with the possible shrinking of Alitalia, are not important. He is also unconcerned about BA's planned merger with oneworld partner Iberia. "At Delta, we're already the largest carrier to the US from Italy and Spain," he says.
Continental's move into Star has raised considerable speculation about the future of US Airways. The Phoenix-based carrier only entered Star in 2004, and is now seen as the odd man out. US Airways is not part of the Star A+ grouping, and it will not become party to the A++ immunised group. And US Airways has no immunised relationship with Lufthansa, so its future is somewhat under a cloud. US Airways chairman Doug Parker puts a brave face on the situation, saying: "As a result of Continental joining Star, we actually upped our position there...it's more certain that we will be in for a longer period of time, so we are happy about that."
If US Airways does make a merger move - and Parker has been an outspoken proponent of consolidation for several years - that could change. But oneworld is wary, with McCulloch saying: "Continental was pursued with enthusiasm. This would be different."
FILLING THE GAPS
Although nearly 60% of world passengers move on an alliance member, "a few open areas remain", says Star vice-president corportate Chris Klick.
It is in Latin America that Star's integration of Continental stands to have an enormous impact. After Star lost Varig, it had to rely on United's southern network. And Star faces a formidable competitor in Lan, a oneworld member with affiliates in Argentina, Ecuador and Peru. But Continental has a deep presence through Latin American capitals, and it has a relationship with Panama's Copa that gives it access to just about every significant city in Central America and the northern cone of South America. Although Copa is not part of the plan for Star antitrust immunity, it has a separate immunised alliance with Continental that will remain in effect.
Mexicana's formal entry into oneworld next year will also bring about change. Its domestic rival Aeromexico is a member of SkyTeam, therefore Star will have to rely on Continental's strong feed and network into Mexico from Houston.
SkyTeam has some Latin coverage provided by Delta, Northwest and Air France-KLM, but the region is still open. So a major carrier such as Brazil's TAM is a target. McCulloch says talks between oneworld and TAM are "continuing", but TAM has already said it is leaning towards Star, and has bilateral agreements with some Star members. Oneworld, he says, will make a choice based on "what is best for us as an alliance".
Copa's competitor in the intra-Latin market, multinational TACA, remains non-aligned, although in May 2007 it signed a co-operation pact with Lufthansa and has major IT contracts with Lufthansa Systems.
In the past two years, the Asian landscape has changed dramatically. While All Nippon Airways has been a member of Star for years, Japan Airlines held steadfast to its policy of independence until a sudden change last year when it joined oneworld. Now, all but one of the oneworld carriers are consolidated near JAL in Tokyo Narita's Terminal 2. But Delta will exploit Northwest's assets in Tokyo, and Hauenstein says "you'll see us taking advantage of Northwest's portfolio of slots there and catching up with United".
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"Invitations to join are based on what they contribute to the network, rather than on size."John McCulloch |
In fast-growing China, China Eastern seems most likely go to oneworld. Air China and Shanghai Airlines are members of Star, while China Southern is in SkyTeam.
Meanwhile, the alliances have been busy with the basics for which they were formed. Star, for instance, continues on co-location of member airlines in such spots as Korea's Incheon Airport and on joint contracts such as ground handling at Heathrow. Oneworld developed a round-the-world product that can book a multi-segment trip with one Internet visit. At SkyTeam, Korean Air has a project with Garuda that will bring the Indonesian carrier into the alliance by 2010.
Star may have given up some of its more ambitious plans for a common IT platform, but the project is still alive and thriving, says the alliance's vice-president for IT Aman Khan: "We're working on business processes and other ways to help the members cope in a downturn." Although oneworld's McCulloch derides what he calls "vapourware", he says the fact that most oneworld members have Amadeus platforms has been a natural advantage. Hauenstein is more philosophical, saying: "We're not using what we would have or should have chosen as an IT platform, but that's the way it is."
For more on alliance moves towards antitrust immunity, go to: flightglobal.com/antitrust
Source: Airline Business
