It has been a long time coming, but two years after British Airways signed its pact with American Airlines, the carriers have finally given their global alliance a name. As the launch celebrations die down, the question remains as to what this oneworld alliance will really achieve.
On the face of it, the lead carriers seem to have done little more than give a name to a collection of their strongest existing partnerships. BA has long held a stake in Qantas and American in Canadian Airlines. There was also the official announcement that Cathay Pacific would indeed be the alliance's key Asian partner - but even that effectively amounted to confirmation of what had been an open secret for months.
Immediate plans essentially boil down to a frequent flier programme (FFP)to be launched in February. It will be accompanied by joint lounges and a modest budget to market the oneworld brand. The BA/American transatlantic marketing pact is still in a regulatory wrangle, and the oneworld partners insist the alliance is not about codesharing. Just as before, they will continue to compete.
In short, the partners could not have gone much further even if they had wished. BA and American had no choice but to sit out the approval process and accompanying US-UK open skies bilateral if they wanted to take their transatlantic tie-up any deeper. And neither dared risk the announcement of any new codeshares as those delicate negotiations continued to take place. A close marketing deal between BA and Cathay, for example, would have given the carriers control of more than three-quarters of the market between London and Hong Kong. "Branson would have gone ballistic," comments one financial analyst.
But despite this, oneworld is more than just a name. "It makes them more visible, and visibility is all part of the marketing game," says James Halsted, analyst at Banque Indosuez, with some understatement.
BA has been in urgent need of a response to the Star Alliance. BA openly admits that Lufthansa and United Airlines have gained an edge through their two-year headstart. But until this autumn, the attention of BA and American seemed trained on the possibilities of a transatlantic tie-up to provide the springboard for a comeback. The oneworld alliance is a latent recognition that while they were rearming to fight the battle in the Atlantic, they were losing the global marketing war.
The captains of oneworld stress that their alliance was prompted by customer surveys which showed that what mattered most were promotional schemes, better connections and smoother transfers. Although not confirmed by BA, it is also understood to have found that 25% of gold card club members now preferred Star. The five airlines - and particularly BA - fear a migration of their traffic, in particular, high yield business traffic to the Lufthansa alliance.
BA's premium passenger loads have been falling as a proportion of total traffic over the last financial year. The carrier denies that they have been lured away by Star, blaming instead the strength of sterling and the flagging UK economy. Others are not so sure. "BA has already lost economy class transfer passengers to Star and is now starting to lose premium traffic," says one-London based analyst.
Both BA and Lufthansa are spending a small fortune on attracting the premium end of the market, but a return on this investment will depend on their ability to capture ever larger amounts of connecting traffic. While BA is strong in the premium point- to-point market, its transfer numbers do not yet match those of its rivals. At London Heathrow, not much more than one-third of BA's traffic transfers and the airport lacks genuine connecting infrastructure, at least until Terminal 5 is built. For Lufthansa, some two-thirds of the passengers at its Frankfurt hub connect. In part that is a function of the London region's powerful pull as an origin and destination market. But as BA itself has argued, in defence of the American link, Europe is following the USpath of inter-hub competition.
The arrival of the oneworld alliance in September also coincides with a growing nervousness about the state of traffic markets, including concerns over maintaining fare levels over the Atlantic. That alone makes the economics of a full-blown marketing alliance with American, including joint planning and pricing, more difficult for BAto square. The price for such an alliance would be to allow new US and possibly European competitors into Heathrow, with the resulting risk of falling fares, weakened market share or both.
While there was the prospect of healthy premium traffic growth the price seemed justifiable, although as long as a year ago there were those calling for caution. Chris Tarry, leading aviation analyst with Dresdner Kleinwort Benson, calculated last year that even a 10% fall in average fares would wipe out the benefits of such an alliance - costing BAas much as $300 million a year. That is on the assumption that BA retains its share of traffic and the fares wars are relatively mild.
With world economies now looking shaky and traffic growth weakening, the dangers of a full marketing alliance may simply have become too difficult to ignore. A commercial decision not to go ahead with the full alliance, at least for the time being, would be "eminently sensible," says Tarry. He adds that BA and American could simply sit it out until transatlantic open skies become inevitable some time in the future.
Others agree. "As we go deeper into recession, BA and American might not be pushing so hard for open skies and their own alliance. If that is true then they needed something else to show the world," says Chris Avery, analyst at Paribas.
Netting new partnersThe oneworld alliance not only provides a focal point for customers, but also to potential partners, who might otherwise go fishing in other waters. BA's director of alliances, John Patterson, acknowledges that the name alone provides a rallying point to "attract" other partners. Netting Cathay is one early victory.
With Thai Airways already in the Star camp and Singapore Airlines close-by with its Lufthansa partnership, the choices were getting thin.
For its part, Cathay admits that the decision to join with BA/American came only after two years of soul searching. "It was a very difficult decision for us, "says general manager of international affairs, Ivan Chu. He adds that the attractions of oneworld were sharpened by the promise of connecting traffic to fill Hong Kong's new airport, Chek Lap Kok. Cathay also needed to reassure investors shaken by recent financial losses.
Chu is keen to sell Hong Kong's benefits as a regional hub, providing connections for European flights into South-East Asia and Australasia. "From five hours flying range we cover more than half the world's population," says Chu. Hong Kong's accessibility from the USA was also underlined in July when Cathay carried out its first polar flights to New York.
Cathay also provides a gateway to the rest of China through its its Dragonair affiliate. Cathay's chief executive David Turnbull is confident that Dragonair, in need of an FFP, "will join eventually". BA's Patterson concedes that this Chinese connection is an "obvious asset", although adding that China Eastern is another possible partner which could help open up China's enormous, but so far protected, domestic market.
With Cathay on board, the rest of BA and American's partners are now lining up. Finnair will join "in the near future" and intends to begin codesharing with American as early as next March. BA's eastern European partners, LOT and Malev, are also waiting to join the club, while a deal with Spain's Iberia, in which both American and BA plan to buy a 10% stake, will be struck by November.
Latin America should be covered by Iberia and America's common equity link with Aerolineas Argentina. After a tense approval process for its stake in Aerolineas, American is understandably playing it cool over the carrier's likely entry into oneworld. American chief executive Don Carty, nevertheless concedes that Aerolineas "...is probably a logical extension."
A Japanese partner is less forthcoming. Japan Airlines has yet to accept an invitation to sign up, although its choices are narrowed by the fact that its rival All Nippon Airways is moving in Star's direction. Cathay has a "very good relationship" with JAL, says Turnbull, adding that with typical caution the carrier is likely to edge into the alliance through "bilateral relationships" with the oneworld partners. JAL already codeshares with Canadian and Qantas and plans to build on its long-standing but dormant links to American.
Africa is possibly the weakest link in oneworld's geographical coverage, with South African Airways widely believed to be leaning heavily in Star's direction. However, BA has a local South African presence through franchise partner Comair and is rebuilding relations with Nigeria Airways.
Even on its present standing, oneworld is a colossus, matching Star with 65 million passengers and around one-sixth of the world's international traffic. If its prospective partners come on board its market share will rise to a 20%.
While the partners are selling oneworld as "...very much a revenue business", analysts are keen to see signs of the alliance taking the next step towards some hard cost savings and rationalisation. While Carty and his colleagues pledge to co-operate on driving down costs, they still remain vague on the details. To date, the savings achieved by alliances, including Star, have been modest. But BA has a knack for coming into the market second, and then doing it bigger. Time will tell whether BA lives up to its reputation.
Source: Airline Business
