Alex on… the relevance of airline alliances

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  • Anonymous
    Guest

    Sixteen years after the formation of Star Alliance one has to ask whether alliances are still relevant.

    When Star, the first airline alliance, was launched in Frankfurt back in 1997 the aviation world was a very different place. Its five founding members Lufthansa, United plus Air Canada, Thai Airways and SAS thought the sun would shine forever.

    Today’s world-beating Gulf carriers were flyweights in those days.

    There was no Etihad. Qatar Airways hardly existed while Emirates had just begun serving Melbourne (its first Australian destination and its first really long distance route).

    Sixteen years on and the world order has changed. We now have three successful global players based in the Gulf and they have all stolen market share from Europe’s national carriers.

    Indeed, one of the three, Emirates has since leapfrogged Lufthansa to become the world’s largest airline in terms of international flown mileage.

    But alliances remain important. However it seems they are now more relevant to the smaller, rather than the larger members.

    It’s rather like the situation that existed in IATA’s heyday. Small to medium-sized carriers sheltered under the trade body’s umbrella because, in pre-liberalisation days when products and tariffs were rigidly controlled, IATA did not permit one member carrier to have a competitive advantage over another.

    Alliance membership fulfills a similar function today. Whereas the big carriers have the clout to go it alone, the smaller members need to belong to an alliance because by linking with the giants they can provide passengers with access to global networks and FFPs. They also gain the kudos of being linked with the world’s quality airlines.

    But alliance loyalty is not the same as it was. We see big carriers like Qantas, Air France and KLM going ahead and forging deals with rival carriers to the detriment of existing members.

    A prime example is Qantas’ tie-up with Emirates (a non-alligned carrier) at the expense of fellow alliance members British Airways, Cathay Pacific and Malaysia Airlines.

    Qantas linked with Emirates to offer its passengers coverage of Europe even though fellow member British Airways has the network to carry out that task.

    Another example would be the Air France and KLM (both Skyteam members) linkage with Etihad (a non-alligned carrier) to boost their networks in the Gulf and onwards to Asia and Australia.

    This tie-up seems like a case of ‘if you can’t beat them, join them.’

    Remember that it was barely two years ago that the then Air France CEO Pierre-Henri Gourgeon was calling for curbs to be placed on Gulf airlines.

    http://www.bloomberg.com/news/2010-10-10/air-france-ceo-gourgeon-calls-for-eu-curbs-on-expansion-by-gulf-carriers.html

    At least Lufthansa, another Gulf critic, has remained true to its word.

    http://www.businesstraveller.com/news/lufthansa-seeks-gulf-airline-restrictions

    So in the final analysis, while alliances remain relevant it would appear the benefits are more for smaller rather than larger members.

    Alex McWhirter


    Str8Talking
    Participant

    Interesting points, but I guess this is strictly speaking about the three formal global alliances.

    Even though the likes of Emirates claim that they “can and want to do it alone”, that is very clearly not the case. Without partnerships, such as with Qantas and possibly American Airlines, they cannot have their global domination. One can say that this in itself is an alliance, albeit not an “official” one. So be it an alliance or a partnership, they all need them.

    While I certainly see the strategic manipulation by the airlines may be detrimental in some ways it inevitably must have gains in others.

    Without some of the alliances a passengers life might be made more complicated on multiple flights and bookings, certainly rewards would be more complex if available and as with everything, you have a saying over here, it’s all swings and roundabouts.

    The negative side is that recently, for example, one of my underlings had an emergency and needed to fly to the client in LA from Birmingham, the quickest way was Lufthansa via Frankfurt at the time. All the Lufty we site would give her were flights on United, NOBODY flies United. In the end it was quicker to bhx Zurich LA on Swiss.


    IanFromHKG
    Participant

    “A prime example is Qantas’ tie-up with Emirates (a non-alligned carrier) at the expense of fellow alliance members British Airways, Cathay Pacific and Malaysia Airlines.”

    I can see that the loss of the European connecting traffic from QANTAS could be a blow to BA, but I don’t see that the change comes “at the expense of … Cathay Pacific and Malaysia Airlines”. CX has entered into codeshare arrangements with BA since the change, which will in all probability boost CX’s Australian business – but I don’t see any corresponding downside for CX. Similarly, I don’t see any downside for MH which is a new entrant to oneworld. Can you provide any context or views to substantiate your assertion that there will be detrimental impact on those two airlines?


    Str8Talking
    Participant

    I would say that CX and MH would be the two other obvious OneWorld carriers to cooperate with QF in the absence of EK on the kangaroo route. I think it certainly affects them when they could have worked closer with QF but at the end of the day, neither offers EK’s extensive European network. QF however would have also wanted something big enough to tackle the Virgin/Etihad partnership in its home turf so had to go for the “biggest” option!

    It’s not so much a case of losing out on something they already have, but more a case of not gaining something that OneWorld would enable them. But then again, OneWorld proudly says that they are happy with their members to have partnerships outside the alliance!


    Senator
    Participant

    I disagree with Alex statement: “But alliances remain important. However it seems they are now more relevant to the smaller, rather than the larger members.”

    I think if you asked the CEOs of United and Lufthansa Group they would insist that the alliance is critical to their business.


    transtraxman
    Participant

    @Alex McWhirter
    “A prime example is Qantas’ tie-up with Emirates (a non-alligned carrier) at the expense of fellow alliance members British Airways, etc.”

    What is more surprising is that Qantas tied up with Emirates but not with Qatar which is a soon to be member of oneworld. I presume that negotiations to join any alliance means all the members are informed. Therefore, why did not Qantas join Qatar? Or on the other hand why did not Qantas push for Emirates to join?

    Another point is … what is the relevance of Cathay Pacific in oneworld?. Would not its subsidiary Dragonair be the ideal platform for access into mainland China, for BA, Finnair, Qantas?


    BigDog.
    Participant

    The hey-day of the big 3 alliances may have passed Alex, however I believe airline alliances, individual link-ups/partnerships, and equity alliances (c/o James Horgan) will be the route to growing the business and are far more preferable/profitable than mergers.

    http://www.telegraph.co.uk/finance/newsbysector/transport/9919567/Sunday-Interview-Etihad-CEO-James-Hogan.html

    We hear of plans wrt IAG, AF-KLM, LH-LX, some believe they are the way forward, a vision for a profitable future. A view, especially wrt Walsh I do not share. Regardless of which view one holds, it is an undoubted fact that whilst each merger party wrestles with the other to prove the synergistic value of the merger, their eyes have been taken off the ball.

    Just as Airbus captured (and retained) large swathes of the Boeing market whilst Boeing spent years planning/grappling/integrating McDonnell-Douglas, so have the middle eastern carriers captured an increasing share of the European market whilst the legacy carriers have been “managing” mergers.

    As Anthony Dunn has noted in other posts, mergers seldom work, most fail (80%) to realise their objectives. But not only do they fail, often the outcome is worse as competitors attack whilst turmoil and confusion reigns.

    Alliances, in various guises, can grow a business whilst yielding many of the benefits of mergers, but without the angst, huge restructuring and diversion of a merger. [1] The financial and business benefits from strategic alliances far surpass those from mergers for they are easier to network and many can take place simultaneously.

    The merger of American Airlines with Reno Air resulted in a pilots “sick-out” due to disagreements about how to integrate Reno’s pilot pay structure into American. Within 8 days AA was forced to cancel 6,700 flights. The sick-out wiped out over $200million in pre-tax earnings or half the profits for the quarter.

    From an airline’s perspective each airline brings hub and spokes access to a network of routes, gates at strategically located airports; its fleets; its crews; loyal customers, frequent flier clubs, famous brand names, lounges, computer reservation systems, financial resources and national government allies.

    Members then benefit from huge bulk orders/economies of scale with : aircraft; jet fuel; maintenance; catering; hotel space, car rental, security and computers at deep discounts. This does not simply translate into lower costs for the new member but a lower cost structure for all existing members of the entire alliance when strong members join.

    From a customer’s perspective, [1] Each airline can provide its clients with a far greater range of potential routes, destinations and extra benefits like seamless global ticketing, more FF miles, special tours, discounts on foreign car rentals, vacation deals with hotels and restaurants and promotions for large savings at countless shopping outlets, service centres, entertainment sites and sports events.

    So Alex, although I do not share your view that “big carriers have the clout to go it alone”, I do agree that Alliances will become less important especially as individual link-ups become more prevalent.. Am also of the view the 3 big Alliances, especially Star which is more connected, will be a major, though declining feature in the airline market for years to come.

    [1] Capitalize on merger chaos – Grubb and Lamb


    AMcWhirter
    Participant

    Hello Ian_from_HKG

    Much will depend on price and connecting possibilities but I based my comments on the fact that EK offers a much larger network in Europe and Scandinavia than either CX or MH.

    For example, in Germany when you fly from HAM or DUS or MUC and want to book with CX to Australia then you’ll be routed via LHR (using BA for the sector within Europe) and HKG whereas QF/EK would be able to offer a faster one-stop routing via DXB.


    CXDiamond
    Participant

    I think Lufthansa will regret the day they did not align with Qatar when they had the chance. Qatar could now have been a key player in the Star Alliance had they done bringing many good things with them.

    Al-Baker spoke out against Lufthansa when he joined Oneworld and rightly so. LH have their heads buried in the sand on this one and it will come home to roost. They are now left without a parter in the middle east and they will live to regret it.


    AMcWhirter
    Participant

    Agreed. At one stage Qatar was tipped to join Star. It was on firendly terms with LH. It used to code-share with both LH and UA on routes between Doha, Germany and the US.


    OzGlobal
    Participant

    “Qantas linked with Emirates to offer its passengers coverage of Europe even though fellow member British Airways has the network to carry out that task.”

    This is obviously a false statement in the context: QF lost 85% of the Europe-Australia kangaroo route volume to other carriers, most notably EK. Why? They were 2 stop to almost all points in Europe via BA, whilst Gulf carriers can do 1: hours saved, stress saved, avoid LHR, and often lower Y fares. EK/QF tie up offers these benefits to Y passengers to Europe. Unfortunately, J and F fares on the codeshare with under QF flight number are much higher from Europe to Oz than EK, so no benefit to people like me in Paris.


    PeterCoultas
    Participant

    alliances were a great plus some 20 years back for those of us using RTW’s ….sadly that benefit is largely over as price since 2000 has more than doubled and the number of segments allowed has dropped from 29 to about 24 and now is only about 16…this means much less flexibility if the routing is not merely hub to hub….(star was generally more flexible as one world always restricted the number of segments usable in one of their “mini zones”)….the alliances now need to look again at their products as 3 returns, UK-asia plus UK-aussi plus UK-south america are now cheaper and more convenient than an rtw


    Dolphin500
    Participant

    In my humble opinion, the word “alliance” has been misused since some time ago. At the beginning the benefits were greater within the few airlines that formed the alliance, but NEVER has been a real alliance at all. There is not much reciprocity within airlines…As Mileage Plus SILVER, I’ll not have the same benefits within airlines… except for a couple of benefits: Waiting list priority and priority airport stand by… that are useless for me!!!. What about the Premier Qualifying Miles?? As United Mileage member, if you are travelling in Business Class in Turkish you will not collect 1.5 premier qualifying miles as you do on flights operated by Untied, Lufthansa, Austrian (now) or Swiss… nor less, I had a segment in Economy from NRT to CAN and only gave me 50% of the points in United Mileage Plus… being the same code of airfare…because that is ANA’s rule.
    Airlines are charging more fees and reducing more benefits than never. Fees for upgrade with miles… fees for extra piece of luggage, not priority luggage anymore for Medallion Elite… just for Elite Plus… and keep going… I’m glad that I’m moving to One World who is keeping more reciprocity within programs. What I don’t understand is why airlines can’t find agreements within the alliance members? Why they still together?

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