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SPECIAL REPORT: What's the future for airline alliances?

20 Dec 2010 by BusinessTraveller
Business Traveller talks to key figures at the annual Star Alliance CEO board meeting in New Zealand The largest airline alliance in the world, with 27 members and four more – Ethiopian Airlines, Air India, Avianca, Taca and Copa and in Latin America – set to join in the near future, Star offers more than 21,000 flights daily to more than 180 countries around the globe. But with consolidation between carriers being a trend that's likely to continue, will there be any need for alliances? And, in the meantime, what kind of developments can we expect to see from Star and its member airlines in the years ahead? On the subject of consolidation, Jaan Albrecht, CEO of Star Alliance since 2001, says: "Consolidation is a trend we are seeing, and it's happening on a regional basis – there is lots of consolidation in Europe, in North America and Latin America, and that will continue. But the added value of the alliance is to be like a bridge over these areas where they are not consolidating – so you have Lufthansa group in Europe and Continental/United in the Americas, but our alliance is still like the umbrella that bring these initiatives together and allows the carriers to offer a seamless product." Rob Fyfe, CEO of Air New Zealand, agrees: "The opportunity to improve the industry's economics and customer propositions through alliances, mergers and acquisitions is key to the sustainable future of this industry and we expect to see more of this activity moving forward. But Star Alliance provides and creates a great platform to facilitate some of those deeper relationships that will emerge. "As a remote nation we are also heavily dependant on our Star Alliance partners to help us source the visitors that feed our economy. Every new Star member helps attract more people to this country. Without the connectivity of Star Alliance there is absolutely no doubt that fewer tourists would be visiting our country and we would be a poorer nation as a consequence." Lufthansa is a good example of an airline that has formed what some might describe as a "mini alliance", with its subsidiaries now totalling four (Swiss, Bmi, Brussels Airlines and Austrian). And there are also rumours that SAS may merge with the German carrier. Robin Kamark, senior vice-president and chief commercial officer for Scandinavian Airlines (SAS), says: "Are Lufthansa and SAS a good fit? Probably. We work very closely within Star but are there any concrete plans between SAS and Lufthansa? The answer is no. We need to structure SAS as a stand-alone entity, and if and when we are successful with that, I think as a healthy company we will be more attractive to be invited." The biggest merger recently was of Star's two largest carriers, Continental and United, which took place in October. But other examples of airlines that have joined forces within the Star network are Brazil's TAM and Greece's Aegean, both of which entered the alliance in 2010. Albrecht says: "Many airlines have decided that the key to future business success is consolidation – both of these airlines are in the process of merging –Aegean with Olympic and TAM with Lan Chile." However, it should be noted that as Lan is part of Oneworld, the proposed Latam Airlines Group, set to enter the market in mid 2011, would have to pick an alliance to team up with. Albrecht says: "Depending on that [decision], it might be nice coverage or it might become a new white spot for Star. We are open for that discussion." He adds: "Ethiopian includes co-operation with our two African members Egyptair and South African Airways, and as we continue to build our strategy in Africa this will most probably result in an enhancement of the network with the creation of another carrier in the western part of Africa." So what about the Gulf carriers? "I cannot see any of the Gulf carriers joining," says Albrecht. "They are competing business models. The typical Gulf carriers, the Emirates, the Qatars and the Etihads, are building hubs in the desert with huge investment in infrastructure to try to connect South East Asia and Australia to Europe and the US, and these are exactly the traffic flows that we are intending [to connect] in a very efficient way, via hubs in Singapore, Bangkok, and India – now with a new terminal in Delhi – from our hubs in Europe. "These airlines are competing, they are not generating new traffic – they are trying to steal the traffic from the established carriers. So why should we enter into this form of collaboration helping them to expand and get their brands known on a worldwide basis? The decision that we have taken so far is we don’t see any added value to the alliance from these carriers," says Albrecht. (For more on how the Gulf carriers are trying to take over the world, click here. What about Star's member airlines Egyptair and Turkish Airlines? Albrecht says: "You have a clear difference between Turkish Airlines and the Middle Eastern carriers, which are just building a hub and trying to ship the traffic from other traffic flows. Egyptair and Turkish Airlines have a big advantage in that they have huge local markets to connect with the Americas and Asia. We see the added value of Turkish Airlines because it is a partner that is willing to play, is willing to collaborate in the alliance." As yet, the Russian market remains untapped. So what does Star have planned to overcome this? Albrecht says: "Russia is top priority but we don’t have a top candidate airline. Why? Because in Russia the airlines are consolidating. We have seen so many changes over the last few years and even months – you had Airunion [a Russian airline alliance] that failed, you have S7, which was a series of airlines coming together, and you have Rossiya, which is a stand-alone airline that is being integrated into Aeroflot, so Russia is a puzzle. As our members already reach Moscow and St Petersburg, what we are looking at, and the customer is looking at, is a way of connecting domestically in Russia." With a codeshare agreement between Air New Zealand and Virgin Blue just days away, Australia's domestic market could also be opened up to the Star network. But what is the likelihood that the low-cost carrier with be integrated? Albrecht says: "They have the right network but we have not done the due diligence on the other aspects – today in Star we have about 80 minimum joining requirements. Once the bilateral relationship between Air New Zealand and Virgin Blue has taken place, we will get feedback from Air New Zealand to tell us if their experience with Virgin Blue is a positive one and if it is a potential candidate to comply with the minimum requirements to join." Since Air Berlin joined Oneworld in 2010, are we going to see more low-cost carriers joining alliances? Albrecht says: "This is what we call 'the morphing of the low-cost carriers'. A few years ago they had a business model that was absolutely incompatible with an alliance or a network carrier but what we have seen is a race for low-cost carriers to improve their service and connectivity, and for us network carriers to lower our costs and somehow to meet halfway, so we are definitely seeing this evolution from some low-cost carriers." Visit staralliance.com, airnewzealand.co.uk, flysas.com For Alex Mcwhirter's In Focus feature on the future of Skyteam, click here. Jenny Southan
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