ANALYSIS: LCCs reap codeshare benefits

Washington DC
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Codeshare partnerships – once synonymous with legacy carriers and airline alliances – have made inroads in recent years with low-cost carriers.

In particular, low-cost airlines in North and South America are leading the charge, snapping up interline and codeshare deals – all without the costs of joining an alliance.

This illustrates low-cost carriers’ increased willingness and ability to embrace network carriers' codeshare environment. It also demonstrates a tactical shift in thinking among alliance and network players – to turn to the evolving budget sector as surrogate members in key markets, in recognition of the local strength and appeal of these carriers.

In the USA, airlines like JetBlue Airways and Virgin America have aligned themselves with several network carriers as part of a strategy to feed their own networks. JetBlue in particular boasts a list of more than 30 partner airlines it interlines or codeshares with. These carriers span the globe – from the Americas to Asia and Africa – and include airlines with substantial networks, such as Emirates and Lufthansa.

Pitching itself as a “hybrid” in a US industry dominated by legacy carriers and discount airlines, JetBlue believes it offers an attractive product to justify it as a worthy partner for the world’s full-service carriers.

Judging by JetBlue’s recent track record, those airlines certainly seem to think so.

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Earlier this year, JetBlue added Etihad Airways and Turkish Airlines as its latest codeshare partners. The New York-based carrier also announced plans in May to upgrade its interline relationship with Singapore Airlines into a two-way codeshare. SIA would be JetBlue’s fifth major airline codeshare partner added over one year.

JetBlue said in July that airline partnerships continue to be an “important source of incremental traffic in high-yield margin passenger revenue” for the carrier. Gross revenue from partnership traffic grew to $120 million in 2013, from $80 million in 2012.

JetBlue’s chief executive Dave Barger reiterates that the airline is focused on deepening its existing partnerships. He is confident this strategy has served the carrier well – so much so that the airline hardly broke into a sweat when American Airlines chose to discontinue its interline partnership with JetBlue earlier this year, after the former merged with US Airways.

While acknowledging his disappointment with American’s decision, Barger says the end of the partnership is “not material” in its impact to JetBlue. “It’s still disappointing, but we are not looking for how to replace it,” he told Flightglobal in April, pointing out that JetBlue is being approached by several international airlines.

The carrier’s chief financial officer Mark Powers said in July that even without the partnership with American, JetBlue has continued to realise a portion of revenues it previously designated as incremental from the tie-up.

The carrier is not the only one among its US peers to be constantly seeking new global airline partners, however.

Virgin America, which announced plans in July to go public in its next major phase of growth, already lists more than 20 airline interline and codeshare partners. Most recently it applied to the US Department of Transportation to codeshare with Shanghai-based China Eastern Airlines.

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Elsewhere in the Americas, low-cost carriers like WestJet, Gol and Azul have formed partnerships with several airlines. In Gol’s case, it has aligned itself strongly with SkyTeam carriers – a partnership that has extended to the point of SkyTeam members investing in Gol.

Air France-KLM in February embarked on a $100 million investment in Gol, in exchange for shares in the Brazilian carrier and commercial agreements between the two carriers. They also plan to expand their codeshare partnership. The tie-up followed a similar deal between Gol and SkyTeam carrier Delta Air Lines.

Gol and Delta are codeshare partners, and Gol also utilises Delta TechOps for substantial maintenance work. The two airlines have become so close that Gol’s chief executive Paulo Kakinoff has said he does not rule out a joint venture with Delta – a sentiment echoed by the Atlanta-based carrier.

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Aside from Delta and Air France-KLM, SkyTeam members Aerolíneas Argentinas and Alitalia also codeshare with Gol.

Despite Gol’s partnerships with SkyTeam carriers, the Brazilian airline has repeatedly said it has no plans to join an airline alliance. Instead, it views the deals as aligned with its plan to seek out long-term strategic partnerships and boost its capital structure.

In Canada, SkyTeam has found a partner in Calgary-based WestJet, which codeshares with six SkyTeam members. The Canadian airline is part of a trial at Vancouver International airport with SkyTeam airlines, involving the use of a simple passenger interface to make transfers easier for carriers transiting between WestJet and SkyTeam airlines’ flights.

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Five of WestJet’s six SkyTeam partners – KLM, Delta, China Eastern, China Southern Airlines and Korean Air – serve Vancouver. SkyTeam says it is exploring a similar trial at Brazilian airports with Gol.

WestJet indicated recently it would look for more codeshare partners when it begins operating its first widebody aircraft in late 2015. Chief executive Gregg Saretsky says two-way codeshares with long-haul international airlines will make sense once WestJet adds long-haul flying to its portfolio.

Gol and WestJet are not the only low-cost carriers aligning themselves with an airline alliance without becoming a member, however. Gol’s competitor in Brazil, Azul, has recently shown to be the partner of choice for Star Alliance carriers. It signed its first codeshare deal earlier this year with TAP Portugal.

In recent months, Azul – which is also embarking on first international flights of its own – has quickly signed up more interline partners, including Star carriers United Airlines, Copa Airlines and Lufthansa. While Azul has not indicated any interest in joining an alliance, having the Brazilian carrier as a partner is vital for Star’s airlines following the departure of TAM for Oneworld earlier this year. Azul is now Brazil’s third-biggest carrier in terms of market share.

Indeed, Brazil perhaps illustrates better than anywhere the evolution of low-cost carrier relationships with the global alliances. It shows how in key markets – and Brazil has been high on the agenda of all three groupings – alliances have looked to local low-cost carriers to help fill a void.

With so many non-legacy airlines linking up with traditional mainline carriers, others are taking note and following suit. Mexican low-cost carrier Interjet recently signed a codeshare with Iberia that will eventually give it access to 80 Iberia destinations across Europe, the Middle East and Africa, in exchange for Iberia placing its code on 24 routes in Mexico.

Interjet chief executive Jose Luis Garza says the airline plans to add more partners once it puts its IT systems in place, and has expressed particular interest in European carriers.

A tweak in IT systems will also likely pave the way for inaugural codeshare deals at Dallas-based Southwest Airlines, which began operating its first international flights in July, transitioned from subsidiary AirTran Airways. Its executives have indicated codeshare deals with international airlines are on the table for the future. This will be made possible by the airline moving over to a standardised reservation system supplied by Amadeus for both its domestic and international networks.

“A lot of airlines have expressed interest. There is keen interest to connect to our domestic network,” Southwest’s senior manager of international business management Evan Berg said in July. Air China, for example, told Flightglobal in June that it had approached Southwest as a codeshare partner, but that the Dallas-based carrier’s IT infrastructure is not ready for it yet.

This is set to change further down the road. A Southwest spokesperson says a single reservations system at the airline will significantly expand the carrier’s capabilities to allow for “codeshare and alliances”, among others. “We anticipate hundreds of millions in incremental revenue just from these new capabilities,” he said.