ANALYSIS: The ups and downs of Asia-Pacific partnerships

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In 2011, prospects looked bright for AirAsia Japan – a joint venture between Japanese full-service juggernaut All Nippon Airways and Southeast Asian low-cost pioneer AirAsia.

Two financially secure parents, limited competition with ANA, AirAsia and ANA’s other low-cost unit, Peach, all boded well for AirAsia Japan’s future.

The carrier was to begin services with Airbus A320s, and even talked about entering the long-haul, low-cost game with A330s.

On the surface, the only concern was that Japanese consumers would not take to no-frills flying.

However, less than two years later the marriage ended in acrimony. In early June 2013, AirAsia issued a statement blasting its partnership with ANA. The low-cost carrier said the joint venture faced challenges attributed to "a difference of opinion in management – most critically on the points of how to operate a low-cost business and operating from Narita".

AirAsia also disliked that most of the carrier’s leadership came from ANA, and griped about a lack of brand awareness in the Japanese market. ANA, for its part, said the airline had “failed to adapt to Japanese customers and way of sales”.

Eventually ANA bought out AirAsia’s 49% stake in AirAsia Japan, thus setting the stage for it to launch Vanilla Air.

AirAsia still has high hopes for Japan, however, and in early July said it would set up a new carrier in 2015 with four Japanese firms: e-commerce provider Rakuten, consumer goods firm Noevir Holdings, sports equipment maker Alpen and Octave Infrastructure Fund. Presumably, AirAsia feels these partners will let it take a front seat in running an airline ­– and just to be sure the carrier will be the largest shareholder, with 49%.

CAUTIONARY NOTE

AirAsia’s travails in Japan provide a cautionary tale for Asia-Pacific carriers seeking partnerships in new countries. The experience highlights the dangers inherent in two broadly divergent corporate cultures coming together to achieve specific objectives. However, despite troubled romances around the region, carriers appear eager as ever to partner with other carriers – or even with companies in other industries – hoping to break into aviation.

“Alliances are generally seen as being win-win and showing benefits across the whole financial spectrum,” says Credit Suisse analyst Timothy Ross. “The key is to improve the return on capital.

“One wants earnings to go up faster than one is investing. You’re trying to capture more revenue and combined benefits, such as frequent flyer programmes, internet bookings and cost savings from shared services.

“When you combine your fleets you use them more efficiently, helping to grow market share without adding aircraft, or perhaps removing aircraft while keeping share.”

In regards to the AirAsia-ANA partnership, Ross says AirAsia wanted more control, but ANA was convinced that only it had the cultural knowledge for success in Japan. It also did not help that AirAsia Japan was losing money. “It made more sense for AirAsia to withdraw and regroup,” Ross adds.

He notes that airline partnerships come in all shapes and sizes. These can range from tentative, codesharing interline agreements on specific flights to cross-shareholding deals or the establishment of all-new carriers.

“The ones that have longevity are the ones in the form of joint ventures, such as IAG, which is a pioneer with this,” Ross says. “You carve out a corridor where you pool capacity and jointly market it. You share lounges, share gates and eliminate as much overlap as possible.

“In a competitive environment you can have shadow flying, with two to three carriers operating at roughly the same time on a particular route, essentially beggaring thy neighbour.

“When you move this to a joint venture you no longer compete directly with your partner. You may have three flights a day leaving six hours apart, as opposed to all flights departing at roughly the same time. It works better for the airlines' yield management and loads.”

Perhaps the best Asia-Pacific example of this sort of arrangement in recent years is Qantas' decision to form a comprehensive, revenue sharing tie-up with Emirates in 2012. Qantas pitched the tie-up as an urgent imperative designed to save its international operations, which had suffered heavy losses for years.

With one stroke, the Middle Eastern carrier brought a battered – yet still potent – competitor into its orbit. It gained a major feed for its European, African and Middle Eastern destinations, while also receiving access to Qantas's strong network in Australia. The deal saw Qantas cut back its flights to Europe via Singapore and Bangkok, and route all of its Europe-bound capacity through Dubai – much of it on aircraft operated by Emirates.

At the time of the deal, analysts were unanimous that Emirates was the clear winner – but they also said the 10-year contract provides Qantas with valuable time, perhaps allowing its international operations to return to profitability.

One key loser in the partnership was IAG, which saw its 17-year relationship with Qantas dissolved at the end of March 2013, when the Qantas-Emirates alliance came into effect.

Under the arrangement Qantas and IAG unit British Airways had co-operated on services between the UK and Australia. Cathay Pacific and Air France also saw their codesharing arrangements with Qantas terminated.

Curiously, the Qantas-Emirates tie-up may not have been the cure-all that Qantas had hoped for. Official views are positive, but many outside of Qantas and Emirates wonder if the alliance is alleviating or perpetuating the problems Qantas faces in the European market.

Outside of the two airlines themselves, no one really knows. The revenue generated by the alliance – a key measure of its success – remains a well-guarded secret, while the method used for sharing that revenue is much-debated. Some Australians fear, either because of revenue issues or the sheer size of Emirates, that Qantas will gradually be squeezed out of Europe.

During the first year of the alliance, Qantas reported a leap in sales to new European destinations opened through Emirates, plus a three-fold boost in Emirates bookings on Australian domestic flights. Chief executive Alan Joyce described the early signs as “good”, but warned “there is still a lot of work to do bedding down the partnership”.

He predicted that “by fiscal year 2015 we expect to see the full commercial benefits flow”. He called the alliance “the most important” part of a five-year strategy to return the Qantas international division to profit by 2015.

That goal has proven too optimistic, however. First half results for this year show a blow-out in international losses from A$91 million ($86 million) a year earlier to A$262 million.

MIXED SUCCESS

Other tie-ups aimed at achieving various objectives have also had mixed success. Rivals AirAsia and Malaysia Airlines terminated their cross-ownership deal in May 2012. This was mainly owing to opposition from MAS’s unions about changes the low-cost carrier would seek to implement at MAS – a key objective of the tie-up had been to introduce best practice from AirAsia into the flag carrier.

Jetstar Hong Kong – a joint venture between Jetstar, China Eastern Airlines and Shun Tak Holdings – failed to achieve its objective of becoming Hong Kong’s first low-cost carrier. Despite the optimism of Jetstar Hong Kong’s management team, Cathay Pacific has proven highly adept at keeping the new carrier grounded.

However, despite the mixed results of various alliances and joint ventures around the region, there are still several prominent efforts taking place.

Singapore Airlines has been particularly active. Later this year its joint venture with India’s Tata Sons will take to the air. The new full-service carrier, which is yet to be formally branded, will be based in New Delhi and eventually operate 20 A320s. SIA owns 49% of the new carrier and Tata the balance, but the chief executive will be a veteran of SIA. The new carrier will be well placed to provide domestic feed into the New Delhi hub, providing feed for A380 and Boeing 777-300ER services to SIA’s Singapore hub.

Similarly, SIA’s long-haul, low-cost unit Scoot has teamed up with Thailand’s Nok for a venture dubbed NokScoot. The new carrier will be based in Bangkok, and is set to begin services at the end of 2014.

Joanna Lu, head of advisory for Asia at Ascend, a Flightglobal advisory service, says alliances will continue to crop up in various guises and forms, with carriers focusing on the key benefits they can derive from such a venture – whether this is opening an entirely new market or generating feed.

“The forms of alliances can be different, but all of them tend to be about leveraging group power,” she says.

The key for executives eyeing a tie-up, however, will be finding the right balance. Although partnerships tend to be designed equitably, over the longer term one partner can tend to dominate things – and given the vast diversity of the region, cultural clashes are perhaps inevitable.

Nonetheless, in an environment where countries place onerous restrictions on foreign ownership, a carrier seeking significant exposure to new markets will need to get its alliance strategy right.

SNAPSHOT - TROUBLED TIES

Malaysia Airlines/AirAsia: the unlikely plan to team national carrier Malaysia Airlines with low-cost rival AirAsia was unveiled in October 2011. But by the following May the partners had called off the tie-up and reversed the share swap by the respective major shareholders;

AirAsia Japan: the partnership between AirAsia and All Nippon Airways unwound within a year of the launch of AirAsia Japan, both subsequently deciding to go their own way. The old AirAsia Japan operation rebranded as Vanilla Air, and AirAsia unveiled fresh plans in July for a Japanese operation to launch next year;

Thai Tiger: in April 2010 Thai Airways and Singapore’s Tiger Airlines unvieled plans for a new Bangkok-based low-cost operation. But the Thai government stalled on regulatory approval and the project was abandoned 18 months later;

Jetstar Hong Kong: in March 2012 Qantas, through its Jetstar unit, teamed with China Eastern and Hong Kong conglomerate Shun Tak Holdings to announce plans for a Hong Kong-based low-cost unit to launch in 2013. The proposed airline has however faced objections from the onset with Hong Kong carriers arguing that it does not meet regulatory requirements, and halfway through this year it is still to launch;

Asian Wings Airways: Japan’s ANA holdings a year ago detailed plans to invest $25 million in taking a 49% stake in Myanmar’s Asian Wings Airways (AWA). The deal would have made it the first foreign airline investment in Myanmar, but ANA today dropped the investment plan citing intensified competition within Myanmar and failing to reach agreement over its investment;