Low-cost carrier codeshares: slow to take off

Washington DC
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Despite all the hype about low-cost carriers rapidly moving into codeshares, there are fewer doing it today than there were two years ago. What has happened? Are there less expensive and complex alternatives worth pursuing?

No one ever said it would be easy. After all, codeshares go against the grain of the pure low-cost model and can be both expensive and time consuming to implement. But enticed by incremental revenues and the opportunity to virtually expand their networks, a handful of low-cost carriers between 2004 and 2007 followed the trail blazed by Virgin Blue, which began codesharing in 2002.

Several others promised to quickly follow and committed to upgrading their reservation systems to facilitate codesharing. But over the last two years new codesharing initiatives have largely been marred by delays and several carriers are now instead looking at simpler and less expensive alternatives.

AirTran Airways, for example, is looking at new technologies which vice-president for marketing and planning Kevin Healy believes will "create 70% to 80% of the revenues without the cost and complexity of a codeshare". He warns traditional codeshares "can be a big distraction with low returns" and says even the so-called new-generation codeshares under development at JetBlue Airways and Southwest Airlines are not worth following: "I think we can take that to the next level without much of the cost and complexity."

Healy envisions "some kind of low-cost alliance across the Atlantic and Pacific". He declines to elaborate further, other than to say the web can potentially be used to build a new alliance model. "That's a more likely solution [for AirTran] than lots and lots of codeshares," Healy says. "Codeshares are expensive."

Dohop, a small Iceland-based travel technology firm specialising in low-cost carrier connection solutions, shares this vision of a low-cost alliance. "The technology is here. It's a natural next step. It can happen," says Dohop chief executive Frosti Sigurjonsson. "Maybe these are the circumstances low-cost carrier alliances can be formed. These times - the economic crisis - call for great moves."

Dohop offers a low-cost codeshare alternative which means airlines can offer connecting flights on their websites and, if desired, point-to-point flights on other carriers. The customer is re-directed to another website to complete the booking and must self-connect. While some airlines are concerned about promoting self-connections, Sigurjonsson points out passengers are already independently building their own low-cost carrier connections and are willing to self-connect in order to save on airfares.

"People need a crystal ball to see all the connections. What we're offering is the missing link - to allow passengers to see what connections are possible," he says. "For the airlines instead of offering 100 destinations they are able to offer 1,000. So often we visit an airline website and are told: 'No we don't fly there'. It's very bad use of a customer visit."

Malaysian long-haul low-cost carrier AirAsia X is one airline already benefiting from self-connections. AirAsia X commercial advisor Tim Claydon says over 90% of passengers on its new Kuala Lumpur-London Stansted link do not originate or complete their journeys at these end points. Claydon does not expect a group of low-cost carriers will form an alliance "because they are all evolving into other areas and have got their own local or regional projects they're working on". But he sees value in the Dohop offering: "We like the concept. It gives brand awareness in markets we are breaking into like the UK, where we are not as ubiquitous as Ryanair or easyJet."

AirAsia X has not acquired Dohop for its website. So far only three airlines have: Iceland Express, Emirates and Virgin Atlantic. But AirAsia X allows Dohop to display its flights on dohop.com, which Sigurjonsson says now provides 500,000 consumers per month with potential connections on several hundred airlines. Dohop.com suggests a single itinerary, but to finish the booking the passenger is directed to the relevant combination of airline or third-party websites.

Navitaire managing director John Dabkowski believes the availability of new alternatives is one factor behind the slowing growth of these codeshares. But he believes the primary driver is the poor business climate dampening the appetite for codesharing technology investment: "We're seeing a lot of procurement processes stop right now. We're not seeing the volume of new customers that we saw a year ago. "Navitaire, which is by far the largest provider of reservations systems for the low-cost carrier sector, says only seven of its roughly 45 customers are now codesharing, including two regional operators. In 2007 Navitaire had six low-cost carriers with active codeshares and said several more were planning to begin codesharing over the next year.

Codeshare plans by Navitaire customers have also been set back by technological challenges. Dabkowski says a lot underestimate the scale and time involved for the project. "It's a big learning curve," he says. "There are a lot of back office processes."

Navitaire customer Gol, for example, is nearly two years behind in its effort to begin selling real-time codeshares. Gol chief executive Constantino de Oliveira Junior says in 2008 his carrier switched from Open Skies to New Skies, a newer Navitaire system with improved codeshare functionality. But it is still upgrading the system so it can sell flights operated by its codeshare partners.

Gol has a deal in place with Air France-KLM, which has already begun selling tickets on Gol-operated flights, but Gol cannot yet reciprocate. The technology should be in place later this year. "Now we're doing the fine-tuning, setting some things that can improve the system. The next update will allow us to do the bilateral codeshare," Oliveira says. "The limitation is our reservation system."

Gol was one of the first low-costs to codeshare, striking a deal with Panama's Copa in 2005. As Gol did not have the technology to implement a traditional free-sale agreement, the Copa deal has always been a block-space codeshare with no real-time link, covering a preset number of seats. Gol was originally planning to switch over to New Skies and begin two-way free-sale codesharing in October 2007. While Gol still lacks the technology to support this kind of deal, Dabkowski says it now has more interline agreements than any other Navitaire customer.

Gol now has 25 interline partners, which it has brought online since it switched to New Skies in August 2008. Dabkowski says in the current economic climate several customers see interlines as "more pragmatic" as they can be implemented faster and cheaper than codeshares while still reaping most of the benefits.

Southwest Airlines is also suffering delays to its codeshare ambitions. It codeshared with ATA Airlines from 2005 until ATA ceased operations in April 2008, but has been forced to postpone plans to codeshare with WestJet of Canada from 2009 until 2010. Southwest senior director of planning, distribution and marketing Richard Sweet acknowledges this delay is partly technology driven: "It's quite an undertaking for us. There's a lot of coding that goes in and there's a lot of dependencies you have from system to system. This is a new world for us." Sweet says the Southwest legacy reservation system is so simple it cannot process foreign currency transactions, passport information and international taxes.

For the ATA codeshare, Southwest had to put in place a cumbersome and manual workaround which required "duct tape and bailing wire". As a result "for the customer it wasn't a typical codeshare experience". But Sweet promises the WestJet set-up will be much more robust and like a traditional codeshare.

However he warns there is still "tons of work that needs to be done" and the Southwest IT team is struggling to juggle several projects, including non-codeshare initiatives which have quickly become priorities due to the economic downturn. Despite the delays Sweet says Southwest remains committed to start codesharing with both WestJet and Mexican carrier Volaris sometime next year although he is not yet ready to commit to an exact date.

Sweet says Southwest is now working with Sabre, which WestJet selected as its new reservations supplier. WestJet now uses Navitaire, but it selected Sabre as it offers superior codeshare functionality. For the Volaris codeshare, Southwest is working with Navitaire.

Volaris chief operating officer Andres Fabre says his carrier is "in the middle of switching" from Open Skies to New Skies, but reveals it is also considering changing to another supplier with greater codeshare functionality. "We're analysing our options," he says. "We're analysing to see if Navitaire is a good option."

JetBlue has already decided to join WestJet in leaving Navitaire for Sabre. JetBlue vice-president network planning Scott Laurence says Sabre will allow it to pursue two-way free-sale codeshares, starting with Lufthansa. JetBlue has a manual block-space codeshare with tiny regional Cape Air and a partnership with Aer Lingus which is not a codeshare but is designed to give a codeshare-like experience with through check-in and bag transfers.

Laurence says Sweet's "duct tape and bailing wire" description also applies to the Jet Blue-Aer Lingus arrangement, which is driven by the Irish carrier's reservation system with combined itineraries only sold on aerlingus.com. Laurence adds: "I think Sabre will provide us a platform to put in place more traditional codeshares. This system gives us more functionality. With Open Skies we have a very manual process."

But Dabkowski counters that Navitaire has invested heavily in developing new codeshare functionality for both Open Skies and New Skies: "It's no secret we lost JetBlue and WestJet. We believe we have the features and functionality to support their businesses but unfortunately they decided to go the other way."

Claydon points out "there's definitely a lot more competition in reservation systems that are available to low-cost carriers in terms of functionality but also competitiveness in terms of pricing". But he says AirAsia and AirAsia X plan to stick with Navitaire. Another Navitaire codeshare customer, Vueling, also intends to continue using Open Skies. Vueling, which completed a merger with Clickair in July, has a one-way free-sale codeshare with part-owner Iberia. "We have seen that the carriers leaving Navitaire are matured, unaligned carriers on the brink of significantly entering new models. We are not as mature as those carriers and perhaps not ready to contemplate more complicated features," says Vueling chief executive Alex Cruz. "A move to Sabre is complex. It requires new rules of engagement with internal teams, new dedicated people to run the system, new ways to interact with resellers, etc. I am not convinced there is an easy, cost-effective way to be a true low-cost platform operator with a traditional airline sales platform. There are very, very few of them around."

Virgin Blue is also sticking with Navitaire and will switch to New Skies later this year, which it says will allow it an unlimited number of codeshare and interline partnerships. Virgin Blue became the first low-cost carrier to codeshare in 2002 when it began a one-way block-space arrangement with United Airlines. Virgin Blue says this will now be deactivated in favour of a more comprehensive partnership with Delta Air Lines which will include two-way free-sale codesharing on Delta, Virgin Blue and V Australia. Virgin Blue codeshares with V Australia and two other sister carriers, Pacific Blue and Virgin Atlantic, as well as Airlines PNG and Australia's SkyWest.

Dabkowski acknowledges competition is intensifying and one of Navitaire's biggest challenges is to overcome "a perception in the industry that we don't have codeshare functionality". But he is confident that, despite the recent setbacks, over time more low-cost carriers will commit to codesharing. Dabkowski says, in addition to Volaris, two other Navitaire customers are in the process of preparing for codeshares: "We see the trends of codesharing and interlines continuing."

Indeed several low-cost carriers continue to look at adding codeshares. The chief executive of Colombian low-cost carrier Aires, Francisco Medez, says he plans to look at codeshares once the airline transitions from New Skies to Open Skies. Mango chief executive Nico Bezuidenhout says his carrier is now considering codesharing with parent South African Airways and it has also been approached by several foreign carriers. "It's on our radar screen," Bezuidenhout says. "It is cost-effective virtual network expansion- it can make sense."

But for now there seems to be more low-cost carriers wary of codesharing, at least traditional codesharing. For example, New Skies user Spirit Airlines has the capability to add codeshares but chief executive Ben Baldanza says "in general codeshares don't work for our business model. The devil is in the details."

Healy says AirTran has the technology to codeshare and has received "a zillion proposals" from domestic and foreign carriers. But he says "we haven't gotten one proposal that makes sense for us". AirTran is not interested in following JetBlue and Southwest as their deals are too traditional and costly. "One of the most important things about low-cost carriers is to actually have low cost," he says.

Claydon agrees, explaining codeshares "can get very expensive". Even if a non-traditional approach is taken, like in the case of JetBlue and Aer Lingus, "if you're not careful before you know it it's a full-on codeshare". While AirAsia X is not looking at codesharing with foreign carriers, Claydon says it is pondering a potential codeshare with short-haul sister carrier AirAsia. He says this is now feasible because both are migrating to New Skies and Kuala Lumpur's newly expanded low-cost terminal, where both carriers are based, has transfer facilities which are currently not being utilised. "AirAsia X to AirAsia is definitely the low hanging fruit. The opportunity is there. The facility has been developed. We'll look at it as the opportunity is validated from a cost and revenue standpoint," he explains.

Ryanair has switched to New Skies but, as a low-cost purist, it will not stray into codeshares. "It makes no sense. It brings in costs to do a codeshare," says former Ryanair chairman Patrick Murphy. Ryanair is also against websites, such as Dohop, displaying its flights. But Sigurjonsson believes one day even Ryanair will realise that new web tool benefits are simply too big to pass up. "It's an intriguing riddle to me why more haven't jumped on [to connectivity]. It can increase bookings and fill more seats," he says. "It's a huge potential for low-cost airlines and they know that. But there's a natural tendency not to change."