Partnerships allow airlines to expand network reach and to be more competitive, but they're not always profitable - even when they drive additional volume, says Shakeel Adam of Aviado Partners

The first ever multilateral airline grouping, Star Alliance, celebrated its 15th anniversary just over a year ago, firmly establishing its position as the largest global alliance. Over 16 years, there have been numerous attempts to launch others, but only three exist today, with SkyTeam the second largest followed by Oneworld.

While Star pioneered the multilateral airline alliance, it expanded on an idea already developed bilaterally between a number of airlines with the most recognisable partnership having been that between KLM and Northwest Airlines.

Alliances have grown significantly over the years leaving some airlines feeling left out and others loudly stating their desire to remain independent. Joint ventures (JVs) have developed as the next stage of deeper cooperation, allowing airlines to coordinate pricing and schedules with anti-trust immunity; further adding pressure on those 'not in the club'. It started with the invention of the bilateral anti-trust JV and further developed into the multilateral JV. The move from bilateral to multilateral across alliances and JVs was a natural one.

However, there is more to the story. Alliances account for just over 60% of global ASKs and JVs account for a fraction of this, leaving almost 40% of ASKs outside a global alliance and about 70% of ASKs outside a JV. Alliances and JVs are significantly more concentrated in mature markets such as the North Atlantic and the North Pacific. Nevertheless, the most profitable airlines in the world include alliance members, low-cost airlines and independent full service carriers. Alliance membership can provide tremendous benefits, but membership alone does not guarantee success. Nor does staying out of alliances guarantee failure.

At the core of all partnerships are interline agreements and special prorate agreements (SPA) created to allow airlines to expand network reach and to be more competitive. When created, these types of agreements provided a defacto guarantee for adding incremental profitable revenue.. Yet it seems the industry has become carried away. An analysis of global data shows tens of thousands of overlapping and competing itineraries between airlines and their partner combinations across non-stop, one and multistop option

Traditional airline thinking considers having more options for travel as being the best option. Yet, the volume of competing itineraries creates tremendous potential for cannibalisation within an airline, across partners and between competing offers. Overlapping competing itineraries creates an exponential increase in the virtual supply of product in the market, skewing economic logic and adding significant downward pressure on yields worldwide.

Airlines launch flights to offer faster routings and connections, and gain market share. This always creates winners and losers. If well executed, an airline can play this game selectively to ensure it wins more often than others, without falling into the yield dilution trap.

Unfortunately, few airlines, if any, can measure with confidence whether their agreements produce positive incremental revenue. Many airlines misinterpret growth in interline passenger volume and revenue. The multiplication of competing itineraries, caused by extensive and often uncontrolled code-sharing and prorating, results in significant cannibalisation. Most airlines are unable to identify or measure this, therefore the problem goes unchecked.

Airlines new to partnerships focus on alliances, but not all have exploited the full potential of their own networks, nor do they realise the benefits provided to them through bilateral and multilateral partnership; be it a simple interline agreement, SPA, codeshare, membership in an alliance or a JV.

Successful airlines get the basics right, ensuring they identify only the most profitable partnerships.

Airlines need to continue to develop innovative means of expanding their network reach without employing excessive capital to launch unsustainable operations. Partnerships between airlines will certainly remain vital in ensuring industry sustainability. However, there is a desperate need for more discipline to identify which partnerships to enter and to measure and execute these partnerships with evidence-based precision. Airlines will and should continue to partner bilaterally and multilaterally through alliances and JVs.

Shakeel Adam is managing partner of Aviado Partners, a global consultancy specialising in airline commercial issues including assisting airlines to maximise the potential of SPA, codeshare, alliance and JV partnerships. Follow him on twitter @shakeeladam

Source: Airline Business