Just over one year ago in April 2014, SriLankan Airlines joined the Oneworld Alliance. Not content to hold the ceremony in the capital city of Colombo, the carrier deployed one of its Airbus A340-300 aircraft to fly media and dignitaries 150km to the newly built, but remote, Mattala Rajapaksa International Airport in Hambontota. One participant described it as “a logistical nightmare.”
"With the world airline industry increasingly focused on alliances, joining Oneworld is one of the most significant developments to date for SriLankan Airlines," said then-chairman Nishantha Wickramasinghe in a speech. "Joining the alliance will help put SriLankan more firmly on the global aviation map and vastly improve Sri Lanka's connectivity with the rest of the world, which is vital for our country's trade and tourism.”
Wickremasinghe said Oneworld membership would help minimise losses and generate up to $30 million in annual revenue. Within months a flurry of codeshare announcements with alliance partners followed: Finnair, S7 Airlines, American Airlines, Qantas Airways, Japan Airlines, and most recently Air Berlin.
Two months later, in July 2014, Air India became the 27th member of Star Alliance, the first Indian carrier to join an alliance. This came nearly one decade after its acceptance in the alliance in December 2007. Its integration was halted in July 2011 because the flag carrier failed to meet minimum membership conditions. After this, for a while it looked as if rival Jet Airways would join Star, but the ever-meddling Indian government kyboshed this in favour of the Raj.
With the alliance entries of SriLankan and Air India, more or less all the flag carriers in the region have found a home. Outliers include Philippine Airlines, Pakistan International Airlines, Biman Bangladesh and North Korea’s Air Koryo. In theory, Myanmar could one day produce a large flag carrier, but for the time being its airline sector is highly fragmented. Cambodia has no major airline to speak of, and Lao Airlines is a modest operation.
High-profile, non-flag outliers with no alliance affiliation include Thailand’s Bangkok Airways, Virgin Australia and Hainan Airlines. All have codeshares and partnerships with airlines across the alliances, with Bangkok Airways, for example, saying it prefers to remain independent to enjoy the freedom to work with any carrier it desires.
The fundamental question facing the big three alliances in the region is not the addition of new carriers, of which there a few qualified candidates, but providing value for existing members. Given the ownership profiles of major carriers in the region, it is clear alliances have reached a certain status quo in Asia-Pacific.
“Once an airline is in an alliance, it takes something pretty big to make them want to leave it,” says IATA chief executive Tony Tyler. “One thing that can cause this is ownership changes, which can push them to change alliances, and we have seen a bit of that, but that is not a major issue in Asia because ownership is pretty stable owing to government involvement in the industry. Alliances will continue increasing their presence here and keep driving competition.”
Michael Wisbrun, managing director of SkyTeam and becoming chairman of the group, notes that in a world where consolidation of airlines across national borders is often restricted by law, alliances offer “the next best thing to consolidation”, as they provide scope for carriers to enjoy economies of scale. He estimates that codeshare growth among airlines outpaces organic growth on a scale of three to one.
“It is far more effective to expand your reach through codeshares than through your own fleet,” Wisbrun says. “For the Chinese carriers, it makes a lot of sense to partner with carriers overseas, rather than grow organically. Bringing capacity to a place is one thing, but you need a market on the other side to fill this capacity in a decent, profitable way.”
SkyTeam’s roster includes two of China’s top three airlines, China Eastern and China Southern. Its other Asian carriers include Taiwan’s China Airlines, Garuda Indonesia, Korean Air and Vietnam Airlines.
Oneworld has enjoyed strong growth in the region as well. The alliance’s cornerstone in the region is Cathay Pacific Airways, and it added Malaysia Airlines in 2013 and SriLankan last year.
“With that hectic period of growth behind us, and with fewer significant unaligned airlines remaining as potential recruits, our focus for the past year has been on generating more revenues for our member airlines,” says Oneworld chief executive Bruce Ashby.
Star Alliance also appears to be in a strong position in Asia Pacific, and a spokesman says it has no immediate plans to admit new members. Its Asia Pacific line-up features Air China, Shenzhen Airlines, Air India, Air New Zealand, All Nippon Airways, Asiana Airlines, EVA Air, Thai Airways, and Singapore Airlines. There formerly was talk of Jet Airways joining Star, but the carrier’s tie-up with Etihad has cast doubt on this prospect.
Alliance executives point out that though the prospects for additional members in the region are limited, member carriers have engaged in extensive codesharing and even joint ventures among themselves. Notable examples include SIA and Air New Zealand’s 2014 codeshare deal, Thai’s working with Lufthansa on Europe routes, and Korean’s working with Vietnam Airlines on transpacific services.
That said, there are also notable examples of carriers abandoning or even hurting alliance partners when convenient. A major casualty of Qantas’s tie up with Emirates in 2012 was the Australian carrier’s 17-year codesharing deal with Oneworld partner British Airways. More recently, Cathay Pacific’s lawyers crushed Qantas’s efforts to set up a low-cost carrier in Hong Kong.
“Airline alliances were driven by the need to reach a broader market, while constrained by the limits of the airline regulatory framework,” says Joanna Lu, head of the Asian arm of Flightglobal’s Ascend advisory service.
“They were initially most effective as marketing alliances rather than a means of cost reduction. A key benefit was offering a broader network to customers, meaning in many cases better connections through key alliance hubs. The hubs offering the best connections will gain the biggest share of connecting traffic. A recent study we conducted for a major Asian airport implies that alliances have greater impact for hub airports rather than for airlines.”
Smaller airlines have pointed to the costs of joining an alliance as a disincentive, and there is the sheer scale of work involved in signing up. Lu reels off an imposing list of items carriers need to deal with when joining an alliance. These include agreements around ticketing, baggage, joint fares and reciprocal airports. Other items include blocked-space relationships, computer reservations systems, joint ventures, joint sales offices, e-commerce joint ventures, frequent flyer programme alliances, traffic/revenue pooling, and codesharing.
And if the recent experiences of SriLankan and Malaysia Airlines are anything to go by, alliance membership is by no means a remedy for all challenges. Although improved revenue was one of SriLankan’s reasons for joining Oneworld, it is still losing money.
As for Malaysia Airlines, it was haemorrhaging cash even before the disasters of MH370 in March 2014 and MH17 four months later. A few weeks before MH370 vanished it reported that its annual net loss for 2013 tripled to MYR1 billion ($263 million). Exactly 12 months before this, company executives had described its 2012 entry into Oneworld as the “dawn of a new era”.
“An airline’s profitability is based on its local position,” says SkyTeam’s Wisburn. “If they are getting attacked locally, they have to find their own solution. There is no one recipe for dealing with this situation.”
Source: Airline Business