The influence of the three alliances is greater than commonly recognised, says Geoffrey Weston, senior vice-president of Seabury Group and former vice-president network planning and alliances and vice-president cargo at Royal Jordanian Airlines
In a mere 10 years, three global airline alliances have consolidated the majority of the world's airline capacity. Most Chinese carriers are now aligned and of all the major markets, only India remains untouched. There is no room for a fourth alliance and there are very few examples of airlines leaving an alliance. Not only is breaking away from multiple codeshares severely detrimental to the top line, but some alliances have financial penalties for airlines that choose to exit. The industry is well past asking the question "who will be in which alliance?" and is now wondering "just how far can this go?".
The term "consolidated" is appropriate despite the airlines remaining largely independent from each other in terms of ownership. For example, the Star Alliance has a central team of approximately 70 people co-ordinating airlines that total around $120 billion in revenues. The most prescriptive and centrally influenced alliance, Star is active in hub-management and schedule alignment, but commercial agreements with unaligned carriers are rare.
At the other extreme, oneworld, which represents approximately $90 billion in revenues, has a much leaner team of around 25 people. Not only are network issues usually organised on a bilateral basis, but also oneworld gives the member airlines freedom to make commercial agreements regardless of partner alignment. SkyTeam has a middle of the road attitude to these matters, but has moved effectively in creating a cargo dimension to its alliance.
The adventure started out as a customer-facing, revenue-enhancing exercise, which involved linking frequent flyer programmes and sharing lounges. Alliances then migrated rapidly to more substantial partnering, involving capacity management and network extension through codeshares, round the world and corporate product development and initial co-location in check-in areas.
However, in the last three years the alliances have embarked upon a third phase of co-operation. This phase is of a completely different magnitude, and involves co-location and investment in terminals, antitrust immunity filings between three or more airlines, active network management and joint procurement initiatives.
The key to this radical shift in power within the industry is that each alliance serves a global set of intertwined commercial interests that are competing vigorously against the remaining two-thirds of the industry. This differs from IATA-led initiatives, which have to please the entire industry, or geographically defined air carrier organisations that represent airlines within a region.
Every time one of the alliances takes a major step forward, the others are under pressure to follow. Common examples of this include antitrust immunity, which creates a significant competitive advantage for an alliance. Others then see their market share slide and need to be able to match with a similar mechanism for capacity optimisation.
Another example is when a major hub is re-organised by an alliance's central planning group. The resultant increase in connectivity generates a significant boost to market share, especially for premium passengers. Maybe handling services are also negotiated. The other alliances, if they do not respond and organise, will be left behind.
Thirdly, when a flag carrier takes possession of a new terminal and co-locates its alliance partners, the remaining alliances have to respond and not only try to co-locate effectively in the older terminals, but also ensure that their facilities are of comparable quality.
Catalyst for change
In each of these situations, the efforts of one alliance act as a catalyst for the others to catch up. Given the pace of change in the last decade, it's not unrealistic to suggest that in 10 years' time all major airports will be split into three, with a rump area for non-aligned carriers and low-cost carriers. Furthermore, the development of air service agreements and the granting of antitrust immunity will be increasingly influenced by the lobbying pressures exerted by the global alliances, or a member airline on their behalf.
I would argue that the influence of the three alliances is not only far greater than is commonly recognised, but is also outstripping the ability of the alliances to manage it. Originally established for a much lower-profile role, the alliances and their governance are not geared up to lead the industry outright.
The current model is a central brand owning entity that is owned jointly by a group of airlines. Clearly, with the escalation of competition the alliances need to consider a more explicit central role that is able to co-ordinate the global strategies and local tactics of their members. Not doing so will leave its members at a commercial disadvantage.
Finally, the periodic chief executive meetings of each alliance provide an entirely new phenomenon in the industry: airline leaders from different continents meeting to support each other's commercial interests.
These get-togethers are not just for show either. The leaders of this industry are co-operating at a level of trust and shared interests that were unimaginable a decade ago.
Source: Airline Business
