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ANALYSIS: Alliance membership, joint venture or both?

Airlines must consider the merits of relationships and whether the objectives they have set can be achieved in better ways with other partners says CTAIRA analyst Chris Tarry

We have often debated the benefits and disadvantages associated with consolidation in the airline industry from a range of perspectives, particularly for shareholders, stakeholders and passengers.

We have also, where necessary, challenged what some consider to be the accepted wisdom: that alliances, which were initially means to gain greater market access, also represent a process of industry consolidation.

Although alliance arrangements, encompassing everything from a simple codeshare to membership of a multilateral grouping, have been a feature of the industry for many years, during the past 25 years or so it has been the big three alliances which have tended to attract the most attention. Recently, there have been a number of potentially game-changing announcements, which are already altering the shape of the alliance landscape.

During the past few months, there have been increasing news reports of bilateral joint business arrangements (JBAs) - the latest being Finnair with American, British Airways and Iberia - where generally two, sometimes more, airlines act as one on a single route or across a network.

These developments raise the question of whether multilateral alliances have passed their peak and a process of deconstruction is under way. The experience of Etihad - with 42 codeshare arrangements, including four where it has made an investment in the partner airlines' shares - is a clear demonstration that there is an alternative to the multilateral alliance. This is also evident at one of its competitors in the region - Aer Lingus. Its management cites a range of ­benefits - not least in terms of ­performance - since its exit from Oneworld. It has a range of market-extending partnerships, including the relationship with Etihad which is a 3% shareholder, providing further evidence that selective and targeted partnerships produce real benefit.

The plethora of unaligned airlines extending market reach and networks via a series of individual relationships is further evidence that individual bilateral ­alliances/ventures, rather than multilateral alliances, will bring direct benefit without the overhead costs associated with alliance membership. These developments may be seen as a return to the type of relationships that existed before the birth of the big three alliances.

The move to JBAs - deepening relationships between individual partners, either as alliances within alliances or between non-aligned partners - appears to be accelerating. However, JBAs are not the exclusive preserve of the multilateral airlines. Being an alliance member may close opportunities with other airlines which belong to a different alliance, but being in an alliance does not preclude partnering with a non-aligned airline.

At an airline level, ensuring you end up with the right partner - as BA has with American - is considered to convey benefits significantly greater than anything which might emerge from BA and Iberia working closely together. In particular by acting as one with American, BA's presence with US travellers increases, as does its market reach.

This is the same rationale for the Delta/Air France arrangement in 2007 and the KLM/Northwest partnership in 1993, which became the Wings alliance.

As with almost any other business, so it is with airline alliances - big is not necessarily better - particularly if you are one of the smaller airlines in the grouping. In such cases, the cost of membership will almost inevitably be greater than the accompanying benefits - while you will get a seat at the table, your voice will not necessarily be heard. At least one Star Alliance presentation suggests membership fees combined with the cost associated with these additional revenues accounts for some 80-85% of the additional revenues that membership will bring.

Multilateral alliances may give greater size, but even within Oneworld, SkyTeam and Star only a limited number of bilateral relationships are of real ­benefit. Each alliance's management team might talk about the number of destinations served, combined fleet of its members or any other measurement of size, but this is no guarantee of membership being worthwhile to every airline.

In a large number of cases, alliance members do not serve common destinations and, as a result, the distribution of benefit is, at best, asymmetric. Membership of a multilateral alliance fails to solve most airline problems, and may well be a diversion of management time. This should all focus attention on the original rationale for teaming with another airline: gaining greater access to other markets while offering a greater virtual network.

While there is also great attention on the value associated with any expenditure an airline makes, it should also focus on the tangible financial benefits alliance membership brings, while being clear that the revenues exceed the costs. Similarly, there should be an examination of whether there is a better, more profitable, way to achieve the objectives set for a relationship, even if this involves swapping partners.

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