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Emerging allies

Cross-boarder alliances between low-cost and legacy airlines are starting to emerge

In the past two months Australia's Virgin Blue has announced an interline accord with Malaysia Airlines (MAS), which also has joined Virgin Blue's frequent-flyer programme along with Hawaiian. Virgin Blue chief executive Brett Godfrey says the airline is in advanced discussions with several other airlines and, "by November, we'll definitely have one and possibly two more interline partners".

Meanwhile Sean Durfy, the new president of Canada's WestJet, has confirmed WestJet is holding early talks with oneworld. "That alliance is missing a Canadian partner," Durfy says, "and we are a pretty natural fit."

Momentum appears to be building for alliances between low-cost carriers and international airlines. The trend may have started in 2002 with Virgin Blue's limited codeshare with United Airlines on domestic flights in Australia, followed by last year's codeshare between Brazil's GOL and Panama's Copa Airlines.

Such deals should not be confused with the co-operation between parent carriers such as United and their "baby" low-cost subsidiaries such as Ted. They are also unlike the affiliations that Air Berlin and germanwings have fostered between like-minded low-cost carriers or the less-common co-operation on domestic routes between a legacy and low-cost carrier without equity links, such as Malaysia Airlines has with AirAsia on some domestic routes.

This new trend, if it is not too early to call it that, is between low-cost carriers and legacy airlines that fly to the low-cost carrier's home from another country. It is a way for the legacy carrier to reach into local markets beyond its gateways and for its low-cost partner to gain market share by carrying international passengers on its domestic network as feed traffic to and from its foreign partner.

Before now, this type of co-operation between business models was rare and often primitive. WestJet exchanged passengers with Japan Airlines and Air China at their Canadian gateways, but without through fares or interlining. GOL's codeshare with Copa is still only on Copa's flights into Brazil. So far, GOL lacks the capability to do the same in Panama.

Technology has been a big obstacle. Low-cost carriers may have links with global distribution systems (GDS), but as Clive Beddoe, WestJet's chief executive, explains, that alone does not solve the problem. "Our current [computer] system can interface with Apollo, Sabre, and others but not with other airlines. We need our new Aires system to interface with all the other airlines." WestJet and Virgin Blue are the launch customers for the Aires passenger reservations system, developed by Travelport.

According to Virgin Blue's Brett Godfrey: "Navitaire's Open Skies is the system used by most low-cost carriers. We've never been happy with it. We need something that can support a major frequent-flyer programme, with codeshare interaction, and compatibility with the GDSs used by most overseas airlines." It has taken Virgin Blue 12 months, Godfrey claims, to develop the IT needed to support its new interlines. In the meantime, Navitaire is upgrading Open Skies to meet the growing demands of its low-cost customers.

Strategic rationale

Beyond technical issues, however, are the underlying strategic reasons why some low-cost and legacy carriers are starting to consider alliances with each other. Three major reasons emerge.

First, some low-cost carriers have moved beyond the standard point-to-point, self-contained business model. Carriers such as GOL, Virgin Blue and WestJet have developed route networks across their countries, often with related experience in connecting passengers and their luggage across that network. As David Lloyd, head of strategy and business development for Virgin Blue, observes: "Once you have a national network, you become attractive to international carriers."

Second, these low-cost carriers with networks are no longer willing to concede to their domestic rivals such as Air Canada or Qantas all international passengers flying on domestic routes. An estimated 10% of all passengers within Australia are connecting with an international flight, which prompts Godfrey to predict: "We should be able to get a disproportionate share of this international market, because less than half the carriers that come into Australia are members of oneworld [the alliance of rival Qantas]. Our target is $60-75 million more in incremental revenue."

WestJet's Beddoe echoes this point. "Air Canada gets 12 points of its market share off of alliances. That's where we see the big disparity between our load factors and theirs. We don't have an alliance partner to feed."

Third, those international airlines lacking a local alliance partner have a similar sentiment. Oneworld carriers bringing passengers to Canada, such as British Airways and Cathay Pacific, would rather interline with someone other than Air Canada, a Star member, just as Star carriers such as Air New Zealand and Singapore Airlines would rather interline in Australia with someone other than oneworld carrier Qantas.

The incumbent alliance members in Canada and Australia are opposite, but the point remains the same. As Virgin Blue's Godfrey notes: "We've had just about every Star Alliance carrier knock on our door, because they're beholden to our competitor."

Some inbound carriers are unaligned, and they may also prefer to interface with another unaligned carrier. That may explain Virgin Atlantic's early interest in JetBlue and Emirates's willingness to talk about interlining with Virgin Blue.

Beyond these strategic reasons, the final reason some low-cost and legacy carriers are willing to explore alliances with each other is that the distinctions between business models are simply starting to blur, particularly for those low-cost models that have developed networks and some legacy airline attributes.

Yet, a product difference still exists, and that remains one of biggest commercial obstacles to these alliances. According to some in the low-cost community, the attitudes - some might call them prejudices - of potential legacy partners are a bigger obstacle to these alliances than IT.

The perception of many legacy airlines is that their low-cost cousins are "cheap and nasty". Hence, legacy carriers do not want to subject their interlining passengers to that kind of experience. In light of the high passenger service standards and reputations of most Asian carriers, this makes Malaysia's agreement to interline with Virgin Blue fairly remarkable. Whether Singapore Airlines will view Virgin Blue - or Cathay Pacific will view WestJet - the same way remains to be seen.

Another commercial issue is how to allocate the risks raised when outbound passengers misconnect. As Godfrey hypothesises: "When our passenger misconnects in Melbourne for a flight to Des Moines, we're not going to pay five grand to put that passenger on another Qantas or United flight when the only thing in it for us is a $70 prorate."

Other commercial issues are the same as in any interline agreement - joint fare prorates, settlement procedures, and so forth. The big difference is that low-cost carriers must learn to negotiate these deals without ballooning their costs.

The current trend is at an early stage. Predicting where it will go is risky, but the reasons underlying what has happened suggest that more alliances are likely to emerge in any country where two conditions exist. First, unless local legacy carriers represent all three global alliances, airlines flying into that country but belonging to a different alliance will want another option for domestic feed. Second, a low-cost carrier in that country would make a suitable partner because it has the network, experience and technical savvy to interline, and an acceptable product. Many countries fit the first requirement, but far fewer the second. Mexico, South Africa and Thailand are among those that might.

South African low-cost carrier Kulula chief executive Gidon Novick says it would be interested in tying up with a legacy carrier, pointing out the "hybrid model" adapted by United and Virgin Blue is in some ways like a full alliance but in other ways is not. Air Arabia chief executive Adel Ali also predicts alliances between low-cost and traditional carriers "will happen as long as you keep the business simple" and do not add resources to implement the partnerships. Ali points out some airports do not charge for passenger transfers and it is at these airports where tie-ups make the most sense.

Natural progression

Experience suggests that these new alliances will follow a progression. They may start with frequent-flyer reciprocity, advance to interlining and graduate to full codeshares.

Finally, WestJet may be talking to oneworld and Virgin Blue to Star and SkyTeam, but the next low-cost/legacy alliances will almost certainly be bi­lateral rather than global. WestJet will interline with Cathay Pacific and Virgin Blue with Singapore Airlines long before either one is ready or willing to take on the much larger burden of global alliance membership. Conversely, it may be even longer before any of the global alliances are willing to open their ranks to low-cost carriers. This trend still has a long way to evolve and it is only just starting. ■