After more than a decade of airline alliance activity, attendees of the inaugural Airline Business Alliances, Joint Ventures and Partnerships conference in Madrid heard how we are still no closer to placing a firm value on membership
Ask a room full of senior airline executives if they know the exact, tangible value of alliance membership and an embarrassed silence descends. The simple fact is that even those with direct alliance responsibilities cannot meet this seemingly simple challenge. "We don't have the metrics to make people feel comfortable that their investment is returned," confessed oneworld managing partner John McCulloch during a frank panel debate at the inaugural Airline Business Alliances, Joint Ventures and Partnerships conference in Madrid in late September.
David Bishko, Delta Air Lines managing director, alliance partnerships EMEA, represented the SkyTeam corner in the discussion. Breathing an audible sigh of relief, Bishko replied to McCulloch: "I'm glad that you answered before us, because I have no idea. You get this question from the chief executive, the board and journalists - and it's a fair question - it's just very hard to measure. The world is simply moving too fast."
THE YEAR IN FOCUS: ONEWORLD
Members: 12 (as 15 Nov 2010)
2009 Revenues: $84.8 billion
Hits and misses A big year for oneworld, holding on to restructuring Japan Airlines in the face of interest from SkyTeam; pinning down its Indian presence through Kingfisher and boosting its reach in central Europe through Air Berlin - both are set to join in 2012. The arrival of S7 Airlines in November gives it a Russian presence.
Missed out on China Eastern as it chose to join SkyTeam, while recent member Mexicana suspended operations in August. Long-standing member LAN's merger with Brazilian Star Alliance carrier TAM also raises questions, although no change is planned in the near term.
Joint ventures American and British Airways finally launched a transatlantic joint venture in October, working with Iberia - whose merger with BA is also moving towards fruition.
Reaffirmed commitment with JAL sees launch of new transpacific joint venture with American Airlines, for which provisional US approval has been secured.
McCulloch pointed to the $850 million in round-the-world ticket revenues generated by oneworld. "Some of our members would get this anyway, but most wouldn't. We know that as a group, despite what happens within our own business, we grow revenues much faster than we otherwise would have done. There is no doubt in my mind that from chief executive level downwards, people are seeing the value of alliances."
Albrecht was equally quick to stress membership benefits during all-too-frequent periods of industry crisis. "For commercial reasons, some airlines have had to close destinations, but they had a substitute within the alliance [through codeshares]. Particularly in crisis years, alliance membership does give benefits. It is the right formula to stay in a market."
Perhaps the flaw lies in the question. Rather than quantifying the value of being in an alliance, British Airways director for strategy and business units Robert Boyle flipped the quandary on its head. "When the relationship has been in place for while, measuring its value becomes a case of what if we didn't have it? What would change? How much traffic would we lose? How would we restructure our network? How would we find other ways of finding the traffic? Through this 'near death experience', you might be able to come up with a way of finding what the relationship is worth to you. It's a long and complex process to come up with a best guess and I'm surprised how big it is. This is not an exercise you'd want to do all the time." It is understood that Boyle was refering to troubled oneworld partner Japan Airlines, which recently committed to remaining with oneworld, as the exercise in question.
The panel discussion once again highlighted the differing strategies of Star and oneworld. "We are not planning to grow that much bigger than we are today," said oneworld's McCulloch. "The focus for us very much today is the implementation of a plan which we put together a couple of years ago: Russia, India, China, something in continental Europe and something in Latin America. We're pretty much finished once we solve those last pieces." While oneworld has attracted Air Berlin, Kingfisher and S7, McCulloch admitted to being "very disappointed" that China Eastern went to SkyTeam.
In stark contrast, a bullish Albrecht sees strong potential for future expansion, saying boldly: "We are not finished by any means. Size matters. This is the feedback we get from our customers. We have agreed we should not put artificial limit on carriers." Star already has 27 members and "three or four" working on membership. Star is notably lacking a Russia player, but Albrecht said it is adopting a "wait and see" approach as the country's airlines consolidate.
He identified Africa and South America as Star's key targets, despite already having bagged EgyptAir, South African Airways, Ethiopian and TAM in these regions. Surprisingly, he refused to shy away from network overlap, noting that it fosters internal competition and is good for the customer. "We would like to see customers travelling with us, versus losing them to an independent airline or another alliance. You are willing to lose a passenger today because on the next flight you might get him. Our overall strategy is not just for today, but the long term."
THE YEAR IN FOCUS: SKYTEAM
09 Revenues $87.6 billion
Hits and misses Heavily active in Asia; Vietnam Airlines joined in June, China Eastern opted for SkyTeam earlier this year and Taiwan's China Airlines recently signed a letter of intent to join as well. Garuda Indonesia has also been tipped as a likely future member, while former Star member Shanghai Airlines could follow merger partner China Eastern into SkyTeam. But SkyTeam failed to tempt JAL to switch camps. Elsewhere, Romania's Tarom has now joined, the planned arrival of Aerolineas Argentinas will be its first Latin American member, and Middle East Airlines could join in 2012.
Joint ventures Transatlantic joint venture widened with the entry of reborn Italian carrier Alitalia from April.
Turning to SkyTeam's "white spots", Bishko identified India and Latin America as weaker areas: "There is no question, we are targeting Latin America," he said.
But, despite the differing strategies, all three are united on one thing: the Middle East goliaths do not feature on their agenda. "Star has no interest in building up an artificial hub in the desert," said Albrecht. His sentiments were echoed by McCulloch: "We have no interest in attracting sixth freedom carriers and they have no interest in us. That's pure duplication of the business. What we are focusing on in the Gulf are the smaller carriers and we will build on those." Bishko completed the set: "I don't see a lot of action going on with Middle East carriers joining alliances in future."
The largest set of non-aligned carriers are low-cost players, which are increasingly morphing to become closer to their traditional airline cousins. Could these be the next recruits? Bishko thinks not: "One of the focus points of the alliance is to be seamless. Alliances are anything but simple. They would be breaking their model to go into an alliance," he said.
Albrecht agrees the low-cost model is essentially incompatible with alliance membership, but is open to the idea, with a few pricey caveats. "Any airline joining Star must meet our connectivity and product requirements. If a low-cost carrier is willing to build their connectivity and their product, we would have no hesitation in welcoming them if they fill a white spot."
Oneworld's frequent business traveller focus means low-cost players are essentially off its radar but, like Albrecht, McCulloch does not dismiss the concept completely. "Can you through-check and issue boarding cards? Most low-cost carriers can't do that and until that changes we probably won't see them being integrated. But in some countries the choice is very limited," he said.
With some carriers falling outside the natural alliance mix, there has been talk of a fourth alliance, with whispers from the likes of Virgin Atlantic, El Al and some budget/hybrid players. All three panellists believe three alliances is a good number, but they see scope for increased competition. "I think there's room for other associations," said McCulloch. "I think with three, things are pretty crowded, but I wouldn't like to see two." Star's Albrecht highlighted Middle East players, various non-aligned airlines and low-cost carriers as already offering an extra competitive dimension.
Virgin Atlantic and Icelandair are among these non-aligned players, remaining unconvinced that the big groupings offer more potential than going it alone. "My aim in coming here is to gather information and see the pros and cons," said Icelandair chief executive Birkir Holm Gudnason. "Until now, we have seen bigger opportunities in being independent, flexible and working very fast. We are not in a pissing contest and not in a market share contest. If we are losing money, we can go somewhere else."
At Virgin, focus is the key driver behind its partnership decisions. "Our approach is to start at bottom and work upwards, to see where the value lies as we move from one level of co-operation to another," explained Edmond Rose, who is Virgin Atlantic director for commercial and revenue planning. "We ask ourselves if it is genuinely relevant to our network. If you join a global alliance, you have to have a relationship with all the members, whether it's geographically relevant or not. You incur IT costs, connecting with a number of airlines you didn't really want to connect with. The whole point is that we have to offer something more than before, in terms of network, passengers and profits."
THE YEAR IN FOCUS: STAR ALLIANCE
Members: 27 (as of Nov 2010)
2009 Revenues: $154.1 billion
Hits and misses Remains the largest alliance by number, swelled by entry of Aegean Airlines and TAM earlier this year. Ethiopian Airlines is the latest to sign up. Air India also remains set for Star, which has also been talking to South American partners Avianca-TACA.
Shanghai Airlines left in October following its merger with SkyTeam-bound China Eastern, while in Latin America it too could be affected by the LAN/TAM merger's alliance choices.
Joint ventures United is at centre of several initiatives, having merged with US partner Continental Airlines and among the carriers with transatlantic anti-trust immunity, it has teamed with Japan's ANA for a transpacific joint venture and is now seeking anti-trust authority on US-Canada trans-border routes with Star partner Air Canada.
Lufthansa vice-president for alliances and co-operations Götz Ahmelmann agreed: "Alliance membership is not a remedy for all your problems. You may be better off with few selected relationships, you may be better off with full integration. Some people are happy with being in a bar every night, others are happy being married. When you are in a partnership, some rules of behaviour apply. This can only make sense to a certain number of airlines. For some, it makes more sense to preserve their independence."
Virgin has the advantage of a brand which punches above its weight. "It's not just a matter of size, it's a matter of relevance," explained Rose. "Possibly some of our partners have the impression that we are bigger than we really are. Frankly, we don't need an enormous number of partnerships to do our business. This means they are less important to us."
STRENGTH IN NUMBERS
Virgin has been a long-term campaigner against BA's various tie-up attempts and the participation of both carriers in the conference kicked off some friendly verbal sparring. "Mr Rose, you may not have managed to block [our joint venture], but you did manage to slow it down for a while," quipped Boyle from BA. Rose's reply: "I did my best."
The mood was light as Boyle and Iberia finance and administration senior vice-president Ignacio de Torres took to the stage to present their merger plans. De Torres joked that 55% of the slides would be from BA and the remaining 45% would be from Iberia, drawing a chuckle from the audience.
"Both airlines felt we needed a significant consolidation move to stay in the top runners of airline industry," said Boyle. "By our count, this ranks us as number five in revenue terms, putting us back into the running as one of top airline groups in the world."
Through the newly formed and its deliberately dull International Consolidated Airlines Group name, BA and Iberia are building a fully scalable growth platform. "This is probably something unique to this merger," claimed de Torres. Boyle added: "We have put a structure in place for the end game, something capable of being scaled for future deals."
BA and Iberia's tie-up is expected to deliver €400 million ($561 million) in synergies by year five. Around €150 million will come from joint marketing and revenue management activity, but the vast majority - €250 million - will stem from cost savings with IT and maintenance synergies representing around half the total.
Despite its infancy IAG has already penned a wish list of a dozen potential airline additions, although it is likely to be 24 months before another company could be integrated. "We are getting to the point of knowing whether, if somebody rings, we would pick up the phone or not," said Boyle. "We may not have the luxury of hanging around."
The clock is definitely ticking. Lufthansa has already taken the airline world by storm with its consolidation frenzy, expanding its stable to include bmi, Swiss International Air Lines, Austrian Airlines and Brussels Airlines' parent company SN Air Holding. Lufthansa also owns or holds stakes in Air Dolomiti, germanwings, Lufthansa CityLine, Lufthansa Italia, Eurowings, JetBlue Airways, Luxair and Turkish carrier SunExpress.
"We have made a lot of lawyers rich with our JVs," joked Ahmelmann. Around 15 years ago 80% of Lufthansa's production was untouched by partnerships. Today only 20% of its flights operate without a codeshare. "The picture has changed dramatically. We're now so highly integrated, Lufthansa's production is completely unthinkable without partners. It has become a commercial necessity. We are no longer just a yellow logo; we are more like a house of brands, like a big department store. You have different brands and you must sell them equally to the benefit of the customer." This must be communicated all the way through the organisation. "It is just a paper-based effort if you can't carry it through to your customers on a consistent basis," he said.
Delta Air Lines senior vice-president EMEA Perry Cantarutti agreed, saying: "As we broaden the notion of our network and our airline, it is a learning experience for employees. Every employee who touches our passengers needs to appreciate that an Alitalia customer is as important as a Delta customer. Ultimately that is what makes a joint venture come to life for our customers."
In the mid-1990s Cantarutti says Northwest and KLM had a near-divorce because of differing objectives, but they still went on to form their joint venture in 1997. He describes the traits of a successful partnership: "It's critical that you share a common vision and joint objectives; that you go into the relationship with a clear understanding of what you want to get out of it and the commercial segment you want to attack. If you are not aligned, it does not bode well for the future. Trust and transparency are probably the most challenging aspects of running a joint venture."
Alliance and joint venture activity is rife right now, but how will the landscape look in three to five years? "That's not a long time," said Icelandair's Gudnason. "I predict fewer and bigger airlines. Whether we'll be the only airline outside alliance, I don't know." Lufthansa's Ahmelmann agreed: "I think we will see closer integration and more joint ventures."
Over at Virgin, Rose sees a slightly different picture: "The pace of consolidation has been painfully slow. I think we will see some flux in global alliance membership, with some consolidation. We will see airlines leaving alliances because benefits are not there for them. There will also be some joining, so things will be in a state of flux," he said.
Wish you'd been there? Our tentative dates for next year's Alliances, Joint Ventures and Partnerships conference are 19-20 September 2011. Put it in your diary now!