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Low-cost alliances: never say never

Low-cost carriers are starting to warm to the idea of codeshares just as their technology providers are making it easier for them to link with others

For over 30 years Southwest Airlines swore it would never codeshare with another carrier. A codeshare seemed contradictory to everything the low-cost model pioneered by Southwest represents. But after purchasing a stake in ATA Airlines in late 2004, Southwest suddenly found itself wanting to implement a codeshare. "For years we said we wouldn't do this, but we find ourselves in a different place today," says Southwest executive vice-president strategy, procurement and technology Bob Jordan.

Southwest's IT team scrambled to place within 60 days its code on ATA domestic flights from six Southwest hubs. But it had to settle for a blockspace codeshare, forcing the carriers to pass information between each other behind the scenes because there is no real-time inventory link. "We did a lot of band-aiding," Jordan says. "It works fine, passengers don't notice it but under the covers we're doing a lot of things you wouldn't see in a standard codeshare."

Southwest is now investing more than $5 million to overhaul with Sabre its custom-built reservation system to allow a more comprehensive codeshare with ATA from 2009. The new technology will allow Southwest to grow the codeshare far beyond the roughly 330,000 passengers it now puts on ATA flights annually, and to put its code on ATA international flights, thereby expanding Southwest's network for the first time beyond US borders. "Our technology department is working hard to build technology so we can do codeshares in an industry standard way," Jordan says.

Southwest is also developing a further enhancement that will allow it to codeshare with foreign carriers from 2010. "We'd be interested in other domestic codeshare partners and foreign codeshare partners," Jordan says.

The drastic change in attitude towards codeshares at Southwest has captured the attention of low-cost carriers worldwide, many of which have modelled themselves after Southwest and are now also interested in pursuing codeshares. "We know a lot of our customers are looking at it real hard," says Navitaire managing director John Dabkowski. "It won't be all of them but a substantial number will be embracing these new philosophies."

Navitaire, the largest provider of reservations systems in the low-cost airline industry, says six of its roughly 50 customers are already codesharing and predicts several more will start codesharing within the next year. Dabkowski says after years of vehemently being opposed to codeshares, several low-cost carriers are now asking technology providers to help implement them. "The classic example is Southwest. For two years they said 'no, no, no' and now they have a codeshare in place," Dabkowski says.

Navitaire does not work with Southwest but helped implement what is generally considered to be the first codeshare in the low-cost airline industry, a one-way blockspace agreement between Australia's Virgin Blue and United Airlines that dates back to 2002. Virgin Blue today has the most codeshare partners among low-cost carriers, having added free-sale codeshares with Virgin Atlantic in 2005 and Malaysia Airlines in 2006.

"The key pre-requisite for catching the attention of prospective partners is having a strong network," says Virgin Blue chief executive Brett Godfrey. "United found itself deprived of connectivity when Ansett collapsed in 2001. By 2002 Virgin Blue was essentially the only low-cost carrier in the world to have such a strong presence in its national market. There was Southwest Airlines with 400 aircraft but with considerably less market share and national coverage than our 32%. It was a natural alignment for United given the alternative was putting their passengers on Qantas, which is in a competing alliance."

Virgin Blue rival Jetstar is another pioneer in the world of low-cost codeshares and today it is the only budget carrier with a two-way free-sale codeshare. Jetstar began codesharing with its owner Qantas when it launched services in 2004 and today Qantas sells more than 10% of its seats.

Jetstar Group general manager commercial Bruce Buchanan says initially the codeshare was limited to a one-way blockspace that "was pretty manual" and had a lot of "workarounds". It switched to a free-sale one-way codeshare in July 2005 after a real-time link was developed by Navitaire and Amadeus, the Qantas reservation systems provider. "Getting Amadeus to the table was difficult. It took a bit of influencing from the Qantas side," Buchanan says. "They didn't exactly want to give technology to a competitor."

When Jetstar launched international services last November it took another big step and began selling Qantas seats. But Jetstar still has to close and upload every passenger file to Qantas before Qantas can issue the ticket. Buchanan says this manual workaround should be eliminated by the beginning of September after a new version of Navitaire's Open Skies reservation system is activated. Jetstar also plans to turn on a new function in September which allows the carrier's website to dynamically package a multi-leg itinerary, yet another enhancement Jetstar has persuaded Navitaire to develop.

"It's been an evolution. In the old days there were a lot of workarounds. These days the workarounds aren't complex. It's just a few back office passes," Buchanan says. "We've been one of the toughest customers in pushing developments. It didn't happen overnight but today [codesharing] is an important part of our distribution network."

Adds Godfrey: "IT has been full of surprises, but it's getting easier as other low-cost carriers begin to emulate our approach and thus make demands of the IT suppliers. The major developments for us have been an interface achieved between our reservation systems and those of legacy partners, and shortly to deal with IATA e-ticketing."

Several low-cost carriers have begun taking advantage of the technology Navitaire developed for Jetstar and Virgin Blue. For example, Clickair chief executive Alex Cruz says prior to launching services last October it specifically asked Navitaire for the Jetstar package.

The Spanish airline relies on codeshares more than any other low-cost carrier - more than 30% of its passengers buy from part-owner Iberia. But Cruz says Clickair is not interested in selling Iberia seats and has turned down opportunities to pursue two-way codeshares with other carriers because it does not want to be responsible for transferring bags or passengers. Even Iberia can only sell one-way point-to-point tickets on Clickair. "We're not ready from an operational standpoint [to connect]," Cruz says. "I don't have any interest. I don't want the liability."

TUI codeshare expansion
TUI Moroccan subsidiary Jet4you is another carrier that has used Navitaire to implement a free-sale codeshare. Jet4you and sister carrier Corsair began codesharing in May on Jet4you-operated flights but the head of TUI's airline distribution competence centre, Hans-Dieter Faerber, says Jet4you plans to begin selling tickets on Corsair-operated flights next year after it receives a new version of Navitaire's New Skies reservation system. He adds TUI also plans to add over the next year several codeshares within its group of seven airlines, which includes three carriers using Navitaire solutions and four leisure carriers using legacy airline systems or tour operator-based systems.

"We intend to use codeshares to expand the distribution power of our family," Faerber says. He adds TUI also plans to pursue codeshares with non-TUI carriers but implementation will have to wait until after New Skies 2.0 is ready.

Jet4you is currently using New Skies 1.0, which Navitaire says has some "baseline" codeshare functionality but does not have as much codeshare capability as the version of Open Skies currently being used by Clickair, Jetstar and Virgin Blue. But New Skies 2.0 will have more codeshare capabilities than any version of Open Skies, in particular enhanced interaction with ticket-dependent airlines. Under New Skies 2.0, functionality is provided allowing an e-ticket to be issued by legacy partners while keeping Navitaire customers completely ticketless. "The core difference is New Skies was built from the ground up and prepared to interact with partner carriers," says Dabkowski.

Brazil's Gol is also eagerly awaiting the release of New Skies 2.0. Vice-president of planning and information technology Wilson Maciel Ramos says Gol plans to implement a two-way codeshare with new sister carrier Varig after it migrates to New Skies 2.0 in October. "The network Gol has is much bigger than Varig and it's important for Gol to feed Varig's long-haul operation," he says.

Ramos says the current version of Open Skies Gol is using "has some constraints so we can only work with a blockspace". Gol has had a two-way blockspace codeshare with Panama's Copa since 2005. Ramos says Gol typically sells eight or nine seats on every Copa flight between Brazil and Panama but it is hard to control the inventory because it is not a free-sale arrangement. Ramos says Gol could have upgraded its current version of Open Skies to support a free-sale but it decided against investing in adding codeshare functionalities to Open Skies and instead preferred to wait for New Skies 2.0.

Jetstar plans to switch early next year to New Skies 3.0, which Buchanan says is essentially New Skies 2.0 with additional functionality designed for long-haul carriers. Jetstar is currently talking to Japan Airlines about expanding its one-way free-sale codeshare to include JAL-operated flights and is looking at potential codeshares with carriers in Hawaii and Vietnam.

Not every Navitaire customer, however, is eager to migrate to New Skies. Cruz says Clickair is satisfied with the codeshare functionality in Open Skies and has no plans yet to switch to New Skies. "I want to make sure 12, 13, 14 carriers convert first and all the bugs are worked out," he says.

JetBlue vice-president business development Gerald Lee also says Open Skies gives JetBlue sufficient flexibility to add codeshares and the carrier has not yet committed to buying New Skies 2.0. In fact, JetBlue has been able to implement its first codeshare agreement, a one-way blockspace deal with small regional carrier Cape Air, internally without any help from Navitaire.

Lee acknowledges the codeshare is a band aid solution with Cape Air flights loaded manually onto JetBlue's system. But he says the link is mostly automated and is sufficient because Cape Air operates small Cessnas and can easily add flights if JetBlue sells more seats. "The programme is working out well. It's moving a lot of customers in Boston."

JetBlue also has ambitions for partnering with other much larger carriers and expects to announce tie-ups in the fourth quarter. "We're looking at this opportunity but not jumping into anything that adds cost and complexity," Lee says. "We're in the process of developing our strategy here."

New kind of partnership
Aer Lingus in February revealed it had forged a tie-up with JetBlue. Lee declines to discuss the potential tie-up but Aer Lingus commercial director Enda Corneille says: "We're moving towards implementation in autumn. We're working through the details with JetBlue. There are a lot of technical pieces behind the scenes. These things are complicated."

Corneille says the tie-up will not be a codeshare or interline but a new kind of partnership. He says to a passenger it will seem like a codeshare because there will be one itinerary, through check-in and the bags will be transferred. Customers will be offered the cheapest available seat on an Aer Lingus transatlantic flight and the cheapest available seat on a JetBlue connecting flight. But instead of a pro rate, which requires the non-ticketing carrier to wait months for payment, each carrier will simply be paid the fare purchased for each segment and receive the funds immediately. Costs will be lower than a typical codeshare by minimising liabilities and risks.

Aer Lingus, which uses an in-house reservation system, is developing a link with JetBlue using its own IT team and supplier Datalex. It hopes to eventually have several partners, including Irish regional carrier Aer Arann, using the same platform.

While he will not discuss Aer Lingus specifically, Lee says JetBlue is interested in developing a new model for codesharing or interlining that does not involve complex pro rates, is completely ticketless and reduces the cost of transferring bags. It hopes to develop one flexible system that could apply to several non-aligned foreign carriers that operate out of Terminal 4 at New York JFK. Foreign carriers serving JFK have been approaching JetBlue for years and are keen to access JetBlue's large domestic network and offer connections that match Delta Air Lines.

"At the beginning we didn't need it [partners]," Lee says. "As we started to grow it made sense because of our size at JFK and the network. The good thing is at JFK there are a lot of people you can work with. We're based at a great gateway and it is under-utilised."

Consultant and former JetBlue senior vice-president of sales and marketing Tim Claydon says low-cost carriers are now keen to tap into the incremental revenues codeshares provide but "want to do it in a more progressive manner that takes out all the traditional costs".

Aer Lingus and JetBlue are not alone in pursuing a new-generation codeshare. Jordan says Southwest is seeking partners that do not insist on doing things the old way. "When you peel back a codeshare it's very archaic," he says.

Oasis Hong Kong Airlines commercial director Ken Chad says it is also looking for partners that do not require complicated rules and take several months to pay partners: "We want to get paid when a passenger pays."

Chad adds that 26% of Oasis passengers are already self-connecting and the long-haul low-cost carrier wants to tap into this market by expanding its network through new-generation codeshares or interlines. "Part of our business plan is to join the dots with like-minded carriers. We see it as absolutely a natural for us," he says.

Radixx, which supplies reservation systems to 30 low-cost and small flag carriers, is working with Oasis to develop a link to other carriers. Radixx chief executive Ron Peri says several of his low-cost clients are looking at adding codeshare functionality: "We believe very firmly in the hybrid model and have targeted our systems to that model."

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