Global alliances are in style, but their benefits are only now becoming clear

Chris Jasper/SYDNEY

Global airline alliances are the height of fashion, with two major groupings operating and possibly two more hurrying to enter the fray.

Yet despite this scramble, the true importance of alliances has been hard to establish. The global groupings have so far made little impact on economy-class travel, concentrating instead on the sparkle of the business lounges.

Airlines have been reluctant to discuss the other benefit alliances could bring, that of cost savings through joint buying - perhaps because such economies might be secured partially through job cuts.

The Star Alliance, however, having just celebrated its second birthday, has offered a glimpse of its future ambitions, in terms of the current core area of marketing initiatives and the as-yet untapped potential of joint procurement.

Star's central commitment is to seamless travel worldwide. The smoothness of the global network is aided, Star claims, by easier interlining in terms of scheduling and through the benefits that joint facilities have brought to ticket purchase, check-in, boarding and general customer service.

Around this concept, Star has built a formidable machine with the aim of maximising its share of the lucrative business market.

Lufthansa boss Jurgen Weber, speaking during the meeting of airline chief executives in Sydney recently, acknowledged that Star, the marketing initiative, has been a huge success. "We have more work, more passengers and more airlines in the alliance. It's a revenue creating machine," he says.

The impact of that machine is now becoming apparent, too, with United revealing that last year more than $200 million - or nearly 10% of total revenues - can be traced to Star membership. Other Star carriers, including Ansett Australia, suggest alliance membership could contribute well in excess of that percentage.

Star is evolving its management structure to maximise revenue, with the appointment of senior executives to head four strategic development areas (SDAs): global network, seamless services and product development, information technology and automation, and most recently, market presence, meaning all activities designed to strengthen the Star Alliance brand and increase customer loyalty and sales around the world.

Together with Stars project support office and special interest committees, the SDAs report to the Alliance Management Board (AMB), responsible for implementing the business plan. Deputy chairman, United's Bruce Harris, says SDA leaders will manage business relationships between the partner airlines in the area of customer interfaces. Above the AMB sits the Star chief executives board.

Air New Zealand managing director Jim McCrae accepts that Star has so far placed an emphasis on marketing initiatives featuring simple customer benefits, but argues that this has been because the alliance can only respond to deregulation as it occurs.

Given sufficient deregulation, he says, member carriers would in the longer term aim for co-ordination, not just of frequent flier programmes, but in the more radical areas of pricing, timing and scheduling, areas in which such co-ordination is largely prohibited by anti-trust legislation.

Further open skies deals would advance these aims, with Weber placing a new US/UK deal at the top of his wishlist and United chairman and chief executive Gerald Greenwald adding that Star is ultimately determined to get all members into one terminal at London Heathrow, as is the case at Frankfurt's Terminal 1.

Joint operation of certain routes - where carriers share costs and profits - are one certain growth area. Weber adds that through such co-operation going beyond simple codeshares, "we would expect to eliminate the effect of cost cutting between our carriers".

As alliances mature in terms of global coverage and marketing initiatives, the next thrust will inevitably be in the direction of savings on expenditure. After a long period of silence, Star - with combined purchases of around $15 billion annually (excluding aircraft) - is prepared to discuss the possibilities, but stresses that consolidation of workforces is not on the agenda.

"One-third of our costs involve people, but two-thirds don't, and that represents enormous opportunities for working together in Star for purchasing," says Greenwald.

To this end, Alan Mauger of Ansett has been appointed head of an alliance joint purchasing committee, reporting to the AMB, to establish targets for joint purchasing and defining areas into which this policy can be quickly extended.

"We are not just talking about the easy areas, such as cups and blankets," says Harris. He will look at things like computers and telecommunications.

Allister Paterson, Air New Zealand general manager, commercial, sees potential for aircraft parts pools and common fuel purchasing, although in terms of fleet, Harris prefers to talk about harmonisation, saying: "We would like to achieve commonality in obvious areas such as specifications, engines and avionics."

McCrae stresses Star's potential to reduce costs collectively and use buying power. "I see common aircraft purchasing, if we can agree common specifications."

Sustainability is the watchword for the Air New Zealand chief, who says that in an age of falling yields one of the primary aims of Star must be to reduce unit costs.

Alliances, it would seem, have a long-term future, although they were created essentially in response to national restrictions on ownership and operations, with the aim of taking advantage of a steadily liberalising environment.

United's Harris believes that even if all restrictions were removed, the new groupings would survive, and is dismissive of the practicalities of becoming a world carrier, saying global alliances are the answer, not global corporations.

Star is bound together only by four pages of governance, with no formal ownership ties. That may be why most Star chiefs, while certain alliances will endure, suspect their make-up is far from set in stone.

Source: Flight International