Global alliance membership is again in play as industry restructuring moves ahead in both North America and Europe. Meanwhile, the global alliances continue to strengthen their structures and leverage their joint purchasing power
After the initial burst of enthusiasm which launched the global alliances in the late 1990s, some of that early momentum has appeared to subside over the past couple of years. Market crisis and the fight for survival has inevitably taken centre stage, leaving the global groupings relatively stable, but working to justify their relevance and deliver on the promise of cost-saving potential. However, as the industry now begins to re-emerge from crisis, the alliance game appears once more to be warming up - with the end-game of consolidation now visible on the distant horizon.
The drive for consolidation among the US majors has already received new impetus in the wake of the industry's crisis. US Airways is extending its co-operation with United Airlines to include full membership of the Star Alliance - pencilled in for the first half of next year. Meanwhile, Northwest and Continental have already lined up with Delta Air Lines on domestic services, and are weighing up SkyTeam membership.
This has provided a backdrop against which further consolidation could begin to take place in Europe. The recent grant of a mandate to the European Commission (EC) to negotiate an open skies agreement with the USA could begin to break down the old certainties of secure national boundaries. "We think this is likely to lead not only to European consolidation but also to scrambling and changing of alliance partners as each airline strives to be part of a winning team," says Susan Donofrio, analyst with Deutsche Bank in New York.
The next big move centres on KLM. The Dutch carrier has officially abandoned any ambitions to become the focus for a fourth global grouping with its long-time partner Northwest, and is in now in advanced talks with both SkyTeam and oneworld. A decision is expected later this year and could prove a landmark.
If KLM chooses SkyTeam, it is almost certain that Northwest and Continental would follow suit. Patrick Bianquis, vice-president for alliances at Air France, says that it will be a case of all three carriers joining SkyTeam, or none. The first scenario would, at a stroke, allow SkyTeam to leapfrog oneworld to put it on a par with Star in terms of passenger traffic. If KLM chooses oneworld and the US partners opt for SkyTeam, the three groups would look fairly balanced.
Air France, meanwhile, continues to develop its relationship with Aeroflot, while South African Airways is weighing up the attractions of Star and SkyTeam, having decided to leave the non-aligned camp. SkyTeam announced earlier this year that it plans to set up a second tier of membership to allow smaller carriers, such a regional players, to join the team.
The Chinese market is increasingly catching the eye of all three alliances after its consolidation around three big mainland carriers. Star chief executive Jaan Albrecht says China is the next priority. Speaking in June at the ceremony which saw US Airways sign up to Star, he said: "China, post-SARS, has double-digit growth. We have connections with Air China and other Chinese carriers and the time will come when Star will have a similar event to today and a Chinese airline will be joining Star." China Eastern is seen as a long-term target by oneworld, leaving the country's third major carrier, China Southern, as a possible SkyTeam target.
The pending arrival of US Airways within Star will itself strengthen the alliance with its presence on the US East Coast. US Airways claims that it stands to gain about $75 million in incremental revenue a year, with a similar benefit across other Star partners.
Elsewhere, Star has been tidying up its portfolio: Spanair, majority-owned by SAS since last year, joined its parent in the alliance; LOT sought shelter within Star following the collapse of Qualiflyer; while Asiana has signed up to mirror Korean Air's membership of SkyTeam. Otherwise, the alliance has been absorbed by the financial crises to hit key members including Air Canada, Varig and United, as well as waiting to discover the fate of Air New Zealand, which has a merger pending with oneworld's Qantas Airways.
Oneworld is not exactly promising a new membership drive, but says that it is in the hunt for a new member in continental Europe - a coded reference to either KLM or a Swiss, which is keen to join but would require radical restructuring to satisfy British Airways for one.
Despite the weaknesses in the American-BA relationship, which lacks antitrust immunity, the alliance has been working to strengthen bilateral ties between members. American has gained permission to codeshare with Cathay Pacific following the signing of a new US-Hong Kong air service deal at the end of last year, while Qantas and LanChile have begun codesharing across the Pacific. American and Finnair have also gained antitrust immunity across the Atlantic.
In the medium-to-long term, the possibility of an EC-US open skies deal may open the way towards an American Airlines and British Airways antitrust deal - the alliance's key weakness. The two carriers have already been granted permission by Washington for a more modest codeshare on routes beyond their US and London gateways.
In Europe, the focus is on the deepening relationship between BA and Iberia, with the two carriers awaiting an EC competition ruling over their proposed venture between the UK and Spain. Iberia and Aer Lingus have also extended their codesharing arrangements.
There has been no let up either in the drive to leverage the cost-cutting potential of alliances. To illustrate its commitment to cost cutting, oneworld itself has reduced its own headcount by around 30%. It is joint purchasing, however, that has emerged as the most tangible area for cost saving.
In June, four Star carriers agreed to place an order for a common-specification 70- to 120-seat aircraft. Air Canada, Austrian Airlines, Lufthansa and SAS have begun talks with Airbus, Boeing, Bombardier and Embraer about a firm order for 100 aircraft and 100 options. An order could be placed as early as autumn this year for deliveries to begin in 2005. SAS leads a specification team, Lufthansa heads performance and cost-analysis teams, and Air Canada heads a support and quality team.
The alliance as a whole had attempted to agree on a common aircraft in 1997, but "it proved relatively hard to get anywhere", says Austrian chief executive Vagn Sørensen, who leads Star's fleet coordination-working group. In addition to apparent economies of scale, he cites such advantages as the opportunity for airlines to swap delivery slots, limiting risk for the airframers, while the carriers could dry-lease their common-specified aircraft. Sørensen stresses that a large number of aircraft with common specifications would have increased residual values, which he calls a major component of the business case.
Star vice-president for finance and strategy Brock Friesen says joint purchasing of jet fuel on the spot market has already saved hundreds of thousands of dollars for Star. He adds that when a new legal entity is formed to buy fuel, which would then allow hedging, it could save more. "Joint purchasing is easy to say and hard to do," he says. "The problem is that everybody has a slightly different variation of what they want to buy."
The oneworld alliance is also developing common engineering specifications to cut maintenance costs through bulk buying and sharing spare parts. The partners are aligning their "policies and processes" so that they can co-operate more closely and share best practice.
American and Qantas agreed two years ago to stick to the former's specifications for narrowbodies - a move that enabled the Australian carrier to take up the US carrier's deferred Boeing 737-800 order in November 2001. The alliance says similar arrangements between members are on the cards, but that the pre-requisite for this is that two members order aircraft at the same time - unlikely in the current climate.
Oneworld says that its partners have saved around $300 million through joint purchasing over the first three years since its inception in 2000, but is reluctant to be more specific. As pressures grow to produce hard results, all alliances are becoming more cagey about giving out detailed breakdowns.
At its last half-yearly meeting in Paris, SkyTeam's chief executives instructed their respective carriers to come up with definite figures on alliance-related cost savings. "This is a bit of a challenge," says Paul Matsen, vice-president for alliances at Delta, noting: "No airline accounts for cost savings in the same way." The alliance estimates increased cooperation across the transatlantic will save around $100m per year over the next three years.
Despite the pressure on costs, alliances have continued to beaver away at improving the customer experience. For example, SkyTeam and oneworld have recently opened joint check-in facilities at Paris Charles de Gaulleand Zurich airports, respectively, while the second terminal at Munich Airport will be dedicated to the Star Alliance. John McCulloch, the new managing partner at oneworld, emphasises that customer experience and marketing will be crucial. "This is where the alliance battle will be lost and won," says McCulloch, who stepped up from a marketing brief in June to take over from Peter Buecking.
IT budgets have suffered over the last year or so as budgets have been cut. At oneworld, the main focus has been on e-ticket interlining, with the intention of rolling out this concept across the whole alliance. American and Finnair introduced the first such inter-continental scheme last year. American says it will only interline with e-ticket-capable airlines from the end of next year, and oneworld sources say BA is moving in the same direction.
Star Alliance IT director Michael Stagl says that StarNet, the alliance's common IT platform middleware solution, has advanced to the stage that it can interface with the basic systems of any member with a simple plug-in. It now offers alliance-wide flight-status information and redemption availability, with Passenger Name Record (PNR) servicing - the ability to change any ticket from a member carrier online - under development. Star Alliance and SITA recently announced a cost-savings agreement on an IT platform - the first IT deal negotiated collectively by Star. The next step towards an unified Star IT system is still out to tender.
SkyTeam has also developed a middle-ware system that translates messages between member carriers. Matsen, says that a move to an alliance-wide IT platform is not going to happen in the short-term, but that "it is the right aspiration". SkyTeam carriers can view PNR from other airlines in the group, but must call a helpline to change them. Matsen says there are no plans to provide online PNR servicing for the time being.
Another area that alliances have been studying is decision-making. SkyTeam has resisted the dedicated management team approach of oneworld and Star. This is partly due to the smaller size of the alliance, based around the Delta-Air France axis, but SkyTeam officials admit things may change if Northwest, Continental and KLM join.
Star, with 17 members, has agreed that clusters of carriers can move ahead on their own projects - as long as they do not affect the customer experience.
Star has around 70 employees, with a headquarters in Frankfurt. Each carrier has one individual reporting to their respective chief executives, forming the strategic-focused alliance management board. Each carrier also has an alliance director, effectively a liaison officer.
For its part, the SkyTeam governing board meets twice a year, with the head, deputy head and alliance director of each airline taking part. This group is responsible for the strategy of SkyTeam, while the day-to-day running of the alliance is carried out by a steering committee, consisting of the alliance directors, SkyTeam managers and alliance managers from each airline. The former provide a link with the governing board.
There are also 10 working groups, covering communications, human resources, product, network, synergies, IT, safety/security, sales, performance management and cargo. SkyTeam integrated its cargo operations to a greater extent than the other two alliances.
Oneworld set up a centralised management team shortly after the alliance's launch in early 2000. At the top end is the oneworld governing board (OGB), consisting of the heads of the member airlines. This meets on a formal basis three times a year. Reporting to the OGB is the oneworld managing partner - John McCulloch. The management team, made up of the alliance directors of the member airlines, also reports to the OGB, but meets on a more regular basis than the airline heads.
Each member airline also has a oneworld project director, responsible for much of the day-to-day activities of the alliance. The project directors also liaise with the various oneworld working groups, staffed by airline, rather than oneworld, employees. Oneworld also has a number of task forces, where two to three individuals are pulled together from the member airlines. This slimmed down approach is designed to speed up working practices, and is, the alliance says, a sign of how trust has been built up.
Oneworld itself has around 15-20 employees reporting to McCulloch, including vice-presidents for sales, IT, project management and public relations, while he retains marketing and customer experience.
The shape of the global alliances should be much clearer within the next year as internal projects and key membership decisions start to feed through.
REPORT BY COLIN BAKER IN LONDON AND DAVID FIELD IN WASHINGTON
Source: Airline Business