Sunday, June 27, 2010

What do airline alliances and consolidation lead to?

Having earned almost 80,000 miles on a SkyTeam member airline, the addition of Romanian national carrier TAROM and especially fast-growing Vietnam Airlines to the alliance in June is welcome news. At the same time, SkyTeam renewed its membership program, eliminating the 'associate member' status and thus upgrading Air Europa (Spain) and Kenya Airways to full members. Smaller airlines wishing to join no longer need to adopt a current member's frequent flyer program (FFP) if they already have their own. So June saw the number of member airlines grow to 13, serving 898 destinations in 169 countries and carrying 384 million passengers annually. Further, China Eastern is joining in 2011, and Air Algérie (Algeria), China Airlines (Taiwan), Garuda Indonesia, MEA Middle East Airlines (Lebanon), and Uzbekistan Airways have also shown official interest in joining, and are in various stages to apply for membership.

However, by size, the undisputed leader of the three major airline alliances is Star Alliance, which is also the oldest, having been founded in 1997 by Air Canada, Lufthansa, SAS Scandinavian Airlines, Thai Airways International, and United Airlines. Now boasting 28 members encompassing 1,077 destinations in 181 countries, they transport almost 624 million passengers annually. They recently added TAM Airlines of Brasil giving its presence a boost in South America, a continent without a partner ever since VARIG Brasil went bankrupt. On the other hand, the alliance with what some say is the most balanced network is Oneworld, with a member airline in every continent of the globe except for Africa (and Antarctica, of course). LAN of Chile (with subsidiaries in Argentina, Ecuador, Peru), Qantas of Australia, and Royal Jordanian in the Middle East help the group stand out. By size, they are third, with 11 members serving 819 destinations in 142 countries carrying 308 million passengers annually.

The battle to lure the leading carriers into their alliances is only getting fierce, especially in India, Latin America, and Africa. In China, the 'big three' have already decided on their future partners, with Air China in Star Alliance, China Southern in SkyTeam, and China Eastern also joining SkyTeam in 2011, which left Oneworld without a partner in the world's fastest growing market, though they do have Hong Kong-based Cathay Pacific. For the 'big three' in India, Kingfisher has already announced their intention to join Oneworld and Air India is preparing to enter Star Alliance, leaving SkyTeam to do whatever they can to persuade Jet Airways to join. The airline is reportedly most interested in Star. In Latin America, the recently-merged Avianca-TACA group is being fiercely fought for by Star and SkyTeam, though the airline says they are so far leaning towards the former.

The aviation industry is one that is fragile and constantly changing, yet often requiring airlines to make company-risking decisions. Consolidation is happening everywhere in the industry, where the strong are merging to get an even stronger hold of the market, the weaker are being gobbled up or wiped out, whether a legacy flag carrier or not, while a constant threat of low-fare low-cost carriers force the incumbents to make radical changes to keep up in the competition. Alliances are also a tool for consolidation, with airlines in the same alliances merging or taking over one another or forming joint ventures and making joint purchases of aircraft. Air France/Alitalia/Delta/KLM, Air Canada/Continental/Lufthansa/United, and the recent American/British Airways/Iberia are the most notable examples.

Recently, in the U.S., Northwest just completed merging with Delta, and now Continental is proceeding with a merger with United (retaining the latter's name), pending government antitrust approval. United belongs to Star Alliance, Delta belongs to SkyTeam, and American belongs to Oneworld. Then there are the now well-established low-fare airlines such as Southwest (the mother of them all), AirTran, and JetBlue, while not doing bad are Frontier, Spirit, and Virgin America. While across the pond in Europe, airlines are starting to get consolidated around three major airlines: Air France (SkyTeam), British Airways (Oneworld), and Lufthansa (Star). Then there are the well-known (or rather notorious) low-cost carriers such as Ryanair and EasyJet, among others like Air Berlin, Norwegian, and Wizz Air.

In Asia, consolidation has been rather slow, however, with the recent surge of successful low-cost carriers such as Air Asia (Malaysia, Thailand, Indonesia), JetStar (Australia, Singapore, Vietnam), Tiger Airways (Singapore, Thailand), and a handful of Indian start-ups, the legacy airlines are being forced to change. An airline like Air Asia X, which is the first low-cost low-fare model for long-haul operations, could change the entire picture, especially if they team up with the local low-cost low-fare carriers and connect their respective networks. It would have the potential to effectively create a low-cost low-fare network that spans worldwide. Plagued by mismanagement, political instability, economic turmoil, or other factors, once great airlines such as Japan Airlines, Philippine Airlines, and Garuda Indonesia (finally improving) need to act much faster. Malaysia Airlines, which is one of only five five-star rated airlines by Skytrax (others being Asiana, Cathay Pacific, Qatar Airways, Singapore Airlines), has been changing their 'long-term' plans too often and seem to have settled down on going solo, for the time being, after having had talks with SkyTeam for years.

In 2000, former TWA chief Bill Compton said that in 10 to 20 years, there would only be about 10 legacy carriers in the world plus a couple of successful low-cost low-fare carriers for each continent. Now, that doesn't seem to be an exaggeration. However, this brings us to another question. Deregulation of the airline industry was aimed at bringing the best value for the fare-paying customers, however, now it seems like they could have less choice in the not-too-distant future, if the industry does actually get dominated by just a couple of huge airline groups, thus raising the potential for higher fares. Hmm... but then maybe there will be the next surge of new airlines challenging the big ones. However, that is not as easy as said, and more so if the challenged are much bigger than they are today; countless start-ups have fallen to predatory pricing tactics of the incumbents.

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