Monday, 16 January 2012

Airline alliances and the Rule of Three

In the business world, three is an iconic number. The USA has three major automobile makers. In fast food you have McDonalds, Burger King and Wendy's. There are even three leading peanut butter brands (Peter Pan, Jif and Skippy). In an open market, three major competitors often emerge. And so it is in the travel industry. For many years, three large U.S. network airlines dominated the skies. And in turn those mega-carriers — American, Delta and United — created three global alliances — oneworld, SkyTeam and the Star Alliance respectively. It is also no accident that the three largest European airlines — British Airways, Air France/KLM and Lufthansa — have each joined a different alliance.
Since 1997, when United Airlines, Lufthansa and a few other airlines formed the Star Alliance, the race commenced to enroll the most airlines and offer the most destinations and routes worldwide. Today more than 40 of the world's largest airlines are alliance members (see chart below). The three alliances carry approximately 60% of airline traffic globally.
Airline alliances have greatly changed the way we travel. In this first of a two-part series I will address the airline alliances from a consumer perspective. In a subsequent column I will go behind the scenes at an airline alliance to see how it works and what the alliances are doing to make international travel a more seamless experience.
The alliances began as a way for airlines to expand their international networks. For many years protectionist rules in most countries restricted the number of foreign airlines or flights from operating to, within or beyond a country to a third country destination. For example, U.S. airlines cannot ferry passengers between cities in Canada and cannot fly passengers from a Canadian airport to Europe. These rules were written to protect national airlines and their employees.
Although some protectionist rules have eased over the years, international growth is still limited. In most cases, U.S. airlines still cannot fly between foreign countries and therefore cannot compete with foreign airlines that can fly passengers from U.S. gateways to that foreign airline's home country and then on to hundreds of additional destinations.
The airlines soon realized they could overcome this handicap with the help of alliance partners, according to Mark Haneke of InterVISTAS, a travel industry consulting firm. Haneke worked on alliances at Lufthansa, American Airlines and other major airlines when the alliances were formed.
Airline alliances allow U.S. airlines to route transoceanic traffic to a partner airline's hub and beyond using that partner airline for the connecting segment. So now you can travel from almost anywhere in the U.S. to almost anywhere in Europe without forfeiting miles in your preferred program, for example, by flying American Airlines to London connecting to British Airways, United Airlines to Frankfurt connecting to Lufthansa, or Northwest to Amsterdam connecting to KLM .
Staying in a single network has been a boon for frequent fliers. "The alliances allow business travelers to move throughout the world with greater ease," Haneke says. When it works correctly, "code sharing" (see related article) allows alliance partners to seamlessly share the passenger. In most cases, alliances also allow passengers to accrue and consolidate frequent flier miles and redeem awards on their alliance partners. For example United Airlines had no award seats available for an upcoming trip to Asia but offered me seats on Star Alliance partners ANA, Asiana, Singapore or THAI airlines.
Alliances also offer corporations a single contract for global access. But the alliances also create issues. When two competing airlines become partners in the same alliance, it often means a reduction in service and diminished competition on shared routes.
Even with 40+ allied airlines there are still major geographic gaps. Coverage in North America and Europe is good, but the alliances have very limited operations in India and South America. South African Airways is a member of the Star Alliance and Kenya Airways will be joining SkyTeam later this year, but no other African airlines are alliance members.
In China, where air travel is growing rapidly, the four largest Chinese airlines are in the process of joining the alliances. China Eastern Airlines will most likely go to oneworld, China Southern Airlines to SkyTeam, and Air China and Shanghai Airlines to the Star Alliance.
Not all airlines see alliance membership as a necessity, but competitive pressures are a strong motivation. "ANA was a domestic carrier originally and wanted to compete with Japan Airlines," says Eva Traunmueller from ANA's alliances department. "The best strategy was to join a global alliance," she says. Now that ANA is a Star Alliance member, their cross-country rival and long time holdout Japan Airlines is joining oneworld.
Royal Jordanian Airlines will be the first carrier in the Middle East to join an alliance when it enters oneworld this year. "We're a small airline in a small country," says Samer Majali, president and chief executive officer. "By linking with oneworld partners we're extending our network without incurring the costs of doing so," Majali told me. Perhaps Royal Jordanian will trigger a competitive response causing other carriers in the region to join an alliance.
Low cost carriers (LCCs) have generally resisted the alliance lure. Haneke believes that alliance membership could complicate their business model. Ireland's Aer Lingus and Brazil's Varig are actually leaving their alliances this year. With discounter Ryanair in Ireland, Aer Lingus is restructuring to pursue a low fare, point-to-point strategy that is not compatible with the connecting passenger alliance model.
Airline mergers could also wreak havoc on the alliances. America West Airlines gained access to the Star Alliance when they acquired US Airways, but some recently contemplated airline combinations, such as Continental-United, Delta-United or Delta-US Airways, would cross alliance boundaries and could have a major impact on the composition of those alliances if any of those pairings come to fruition.
The recently announced open skies deal between the U.S. and the European Union could also affect the alliances. Open skies could obliterate any remaining protectionist rules making alliances superfluous. But don't expect major changes, at least in the short term. With so much invested already, any changes will be very slow and even without flight restrictions, it's far less expensive to sell tickets on someone else's airplane than to operate your own.
Alliance Name oneworld SkyTeam Star
Number of members (projected by end of 2007) 11 13 23
Number of flights/day 9,190 14,615 16,000
Number of destinations served 692 728 855
Number of countries served 142 149 155
Annual passengers (millions) 320 373 413
Members American Airlines
British Airways
Cathy Pacific
China Eastern Airlines*
Japan Airlines*
Royal Jordanian*
Air Europa*
Air France/KLM
China Southern Airlines*
Continental Airlines
Copa Airlines*
Czech Airlines
Delta Airlines
Kenya Airlines*
Korean Air
Northwest Airlines
Air Canada
Air China*
Air New Zealand
Blue 1
Croatia Airlines
Lot Polish Airlines
SAS Scandinavian Airlines
Shanghai Airlines*
Singapore Airlines
South African Airways
TAP Portugal
Turkish Airlines*
United Airlines
US Airways
*airlines expected to join that alliance
Source:USA Today

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