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June 2011

l FINDING THE OPPORTUNITY IN CHANGE

Airline Alliances

Responses to a Global Marketplace In an increasingly global economy and air travel market, airline alliances provide opportunities for airport operators to expand the global reach of their airports.

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n airline industry shaped by alliances changes the competitive landscape for airline service. As a result, airport operators must evaluate how these changes affect their airports and identify opportunities to improve financial and operating performance.

The Forces that Shape Airline Alliances Airline alliances are being shaped by a global marketplace. Airline alliances emerged from a need to create seamless international air travel. Globalized industries increasingly require access to local markets beyond a country’s primary international gateway. In response to this requirement, large, strategic, branded airline alliances were formed, together with code-sharing and other marketing arrangements, to mitigate the effects of restrictive bilateral agreements, ownership restrictions, and licensing and control regulations. Airlines based in different countries formed alliances to facilitate access to specific markets and to leverage their local knowledge, relationships with suppliers, and specialized marketing and distribution channels. The liberalization of international aviation-related treaties contributed to the development of airline alliances, including the creation of more than 100 U.S. Open Skies agreements. Recent U.S. Department of Transportation (DOT) decisions are affecting the shape of alliances, including requirements

for joint ventures with provisions for cost and revenue sharing and the operation of flights by any airline within the alliance (also referred to as “metal neutral” joint ventures). The most integrated airline alliances include a grant of antitrust immunity (ATI), which allows allied airlines to legally set prices, allocate routes, and otherwise operate as though they were one airline. Since 2007, the U.S. DOT’s approval of ATI agreements for the major airlines in the three global alliances (Star Alliance, SkyTeam, and oneworld) has been based on the fulfillment of these requirements, as well as the existence of a signed U.S. Open Skies agreement. Airline networks enhance alliances as airlines around the world link their networks to capture efficiencies and provide service to a

FINDING THE OPPORTUNITY IN CHANGE “Metal neutral” joint ventures are structured so that partners in the venture are indifferent as to which one operates the ‘metal’ (aircraft) when they jointly market services. Metal neutrality can be achieved through cost-, revenue- and/or comprehensive benefit-sharing arrangements.

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he prolonged recovery from the financial and economic crises of the last few years has prompted new thinking about airport planning. New challenges created by volatile oil prices, an aging infrastructure, scarce funding sources, and ongoing restructuring in the airline industry suggest that airport planning will need to be responsive to a constantly changing environment. This focus piece is the first in a series addressing challenges airport operators face in finding the opportunity in change.


Airline Alliances—Responses to a Global Marketplace l

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larger number of city-pair markets – particularly longer-distance, under-served markets. One objective of airline alliances is to increase traffic in markets behind and beyond international gateways, as shown on the map on the previous page. Another approach to achieving this objective is for airlines to evaluate opportunities to expand the geographical reach and market share of their network through mergers. Advances in technology also shape airline alliances. The integration of new airlines into an alliance is, to a large extent, facilitated by the use of a common information technology platform to coordinate flight schedules, book single-ticket itineraries on multiple airlines, manage frequent-flyer programs and airport lounge access, and promote consistent customer service.

Airline Alliance Cooperation Takes Many Forms

The Role of Airline Mergers Airline mergers have increased the opportunities for alliance partners to serve markets behind international gateways. Since the merger of Air France and KLM-Royal Dutch Airlines in 2004, most of the recent mergers have been between U.S. airlines. In contrast to the Air France/KLM merger, in which each airline continues to operate separately, mergers of U.S. airlines have resulted in single-branded entities with consolidated operations and facilities. The result is a combined airline that serves a greater number of destinations within the United States and throughout the world than the individual airlines before the merger. For example, as a result of Delta Air Lines’ merger with

AIRLINE ALLIANCES ACCOUNTED FOR NEARLY TWO-THIRDS OF U.S. AIRPORT CAPACITY IN 2010 Percent of scheduled departing seats

Cooperation among alliance partners ranges from basic arms-length arrangements to highly integrated joint ventures. Airline alliance cooperation can take many forms and is changing in response to new challenges, including increased competition from low-cost carriers, the high cost associated with developing service to new international destinations, and the volatility of fuel prices. The figure below illustrates the range of airline alliance cooperation as it exists today. The range extends from the least alliance cooperation – where there is limited cooperation on specific routes (e.g., interlining, frequent flyer program credits, and airline lounge access) – to the most alliance cooperation, where there is a merger-like integration. The most integrated airline alliances include ATI agreements; revenue, cost, and benefit sharing; and “metal neutral” joint venture arrangements.

LEAST ALLIANCE COOPERATION

2000 Star Alliance 12.4%

Interlining

Frequent flyer programs

SkyTeam 16.7%

Non-alliance airlines 44.2%

Low cost carriers 12.9% Non-alliance airlines 7.4%

Limited cooperation on specific routes

42.9%

oneworld 13.8%

2010

Airline lounge access

Low cost carriers 26.4%

66.2% Star Alliance 30.5%

Expanded cooperation to develop joint network Code sharing

Direct coordination on prices, routes, scheduling, and facilities

Merger-like integration MOST ALLIANCE COOPERATION

Antitrust immunity agreements

Revenue, cost, and benefit sharing joint venture

“Metal neutral” joint ventures

oneworld 14.4%

SkyTeam 21.3%

Notes:

Low cost carriers include AirTran, Allegiant, America West (merged with US Airways in 2005), Frontier, JetBlue, Southwest, Spirit, and Virgin America. Airline alliance members are listed in this document. Includes domestic and international capacity.

Source:

Official Airline Guides, Inc., online database, accessed May 2011.


Airline Alliances—Responses to a Global Marketplace l

Northwest Airlines in 2008, the combined airline (including regional affiliates) now serves 28 additional U.S. destinations and 15 additional world destinations, more than Delta alone served before the merger. Similarly, as a result of United Airlines’ merger with Continental Airlines in 2010, the combined airline (including regional affiliates) now serves 50 additional U.S. destinations and 79 additional world destinations, more than United alone served before the merger. The objective from a U.S. airline perspective is to strengthen the competitive position of their alliances by expanding their U.S. networks.

Airline Alliance Presence at U.S. Airports Airline alliances have redefined the competitive landscape. With the development of airline alliances, the pursuit of passenger market shares shifted from competition among airlines to a contest between airline alliances. In 2010, the three global airline alliances—Star Alliance, SkyTeam, and oneworld —accounted for two-thirds (66%) of scheduled departing seats at U.S. airports, up from 43% in 2000. During the same period, the low-cost carriers doubled their share of U.S. airport departing seats. The participation of U.S. legacy airlines in global alliances has allowed them to remain competitive with the low-cost carriers by expanding their global networks, making their network service more attractive to business travelers, and accessing markets that are not yet subject to low-cost carrier competition. Of the three global alliances, the Star Alliance accounted for the largest share of capacity at U.S. airports in 2010, except at medium-hub airports. The large low-cost carrier share at medium-hub airports reflects, in part, the strategy of these carriers, such as Southwest Airlines, to provide service to secondary airports, particularly in multi-airport regions. At this time, the three global alliances do not include any U.S. low-cost carriers, largely because the complexity and integration costs of alliances are inconsistent with the business model of these carriers. There are, however, examples of simplified and less costly forms of “By pooling resources to improve the overall service offering, and by sharing financial gains and losses, we find that the partners are able to harmonize the global network and become indifferent as to which of them collects the revenue or operates the aircraft over a given itinerary. They are thus able to focus their efforts on gaining the customer’s business by providing the best available fare, schedule, and routing between two cities.” U.S. Department of Transportation, Final Order Joint Application of the Star Alliance, July 10, 2009.

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THE STAR ALLIANCE ACCOUNTED FOR THE LARGEST SHARE OF CAPACITY AT U.S. AIRPORTS IN 2010, EXCEPT FOR MEDIUM HUBS Percent of scheduled departing seats 100% 90 80

20.6 30.1

33.4

29.5

30.5

17.2

70 60 22.1

9.6

20.9

28.0

21.3

50 40

10.5 44.2

30 20

30.5

9.2 26.4

21.8 21.1

10 0

14.4 12.2

16.4

6.3

8.4

8.0

Large hubs

Medium hubs

Small hubs

Star Alliance Low cost carriers

7.4

SkyTeam

Non hubs

All U.S. hubs

oneworld

Non-alliance airlines

Notes: Low cost carriers include AirTran, Allegiant, Frontier, JetBlue, Southwest, Spirit, and Virgin America. Airline alliance members are listed in this document. Includes domestic and international capacity. Source: Official Airline Guides, Inc., online database, accessed May 2011.

alliance cooperation among U.S. low-cost carriers, such as JetBlue Airways’ arrangements with Aer Lingus, American Airlines, El Al Israel Airlines, Emirates, Icelandair, LAN Airlines, Lufthansa German Airlines, and South African Airways and Southwest’s code-share arrangement with Volaris. “The Delta alliance is a key plank in our strategy to build an international network of airline partners that offers global coverage. Now that we have DOT approval, we will move quickly to implement the joint venture and plan to have it up and running by the end of the year.” John John Borghetti, Chief Executive Officer, Virgin Virgin Australia Airlines, press release, June 10, 2011.


Airline Alliances—Responses to a Global Marketplace l

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Alliance

Transatlantic joint venture partners

Principal U.S. airline

Transpacific joint venture partners

Other airline members Americas Avianca* Continental Airlines COPA Airlines* TACA* TAM Airlines US Airways

Americas Aerolíneas Argentinas* Aeroméxico

Americas LAN Airlines Mexicana**

Europe & Africa Adria Airways Aegean Airlines Blue 1 Croatia Airlines Egyptair Ethiopian Airlines*

Asia & Pacific

LOT Polish Airlines SAS South African Spanair TAP Portugal Turkish Airlines

Europe & Africa Aeroflot Russian Airlines Air Europa CSA Czech Airlines Kenya Airways TAROM Romanian Air Transport

Europe & Africa Air Berlin* Finnair Iberia S7 Airlines

Air China Air India Air New Zealand Asiana Airlines Singapore Airlines Thai Airways

Asia & Pacific China Airlines* China Eastern Airlines* China Southern Airlines Garuda Indonesia* Korean Air Middle East Airlines* Saudi Arabian Airlines* Shanghai Airlines* Vietnam Airlines

Asia & Pacific Cathay Pacific Airways Kingfisher Airlines* Qantas Airways Royal Jordanian Airlines

* Member elect airline that has stated its intention to join the alliance and is currently completing the steps required for integration. ** In August 2010 suspended operations indefinitely.

Global Considerations Airline alliances have the potential to expand the global reach of airports. As airlines increasingly rely on global alliances, airline service at U.S. airports is likely to be evaluated in terms of its contribution to an alliance’s market share and overall profitability. Future decisions about service at a specific airport may be influenced by the intensity of fare competition and the contribution of each additional passenger to the bottom line. The challenge for airport operators making financial and planning decisions is to consider the changing role of their airports in accommodating global airline alliances. The opportunities for airport operators will depend on the types of airline service provided at their airports and may include: • Co-locating alliance members, evaluating facility use, and identifying other revenue-generating uses of returned SAN FRANCISCO OFFICE:

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space. Co-locating alliance members reduces connection times and promotes more efficient use of facilities and space. • Identifying additional rentable space for shared uses, such as alliance lounges, the costs for which would be shared among alliance members. Sharing facilities, such as baggage claim, lounges, ticketing, and check-in counters, improves the customer experience and strengthens the alliance brand. • Exploring itineraries from spoke airports through alternate hubs and gateways for both connecting and origin-destination opportunities to increase passenger choices and diversify the airline service base, particularly in response to lost or reduced service in already developed markets. • Engaging the local community and businesses in promoting the role of the airport, exploring opportunities to connect the local region to international destinations and to provide lowcost carrier choices, and possibly providing alternate revenue sources for economic and air service development. n Prepared by Linda Perry, with contributions from Matt Townsend. For further information, please contact: Linda Perry—linda.perry@leighfisher.com Matt Townsend—matt.townsend@leighfisher.com

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Focus Airline Alliances