Independent airlines have shrunk to a handful of smaller carriers in a year that’s seen mavericks including Virgin Atlantic Airways end their solo approach and top Gulf operators enlist in alliances or joint ventures.
Of the 40 leading airlines by revenue from flights to the top 100 business hubs, 11 lacked partnerships deeper than code-shares as of January 1. Since then, accords and investments have left only EasyJet, El Al Israel Airlines, Jet Airways and Philippines Airlines unaligned.
Sluggish growth and high fuel prices are clipping industry earnings, compelling carriers including Virgin Atlantic and Malaysian Airline System to seek outside ties as government controls limit the scope for full takeovers. In the Gulf, Dubai’s Emirates signed a pact with Qantas Airways in September and Etihad Airways of Abu Dhabi sealed a deal with Air France-KLM Group the next month just as Qatar Airways agreed to join the British Airways-led Oneworld group.
“Aviation is this weird animal that’s the last regulated industry,” Virgin Atlantic Chief Executive Officer Steve Ridgway said Dec. 11 in an interview in London. “Alliances are a way of dealing with the stresses and strains.”
Ridgway spoke after announcing a cost-and-revenue-sharing venture with Delta Air Lines on 31 daily round-trip flights between the UK and North America, facilitated by the US company buying a 49 percent stake in Richard Branson-controlled Virgin from Singapore Airlines for $360 million.
UK-based Virgin is also in discussions about joining Delta’s SkyTeam alliance after eschewing membership of the three main groups for the past 15 years. SkyTeam, the last to form in 2000, appears more attractive as Deutsche Lufthansa AG-led Star prepares for the loss of Brazil’s TAM SA after its merger with Oneworld member LAN Airlines SA of Chile, Ridgway said.
Twelve airlines joined or committed to joining global alliances in 2012, with Oneworld securing three top-40 carriers: Air Berlin, admitted in March, Malaysian Air, which signed up in June, and No. 2 Gulf operator Qatar. SriLankan Airlines has agreed to become the 15th member next year.
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Star Recruits
Star, which also includes United Continental Holdings Inc. (UAL), added three second-tier operators in Avianca Taca Holding SA (PFAVTA), the No. 1 Columbian carrier, and Copa Airlines Inc. of Panama -- which both joined in June -- and Shenzhen Airlines Co. of China, admitted last month. Taiwan’s EVA Air also agreed to join.
Mark Schwab, Star’s CEO, said in a phone interview that the loss of airlines such as TAM and U.K. carrier BMI -- sold to BA by Lufthansa -- was beyond its control. The alliance is still the biggest in the industry, with 27 members.
“There were some carriers that left Star, particularly with the economic situation that’s dragging down Europe these days, and some M&A activity that created some changes in our alliance world,” Schwab said. “By the same token, we continue with our vision of strengthening our position in growing markets.”
Xiamen Airlines became the 19th member of Delta and Air France-KLM-led SkyTeam last month, hard on the heels of Aerolineas Argentinas SA, Lebanon’s Middle East Airlines and Saudia, the flag carrier of Saudi Arabia.
Dominant Force
Alliances now account for 82 percent of sales from flights to the top 100 business centers listed in payment card provider MasterCard Inc. (MA)’s Global Destination Cities Index, according to calculations by the Oneworld grouping based on International Air Transport Association data for the 12 months ended July 31.
The MasterCard index ranks 132 cities by cross-border visitor numbers and spending, while IATA’s Airport Intelligence Services estimates individual airline sales at specific hubs.
For airlines, global alliances are marketing tools offering wider access to premium lounges, the right to “earn and burn” air miles on a variety of operators and a more seamless travel experience built around code-share deals which allow carriers to book people onto each other’s flights as if they were their own.
“We can offer a package of identifiable things and that’s an incentive for customers to pool their spending,” Bruce Ashby, CEO of Oneworld, which has its base in New York, said Dec. 7 in an interview in London.
Hub Rivals
Qatar Air’s recruitment to Oneworld by British Airways (IAG) came after years of tension between Gulf carriers and older operators including Air France and Lufthansa, which had queried the role of state support in building huge hubs and fleets that stripped traffic from established bases in London, Paris and Frankfurt.
Ashby said Oneworld members understand that the Gulf’s location on routes between Europe, Asia, Africa and Australia and within a single flight of most North American cities make it perfectly located for transfer travel and have come round to the view that it’s wisest to seek to tap into those networks.
Qatar Air CEO Akbar Al Baker said in an interview that the 15-year-old business is now an established player and offered Oneworld members the best fit in the Middle East, taking the alliance’s reach from 5 percent to 16 percent of the market.
“Most airlines around the world, some time or another, will be part of one or another alliance,” Al Baker said at London’s Heathrow airport. “Alliances don’t only make sense for one person or one airline. You can’t isolate the Middle Eastern carriers from the global aviation scene.”
‘1980s Thinking’
Qatar’s Gulf rivals aren’t so convinced by the global groupings, with Emirates, the world No. 1 by international traffic, restricting itself to limited code-share arrangements before signing the accord with Australia’s Qantas, which scrapped a 17-year tie-up with British Airways in the process.
“Alliances remain a product of late-eighties thinking in an aviation world that bears little resemblance to today,” Emirates President Tim Clark said Dec. 8 in an e-mailed response to questions from Bloomberg News. “As such they are anachronisms.”
Star CEO Schwab said that Emirates’s Qantas tie-up shows it has changed strategy, regardless of Clark’s comments.
“We took note of the Emirates-Qantas alliance, and to us that’s a signal that they’ve taken a change in the way they think,” he said. “They’re looking for access to big markets, and you can’t simply build that by adding a few services into a country. You need connectivity within the country.”
Schwab added that Star doesn’t need a Gulf member, since the alliance’s east-west connectivity is already good and the region offers no major home population to tap, usually “a fundamental reason why people get invited in.”
‘No Interest’
Etihad has also shied away from global alliances, opting for tie-ups via equity investments and code-share deals, of which it has 41, more than its Gulf rivals, including the recent hookup with Air France-KLM, which it says could develop into a revenue-sharing pact requiring antitrust immunity -- the closest most carriers can get to joint operations given bars on mergers.
“At this point in time I have no interest in going into an alliance,” Chief Executive Officer James Hogan said Dec. 4 in an interview in London. “I don’t want to be told who I can work with and who I can’t. I’d rather work with CEOs of other airlines and focus on bilateral wins.”
Of carriers unaligned in January, Aer Lingus Group Plc (AERL) sold a 2.99 percent stake to Etihad in May as a prelude to a possible partnership, though Ryanair Holdings Plc (RYA) is also bidding for control of the Dublin-based company. Etihad may bring another non-aligned member of the best-connected 40 into its fold in coming weeks, with Jet Airways favorite to secure funds from the Gulf company as India opens to foreign airline investment.
‘Shifting’
Jet’s network and market share make it more attractive than Kingfisher Airlines Ltd. (KAIR), which ended plans to join Oneworld in February amid a cash crisis, the CAPA Centre for Aviation says.
Oneworld offers flexibility to cooperate outside the group, acknowledging “constantly shifting allegiances,” spokesman Michael Blunt said, citing Air Berlin, which is deepening code- shares with 29 percent owner Etihad and new partner Air France.
At Virgin, CEO Ridgway said alliances and joint ventures are inevitable given restrictions on foreign ownership of the kind that limited the company to minority holdings when it sought to penetrate markets such as Australia and the U.S.
“All the other industries have consolidated -- automotive, telecoms, computers -- and this in the last one that hasn’t,” he said. “Alliances allow airlines to cooperate and make up for the very archaic ownership and control rules.”