As the majority of the world celebrated Christmas, China Southern Airlines (ZNH) planted a very unwelcome gift under SkyTeam’s tree on December 24, 2019, as it confirmed that as of January 1, 2020, it will no longer be a member of the alliance. 

Reasoning by the vision to “enhance global connectivity and create a better life” for its passengers, the Guangzhou-based carrier was not grieving for a long time and already created new partnerships before officially leaving SkyTeam with British Airways and numerous other companies.

Most recently, LATAM also announced that it will leave oneworld after Delta Air Lines acquired a 20% stake in the South American carrier, while another oneworld member, Qatar Airways, likes to throw hissy fits and threaten to leave its membership on the table and slam the door behind itself in the same dramatic fashion that the airline’s Chief Executive Officer Akbar Al Baker likes to express himself publicly.

Another SkyTeam member is also set to potentially leave, as Air Europa and International Airlines Group (IAG) (IAG) have agreed to the latter’s purchase of the former. While the transaction is still pending approval from governmental authorities, two IAG-owned airlines are associated with oneworld, putting Air Europa’s SkyTeam membership in question.

Thus, with the most recent developments, are airline alliances going to fade into mediocrity in the coming decade, considering the fact that the industry is also going towards the trend of consolidation?

Benefits and drawbacks

From a carrier‘s perspective, the allure of joining an alliance is fairly obvious – the ever-increasing network of routes and destinations that passengers are able to reach via alliances when partners are expanding. Customers also stay in line with loyalty programs and are able to receive a similar level of passenger experience wherever they are, including airport lounges. At least on paper.

Essentially, airlines are able to offer more to their customers without dedicating too much of their resources, namely aircraft and flight crews, or operate routes that would not make much sense. For example, it would not make sense for Lufthansa (LHAB) (LHA) to operate intra-United States routes to feed their transatlantic. Instead, it is more sensible for a locally known brand, like its partner, United Airlines, to transfer domestic passengers onto international flights.

However, at the same time, the airline business is cut-throat. Companies have to look out for their best interests, including expanding into markets where there are opportunities to do so. One example could be the recent tie-up between British Airways and China Southern Airlines (ZNH) . Neither International Airlines Group (IAG) , the owner of British Airways nor oneworld, the British carrier’s alliance, had a strong presence in China. While Cathay Pacific is a oneworld member, it serves the Europe-China market via its hub in Hong Kong, meaning less flexibility for passengers who are looking to travel on the Silk Road in the air.

A partnership between BA and CSA, on the other hand, provides more direct opportunities between London and Chinese cities. Yet at the same time, it also creates a competitive disadvantage for Cathay Pacific, as direct flights, instead of connections through Hong Kong International Airport (HKG), sways passengers towards choosing the former option, consequently decreasing potential revenue for Cathay.

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Thus, airlines have to juggle their own best interest with the interest of the alliance they represent, potentially limiting growth in a market where growth opportunities are becoming limited. With airports getting fuller rather than freer and with passenger numbers predicted to only grow more and more, there is a clear incentive for airlines to grow. In addition, building a new or expanding an older airport is no easy task, as proven by the Berlin-Brandenburg (BER) or the London-Heathrow (LHR) debacles.

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After running into multiple delays, the expansion of the United Kingdom’s busiest airport, London Heathrow International Airport (LHR), was pushed back once again. The British Civil Aviation Authority (CAA) denied permission for the airport to increase spending, delaying the project by another 12 months. Work is estimated to be finished by early 2028 or late 2029.
 

Consolidating into groups

And one sure way to expand is to purchase an already established company with its own set of aircraft, slots and crews, like the recent Air Europa acquisition by IAG or Lufthansa Group purchasing airlines from neighboring countries. Further examples could be found elsewhere, namely Cathay Pacific getting into the low-cost carrier market by purchasing HK Express outright or Virgin Atlantic rescuing the ailing Flybe to increase its own domestic network without having to lease or purchase narrow-body aircraft. Both deals were completed in 2019. At the same time, unlike alliances, these groups are much more concentrated on local market dominance, rather than trying to bite off a global pie that is much more difficult to chew.

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Starting from 2020, Flybe will now officially be known as Virgin Connect. The rebranding, which was hinted since the Connect Airways consortium purchased the regional airline, and the partnership, secured crucial growth opportunities for Virgin Atlantic.
 

During AIR Convention 2019, Chief Executive Officer of Wizz Air, József Váradi noted that the “heyday of globalization is over,” as there is much more patriotism and “nationalism affecting businesses, including aviation,” as regulators are swaying towards the best interest of their home countries. At the same time, he noted that the industry is “becomes increasingly commoditized” as consumers want more but are prepared to pay less for their goods, meaning the number one priority for passengers is becoming the price, rather than the unique product they will receive onboard a flight.

And apart from the overflowing luxury on such airlines as Emirates or Singapore Airlines (SIA1) (SINGY) , the industry is seeing the phasing out of First Class and the mass introduction of Premium Economy to cater to the price-sensitive consumers that still want to feel more special than a regular Joe in Economy. One example could be Lufthansa (LHAB) (LHA) that did not include First Class seats on its newest Airbus A350 aircraft, the first of which it received in 2016. United Airlines also phased out its top-of-the-line onboard product with a Business Class equivalent in 2016, with many more cases around the industry.

And offsetting the pressure on yields from the consumers that are not prepared to pay more is something that is a must for airlines. One way to do so is to provide services that your competitors cannot, which allows airlines to disfigure the competition and maintain high ticket prices. For example, the aforementioned Virgin Atlantic is on a steep hill climb to overcome its main competitor in the British Isles, British Airways, as it wants to become a “second flag carrier” in the United Kingdom. It even launched a website with the name Two Flag Carriers, publicly persuading that “Britain deserves better.”

“A second flag carrier at Heathrow would give you more choice, more routes and lower fares.”

While BA is locked in with oneworld and its partners, Virgin Atlantic, on the other hand, is much more flexible. The airline lists its partners from numerous alliances: Air France-KLM, Aeromexico, Delta Air Lines from SkyTeam, Air China, Air New Zealand and Singapore Airlines (SIA1) (SINGY) from Star Alliance and such carriers as Westjet and the Brazilian GOL Linhas Aéreas Inteligentes that are not associated with any alliances. Thus, while it is hard for Virgin Atlantic to expand in LHR, as the airport lacks open slots, it can increase capacity by signing codeshare agreements with carriers that also have slots in Heathrow, including Air China, Delta and Singapore Airlines (SIA1) (SINGY) .

And it is not only Heathrow where codeshare agreements help Virgin Atlantic expand without allocating their resources. Nevertheless, without an airline alliance tying its hands together, the company is able to pick and choose its partners, unlike the, seemingly, unhappy marriage that even results in public bickering. Case in point: American Airlines (A1G) (AAL) and Qatar Airways, a relationship that was described by International Airlines Group CEO as “fun”.

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The relationship between American Airlines and Qatar Airways is “fun‘, says William Walsh, CEO and Executive Director of International Airlines Group (IAG). 
 

The Doha-based airline, while publicly threatening to leave oneworld multiple times now, is also seemingly preparing to do so. It has been acquiring stakes left and right in various carriers, including the aforementioned China Southern Airlines (ZNH) or LATAM, both of which left their respective alliances in 2020 and 2019, respectively. Doing so guarantees Qatar Airways the ability to maintain or to create new partnerships with them despite the fact that they are not in the same alliance, meaning the result of leaving oneworld would not shrink the airline’s network.

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With the Saudi-led blockade continuing on since 2017, Qatar Airways has little room to wiggle. Yet the airline, in part, needs to grow, with a global mega-event and Doha's Hamad International Airport (DOH) expansion coming up. So, despite the blockade, what moves has Qatar Airways done?
 

The same China Southern, when it officially left SkyTeam on January 1, 2020, maintained codeshare partnerships with multiple members of the alliance and since has created numerous new ones with such carriers as American Airlines (A1G) (AAL) , Emirates, Finnair, Qantas and, of course, Qatar Airways.

So, if an airline can sustain the most important connections even despite leaving an alliance and even create new ones in the formal process of withdrawing from one, a question arises: are airline alliances really needed, considering they restrict the flexibility of a carrier to expand their partnerships and in the same swoop, it’s capacity?