Airline alliances: a gentlemen's club or smart business move?
Just days ago China Southern Airlines (ZNH) announced it will be leaving SkyTeam, a move preceded by Qatar Airways boss’ threats to exit OneWorld. Now, there are rumors that Cathay Pacific, the founding member of the very same OneWorld, is also questioning the value of airline alliances. Slowly but surely, we may be witnessing the downfall of global airline alliances. So why do airlines enter these memberships in the first place? And does it pay off?
Most of us know of airline alliances: we have seen their logos gracing aircraft liveries, often more prominent than (or at least as much as) the airline’s own signature; we have heard of the frequent flyer programs, demanding (of the mileage-obsessed) as much bookkeeping and computing as your monthly utilities bill (online airline mile calculators come in handy).
When on an airplane, hearing something like, “American and its OneWorld Partners thank you for flying with us,” instills a sense of prestige and stature on the part of the airline. And the airlines themselves like to boast of their memberships, making sure you notice that it is “An X Alliance member” whenever you come across a brochure, a promotional video or just scroll down the company’s website (meaning, Airline X is Running with the Big Boys now).
The world’s three largest passenger airline alliances are StarAlliance, OneWorld and SkyTeam; and even they are ranked in terms of quality. So forget the “Best Airline in the World” awards, whether courtesy of AirlineRatings.com or TripAdvisor, or other party. If a particular airline does not make it to the top of the “Best” list, at least it can say it is a part of a leading alliance.
According to the certified airline and airport ranking site Skytrax, StarAlliance tops the list as the world’s best airline alliance of 2018, based on the global passenger satisfaction survey, combining the impressions of 20.36 million travelers from around the world. OneWorld comes in second place and SkyTeam takes the third position.
Singapore Airlines (SIA1) (SINGY) is a member of this no. 1 airline club; it has also been named world’s best airline for the fourth time in 2018 by Skytrax awards, according to the very same passenger survey (thus continuously upping the ante for other member carriers of its alliance).
Another member is Air China. But the carrier is certified by Skytrax with a 3-star airline rating and landed only at 93rd place for 100 best airlines ranking (compared to Singapore’s 5-star ranking and top position); one might argue that it certainly helps the Chinese airline to be associated with a leading alliance.
The perks of airline alliances
The advantages airline alliances bring international passengers are well-known and quite compelling. Member airlines offer easy and convenient connections to a large range of destinations around the world. So, for example, if Airline X does not fly a route on one of its own aircraft between two, say, Southeast Asian cities, partner Airline Y, which does, can offer Airline X’s customers the flight.
Airline alliances also have reciprocal earning and redeeming loyalty program benefits and in some cases, allow frequent flyer points, or miles, to be shared across different member carriers. Hence, within the same alliance, you could fly with a paid ticket on Airline X but credit the miles earned to Airline Y. Later on, you can use your Airline Y miles to book an award flight on that same airline or other alliance members, including back on Airline X, TheGlobeTrottingTeacher.com explains.
But what’s in it for the airlines? Why would they choose to join an alliance? Well, it comes back to the first point mentioned here – connectivity. Alliances provide a network of connectivity through codeshare agreements, allowing airlines to extend their flying networks. Two airlines can cover far more routes than one, giving them more market share access, as SimpleFlying.com observes. Also, the routes that both airlines cover can be split between them or traded for other routes.
The other major (and very attractive) benefit for airlines is cost reduction. Generally speaking, an alliance is an agreement between airlines to cooperate and pool resources. Joining an alliance can allow to save on maintenance, fuel prices, crew accommodation and more. With operational costs more streamlined, ticket prices can be lowered. All of the aforementioned benefits give airlines a greater ability to compete against other airlines.
“Alliances and partnerships between airlines are entered into to create competitive advantage, reduce costs, and expand network reach.” – ScienceDirect.com
By the way, what is seen as a benefit for passengers – how alliance members share the frequent flyer rewards – is also a big benefit for the airlines. For example, crossing “the pond” can be much more convenient with OneWorld members American Airlines (A1G) (AAL) and British Airways (BA). The perks come in through easier booking, lower fares, joint lounge access and reduced flight times as well as transfer of frequent flyer points between the airlines. So if you are looking to travel between the UK and the U.S., you will probably be drawn to choose these two airlines, due to the benefits the alliance offers.
Airlines working in (dis)harmony
The first major alliance, StarAlliance, founded in 1997, today has 28 member airlines, including United, Lufthansa (LHAB) (LHA) and Asian carriers Thai Airways, Shenzhen Airlines, All Nippon Airways (ANA), Singapore Airlines (SIA1) (SINGY) , EVA Air and Asiana. The alliance offers more than 18,800 daily flights to over 1,300 destinations, thus remaining the biggest and most wide-reaching airline alliance in the world.
The second (and the smallest) of the three major players is OneWorld, launched just two years after its rival StarAlliance. The alliance has 13 member airlines, including American Airlines (A1G) (AAL) , British Airways (BA), Cathay Pacific, Japan Airlines (JAL), Qantas and Qatar Airways. Currently, the alliance covers up to 12,750 daily flights to over 1,000 destinations, carrying 530 million passengers per year.
And then there is SkyTeam, founded a year after OneWorld and now comprising 20 airlines, with the likes of Delta, Air France, Aeroflot, KLM, as well as Garuda Indonesia, Korean Air, China Airlines, China Eastern, China Southern and Xiamen Air. This “team” network operates around 17,343 daily flights to 1,074 destinations in 177 countries.
All in all, these three airline alliances account for almost two-thirds of the total world airline capacity (ASKs). All but one of the world's 20 largest full-service carriers are now signed up to one of these, as can be seen in the case of the U.S. top three legacy carriers – American, Delta and United, each being part of one of the aforementioned alliances. And notice how many Asian carriers are part of them?
“Originally conceived as a small-scale agreement to cooperate made between two airlines, airline alliances have grown into huge and ambitious projects, aiming – in the words of the world’s biggest alliance – to “take passengers to every city on earth.” – Hopper.com
From slogans such as “The Way The Earth Connects” (StarAlliance), to “An alliance of the world’s leading airlines working as one” (OneWorld), these joint ventures, however, do have some disadvantages to contend with. These appear in the form of ‘bullying’ of one (or more) airline by other members of the alliance; or when a small carrier, for instance, Kenya Airways (part of SkyTeam), tries to establish itself in the midst of big legacy member airlines; or even when rivaling carriers join the same alliance.
When there is bad blood between member airlines, we get a situation that Qatar Airways currently finds itself with Qantas and American Airlines (A1G) (AAL) . Tensions reached a boiling point when on October 18, 2018, the CEO of the Group, Akbar Al Baker threatened to exit OneWorld, fed up with what he says is foul play from American Airlines (A1G) (AAL) as well as Australia’s Qantas.
American, together with Delta and United, have long made allegations that the flag carrier of Qatar is accepting unfair government subsidies. In addition, according to Al Baker, rumors about the airline have been “constantly spread” by Qantas in efforts to obstruct Qatar Airways’ (as well as Emirates’) investments and growth, Skift.com wrote at the time.
Qatar’s “ultimatum” was followed by China Southern Airlines’ (ZNH) definitive announcement on November 15, 2018, stating that it would leave SkyTeam on January 1, 2019. The carrier, which was the first Chinese airline to join the alliance (back in 2007), said it decided not to renew its contract, in alignment with “the company’s development strategy”.
Analysts put the very same American Airlines (A1G) (AAL) at the center of this controversy. Some have observed that the U.S. carrier had become more closely linked to China Southern after taking a minority stake in the company in 2017, The Jakarta Post reports. It is obvious that the U.S. carrier wants to gain a foothold in China, especially given the prospects of the Chinese travel market in the near future.
Meanwhile, reading between the lines, the “strategic development” that the Chinese carrier cites as one of the reasons for its exit from SkyTeam, reveals the company is aiming to distinguish itself from other Chinese airlines (its rival, China Eastern, is also a member of SkyTeam) and boost its global profile amid fierce competition back home.
"Our members will assess in due course the potential implications for OneWorld of China Southern's announcement that it is to leave SkyTeam," OneWorld was quoted as saying by The Straits Times. Here is to hoping that they can figure out the ‘deal breakers’ for their member airlines, and that more do not follow Qatar’s and China Southern’s suit. Establishing own joint venture partnerships may as well be a better choice business-wise for some airlines, as Oman Air believes.
Why would the national carrier of Oman not enter a major global alliance as its neighbors – Qatar Airways, Emirates (the UAE) and Saudia (Saudi Arabia) have? Oman Air maintains its position that joint ventures with codeshare partners can offer greater benefits than membership in an alliance. The airline has established partnerships with many carriers around the world, as well as keeping a special partnership with several select carriers.
“A small carrier in a global alliance is really unheard of. I believe the future is more about JVs and partners, getting other assets such as frequent flyer programs and lounge access,” CCO Paul Starrs was quoted as saying by ATW Online.
Food for thought.
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