Airline Alliances: The Good, the Bad and the Ugly

3airallies1One of the truly innovative aspects of airline services in recent years has been the emergence of airline alliances. We’re talking about Star Alliance, SkyTeam and OneWorld. By innovation I imply the successful commercialisation of a new idea or invention. I am also not referring to technological innovation in aerospace either – since it is clear that the development of faster, more comfortable and less environmentally harmful aircraft has also dramatically changed the way we fly today.

These alliances are innovative because I believe they have improved the commercial success of the airlines and they do create value for customers in a way that could have not been generated in their absence.

Before the alliances began, customers were either limited on the number of routes they could take with a given airline or offered specific joint venture code share routes. Their luggage was handled by broad inter-line baggage agreements and frequent flyer programs were restricted to one airline so if you flew a lot with Lufthansa (LH), you could only collect membership points with LH.

Contrast that with the world of alliances. Today, Lufthansa customers can check in on All Nippon Airlines (ANA) flight in Tokyo, connect in Frankfurt onto a LH flight to Sao Paolo and then transit on to a TAM flight to Buenos Aires – all within the same alliance with their baggage being handled with a single baggage number, membership points collected on all segments of their journey across three member airlines and if they have elite status with their airline, they can access the business lounges of all the airlines involved in the journey. As far as possible, the airlines have also attempted to harmonise flight schedules so layover times are also reduced.

Described this way, I can think of few reasons why airlines have not improved the flying experience for customers and enhanced the efficiency of the operators themselves.

In my post today, I’d like to add some nuance to the description above aimed not at criticising the airlines for having alliances but ways in which we may constructively criticise the management of the alliances as well as raise concerns we may have over public policy and competition raised by the existence of these alliances.

The Good

Much of what I have described above constitutes the good – from the passenger perspective. From the airline’s view, alliances also serve important purposes. First, they enable alliance airlines to more effectively rationalise their route network – instead of operating two flights a day on the same route within the alliance, they can offer one flight. Second, they can reduce duplicated investments in facilities by sharing check-in, ground and lounge facilities. Third, they can co-brand and co-market their services through the alliance umbrella. Fourth, they can learn from each other about ‘best practices’ in technology and service quality. Finally, by being part of an alliance they can increase their competitive position in the industry – because of the reasons above.

The Bad

There is a question of optimal alliance size – both from a strategic, tactical and organisational perspective. From a strategy point of view, at what point does having too many alliance partners weaken the value proposition of individual airlines within the alliance? For example, does Singapore Airlines’ reputation for quality get diluted when they code share flights with US Airways who don’t have the same industry and customer reputation? Related to this is the consistency and quality of shared resources and facilities; training of staff and implementation of technology systems across the alliance. Based on research I have done with several airlines, the three airline alliances have rigorous standards that alliance members need to follow – my subjective impression is that Star Alliance is the most rigorous but I have been contradicted by managers at partner airlines of SkyTeam on this.

On a tactical level, an alliance needs to harmonise approaches to service whilst not diluting the individual identity of the airlines themselves. While I am sure that there are many reasons why Emirates, Qatar, Etihad and Virgin Atlantic have refrained from joining an alliance, one of the reasons is the perception that their service quality (backed by the culture at these airlines) would be damaged if they begun to cooperate with airlines that devoted less time and resources to training of staff, building service excellence and so on. If membership of an alliance can raise the quality of the service that is provided than that’s excellent. However, if it drives service down towards a lowest common denominator than it is not so desirable.

Lastly, on an organisational level, the biggest alliance – Star Alliance – has 27 member airlines. Managing this alliance requires a dedicated management and staff cadre. Presumably, as more members join, diverging interests may grow within the alliance causing difficulties with decision-making. My unscientific hunch is that a strong alliance has a “variable geometry”. At the core of the alliance is a strong airline (or couple of airlines) that drive change and structure. Other airlines, while being members, are less proactive and tend to accept initiatives rather than pushing for them. Naturally this may also be related to the size of airlines – larger, more comprehensive players have more weight in decision-making.

The Ugly

I have one main concern about airline alliances – the potential for reduced competition and greater risks from alliance information sharing that may lead to anti-competitive conduct. To what extent is membership of an alliance a ‘back door’ merger strategy designed to reduce competition or price coordination? I have always felt that OneWorld was developed by American Airlines (AA) and BA to facilitate a merger between them. Lo and Behold, several years later BA, AA and Iberia merge to form the International Airlines Group (IAG). The strong position that IAG holds for transatlantic routes speaks for itself. By initially forming an alliance (OneWorld), doesn’t BA and AA implicitly strengthen their hand in a future merger investigation with regulators? A future blog post will focus on ‘fuel surcharge’ but for the moment, consider how alliances may allow airlines coordinate pricing and non-ticket price charges such as fuel surcharge using the alliance as cover for cooperation. By being able to sell tickets on each other’s planes, doesn’t this implicitly allow airlines within an alliance to harmonise ticket prices?

Advertisements

2 thoughts on “Airline Alliances: The Good, the Bad and the Ugly

  1. Hi Yus,

    I’d like to add to the ugly bit, having worked for an airline for some years. Net fares and fuel surcharge (the so called YQ) are being fixed to such extent that we cannot even begin to imagine. You don’t even need an alliance to do that, you can easily sign a code share agreement for a given route and you have that immediately. Having in mind airlines from different alliances can sign code share agreements between each other puts the conspiracy theory at a whole new level. However, I do believe there is no conspiracy there, but fare fixing is beyond doubt. Take the simplest fact that they all know each others fares well ahead of time, that information is easily visible in Amadeus reservation or any other ticketing/reservation platform for that matter. Knowing their fares on a route where they compete, they immediately set their available fare to match their counterpart. If you check their tariff structures you will see they are almost, not to say completely the same.

    1. Thanks Danyo for the insight. Very interesting information. I agree that is not a conspiracy per se more like tacit collusion. By the way, my next post next week is on fuel surcharge. Hope all is well with you!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s