The End of Airline Alliances: Is Skyteam Crumbling, and Will it Just Be the First to Fall?

Several readers pointed me to an Economist piece on Skyteam’s crackup and the future of airline alliances.

SUMMER has not been kind to SkyTeam, one of the three big airline alliances, which has suffered two very public snubs by incumbent and prospective members. In late June Craig Kreeger, the CEO of Virgin Atlantic, said that his carrier’s much-mooted membership of SkyTeam was unlikely to materialise any time soon. “For now, Virgin Atlantic remains very happy with the partners we have,” he said, in reference to Virgin’s recent transatlantic tie-up with US-based Delta Air Lines. Less than a week later Reuters quoted a “source close to [Aeroflot’s] board” as saying that the Russian carrier would leave SkyTeam if its management could do so without political interference.

In fact, Skyteam has even more issues than that.

Flying Skyteam member Korean Air will no longer help Delta Skymiles members earn elite status (beginning September 1). Rumors are of palace intrigue, with Delta attempting to muscle Korean into a joint business venture.

Delta members can no longer book all of the Air France premium cabin awards that are available to Air France’s own members, and there are even discrepancies between what Delta members can book and the somewhat better inventory that non-Skyteam member Alaska Airlines can.

And even though Virgin Atlantic, which is now 49% owned by Delta, says they’re not on a path towards Skyteam membership and are quite happy with a bilateral relationship with Delta Skymiles, Delta members don’t appear to get access to nearly the business class award inventory that Virgin’s own members have — though Delta members don’t pay fuel surcharges on Virgin awards.

Alliances were supposed to represent seamless integration, a precursor to the current promise of ‘joint business ventures’ where airlines cooperated and coordinated to create passenger experiences that were nearly metal-neutral, it wasn’t supposed to matter which airline you flew as there would be alliance-wide product standards and assistance during irregular operations.

But there’s clear a degree of unhappiness in Skyteam. Although I fundamentally believed the dustup over Aeroflot’s desire to exit the alliance was overblown, if they actually were going to leave they wouldn’t be complaining to the media, instead they were using the media to signal their unhappiness as part of their bargaining strategy (they too are unhappy with Delta).

Nonetheless, is it really just about Skyteam, which Delta seemingly the axis of evil within that alliance? Certainly Skyteam could be a unique case amongst the alliances, it is already in many ways the weakest and least tied together. While they’ve tried to work on this, booking classes are far from aligned which means it’s difficult for customer service agents to put together awards on partners. They’ve been putting a good public face branding ‘Sky Priority’ it’s more PR than substantive changes at most airports. And the alliance is in many ways a collection of also-rans, not just the Vietnam Airlines and Czechs and Aeroflots of the world but they’re on a path to add Garuda Indonesia. Singapore Airlines they ain’t.

But it isn’t just Skyteam. Oneworld member Qantas severed its joint business arrangement with fellow oneworld carrier British Airways to do a deal with non-alliance member Emirates. This as Emirates’ Middle East megacarrier competitor Etihad bought into oneworld carrier Air Berlin (leading to speculation that it could be the UAE airline to join oneworld). And yet it’s Qatar that’s slated to join in a matter of months. And yet — though Etihad subsequently started getting closer to Skyteam carriers — there’s been speculation that it could still join oneworld (despite geographic overlap with Qatar) rather than pulling Air Berlin out of the alliance.

Star is the best integrated alliance, and the furthest along in joint IT investments. It’s also been free of public drama to a large extent. And yet some of the criticisms of alliances in the Economist ring true even for Star.

Speak to James Hogan, the CEO of Abu Dhabi-based Etihad Airways, one of the new breed of Gulf “mega-carriers”, and it will not take him long to broach the subject. “The traditional airline alliances have evolved into slow-to-respond, bureaucratic organisations which struggle to deliver added value to their member airlines,” he said recently. Mr Hogan believes that competitive pressures and a lack of uniformity will cause “fragmentation” in all three major alliances–SkyTeam, oneworld and Star Alliance. Willie Walsh, the CEO of International Airlines Group (IAG), the parent of British Airways (itself a oneworld member), recently called alliances a “poor substitute” for outright mergers.

…A senior executive at one of SkyTeam’s member carriers expressed admiration for these new, smaller partnerships. “Alliances are a thing of the past,” he told me. “It’s a bad solution to a problem which is basically about to disappear: that consolidation is impossible. The barriers [to consolidation] are going to fall sooner or later.”

In these criticisms of alliances is likely some truths that are less indictments about alliances themselves but recognitions of how much value they’ve already delivered coupled with a recognition of the limitations on their ability to deliver more. They aren’t a relic of the past, but they also may not be vehicles for the future.

  • Alliances allow airlines to provide services — some revenue, certainly reach, customer sharing, and mileage earning/burning across greater swaths of the world than individual carriers can offer on their own.

  • Alliances are a mechanism to grow virtually and quickly. They’re also a mechanism to do in the face of heavily regulated aviation markets. Landing rights are difficult negotiations from an individual airline’s perspective and that’s just to fly to a country, it’s rare indeed for foreign carriers to be able to offer flights within a country that is not their own.

  • Alliances also offer opportunities to coordinate customer service, share information, and even gain greater leverage in purchasing negotiations by offering significant scale.

But alliances — operating by consensus of large numbers of airline managements — move slowly. And they aren’t a substitute for mergers or direct control.

And local regulation likely isn’t going to go away in the immediate term. Limitations on foreign ownership are entrenched throughout much of the world.

Nonetheless, the benefits of alliances have mostly been capitalized. Alliances have pocketed much of the gains they possibly can, with many of the biggest airlines of the world already members. Largely the only untapped major markets have been the Middle East (with those carriers now in play), India, and until recently Africa (but South AFrica, Kenya, and Ethiopian are already alliance players — it’s a big continent but there are limitated developed airlines to work with). There are still opportunities in a growing China, though there are questions about continued growth over time in aviation there.

So airlines have incentive to belong to alliances, to extract benefits there, and to do side deals outside of alliances. But those bilateral deals do threaten the alliances.

Alliances aren’t going away any time soon, but there’s likely limitations on the incremental value that they can have, so they may remain relatively static and it does look like the future is in bilateral deals — and ultimately, eventually, should ownership rules falls across the globe, then alliances could begin to crumble. With Skyteam probably tumbling first.


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About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Interesting post and viewpoints. To me the partnership was already crumbling from day one. I simply don’t ever use Skyteam ever. Delta is a horrible program plain and simple and their miles more often than not unusable without extortion redemption rates. Need some statistical industry truth?
    Why would anyone with a choice choose what may be the worst FF program in the world ever for award availability? And from an Alliance perspective when I look at Star Alliance and One World as choices is Sky team even remotely a desirable choice? If I was in that shambles of an Alliance with my partners I would be doing everything to make it the most appealing alliance in the world with benefits, redemption ease and perks
    Sky Team/Delta are the least/last desirable choice for so many reasons!
    I especially find it appealing when traveling picking up my luggage and having to recheck it in the middle of my journey and go through security clearance repeated times but I have always liked falling off the roof of 110 story buildings.
    Selfishly I worry my Virgin Miles will become tainted/poisoned/ a victim with Deltas involvement

    I’m sure there will be some post here touting how great Skyteam is :)I’ll applaud it as I’m looking forward to flying BA in First on the new A380 on award. And at least I can get my seats on a product and brand I actually want to be on
    We already have enough competition for seats as it is in One World.
    Sky Team good luck to you.

  2. @Wandering Aramean – On the original Aeroflot post I say they aren’t about to leave Skyteam, they’re posturing and negotiating through the media. I said the exact same thing about them in this post. But it IS an example of unhappiness, not all is well in alliance-land. Alliances are useful. They’ve added value. But there are limitations to that value, they’ve mostly been maxed out. I think that’s a pretty consistent story, actually.

  3. @D Wonderment – Virgin miles will hardly be made worse by Delta, they’re already pretty limited in value… though i do have a bunch from (1) the Bank of America co-branded credit card signup bonus, (2) 1-day Avis rentals.

  4. Star Alliance is about as strong an alliance as you have, and the implication that even it is having challenges is overblown and completely unsubstantiated by this post. Clearly, SkyTeam is having big challenges, but then it always was the loosest and least coordinated alliance; calling it an alliance in the same sense as Star and oneWorld was always a misnomer to many, since it never gave the same benefits as the others. oneWorld certainly has a few challenges, but the framework of oW is smaller than Star’s, so it has more opportunities to extract value from bilateral deals which less threaten the whole. Star is the most closely integrated alliance, and the other 2 alliances don’t even come close. That is also why Star airlines have so many fewer bilateral agreements compared to their peers in OW and ST.

    So I’d say the future is brightest for Star Alliance, and that SkyTeam is risking devolution into a bunch of loosely tied airlines with a complex and unorthodox set of bilateral agreements between themselves and various other airlines. Each has its own pluses and minuses for the various airlines, but it is clear from a global perspective that Star continues to offer the most benefit to its frequent flyer members with mileage earning and redemption opportunities available on more airlines in a fairly seamless manner. Star is best positioned to take advantage of the complications of the others, and therefore is best positioned to weather the coming adjustments as the Middle East carriers throw a wrench into the works. Star’s decision–largely due to Lufthansa–to avoid the Middle East Big 3 carriers may turn out to have been the smartest play. Taking Turkish allows Star much the same routes but without the direct competition and loss of competitive advantage it already has.

  5. i think oneworld is the one that’s crumbling even more

    BA likes QR
    QF likes EK
    EY partially owns AB and works closely with VA, biggest competitor of QF

    CX doesn’t talk to QF
    IB is strategic but financially a dud

    I think AA is the only glue left to hold the entire oneworld together

  6. I don’t understand the Virgin comment. They’ll do whatever they want and operate at a loss and enjoy it. They’re just different.

    Also a joint venture agreement is one step beyond an alliance, so ending that is not ending an alliance relationship. Honestly I think it’s good that QF and others can work on their own partnerships where it works for them, and that it can make the alliance more competitive.

  7. You give Garuda quite a hard time. I don’t know if you’ve tried them but they quite a good airline, especially in business class..

  8. Wait a minute? First you go on Television praising and telling the whole world how much you love your dear domestic partner (Skypesos) and then you tell us that your partnership is not really doing that well….oh time to call the Maury Povich show and tell the truth ! Lie detector please !!!

    🙂

  9. I agree with Patricia that OW will be the first to fall apart. A couple more data points:

    – mileage earning between QF and MH is atrocious despite the fact QF sponsored them in – and then jumped out of bed and in with Emirates
    – CX recently announced cooperation with Air New Zealand
    – OW is the only alliance which doesn’t charge members exit fees, which allowed Aer Lingus to jump ship so easily when they realised OW membership didn’t deliver

    If James Hogan is right and smaller alliances are the future, airlines trying to replicate Etihad/Alaska/Virgin Australia who are members of Star could be at the biggest disadvantage – I understand their exit fees are the largest.

    As for referring to airlines as also-rans, I hope all your other analysis isn’t as flawed and prejudiced as this. Flying Garuda is a much closer experience to Singapore than to a real horror show like having to board United Airlines.

  10. While there can be little debate that ST is the loosest of the three alliances, you cite some things about ST that are also the case about Star…most notably the blocking of partner awards. LH, LX and SQ, purported by many to be crown jewels of Star, releasing meaningfully less award space (or nil, in certain cases) to partners than they do to their own FF members. While no one has this down better than DL, but US, a soon-to-be-former member, also took the step of blocking its own members from available awards on partners!

    You knock GA. GA ranks a few notches ahead of Star powerhouses MS or TP!

    Of two of the worlds three biggest growth markets for aviation (Gulf, China, India), Star is not in the lead amongst the alliances in any of them.

    Despite the QF/BA dust-up, OW still feels like the tightest of the alliances. They’ve got the right mix of quality carriers without too many superfluous members.

  11. Appreciate the detailed analysis, gives a more in-depth look into what I have always considered as just convenience for consumers to have greater geographic reach.

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