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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