Could Airline Alliances Be in Trouble?

As always, this year’s Phoenix Aviation Symposium was packed with great, thought-provoking discussion. A few of us were constantly posting updates on Twitter under the #PHX2012 hashtag. I’d suggest taking a look if you’re interested. But there were small Goodbye to Alliancesnuggets that came out throughout the conference that I thought deserved a deeper look. First up is the issue of joint ventures and whether they might actually mean trouble for airline alliances.

Andrew Watterson, Vice President, Planning & Revenue Management for Hawaiian Airlines made a comment during the strategy panel that caught my attention. He explained that while Hawaiian is “outside an alliance, we sense the friction between joint venture partners and non-joint venture partners. I can’t imagine what that’s like inside the alliance.” In the end, he suggested that with airlines like JetBlue and Hawaiian (you could throw Alaska in there as well, domestically) offering partnering opportunities without an alliance, some members might start to think twice.

What’s the Difference Between an Alliance and a Joint Venture?
But first, we should back up. Let me explain the difference. Most of us know what airline alliances are. The big three are United-led Star Alliance, American-led oneworld, and Delta-led SkyTeam. These alliances are really focused on providing reciprocal benefits to members of each frequent flier program of the member airlines. You can earn miles (even elite qualifying miles) on all member airlines, and if you’re an elite member, you will get reciprocal benefits like priority boarding, lounge access, etc. There is limited cross-upgrading opportunity between some members but that benefit isn’t a very strong one at this point.

These alliances, are full of independent airlines that still compete with each other, even though they may be partners. When US Airways flies from Philly to Chicago, it is going head to head with United in that market, for example. United and US Airways do codeshare, and that allows them to expand their reach, but it’s not a requirement to codeshare to be an alliance member. In other words, it’s a fairly loose commercial cooperation at its core.

A joint venture, however, is a different story. The idea there is that two or more airlines agree to put all revenues into a big pot for travel in a geographic area. The money is then divided up between the airlines depending upon how much they fly. A good example of a powerful one today is the Atlantic Plus Plus venture led by United and Lufthansa. This also includes Lufthansa-owned Austrian, bmi, and Swiss as well as Air Canada.

The idea is simple. Since governments like that of the US have not been willing to allow mergers across borders, a joint venture is as close as airlines can get to merging under the law. Today, if you fly on a Lufthansa airplane or a United airplane, United shouldn’t care. It works with Lufthansa to coordinate schedules and pricing, and it splits the revenue up. (It’s not as simple of a split in actual terms, because there are adjustments depending upon a variety of factors but let’s not make this too complex.)

Now think about an airline like US Airways. US Airways is a member of Star Alliance, but it is not a member of the joint venture. While US Airways can connect people from all over the US to Europe, Lufthansa now has less incentive to put people on US Airways. Why not connect passengers within the US on United instead where it stands to gain? Lufthansa can keep more of the revenue that way, in all likelihood. It can also work with United to study traffic flows and arrange top connections to be as convenient as possible from a scheduling perspective. US Airways theoretically loses out.

I say theoretically, because in reality US Airways is doing just fine. In fact, I asked President Scott Kirby about this at media day last week. He responded that they are happy to consider joining the joint venture, but their transatlantic flying is doing so well that they would end up having to pay more out because of that. That’s not ideal, but if it starts seeing less benefit from the alliance, you would think it might have second thoughts. Certainly it might think twice about joining today if it weren’t already a member.

Getting Back to the Point . . .
But let’s get back to Hawaiian’s point. There is a feeling of haves and have nots. While US Airways is an incredibly rational airline that looks at numbers above all, not all alliance members will feel that way. There is bound to be a tension that grows when those airlines that feel left out think they deserve to be a part of the “in crowd.”

In the past, even those emotions were too hard to act on since the revenue from cooperation was so good. But if there is an alternative, then does that sway things? The airlines that use this, as JetBlue calls it, “open architecture” which allows for partnerships with any interested airline, have been growing quickly. They provide more schedule options and feed opportunities each day. So at some point, do airlines get fed up with alliances and start going it alone?

It’s incredibly rare for an airline to leave an alliance unless it goes under, but it has been done. Aer Lingus was a member of oneworld but is now independent. It has been aligning itself more closely with JetBlue to the point where there has been discussion about JetBlue buying a stake. There was a discussion last year about Aer Lingus rejoining an alliance, but the costs to join are steep and Aer Lingus didn’t think it could get enough benefit. With more successful niche airlines looking to go it alone, the temptation to stay out of an alliance may very well become a desirable option, especially as core members get closer and closer via joint ventures.

29 Responses to Could Airline Alliances Be in Trouble?

  1. D-ROCK says:

    I think where most get confused (and even I did until Cranky schooled me), is that many think to ticket together or get bags checked through requires an alliance or partnership, whereas in reality, all this requires is an interline ticketing and/or baggage agreement. It is amazing how even agents at the airport only think that bags can be checked through to their alliance partners and don’t even bother trying to tag bags through to “other” airlines that aren’t part of their alliance. Cranky, can you speak to the differences between an alliance and interline ticketing/baggage?

    • Rohit Rao says:

      To be in an alliance, you must have an interline ticketing and an interline baggage agreement in place with all other member carriers, among other agreements.

      To be on a single ticket with multiple carriers, the carriers must all have interline agreements with at least 1 operating carrier, so the ticket can be combined on that carrier’s ticket stock.

      To have bags transferred between 2 separate airlines, the airlines must have an interline baggage agreement in place.

    • CF says:

      I think Rohit covered this from a mechanical perspective, but a T&B (ticketing and baggage) agreement is all that’s needed to allow for airlines to sell tickets on each other and transfer bags. Alliance members all have this, but really they’re mostly about frequent flier benefits being transferable from a customer perspective. There’s more behind the scenes in terms of purchasing power, but people won’t really see most of that.

      • JL says:

        D-Rock, in the days of cost-cutting, airlines focus on interlining with their alliance partners. For instance Air Canada and Air France has discontinued interline agreement with over 50 carriers (it could top 100, but the number is not the main issue here) in the past few years. This directly affects agent’s mentality, thinking Air ABC will only interline with Air DEF , not Air GHI, because ABC and DEF are in the same alliance.

        Think these terms as a pyramid, from bottom to the top:

        Interline – Basic partnership between 2 carriers for T&B.

        Codeshare – Airlines placing their own code on another carrier’s flight, requires T&B Interline.

        Alliance – Airlines working together closely, in addition to codeshare and T&B Interline.

        Joint-Venture – “Virtual merger”, all-in-one, including interline, codeshare, alliance.

        However…
        1) you don’t need to codeshare with one another within an alliance
        2) codeshare does not mean interline (which EVERY media makes this mistake)
        3) Depends on the depth of airline cooperation, some choose to call “partnership” (codeshare) and some choose “alliance”, it’s all about airlines manipulating with what word to use
        4) It is possible to coordinate routes and schedules at the alliance level, without JV. But you can’t coordinate pricing and joint-marketing without JV

        Answer to question below on “why should alliance be in trouble”. It will be in trouble with government regulators every once a while if someone (public or regulator) filed a complaint (just because they have nothing better to do) about monopoly. These days on trans-atlantic flights, although there are over 20 big ones operating, but the reality is, you really only have 3 to choose.

  2. Jason H says:

    Given the disparity of amenities between alliance partners they really only serve to annoy some people. Singapore vs US Airways for example. The alliance is theoretically great for the frequent flyer, and to some degree the airline, since it makes choosing which airline to fly to a location that your primary doesn’t fly easier as long as an alliance partner flies there, but I think airlines like JetBlue, Hawaiian, and Alaska are a much more powerful player since they provide a common point for several potentially distant airlines. In the end it seems a smart strategy since they attract passengers from their core group of loyalists as well as passengers from multiple other airlines that need to go somewhere only they serve without all the overhead and political issues that come with an alliance.

    • Sanjeev M says:

      More options and more possible routings is always better.

      Unless you have a critical mass like EK or a unique niche like Alaska, I would think an alliance is necessary. I remember a graphic on Cranky that showed that 40% or more of every US Airways flight to a Star European hub connected onward with the LH Group/SAS/Other Star carrier. That is significant so US will stay in the alliance.

      • CF says:

        Ah yes, Sanjeev. That was from a couple of media days ago, I believe. There is significant transfer traffic there, but I do wonder if an alliance is really pushing that or not. I mean, could they get that traffic flowing if they just had a partnership in place? Ultimately, I don’t think US Airways will leave (unless it’s for AAnother AAlliance) but that’s because they’ve already paid their dues to join up. I do think US Airways wouldn’t bother today if it was on the outside looking in.

  3. I think alliances do their best job at fooling the public into thinking they need to fly them because that’s the only way flying can be done. That’s bull since nothing has changed since before alliances came to be. As was D-Rock said interline agreements are still around and used more then alliances I bet. AA can still sell a through fare that connects them to LH and check bags all the way to the destination as an example. Except for the mileage issue, everything else is the same as it’s been for decades prior to alliances. Well tricking the public on who they are flying is all alliance based, you’re on four AA flights except not one flight is operated by AA.

    • But one of the things alliances do is that they make it evident to the public that airlines work together. This is something that your travel agent used to check for you, but now that very few folks use travel agents alliances seem to be more important, plus you get connect times minimized in theory..

      Do others agree that Alliances are related to people booking their own tickets?

      • Rohit Rao says:

        I would say that people booking their own tickets are related to alliances – alliances make the process easier for customers, but I’m pretty sure that alliances came first, and for entirely different reasons.

  4. Skiurlaub says:

    I´m researching for my studies about airline mergers and I came across this blog.
    But I think I didn`t get the point. Why should alliances be in trouble?
    What is the benefit if they go alone? If I understood it correctly then Lufthansa is just doing fine beeing in the star alliance and a partner in a joint venture.
    Or is it just the mentioned friction between all involved parties which could destroy the alliance membership or are there further legal constraints?
    Anyhow what is best for the customer?

  5. Dan says:

    Keep in mind that airlines have additional partners outside of the alliance itself. AA, for example, has a dozen non-alliance partners, including Alaska and Etihad. TBH, the biggest downer for not being a one-world member is that AA won’t let you book their distance-based “one world awards” with them.

  6. Was there much conversation re AA’s bankruptcy and possible mergers?

    • CF says:

      There was certainly some discussion about AA’s bankruptcy but not nearly as much as you’d think there would be.

  7. Rob Mark says:

    Good piece.

    As you and I have spoken about many time Brett, alliances might be good business for the airline, but from a customer standpoint they pretty much stink.

    And in case you’re wondering, NO … Iberia never did give me my miles for the trip to France. Of course I swore off of them anyway after my last ride … too scary.

    Rob

    • Bill Hough says:

      Rob: “As you and I have spoken about many time Brett, alliances might be good business for the airline, but from a customer standpoint they pretty much stink.”

      Yeah, that’s my conclusion also. I could never figure out any benefits to consumers from these alliances, unless you’re a mega frequent flyer who gets perks.

      • Jason D says:

        But then again, what are the downsides of an alliance?
        I like the fact that you can earn miles on alliance partners so I only need 2-3 frequent flier accounts for all my travel. Otherwise, I don’t really see any significant advantages or disadvantages – but that’s still better than nothing.

    • CF says:

      Rob Mark – I’m actually not against alliances at all. Codesharing, however, drives me up the wall. But the standardized reciprocal benefits across alliance members? Those are great. I’m not against those at all; just codesharing.

      • JL says:

        CF, I never understand what’s with the problem and the so-called “false advertising” criticism of codesharing. So it’s considered “false advertising” when you buy UA ticket but ended up on LH aircraft, but it’s not when you earn UA miles on LH aircraft?

        • CF says:

          Why would it be false advertising when you earn United miles flying on a Lufthansa airplane? If I’m a traveler, I buy a ticket on Lufthansa. If I find out I can earn United miles because they are partners, then that’s great. Maybe I planned that trip because I knew they were partners and I could earn miles. There’s nothing misleading about that.

          With codesharing, however, people buy one thing and then get something different than they expected.

          • JL says:

            I’m referring to when a passenger buys UA tickets but ended up on LH aircraft, not buying LH ticket and flying on LH aircraft.

            If one buys ticket with UA, on a UA-coded flight but flying on LH aircraft, why should this constitutes “false advertising” when you can still get UA miles (apart from getting something different than one expected)? Based on this type of logic, one shouldn’t earn miles on codeshare flight too.

          • CF says:

            Because it’s not all about mileage earning. (For me, it’s not about mileage earning at all.) It’s about very different onboard products. It’s about different levels of safety, reliability, and financial solvency.

  8. Rob Mark says:

    To Jason’s point about frequent flyer miles … “Don’t get me started.” Cranky and I did a podcast over at Jetwhine last month simply because of the the miles AA wouldn’t give me on a trip I flew with Iberia.

    American said call Iberia because they’re the partner. Iberia said that because of an equipment problem we had at ORD and the fact that they sent me on yet another carrier, I wasn’t entitled to anything … something I really protested since they AA agent at ORD promised me I’d get the miles.

    And honestly, not that the miles are life or death, but the partner/alliance thing or whatever the heck you call it — help Brett !! — just doesn’t work when there’s a problem. Every partner airline looks at the other guy and says it’s their fault.

    AA really doesn’t care that I’m a Platinum, Gold, Elitist, Superior flyer … or whatever they call it. In their mind it’s Iberia’s fault. And BTW, I did try calling Iberia. They said a frequent flyer problem could only be dealt with by the big mucky-mucks in Madrid. So could I please plan seven hours ahead some morning and call them before siesta time over there.

    Give me a break.

    Rob

    • Argh, this is exceptionally poor customer service.

      IMHO the airlines in an alliance should each take care of their own customers, then have a way of billing back the miles to their alliance partner. They probably know from internal experience that they need 1 mile per 1000 for customer recovery. Product manufacturers work the same way. A retailer orders 1,000 units, the manufacturer ships 1,003 units and if upto three are defective the retailer eats it. If five are defective the manufacturer reimburses for two units. Etc.

      IMHO you are more AA’s customer than Iberia’s so AA should’ve taken care of you and hashed it out with Iberia on the back end.

    • Rohit Rao says:

      I listened to that podcast… While it did shed light on the fact that codesharing can be a hassle for customers, practically every move you made or complaint you had made me cringe from a technical perspective. A lot of the problems were so easily solvable/explainable by a CSR, yet nobody bothered to explain…

    • Jason D says:

      That’s just a problem with AA, not alliances in general. This has happened to me too (on United, Delta, former Northwest) and I’ve never had any problems.

  9. cook says:

    And, these days, if one is not a ‘status achieved’ flyer, or not paying cash for that “J” fpr “F” seat, you are +/- screwed. Well, someone always has to be the last to board and lots of folks still sit in the back of the bus. If one wants anything better than Ryan’s idea of standing room, it is going to cost – a LOT.

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