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.

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