Willie Walsh Has Plenty to Say About Alliances and Acquisitions at CAPA’s Airlines in Transition Conference

My time in Dublin wasn’t just spent drinking Guinness and learning about Travelport’s new merchandising platform. The main event was the Centre for Aviation’s (CAPA) Airlines in Transition conference. The gathering was an interesting one with the highlight being the dinner debate involving several airline CEOs.

Ultimately, there was a lot of industry dorkiness involved, but there was also a lot of good conversation on topics that would interest even the casual traveler. It’s always a party when IAG (parent of British Airways and Iberia) CEO Willie Walsh is around. He is never one to mince words. In particular, I thought there was a lot of good talk about the future of alliances, so I thought I’d share that here.

BA Mistress from Oneworld

First off, Willie isn’t a fan of alliances at all. Wait. What? How could a founding member of an alliance not be a fan of them? It’s because he sees alliances as the best option available, even though they aren’t ideal.

The reason alliances exist is because we can’t consolidate and alliances are a poor substitute for proper consolidation.

Amen to that. Because of foreign ownership rules (no foreign entity can own more than a quarter of a US-based airline and rules are similarly restrictive in other countries), true global mergers can’t happen. And that’s a shame, because as Willie notes, mergers always trump alliances.

Alliances give you revenue synergies, but consolidation gives you cost and revenue synergies.

In general, nearly everyone at the event agreed that foreign ownership restrictions are stupid and should be abolished. But that’s not the case today, so we have to work with what we have. And that means alliances have an important place in this industry.

But what’s really interesting is seeing how different alliance members approach the idea of an alliance. An alliance like Star Alliance is incredibly strong, but you see few partnerships outside the alliance itself. Outside of regional partnerships, for example, United has just Aer Lingus and Jet Airways as minor partners.

oneworld looks at things differently. The way Willie sees it, alliances are great, but they are not exclusive. Airlines will need to go outside alliances to fill gaps. That’s why Willie supports what you might not think he would. That Qantas and Emirates tie-up that left BA out in the cold? In his eyes, the move “was clearly right for Qantas and for Emirates.” He didn’t seem fazed.

There’s a lot more happening in the gulf with oneworld carriers that seems strange from an alliance perspective. American is aligned with both Abu Dhabi-based Etihad and Bahrain-based Gulf Air. As mentioned, Qantas, which was aligned with BA for Europe service, unwound much of that relationship and instead tied up with Emirates based in Dubai (a mere 70 miles north of Abu Dhabi). While all this was going on, Qatar Airways, just a couple hundred miles west of Abu Dhabi and Dubai, joined oneworld. What a tangled web. But if it works for each individual member, then it works for the alliance; at least it works for THIS alliance.

I think Willie put this best when he quoted someone he would only identify as a member of another alliance… “Just because I’m married doesn’t mean I can’t have a mistress.”

For an airline like American, that means a whole host of partners including Air Pacific, Air Tahiti Nui, Alaska, El Al, Etihad, Gulf Air, Jet Airways, jetBlue, and WestJet. Willie thinks “it might not be necessary for American to have as many partners as it has, but there’s no reason it can’t exist.” For its part, BA has only relationships with Aer Lingus and Alaska Airlines. But its parent is more focused on consolidation right now anyway.

IAG was formed when both BA and Iberia were merged under one roof. Now there is also Iberia Express, an airline that was solely formed to operate short haul flights from Madrid at a lower cost (40 percent lower non-fuel costs, actually). This was all about lowering labor costs, and Willie readily admitted that if he could have, he wouldn’t have bothered starting Iberia Express but he had no choice to get costs down.

Now IAG is expanding again as it closes in on acquiring the piece of low cost carrier Vueling that it doesn’t already own. I find myself wondering if IAG would have bothered buying Vueling if it didn’t already own a little less than half of it. But Willie is convinced this will work (of course) and intends to keep Vueling operating as a completely separate entity.

I believe it can be done. Can a profitable full service carrier run a profitable low cost carrier? What has been happening is that an unprofitable full service carrier takes over a profitable low cost carrier and then brings it down.

The jury is most certainly still out on that one (mostly since it has never successfully occurred). But when it comes to alliances, the results are clear. They provide real benefits that can’t be achieved elsewhere until cross-border merger restrictions are lifted. But there won’t be a single approach to alliances, and oneworld seems to be keen to keep a looser rein on things than others.

[Original cheating photo via Shutterstock]


13 Responses to Willie Walsh Has Plenty to Say About Alliances and Acquisitions at CAPA’s Airlines in Transition Conference

  1. A says:

    Re: foreign ownership rules. BA want’s to consolidate rather than form an alliance so if the rules were waived where does that take us? BA could buy a struggling US carrier like AA and do what? Reduce capacity on long haul intercontinental routes? I don’t see how it would change anything on the domestic side (from a consumer perspective) except where management sits. Is the cost savings entirely in having less management? Consolidated maintenance? What?

    Don’t get me wrong, I agree that less regulation the better, but I’m trying to see the positive in a European or Asian carrier having controlling ownership in a US airline, likewise a US carrier owning an airline across the pond. I see why business would want that but from a consumer perspective – after seeing lots of consolidation domestically with no real positive outcome how would this be any different?

  2. Bravenav says:

    The European airlines don’t seem to want to consolidate even after they are allowed to merge. BA still operates Iberia as a separate airline, incurring additional cost and stifling additional revenue. Likewise Air France and KLM refuse to consolidate even though AMS and CDG are less than 250 miles apart. Lufthansa continues to operate Swiss and Austrian in competition with its own flights. Lufthansa could be a much stronger airline to Eastern Europe than it is if it would consolidate the Vienna hub to Munich (or vice versa). It seems that the national pride of each country having its own airline trumps network efficiency.

    • Rory says:

      No – these airlines must remain distinct entities to retain many traffic rights. A lot of non-EU countries have bi-laterals with Holland that only a Dutch carrier (KLM) can operate. The same holds true for Iberia, Swiss, etc.

      That’s why companies like IAG develop complex ownership structures to ensure, for example, that Iberia remains majority “Spanish” under international law.

      • MathFox says:

        Another issue is “what language is spoken on the flight deck.” It would be less of an issue with Lufthansa, Swiss and Austrian that could standardize on a South-German dialect, then it is for BA-Iberia (English or Spanish) and AF-KLM (French or Dutch).
        And even with multiple operating carriers in one holding it still is possible to consolidate on maintenance, ground handling, procurement and such.

  3. The big three alliances (Star,Oneworld,Skyteam) are nothing but PR alliances. Each may look good by listing a bunch of airlines, but travel is mostly on just a few carriers on each list. It might benefit the airlines more to just have a small group, and forget about trying to fill gaps with any old carrier they can get a hold of.

    People tend to forget (or not know) that carriers have ticket agreements with tons of airlines all over the world and can get you from anywhere without having to use an alliance and pretend they are flying you by booking other airlines under a codeshare agreement which is a whole other scam that fouls things up.

  4. SEAN says:

    ?Just because I?m married doesn?t mean I can?t have a mistress.? That is a priceless quote.

    Could you imagine the impact of AA & BA as a single company? The ramafications would be enormous, even in unexpected ways. First of all UA & Dl would natually feel pressure to do the same. Second there will be flight cutbacks & increased prices on consumers forcing some if not many to avoid flying all together. Third the US & Canada don’t have the mass transit infrastructure that other countries have, causing more cars on the road. I’m sure there are plenty of other impacts both obvious & not so obvious that I’m not thinking of, but it’s a start.

    • CP says:

      Not too mention you’d have to pay BA’s ridiculous “fuel surcharges” on every frequent flyer redemption.

  5. Jim says:

    Carriers can already apply for antitrust immunity for particular routes. That is practically a merger in all but name. It certainly provides both “cost and revenue synergies” as Walsh notes.

    It sounds to me like the airlines are just whining and trying to blame the government for their poor management. I don’t believe that international consolidation would solve anything. Bigger is not always better.

  6. I’m curious if AA will continue its current alliance strategy once Doug Parker takes the helm, if not does that mean that Oneworld will become more like Star Alliance.

    In other news, BA in the picture above can cheat on oneworld with me. :-p

  7. I wonder if too many mergers would create more problems than solutions. From what I understand, the four large U.S. freight railroads have chosen not to merge into two coast to coast carriers because taking that next step tends to reduce the number of interline and routing possibilities.

    In some ways, too much consolidation may potentially be as harmful as too much fragmentation.

    I do think more consolidation is necessary outside of the U.S. But, in the end, it may be better to have three large airline alliances instead of three huge, inflexible world wide airlines.

  8. Jorg says:

    Not many mainline airliners have made a low cost carrier work under their wings. There is, however, one exception: Air France/KLM has Transavia. Even though Transavia isn’t extremely low cost (like Ryanair), it’s a nice competitor of EasyJet. Not by far the same size (58 vs 5 million passengers last year), but especially here in The Netherlands very popular!

    Funny enough, AF/KL is a combination of two airliners from two countries, where the low cost daughter is based in the country of the smallest, while IAG… oh hold on… exactly the same ;). Transavia was bought 25 years after starting, Vueling 9 years.

    Then, when you look at the low cost carries actually started by a mainliner… Go Fly (started by BA, bought by EasyJet), Buzz (started by KLM, bought by Ryanair) are the most relevant here. Didn’t work.

    So, I guess Vueling under IAG’s hood could very well work, as long as they keep it run separated. Just waiting for Vueling to open a base in the UK (as Transavia did in France ;) ).

  9. Sanjeev M says:

    Speaking of alliances, it seems the Jet-Etihad deal is going through! Jet is pinning its entire future on this basically.

    1. Revenue enhancements. Oh yeah. 23 Indian cities (including regional cities) with direct to AUH and onward transfers to EVERYWHERE. 53000 weekly one way seats by 2015. Finally someone to put EK to the test. This could be the COPA equivalent of India.
    2. Cost reduction – they say joint purchasing of fuel, etc. and help with financing. Given that there’s a financial stake involved there will be cost reduction

Leave a Reply

Please use your real name or nickname instead of your company name or keyword spam.