Question

Global Airline Alliances, Airline Joint Ventures, and Network Difficulties

Star Alliance (initiated by United Airlines) became the first multi-airline global network where member carriers could book seamless schedules and share frequent flyer benefits among their passengers. It was a convenient way for airlines to expand and maintain market share internationally without having to invest billions of dollars in market growth initiatives. It gave alliance partners airport access in regions where it might be difficult to obtain. Many of the partners also have aircraft maintenance agreements, which can create savings as well as avoiding expensive duplicative maintenance facilities around the globe. The Star Alliance was followed by Oneworld (headed by American Airlines and British Airways) and SkyTeam (headed by Delta Airlines and Air France-KLM).

In 2016, Star Alliance topped the list of alliances with 23 percent of total traffic, followed by SkyTeam with 20.4 percent and Oneworld with 18.8 percent, leaving a 38.8 percent market share divided among smaller alliances and unaligned carriers. This shows the importance of these global networks to the travel system and to the airlines involved. These alliance networks exist largely due to regulatory ownership restrictions; for example, foreign airlines cannot own over 25 percent of U.S.-flagged airlines and foreign carriers cannot own over 49 percent in EU countries. These restrictions are often justified in terms of country security and military needs; for instance, if a war breaks out, the national military system may need airline capacity to move troops in an emergency.

These alliances are, however, quite mature and they are trying to stay relevant as many of the flagship airlines have merged and have large systems in their own right, such as the Air France-KLM merger, Delta’s acquisition of Northwest in 2008, and United’s acquisition of Continental in 2010. Delta Airlines, for example, is continuing to enter into separate joint venture (JV) ownership arrangements to improve its scale and control. Delta has recently launched JVs with Aeromexico and Korean Air. It also formed a very large JV with Virgin Atlantic of Britain and Air France-KLM. It is also seeking to make deals with low-cost carriers such as Canada’s WestJet, China Eastern, and GOL of Brazil. One analyst noted that these JVs “produce 90 percent of the cost savings of a full merger,” where the global alliances can only participate up to 25 percent due to the ownership restrictions noted above. These JVs work for the regulators because the parent firms are still independent airlines. As such, although the global alliances are still important, many airlines are pursuing additional joint ventures as the Delta Airlines example suggests.Jets from Thai Airways, United Airlines, Lufthansa, Air Canada, and Scandinavian Airlines Systems, form a star to mark the launch of Star Alliance.

Because of the maturity of these dominant global alliances, they are expanding with more flexibility to gain share. For example, the Star Alliance added Chinese carrier Juneyao Airlines recently, as an experiment with a “connecting partner” model, which allows regional, low-cost, or hybrid airlines to link to the Star Alliance network without becoming a full member, which can be expensive for a small carrier. SkyTeam and Oneworld are also working on affiliate member schemes. These “affiliate” members would not be required to take on expensive technology improvements, which the large alliances are developing, such as a common digital services platform allowing passengers to always be connected to the Internet. Full membership in these alliances also usually requires “fast-track security, priority boarding and check-in, as well as lounge access” which low-cost airlines often do not pursue.

Frequent flyer programs among some airlines are also changing from a focus on distance to a focus on revenue produced by the customer. For example, Air France-KLM customers were told in April 2018 that the airline would no longer offer distance-based mileage credits for their flights. Air France-KLM will join the roughly 20% of airlines already operating schemes on a revenue basis. Most of these are low-cost airlines, but Air France-KLM is a leader in the SkyTeam alliance. Of course, this makes integration with other partners in the SkyTeam network more difficult and complex given the difficulty of obtaining revenue information from partner airlines that accrue loyalty on a mileage basis. This is also creating problems with regard to which frequent fliers gain lounge access; some top frequent flyers are finding that they do not have access to the most prestigious first-class lounges around the world. So, coordination has grown more difficult as changes at individual airlines create network integration challenges.

1. How have these airline networks benefited the companies involved?

2. Do they benefit shareholders? Explain

3. How do they affect stakeholders, particularly customers?

4. Read the “Air Transportation” Industry Essay from the Business Insight: Essentials database. What impact will the coronavirus pandemic have on airlines and airline network

Answer 1

1) These airline networks benefited the companies involved by allowing member carriers to book seamless schedules and share the benefits of frequent flyer among their passengers. It has also allowed airlines to expand very easily and maintain their global market share without having to spend a huge amount of money. In addition to this, it also gives alliance partners the access to airports in regions where obtaining permissions is not easy. Many companies also benefit from the shared aircraft maintenance agreements as it allows them to avoid costs on duplicate maintenancce facilities across the globe.

2) Yes, these airline network benefits the stakeholders. For the internal stakeholders like the member carriers, it greatly reduces the operational costs and helps to maintain market share globally with minimal expenditure. For external stakeholders like the customers, it allowed the sharing frequent flyer benefits and also booking schedules become seamless.

3) Airline networks allows sharing frequent flyer benefits. It also gives customers priority services like fast-track security, priority boarding and check-in, as well as lounge access which low-cost airlines can't afford. They also offer a common digital services platform that allow passengers to always be connected to the Internet.

4) The coronavirus pandemic have had devastating impact on airlines and airline network. It has crippled the aviation industry and forced many of the airlines to file for bankruptcy. Those airlines and airline networks that have survived so far have had to lay off most of their human resources. Sales of tickets have dropped and airlines have been forced to drastically cut back on flights due to international travel restrictions as well as a general lack of appetite for travel.