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AIRLINE ALLIANCES BECOMING INCREASINGLY IMPORTANT

The biggest decision facing an airline today is no longer whether to choose turboprop or jet, or whether to buy Boeing or Airbus, with engines from Pratt & Whitney or General Electric, but which alliance to join. Alliances determine not only connection to computer reservation systems and hence the actual reservation income of an airline, but also practical access to international hub airports and growth markets. Even if the airlines never tire of stressing the advantages of the alliance to the passenger, it is no secret that the main beneficiaries of the alliances are the airlines themselves.

Some of the major alliances, for example Star Alliance, oneworld, SkyTeam, Qualiflyer and Wings, have their own presidents and chief executive officers just like companies and have matching external corporate identities and aircraft fleets. For the more far-reaching the collaboration, the greater the potential to make savings, from alliance-wide volume discounts on purchases of aircraft and spares through to sharing of maintenance facilities.

Star Alliance aircraft at Frankfurt

Alliances have today replaced an air transport market that was once strictly regimented by governments with a kind of oligopoly, with the market now effectively dominated by a smaller number of big players. Along with this development, the alliances have long since moved beyond their originally purely marketing and sales function to become a critical tool in the tough global competitive struggle between the airlines.

The concept of airline alliances came about as a result of deregulation of air transport in the USA in 1978. The major American airlines sought international allies in the face of intensifying cost pressure in the now unfettered free market, and the first (provisional) marketing partnership for North Atlantic traffic was formed between British Airways and United in 1987.

Codesharing, i.e. the assignment of two or more flight numbers, each associated with a different alliance partner, to a single flight, has the effect of multiplying the reservation options displayed on the screens of the reservation systems. Flights offered by previously unconnected airlines suddenly now appear under the "own" flight number of other alliance airlines as well.

The shortest connections always appear first on the screen of travel agencies' reservation computers. And when the same flight is being offered by more than one alliance partners, it appears more than once. In addition, people who work in travel agencies report that many alliances seem to attain a kind of "electronic priority" in the reservation programs, for 90% of all flight bookings are made from the choices offered on the first screenful of suggested flights. 70% of those bookings are even accounted for by the flights appearing in the first three lines of the screen. The airline which can get its flight to one of these top positions will win the business, for as far as the other flights on offer are concerned and in some cases there could be as many as a dozen screens to wade through it is evidently a matter of "out of sight, out of mind". They achieve trivial numbers of bookings by comparison.

Even if the passenger ends up flying with quite separate companies, his alliance air ticket will create the impression of a seamless connection. This raises the probability that the passenger will stay within the system of "his" alliance, even if he has to change planes several times.

In this way, the large international airlines have devised a convenient way of filling up or spreading out their longhaul flights, which continue to be particularly lucrative, by using foreign partners and/or regional feeder airlines to good effect. An intercontinental flight from Frankfurt is thus, for example, "fed" with transfer passengers from the whole of Germany and even groups of passengers from European destinations as far away as Norway or north Italy. This ensures that utilisation will be high, so that the flight will be profitable.

Often the feeder airlines, i.e. the partnered regionals, have a more favourable cost structure than the big airlines so that the latter are gaining access to completely new local markets and at the same time saving themselves a lot of money. Conversely, alliances provide smaller airlines with the opportunity to gain a foothold in far away markets and make themselves better known there, as their logos now appear all over the world on the check-in counters of partner airlines. On the other hand the majors may have a significant say when it comes to the route structure, service concepts and fleet planning of the smaller airlines. And often the smaller airlines are forced to cut back on routes which, although lucrative, lead to hubs of the "wrong" alliance.

But most alliances are geared up to the global large primary markets. Usually there will be one powerful airline from each of north America and Europe, for example United and Lufthansa or American and British Airways, which will act as the "lead powers". These are joined by Asian partners and additional "weaker" airlines, possibly traditional national airlines which have potentially promising hubs and transport rights. Regional partner airlines do not always belong directly to the alliance but are sometimes simply associated via a frequent flyer programme or a codesharing agreement.

Above all alliances provide the industry heavyweights with the opportunity to gain established and powerful allies on other continents and to save themselves the expense and risk of having to conduct their own field campaigns in those markets. At the same time alliances serve as a vehicle by which to strengthen their own hubs and sometimes even to turn these into true strongholds ("fortress hubs") in which henceforth it is extremely difficult for a competitor to gain a foothold.

Some airlines have actually extricated themselves from alliances for strategic reasons, incurring conversion costs, possibly in the computer area, which should not be underestimated. Extensive route changes and sometimes even fleet conversions may also be necessary.

While the alliances move still further along the path towards integration, and throughout the industry there is talk of an imminent phase of mergers on the lines of what has occurred in the USA, one part of the airline scene has withdrawn into alliance-free niche markets. As well as the area of charter operations, which has its own power blocks, a second sector that must be mentioned here is the low-cost airlines. These operate from small airports outside of the alliance hubs, are primarily aimed at the price-conscious private traveller and are expanding highly successfully.

From page 30 of FLUG REVUE 5/2001