Flying colours

The alliance between British Airways and American Airlines, provisionally blessed by European Union competition auth-orities last week, has caused an identity crisis.

That, of course, is not to say that when the deal does eventually take off – possibly as early as October – BA and AA will not wield considerable power. Together, they will effectively control about 60 per cent of the transatlantic market between the US and UK. And with further partners lining up join them, including Japan Airlines, Qantas, Iberia and Cathay Pacific, there are considerable global opportunities.

However, it creates a dilemma because the two partners must decide whether to keep their brands separate or follow the lead of the Star Alliance – a partnership between airlines including United Airlines, Lufthansa, Air Canada, Thai Airways and Scandinavian Airlines System – and create a single super- brand. BA and AA are discussing this with M&C Saatchi, BA’s advertising agency.

“I’m sure BA will try to create an over-arching brand,” says Gary Davies, a professor at the Manchester Business School. “Once one player has tried it, BA will feel it has to do the same thing. BA will be too worried that it will miss the opportunity and that the Star Alliance could turn out to be a success. It will also be aware that it is second in the market and quite far behind.”

Of course, there are other problems. While the alliance will give BA access to AA’s US routes and AA access to BA’s global network, it still has to receive clearance from the US anti-trust authorities. In any case, the EU says BA must concede 267 take-off and landing slots to its rivals free of charge.

Nevertheless, the alliance will benefit business travellers, who will be able to earn loyalty miles for their combined trips and then use them to take holidays.

They will also benefit from “seamless travel”. International travellers like the simplicity of having one check-in for a trip with an onward destination. At the moment, travellers taking BA to New York have to go through the check-in and baggage reclaim process twice.

Creating a single brand helps to communicate these new benefits to the traveller.

The Star Alliance launched a new global brand last year. Members say it signals to the outside world that the airlines are working together more effectively.

The Alliance is running ad campaigns through the UK national press and business weeklies, and elsewhere, to target the lucrative business travel market. Its shop in London is emblazoned with the Star Alliance name, and it is also considering running TV advertising.

“What the [Star Alliance] brand signals to consumers is that the airlines are working together,” says Suzanne Sharpe, account managing director at Young & Rubicam Europe, which handles the Star Alliance in Europe. “Over time we aim to develop a service brand which offers an increasing number of benefits to the frequent business traveller that one airline alone cannot bring.”

But some observers argue that it is too early to tell whether the creation of a single brand will give airline alliances a significant advantage.

“When you have an alliance with two, three, four or six players coming together, where each brand has certain values, you have to ask yourself whether the sum of their parts is greater than the whole, or vice-versa,” says Eli Abeles, managing director of ABS Consultancy and a former strategist with BA.

“The Star Alliance is unique in that it has given a name to the grouping and it represents some semblance of commonality and values such as reliability, safety, and size of operation. The holy grail of marketing an airline alliance is in creating that synergy. The big dilemma is: do you create a single strong brand or do you have a scenario where the strength of one or two existing brands rubs off on the other partners? It’s too early to tell whether the Star Alliance is a success.”

Some observers argue that alliances give partners all the benefits of a merger without having to take a stake in the venture and that any of the parties can walk away unscathed. The downside is that, with a plethora of brands working together, the consumer can become confused.

The existence of two or more strong brands as part of one journey risks diluting the impact of the original branding, especially if the onward flight does not match the quality, service and punctuality of the first.

And if an airline has no shareholding in its partner, then it is questionable how much power it has to demand better levels of service.

“The marketing challenge lies in picking your partner very, very carefully,” says Abeles. “Your brand could be seriously diluted if the other carrier is a bad strategic fit. For example, KLM and Northwest have had difficulties. The culture at Northwest was all about cutting out the peanuts, which was very different to the culture at KLM.”

Even if AA and BA’s marriage represents a good strategic fit, BA passengers travelling onward within the US will not see the BA logo, branding and livery on the plane for a large part of their journey.

Some predict that, in the long term, nationally branded airlines may fall by the wayside as global brands and mergers become dominant. “I see the BA/AA alliance as an intermediary step on the way to them becoming a single company,” says the Davies. “If you compare this [the airline sector] with other market sectors, it does not make sense. How long the protectionist, nationalist barriers will remain, though, is difficult to tell.”

The airline industry is an anomaly in the corporate world. It is by its very nature a global business, but because of political influence and national pride – for which the air carrier is still a potent symbol – airlines enter into alliances rather than mergers. In the US, there is a 25 per cent ceiling on foreign ownership of airlines. In the EU, the figure is just less than 50 per cent.

But the increasing pressure to cut costs could drive airlines into mergers. Aviation is not a high margin business. Acquiring airlines is costly and increasing deregulation in Europe has kept seat prices down. As a result, national carriers frequently operate on unprofitable routes. The ability to leverage costs through using a common name, common management, IT system, advertising and liveries is likely to be an attractive proposition.

BA and Qantas have already done this and effectively merged in all but name. BA has a 25 per cent stake in Qantas and in Asia the two airlines have a single management structure. The liveries on the planes are aligned so that passengers do not really notice the difference between a BA plane and Qantas one.

But Aviation Economics managing director Nick Moreno is cautious about how quickly the airline industry will come into line with other global industries and merge. “Airlines are taking a softly, softly approach and are just feeling their way at the moment. You have to set the industry apart from any other.

“You have horrendous regulation. There are lots of emotional ties and people do not want to lose control of their national airline. Many airlines on the global stage are badly managed and run by political appointees who are out of date. I can’t see airlines moving towards mergers over the short term – but in ten years time things could be different.”

In five to ten years, the Star Alliance may well have taken precedence over national carriers and is unlikely to be the world’s only airline super-brand. In view of this, BA and AA will need to create a strong unified brand to be able to explain the benefits of the merger to their customers.