Airlines flock to preserve alliances

The battle for supremacy of the skies between airline partnerships Oneworld and Star Alliance took a dramatic twist last week when Star members United Airlines and Lufthansa announced they are to pump C$730m (&£303m) into partner Air Canada.

The cash boost, which will take the form of convertible shares, a credit guarantee and a leasing deal, is aimed at bolstering the airline against a C$1.8bn (&£747m) hostile bid from Oneworld partners American Airlines and British Airways, which want to merge it with fellow member Canadian Airlines.

This regional scrap is dismissed by some observers as mere posturing by two giant alliances locked in a global power struggle, but it shows the potential for instability, whereby alliance members can easily fall into enemy hands.

Closer to home, Lufthansa is expected to acquire a 20 per cent stake in British Midland for &£120m. This will increase the German airline’s share of Heathrow’s take-off and landing slots from 4.3 per cent to about 20 per cent.

The acquisition will significantly strengthen Star’s European operations, so BA has appealed against the deal to the UK Government and European Commission – ostensibly in the interests of saving the UK airline industry from foreign domination.

Because of strict regulations preventing global mergers, these airline alliances have grown up in their place to fend off competition from low-budget airlines such as Ryanair and EasyJet and to cushion profit cuts due to plummeting demand for Asian routes.

Early alliances were unnamed and usually confined to two airlines. Since then they have grown to include up to ten airlines and have their own names and marketing campaigns.

The biggest are Star Alliance, Oneworld, Qualiflyer and Wings.

These alliances aim to cut costs through economies of scale and to give customers a “seamless” service, on journeys involving more than one airline. They also enable the airlines to cover a much greater area through a broader range of destinations.

Experts point out that significant operational costs can be saved – for example, through joint mark eting campaigns, ticket desks and baggage handling facilities.

The extent to which the carriers can integrate their operations, however, depends on their location and the routes they offer.

Eli Abeles, managing director of ABS Consultancy, and a former strategist with BA, says: “The fact that [Lufthansa and United Airlines, and BA and American Airlines] are prepared to plough so much money into Canada – which is, after all, a relatively small market – suggests they believe there is real value in having a comprehensive global network.”

United Airlines claims Star Alliance generated an additional $200m (&£132m) of income in 1998.

Ford Ennals, group marketing director at Lloyds TSB and former marketing director at BA, says: “Alliances are by no means fulfilling their potential. They promise real benefit to airlines and consumers alike, but the benefit to customers has not been well communicated and many are confused. Customer loyalty will ultimately be the key to their success.”

The benefits to customers include only having to check in baggage once when their journey involves more than one flight operator who are members of the same alliance. Passengers on a flight put together by a travel agent have to check in each time they change airline. Alliance airline customers are also able to pool loyalty points and use other member airlines’ lounges.

According to David Rowson, managing director of branding consultancy Luxon Carra, a shake-out of the alliances will happen in the next few years. Rowson has previously worked with Aer Lingus, Iberia and US Air.

Star Alliance members are working towards co-ordinated flight schedules and service standards, and may be looking at aligning prices. Competition laws prevent Oneworld from the same level of integration on the basis that it would give it an unfair advantage in the transatlantic market. (Oneworld members’ BA and American Airlines are two of only four airlines offering transatlantic flights from Heathrow).

Creating a strong brand will be crucial to the alliances’ long-term success – and the airlines within them – says Rowson. But he points out that alliance members have to achieve a balance.

If the umbrella brand becomes too powerful the airlines risk watering down their own identity and losing business from loyal customers not aware it is part of an alliance.

At the same time, the alliances cannot capitalise on their strengths if they do not create and market a coherent brand, says Rowson. Meanwhile, Oneworld is spending &£9.4m on a campaign, created by M&C Saatchi, covering 90 countries.

But possibly the most cut-throat aspect of the new generation of alliances is that airlines, once committed to a partnership, are not forced to remain.

Abeles says: “Airlines are a promiscuous bunch. After an initial scrabble to join an alliance they are now starting to look around to see if they might be better off in one of the others. The Canada case demonstrates just how precarious some of these alliances are.”

Austrian Airlines recently left Qualiflyer to join Star Alliance and Delta Airlines has hooked up with Air France to form a new alliance, as yet unnamed.

This follows Singapore Airlines leaving Qualiflyer last year, also to join Star Alliance. Singapore Airlines is reported to be forming a separate partnership with Virgin Atlantic, which is not currently part of an alliance.

The landscape is likely to become further complicated as Asian air lines – as yet outside the alliance phenomenon – enter the fray, says Abeles.

Analysts agree Star Alliance, established for two-and-a-half years and the oldest, is likely to build the most successful global brand. It has a bigger network than Oneworld and is less restricted by regulations.

But as its battle with Oneworld proves, Star Alliance is not taking any chances.

For British Airways the success of Oneworld could prove critical. Last week its share price tumbled to 296p – its lowest level since 1993 – due to a combination of poor results and analysts’ lack of confidence in chief executive Bob Ayling’s strategy for the future.

And some observers speculate that American Airlines, frustrated at not being able to develop a closer alliance with BA, might pull out of Oneworld.

Most observers agree that regulations are relaxing and will continue to do so. Opinions as to whether full mergers will ever be allowed are divided. However, the closer the integration, the greater the benefits – and the more important it becomes to be integral to a stable alliance.