Rebels against the alliance

The departure of Aer Lingus from the Oneworld airline alliance has led some to question the need for such partnerships. Of little tangible value to passengers, can these groups survive in the competitive environment created by ‘no-frills’ rivals? Dominic Dudley and Mark Choueke report

According to wags, the name of the now-defunct Belgian airline Sabena stood for Such A Bad Experience Never Again. The airline might not have been happy with the joke, and its partners in the Qualiflyer Group probably weren’t either. Such are the dangers of airline alliances, where one carrier can fall foul of its partners’ brands.

Aer Lingus recently decided the game is up for its membership of the Oneworld alliance and has pulled out (MW last week). It may be the smallest airline in the smallest of three major alliances, but as one of Oneworld’s longest-standing members, its departure is significant.

Aer Lingus joined Oneworld in 2000 when the “no-frills” airline revolution was in its infancy. Since then, it has been battered by competition from Irish rival Ryanair and forced to adopt its own low-cost model to survive – one which has no room for certain minimum service standards required by the alliance, such as business class.

With the exceptions of BA and BMI, all the other major UK airlines have shied away from joining a global alliance. Lest anyone think Oneworld is struggling, the alliance is quick to point out that one of the world’s larger airlines, JAL, will soon become a full member, as will Hungary’s Malev and Royal Jordanian, attracted by the potential for sharing costs, expertise and passengers.

The key questions for observers is which airlines are making the more sensible decision, and whether the alliances offer advantages solely for member airlines, or for passengers as well. Those who avoid the alliances are either fiercely protective of their brand, like Virgin Atlantic, or keen to keep down costs, like the no-frills carriers. “Absolutely, definitely bloody not,” says easyJet communications director Toby Nicol, when asked if it is likely to sign up to one of the groups. “Complexity adds costs. It’s more beneficial to the airlines than it is to passengers.”

Others, like Star Alliance member BMI, argue that both customers and airlines benefit. “It becomes cheaper as alliance members are able to work on, and invest in, systems as a group. For example, e-ticketing can be brought in cheaper,” says BMI spokesman Phil Shepherd.

Revenues outweigh costs

Revenue generation is the main benefit for airlines. Oneworld, which claims to be the most profitable alliance, says 7.5 million passengers transferred between its members’ flights last year, accruing more than $1.8bn (&£970m) for the eight airlines. The membership costs are, it says, very small in comparison to the revenues it brings in. Oneworld managing partner John McCulloch states/ “At a time when fuel prices have reached record highs, revenues represent an increasingly important contribution to our member airlines’ financial standings.”

But Chris Avery, aviation analyst at JP Morgan, doubts their importance. “When most of the Western world is signed up, the difference alliances make is no longer significant,” he says. Instead, he believes, fuel prices, levels of demand and wages are key issues for the industry.

The benefits that the alliances tout to passengers are faster check-ins, shared airport lounges and linked loyalty schemes. The member airlines are also increasingly grouping together into single terminals at major hubs. Such things are most attractive to the frequent business travellers that all airlines are after.

Despite the perceived financial advantages, just 30 of the world’s 250-odd passenger airlines have become full members so far, albeit most of the largest ones. Besides the absence of no-frills carriers, there are large geographical gaps – the strongest-growing markets of the Middle East, China and India are where alliances are at their weakest. If they can attract airlines from those regions with flights into Heathrow or Frankfurt, alliance members flying around the UK and the rest of Europe should benefit. “Although we are expanding into long haul we’re no BA or United Airlines,” says Shepherd. “Being part of the alliance allows us to tap into the long-haul networks and feed them passengers.”

Even mavericks like to share

In essence the arrangements are more complex versions of the code-sharing deals that gave birth to alliances in the first place, although flying with one airline when you have booked with another is not something passengers always welcome. Even for airlines that are determined to stay single, however, there are advantages to some bilateral links.

Virgin Atlantic is not in an alliance because it is “such a different product”, according to a spokeswoman. But it does have very strong ties with several other airlines, including Singapore Airlines (which owns 49% of it), Continental and Air China.

Virgin synchronises its schedules with its partners, and passengers can use frequent-flyer miles on alliance services. It also has deals with other airlines to provide access to airport lounges.

Aer Lingus is not completely abandoning its old partners, either. “The majority of business the airline got with Oneworld was with BA and American Airlines, and we’re in discussions with both on code-sharing and other things,” says a spokeswoman.

If unattached airlines can maintain all these benefits, there seem to be few benefits to joining a partnership in the first place. And until no-frills carriers start caring about inter-linking services, rather than the point-to-point services they offer at the moment, there is little need for them to get involved in alliances either.

If the alliances do want to dream up something distinctive, they could offer even closer co-operation and consolidation, but politics and national identity mean it is unlikely alliance brands will ever supersede the individual airline names. Star Alliance makes each member paint at least one of its planes in the alliance colours, but that is the most headway it is likely to make in terms of single-branded flights across the networks.

In turn, there should still be room for new airline brands to start up in the future and challenge the main players. As Aer Lingus has found out, being part of an alliance cannot on its own protect a member airline in the face of determined competition.

Alliances can crumble

Ultimately, just as airlines come and go, so can alliances. The Qualiflyer Group, for example was shut down in 2002. It was an ill-fated set-up, including Sabena and Swissair, which were both grounded in 2001, and Volare, which went into bankruptcy in 2004.

As more airlines react to the low-cost revolution, the surviving alliances could find that they are only attractive to the limited number of airlines that want to offer multi-sector international travel. While their members might be the biggest brands, they’re not necessarily the most profitable. That mantle has been held in recent years by Ryanair and Southwest – both of which stand resolutely outside the alliances’ umbrellas.