Discussion of recent trends in airline alliances, the value that carriers can gain from different forms of alliance agreements, and issues that airlines are likely to face in negotiating and implementing alliance agreements
2. The economic downturn and volatile oil prices have driven a
dramatic collapse in airline profits . . .
Global Airline Net Profit
2004 - 2009
$20
$15 $12.9
$10
$5
($0.1)
$0
-$5 ($4.1)
($4.6)
-$10 ($9.0)
($10.4)
-$15
2004 2005 2006 2007 2008E 2009F
Source: ICAO (2004-2007), IATA (2008-2009)
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3. … resulting in a large number of airline failures in 2008 – and
certainly more to come
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4. Airline mergers and acquisitions were accelerating even before
the economic downturn
RosAvia
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5. In the current environment, joining an alliance has become almost
a prerequisite for smaller, non-LCC airlines, to enable them to
remain competitive – particularly in liberalized markets
Alliance Advantages:
Increased critical mass, enabling airline to remain competitive with “mega-carriers”
Economies of scale and scope
Enhanced network reach
Increased flow traffic
Leverage alliance partners’ resources – capacity, distribution networks, terminals, FFP’s, purchasing power
“Presence” advantages – and potential yield premiums -- at key airports and on key routes
Note: Reflects airlines
approved for membership
and anticipated alliance
switching
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6. Benefits of alliance membership can be considerable for a
prospective partner carrier
SH&E was recently engaged by a mid-size European carrier to quantify the
potential benefits to it of membership in two alliances under consideration
Enplanements, Thousands Revenue, USD $ Millions Profits, USD $ Millions
600 $270 $100
$90
$262 $90
500 483 $260
450 $80 $73
$70
400 $250
$60
300 $240 $50
$40
$229
200 $230
$30
$20
100 $220
$10
0 $210 $0
Alliance 1 Alliance 2 Alliance 1 Alliance 2 Alliance 1 Alliance 2
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7. The three Global Alliances now account for more than 60% of
scheduled capacity worldwide – and dominate key markets such
as North America-Europe and North America-Asia
Estimated Alliance Share of Global Alliance Share of
Scheduled World ASK’s, 1996-2009 ASK's by Market:
North America-Europe: 85%
100% SkyTeam North America-Asia: 81%
oneworld Europe-Asia: 79%
90% Qualiflyer (Swissair) Intra-North America: 68%
STAR Intra-Asia: 58%
80% Wings (NW/KL) Intra-Europe: 39%
70%
60%
60% 60% 59% 60%
56% 54% 55% 53% 54%
10%
53%
12% 16%
50% 11% 11% 11% 20%
18% 18% 18%
40% 17%
40% 16%
16% 16% 15% 16%
30% 15% 4% 3% 15%
25% 14% 14% 15%
20% 4% 4%
20% 19% 20% 20% 21%
19%
14% 15% 15% 28%
21% 21% 21% 24%
10% 6%
10% 9% 9% 8% 8%
6% 6% 6% 6%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E
Based on published schedules for August of each year. Source: OAG 6
8. Antitrust immunity among alliance members is likely to increase,
making them even more powerful
Recent and Pending U.S. Immunity Grants Immunity enables carriers within
the alliance to operate virtually
Recent as a single entity
– Coordinated capacity planning,
scheduling, pricing, revenue
AF / KL / DL / NW / AZ / OK management and sales
– Revenue sharing
With U.S.-Europe air transport
CO + 10 Star members plus liberalization, immunity applications
CO / AC / LH / UA joint venture have been more favorably received
(Tentative)
In spite of the liberalization and
Pending “carve-outs”, it is difficult for
non-aligned carriers to compete in
markets that are dominated by
AA / BA / IB / AY / RJ immunized alliances
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9. The threat to smaller, stand-alone carriers remains considerable
Advantages of M&A and Alliances: Implications for Stand-Alone Carriers:
Gain incremental traffic, revenue & profit Traffic and revenue siphoned off
Higher yield from increased market share, Yield dilution
service frequency, “S-Curve” benefits
Greatly extend network reach – with little Network remains circumscribed
increase in assets and operating costs
Circumvent difficulties in obtaining Network expansion may continue to be
international route authority blocked by restrictive bilaterals and
government route allocation policies
Defend against organized aggression by Increased vulnerability to strengthened
other mega-carriers & alliance groups competitors
Scale and scope economies in distribution, Sales remain limited to single carrier
marketing & publicity programs distribution network and interlines
More advantageous GDS listings to off-line Inferior GDS listings to off-line destinations
destinations
Exploit scale economies in operations and Comparatively higher costs of operations
procurement and procurement
Greater access to capital markets Limited access to capital markets
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10. While alliance benefits are undeniable, planning, negotiating and
implementing entry into a global alliance can be time consuming
and the outcome is not guaranteed
Evaluate and Plan Negotiate Implement
Assess Select Identify Make Case Interim Plan FFP Align Product Marketing & IT Links
Alliance Preferred Alliance for Entry to Bilateral Implemen- Links Pricing & Improve- Distribution and
Options Option(s) Sponsor Existing Code- tation RM ment Links Upgrades
Alliance Sharing
Members with
Alliance
Members
Develop Alliance Plan Formally Invited to Join Alliance Airline Becomes Alliance Member
1+ Years 12 – 18 Months
Costs can be incurred as schedules are refined, revenue management practices
aligned, and systems upgraded. Benefits may not be seen for an additional few years
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11. As alliances have grown, they have become increasingly
selective about new partners – and are imposing stringent
requirements for entry
As alliances have gotten larger, the likelihood of a prospective new member competing
with existing members has grown
There are fewer and fewer regions of the world that are not already covered by global
alliances
Existing alliance anchor carriers may prefer to serve a region themselves rather than
acquire a new partner based in that region
For the alliance, there can be diminishing returns and increased costs and complexity
with each new member added
New alliance members may lose some commercial independence, and in some cases be
forced to sever existing bilateral code-share arrangements
Members may be encouraged to give up their own FFP program, losing a valuable
marketing tool
Membership fees can be high
Depending on the alliance, a new member may only receive “associate member” status,
and have little decision-making authority within the alliance
New members must adhere to strict policies regarding product quality, safety and security
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12. Bilateral code-sharing with partners in different geographic
regions can be a viable alternative to Global Alliance membership,
providing many of the same benefits
Even anchor members of Global alliances continue to pursue
bilateral code-shares outside the alliance framework
Some Non-Aligned Carriers
Recent Bilateral Have Been Able to Partner
Code-Sharing Agreements Across Competitive Alliances
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13. Bilateral code-shares can also offer the first step towards possible
acceptance in one of the three main alliances
STEP 1 STEP 2 STEP 3 STEP 4 STEP 5
/
Airlines expand
Airlines expand
code-share to
code-share to
major aligned
major aligned
airline
airline
/ Airlines expand
Airlines expand
relationship
relationship
to include
to include
synergies through
synergies through
FFP links, etc.
FFP links, etc.
/
Existing alliance
Existing alliance
Airlines form
Airlines form member carrier
member carrier
bilateral code-
bilateral code- sponsors “adopted
sponsors “adopted Airline becomes full
Airline becomes full
shares based airline” for alliance
airline” for alliance or associate member
shares based or associate member
on region and membership
membership of a Global Alliance
on region and
market
market / of a Global Alliance
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14. Partnership agreements should be reviewed periodically to
determine if they continue to provide optimum benefits
Code-sharing: scope of code-shares, regional exclusivity, audit of listings
Route and schedule coordination
Revenue sharing: SPA’s, code-share commissions
Inventory allocation: Block space (hard, soft), free-sale
Pricing, revenue management: joint fares, booking terms & conditions
Product and service: Quality standards, audit provisions
Marketing, advertising, branding
Loyalty program linkages: Accrual and redemption policies, value of miles
Cargo
IT: Linkages, required upgrades
Procurement
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15. Most recent partnership trend: airlines have begun to use technology
to complement or bypass the need for actual code-sharing
Carriers are using their own website distribution channels to
jointly market potential connecting services with partner carriers
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Linkages may be across traditional definitions of “network”, “point-to-point”,
“low cost” and “legacy” carriers, but nonetheless make commercial sense
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16. SH&E offers an array of services that help carriers identify,
develop, negotiate, implement and improve code-sharing and
alliance agreements
Assistance in identifying and selecting prospective code-share or alliance
partners
Valuation of alliance opportunities
– Utilizing SH&E’s proprietary NETWORKS route planning model
Assistance in “selling” carrier to prospective alliance partners
Negotiation assistance
Implementation assistance
Evaluation and optimization of existing partnership agreements
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