Airlines Bet On Alliances To Survive

Anindita Chattopadhya - New Delhi

Call it cartelisation, or alliance, airlines around the world are finding it financially correct to align with one group or the other to help them stay afloat. That it is an emerging world order which is evident from the fact that the four main airline alliances - Star, Oneworld, SkyTeam and Wings, already account for more than 60 per cent of the total world capacity. In an industry where competition is razor sharp, operation cost is ballooning, business margin is wafer-thin and risk is high (9-11 and SARS brought carriers down on their knees), grouping for airlines has become an important option to eliminate competition, cut cost as well as leverage passenger loyalty.

The effort started some 15 years ago to increase passenger yield by entering into passenger exchange/feed through pro-rate fare agreements between two airlines. In the late 1980s, British Airways and United Airways attempted to form a marketing relationship model aiming to increase revenues by establishing code share and sharing of some facilities like lounges and check-ins at airports.

However, today's alliance model is an improvisation of the past as the business focus is not just limited to increasing revenue and yield but the thrust is on managing costs better. As Werner Heesen GM of Lufthansa (a member of the Star Alliance) explains the situation, "Your fare has to be competitive to retain market share. But if you offer a low fare and your cost structure is not adequate, then you find it difficult to sustain that fare. To remain competitive by maintaining a low cost structure alliance, is the best answer because it has a tremendous impact on the cost structure. For instance, SAS is handling sales and marketing for Lufthansa in Scandinavia and likewise Lufthansa is doing the same for SAS in Germany thus both airlines save on distribution cost." Ravi Talwar, Area Sales Manager, Thai Airways (another Star Alliance member) endorses the view. "Partnerships give the airlines the advantage to control cost by way of common infrastructure usage, negotiation with vendors, joint investment on IT, maintenance and training and it also provides the benefit of feeding your network".

Yes, feeding the network is becoming an important need as `significant benefit to passengers' has become the buzzword. With globalisation pushing business travel to an all time high, it is now a buyer's world. Carriers are looking at offering all comfort and facilities to win the loyalty of the corporate king, providing flat bed, gourmet food, entertainment, and internet on board. But what about inter-continental connectivity? And this all important need to ensure that its passengers do not use the service of a competitor airline on routes that its operations do not cover, has been the basis of most alliances. In the words of Tom Owen, country manager - India, Nepal, Bangladesh, Cathay Pacific, "Cathay Pacific took an important step to enhance customer service and offer faster connections by helping found the Oneworld global airline alliance in 1999. It has vastly increased Cathay's network to more than 570 destinations around the world." Star Alliance member United Airlines with extensive network in USA is feeding passengers from across North America into Lufthansa's network while Lufthansa is feeding its network from Europe and Asia.

It is true that such alliances enable carriers to offer customers services and products that they cannot provide by themselves. And for any passenger, however loyal, it is difficult to ignore value adds like:

• Miles accural and redemption to and from the member airlines' frequent programmes

Provision of elite frequent flyer cards with a common element of branding which ensures travellers receive appropriate recognition and privileges to which they are accustomed no matter which member airlines they fly on.

• Access to special lounges (Oneworld has 380) worldwide, along with priority check-in, standby and wait listing, and preferred sitting and boarding.
• Smoother transfers for passengers traveling across the global networks.
• Greater value through a range of round the world products such as Oneworld Explorer fare and visit passes, Star Alliance Round the World fare.

In such a scenario, no wonder, stand alone airlines will find it difficult to stay afloat because they would not only have to offer added frills to the traveller but also the advantage of global connectivity. As Talwar explains, "Member airlines of any alliance group are preferred over stand alone carriers today because travellers have many options to consolidate their miles. Most of the frequent travelers are corporate clients whose cost of travel is borne by the company and they use the miles accumulated for their personal trip."

However, Emirates, an airline that boasts good financial result and passenger growth begs to differ that an alliance is the ultimate option. It feels that its customer' interests and its own are best served by remaining independent. "The airline sees no tangible benefit from trading in its freedom of action. We prefer the flexibility to make codeshare and interline agreements where these are mutually beneficial," said Abdulla Nasser Abdulla Hussain, vice-president - India and Nepal, Emirates .

What one needs to understand is that survival of stand alone airlines is possible if they operate in strong source markets, thus offering them an adequate business opportunity and have a strategic geographical positioning supported by modern on-ground facilities to afford them hubbing opportunities. Further, the coffer should be full enough to continuously invest on modernisation, fleet acquisition and building brand value. Industry captains feel that aviation is now far too controlled and restricted by nationalities vis a vis business needs. Hence the success of alliances will need a far more open and liberal business environment where airlines will be allowed to freely source capital and be able to fly to any destination, charge fares that consumers are willing to pay and offer services that allow them to deliver against promises. Till such a situation emerges, local players will always have adequate business opportunities.

Hence the most pertinent question arises as to what steps need to be taken by Indian carriers to survive, given the fact that India is an original market and not a transit base like Dubai and these are not really cash rich? According to Gautam Chadha, MD, Tirun Marketing who has been part of the aviation industry for long, "India's strength can only be derived from a planned aviation infrastructure approach. It should combine the construction of new facilities at Delhi and Mumbai which afford hubbing activities with the immediate creation of one large airline by combining Air India with an existing domestic carrier as well as forming a supporting tier that allows other Indian carriers to fly anywhere with a transparent process of alocation of routes and rights. A truly open global environment is unlikely to emerge in the near future. So India must to use this time to create a very strong base, brand value and operational expertise towards managing costs". Is anybody listening?