15 December 2007

For many airlines in search of new revenue opportunities – the alliance game has played out and the incremental revenues are becoming less and less attractive. Consider the basic mathematics. For new partners joining an Alliance – they tend to be smaller and with an in inferior product than the established carriers. So the lager airlines are unlikely to gain much from a new partner joining. The new joinee tends to get greater reach and the benefit from the larger airline.

Of the alliances – the Star group probably has the most structure and is the most mature. But they are now struggling with the fundemental flaws of the concept. Consider Singapore Airlines. They have been very reluctant to put their code onto any other airlines' flight. Indeed if you look at the actual SQ codeshares – the number is very small. On the other hand many carriers want to place their code on SQ because of its “superior” product. In the past I have used Lufthansa as an example of where the Alliance concept is broken. Perhaps now SQ is a better example. If I was a SQ frequent flyer I don’t think I would be happy to be flying on say LOT.

Now lets consider the new (well not new lets call it a rebirth) of the bilateral arrangement which has (usually) hard equity in a formal JV. Recently we have seen two good examples of this:
Air France/KLM Group joint venture with Delta for servicing Transatlantic passengers including from London’s Heathrow. Another example is the recent Lufthansa investment in jetBlue. Both these arrangements return real value in the near term that can be both quantified and tracked in real time.

In our opinion the future of Alliances is not rosy. Those guys who work there are going to be working overtime trying to justify their existence. Not just to their bosses but well each airline.
Example are: Fees that keep rising, more complications, advertising that is ineffective, endless meetings that produce no results… I think you get the picture.

On the other hand consider a partnership with mutual investment or a big parent owning a smaller player. Sound good? Well maybe. The recent past of mutual investment didn’t work out… remember BA and US Airways, SQ and Virgin, The Quality Alliance: SwissAir, Virgin and Delta… lots of not so good stories.

However at the end of the day – airlines like to be married. They are a bit like humans. Maybe polygamy is not such a good thing. Just sleeping together or even getting engaged even married is a better solution for a relationship. Interlining is just being good friends.

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