Alliances… good or bad?

There is currently a spat going on between the airlines of the traditional variety and the airlines of the non-traditional variety. On the traditional airlines group are the likes of Air France, British Airways and several US airlines. They are complaining that Emirates is abusing its position and getting preferential pricing from the manufacturers such as Boeing via the US Government’s Exim Bank. The traditional airlines are now also very concerned that Emirates is going to start eating their lunch in a lot of markets. Indeed when you start to look at the order book from Emirates it becomes hard to imagine that the UAE Carrier is not going to take a significant chunk of world’s global traffic. In a few weeks they will announce a bumper profit – my sources tell me it will be quite pleasing to the cash strapped Emirate of Dubai.

But perhaps the traditional airlines are complaining long and loud for reasons that don’t always make sense. I have been looking lately at what the world is coming to in Airlines. The latest trend is merger in all but name aka the Marketing JVs. In my view these are back door mergers and are not really thought out well. What seems to be so incongruous is that supposed champion of the consumer the US government has been the biggest supporter in the merger process. The US DoT has effectively rubber stamped all the JV requests. Over the severe objections of its own Dept of Justice, the US DoT has approved these anti-trust immunity agreements: BA+AA and co, A++, TransPac Star and Inner Skyteam. What were they thinking! They are clearly anti-competitive. Just look at the fares.

As a direct result of these new JVs, I believe that Airline corporate management have moved further from the customer. Consider this. One of the key components of the JV alliance model is the move to local home airline serving all the alliance members in that geography. So that in the case of A++ (LH, UA, CO, AC) Lufthansa handles everyone in Germany and UA/CO handles everyone in the USA. The local market staff for LH have been fired, retired or reassigned. And vice versa. However this assumes that the JV has a strong team at the top who operate effectively a unique business. My friends – I can assure you that this is not behavior that we have seen from airlines. JV Alliances have pointed to the success of the KLM/Northwest JV that actually worked. However I think this was an exception rather than the rule. An alliance of equal partners worked because of a number of factors. Not least of which was the streamlined management structure and the ease with which the two players complemented each other. But not so the new batch.

The complexity of these arrangements is almost mind boggling in their complexity. Sadly in my view having experienced just about all of them from a consumer perspective – they do nothing to improve my travelling experience. In fact I would say that actually it has worsened the situation because remedial action out of your home market results in laughable service if you are trying to get service in the non-home market. Air France is not going to even give me the time of day when I as a Delta customer ask for help. Trust me this has not changed – its still awful.

I believe that the unwieldy management of the JVs will harm everyone’s brand involved in the JV. The service quality will fall all round. The responsiveness of the airlines to market conditions will worsen. The arrogance of some players will become acute. But perhaps the most perplexing part of all of this – is that the JVs are not going the whole hog. It seems that no one is asking the one question that would seem to be obvious. If the world falls now into effectively 5 airline types. Skyteam, Star, OneWorld, Pure LCCs and unaligned independents. So why do we need GDSs?

Now that’s a good question… anyone care to give me their answer?

Cheers

(Image courtesy of the good the bad and the ugly)

So OneWorld makes 3 across the Atlantic.

So the homogenization of the airline world is almost complete. With now more than 90% of the traffic across the Atlantic under the control of the 3 Alliances the airline world has become something of a boring place.

From a strategic perspective I believe that the creation of this risk sharing – mergers in all but name – alliances create as many issues as they solve. From a user’s perspective – IE the flyer, and as speaking as a frequent flyer, I cannot say that the rewards of the so called “seamless” experience are that great. Frankly I believe they are still a myth in the mind of the airline marketing departments. Let me illustrate this with a simple pair of examples from Star/Atlantic Alliance Plus:

Star Alliance – Transatlantic Alliance A++ AC,CO, LH UA. LH has first class as does UA. CO and AC do not. UA and CO have premium economy, AC and LH do not.

An itinerary NUE-FRA-YYZ-IAH-CCS-IAD-FRA-NUE should be (logically) possible all on A++ carriers and Transatlantic. Not so – the CCS legs are outside of the alliance and therefore have to be either added as a separate flight or as one ways. Any solution would up the price significantly.

I use these to illustrate the issue not to pick on Star/A++ specifically. I believe that the airlines have a long way to go to make the experience truly hassle free. However I think it is getting better. But it takes a very long time and the hype decidedly does not live up to the delivery. I hope that the regulators are paying close attention to the issue. When these alliances anti trust immunity comes up for renewal. I hope that they look at the issues for the customer. In my view the benefits to the customer should be considered as follows:

1. Better choice of schedules – ie more not less flights
2. Lower fares or at least no comparative increase in fares. I also think that the consideration of Frequent Flyer miles should be added to the equation, so that the currency of FF miles be considered as part of the cost equation.
3. Ease of use – to get from A to B should not be harder. Therefore in considering the value of an alliance – the customer issue of nonstop vs connections should also be considered. For example did the alliance reduce the number of nonstop routes in the broader market?
4. The hassle factor. Did the Alliance truly reduce the amount of trip hassle for the customer – of all types not just premium traffic.

If we are truly to regard this as a benefit then a truly objective and transparent mechanism for assessing Alliances should be put in place. I believe that players have the right to set their own standards in an open market. However when the marketplace is restricted to only 3 major players with such a large percentage of the market – then the standards of care and customer value must be put at a high premium. This includes the ability of the governments to force the players to undo their arrangements. Currently these standards are not in place and all that seems to have happened is a lot of talking without consumer consideration. Given how much money the airlines are going to make this year as a result of their oligopoly power – I think this should be a consideration. And with OneWorld now the third man in – we have to be very careful.

Cheers

BA Tries New Cost Measures

A great piece in the Beat this week on BA's new compensation program in the USA indicates a different tack by BA in its way to try and reform its business.

Having essentially rolled over on the issue of GDS fees - it is going after - let's call them softer targets. There is a lot of fodder in the battle with the Flight Attendants - who probably have lost the hearts and minds of the consumers. BA in my opinion now has the ascendancy in that battle. So now it is going after a revised compensation plan against the agency community. This time the US TMCs.

Given the importance of the business market to BA's bottom line (particularly after the disastrous 2009) this might be a risky strategy. Given the spring shoots now appearing in the USA - it would seem unwise to stifle the growth and upset this group of people. But perhaps it feels emboldened by the pending BAAAIB alliance approval and the resulting synergies - particularly in the business market to the UK. Given the relatively small footprint by Star on the UK - US market and the paucity of Skyteam flights (just 2 767s a day between LHR and JFK) perhaps they can throw their weight around.

However I do hope someone from the DoT is paying attention. The reduction/absence of competition on the Transatlantic run does seem to allow behavior like this.

This is my opinion and take it for what its worth

Cheers

US DoT Tentatively Approves BAAABI. Branson Pissed

For some reason on a Saturday the US Dept. of Transportation has announced its approval of the BA+AA+IB transatlantic alliance. In a continuation of its policy of pro-oligopoly, it demanded only a small concession of 4 slot pairs at LHR be surrendered. Far less than the EC has demanded and far less than its own demands 8 years ago for 16 daily slot pairs to be surrendered.

Virgin Atlantic Chairman Richard Branson is obviously not a happy person.

Already the applause has come from some groups such as BTC who believes that 3 alliances are an inevitability. Given the previous rulings it is unlikely that the EC will impose greater restrictions but it does seem to be a bit of a joke to only ask for 4 slots to be surrendered. A far better arrangement would have been to demand that new slots be made available for new entrant carriers. But the status quo seems to be the protectionism and cronyism that has been a hallmark of the US DoT.

If the competitive authority was truly doing its job then it should open up the market for total freedom. Well we shall see. Next week in Spain the negotiations for the next round of Open Skies between Europe and the USA open up. High on that agenda will be total deregulation and relaxation of sovereignty rules.

Cheers

CO To Boost LHR Flights

CO is boosting its daily schedule from LHR to 7 come the October schedule. This includes 5 to NYC and 2 to IAH. With some slots acquired recently (presumably from BD who disposed of a few) this puts CO at a distinct advantage for the New York Market. With at least 3 of its services with the larger 777-200 planes, DL has no match with just 2 767-400s on its schedule.

You have to wonder if DL is playing a game here. Forcing the EC to hold BA and AA into a corner by not upping its schedule. The proposed BA-AA alliance has 13 nonstops this summer. Don't forget that CO also has access to the 4 Virgin flights.

Ah gotta love politics

Cheers

Shock Horror - BAAABI Starts To Negotiate

Seeing their proposed Transatlantic Alliance going no-where fast and with the scrutiny of the European competition authorities being more and more aggressive (unlike their US DoT counterparts), it looks like the airlines are prepared to deal. Bloomberg and WSJ both reported on Friday that the three airlines (and presumably an army of lawyers) had opened up discussions on the surrender of slots at LHR. Long a bone of contention and with expressions like "Over my dead body" they are now indeed talking about that.

The 3 airlines (and occasionally joined by RJ - Royal Jordanian Airlines) have a great (sic) website with the title MORE TRAVEL CHOICES.COM to put their case against Virgin mostly but the other 2 existing Transatlantic Immunity groups - AF/KL+BL and A++ (LH, AC, UA, CO).

The Professor has opined that the ONLY way this alliance was going to get any chance of success was if the 3 players agreed to surrender slots at LHR.

At about $40 million per slot pair this represents a significant amount. Currently BA alone has 41% of the slots. LH quietly dumped a few to help pay for its take over of BD.

This battle will play for a while. And we know that BA is happy to surrender slots at LHR because it was offering several to JAL as part of the failed deal to keep them in the fold.

In my own opinion the EC and the US authorities have got themselves into a bit of a pickle. They can hardly hammer on these three having let the other 2 alliances gain immunity. So we are really condemned to LESS Travel Choices. Let's hope Sir Richard continues his battle.

Cheers

Alliances - Face Heightened Scrutiny

The good old days of carte blanche acceptance of Alliances may be coming to an end.

The Oneworld proposal seems stuck in no man's land. It was supposed to be given the green light (with changes of course) last week, but so far nada.

On both sides of the Atlantic - the regulators are watching much harder. The last approval (Continental + Star) was given the all clear by the DoT over the objections of the DoJ. It wont be that easy next time round. On the EU side - the regulators sent a 400 page document to the participants. Probably this will mean that there needs to be slots to be surrendered at LHR which seems to be over Willie's dead body.

This is a song that is going to be sung for quite a while yet.

Cheers

Latest Airline TLA/Buzzword - ATI

So the airlines all want it - legislators (as if they don't have enough to do are very happy to enjoy this distraction) - what the heck am I talking about ATI?

Anti
Trust
Immunity

So frankly I am not a huge fan of creating specific exemptions from good laws. Anti-Trust Immunity means that you are engaging in a practice that you freely admit is anti-Trust (and therefore against the law) yet you want to be exempt so you can engage in something that well is not exactly consumer friendly.

I prefer Black and White. Grey/Gray is not a good color combination.

At the moment there is a significant debate driven largely by Continental's shift from Skyteam to Star and by the expansion of the 3 big alliances. BA-AA-IB (that's BAAABI to regulars of this blog) is still out there. Now the BTC has thrown its voice in support of AA in this manner.

So let's see if I get this right. Several OneWorld airlines are requesting ATI so that they can combine their resources at LHR and across the Atlantic (in normal times among the most profitable routes on the planet), OK fair enough so far. But by combining them - they have a footprint that is at least bigger than all their competitors combined? The justification? the other ATI players have bigger footprints in their home markets. Following their logic this safeguards competition?

Sorry I just don't and cannot buy that argument.

Interestingly enough Air Transport World in their latest editorial penned by Perry Flint is voicing its objection to the EC proposal to make the ATI automatically reviewed at least every 3 years.

I really think that we need to have good competition. We need to have fair competition. I am against ATI. I hope that in future - there will be a clear formula that can emerge that will allow airlines to compete truly competitively without Government Intervention except for consumer protection.

Right now I don't see it. I guess I am more in the Richard Branson camp on this one.

This is going to be a battle that will run for some time yet. May the fairest of them all win out.

Cheers