Airlines seek global alliances for survival

Airlines seek global alliances for survival

New alliances include sharing profits, employees, routes and even pooling to buy airplanes

The sharp falloff in passenger traffic in the months after the 2001 terrorist attacks forced many airlines to file for bankruptcy or cut deeply into operations. When oil prices soared in recent years, carriers piled on new fees for baggage and fuel, and shut down unprofitable flights.

Now airlines are thinking of ways to grow again — this time, by teaming up with global partners to expand their international reach.

That is one reason a bidding war has broken out among airlines wanting to unite with troubled Japan Airlines, which is under orders from the Japanese government to develop a survival plan.

In another time, JAL might draw little interest from American players. But all are looking to find international partners, since the domestic market shows little sign of rebounding sharply, at least in the next few quarters. Wall Street, optimistic that the airlines have moved to fix their structural problems, is willing to provide new capital to pursue partnerships — not just as a growth strategy, but also in self-defence.

American Airlines, which has long been in an alliance with JAL linking their flight systems, reportedly has recruited two other alliance members, Qantas and British Airways, to help rescue the Japanese airline, and fend off a competing offer from Delta.

American has been waiting more than a year for federal approval of a proposed flight sharing deal with British Airways and the Spanish airline Iberia. United and Continental struck a marketing agreement more than a year ago after their merger talks failed.

Safe route

“You want to be friends with as many people so they don’t crush you or try to buy you,” said Philip A Baggaley, an airline analyst with Standard & Poor’s Ratings Services. Alliances are “superior to mergers, because you don’t go through the costs and upheaval of a merger,” he said.

Many analysts see this strengthening of global alliances as an important new chapter in the airline industry.
“We’ve gone from individual carrier efficiencies to domestic efficiencies and now we have to get to global efficiencies,” said Mo Garfinkle, a longtime consultant to several airlines.
Alliances among big airlines have been in place for years, involving groups such as OneWorld, which has 10 airlines, including American and JAL; SkyTeam, whose 11 members include Delta and Air France/KLM; and Star Alliance, with 24 airlines, including United and Air Canada.

But these alliances were formed mainly to link airline flight systems so passengers could book flights to more destinations.
Now, analysts and industry executives predict alliances will include sharing profits and employees, greater coordination of their route systems, even pooling resources to buy airplanes.

As a result, alliances could become more powerful brokers with airports, aircraft manufacturers and corporations seeking travel discounts.
An example of such a deal occurred two years ago, when the German airline Lufthansa invested $300 million for a 19 per cent stake in JetBlue.

On Aug 31, they signed a flight sharing agreement that will cover 180 Lufthansa destinations worldwide and 12 JetBlue cities in the United States and Puerto Rico.
The original deal, suggested by Wolfgang Mayrhuber, chief executive of Lufthansa, to David Barger, chief executive of JetBlue, at a dinner in Frankfurt, startled the industry.
The agreement started paying off quickly, executives at the airlines said.
JetBlue, which includes the Embraer E190, a commuter jet, began training Lufthansa pilots for its CityLine subsidiary, which flies to 70 European cities.
Meanwhile, Lufthansa taught JetBlue how to manage a fledgling cargo business that supplemented its passenger flights.

Lufthansa, which owned 80 per cent of British Midlands, has bought out the 20 per cent of that was still held by SAS, the Swedish airline, giving the German carrier complete ownership of the British airline.
Delta, the country’s biggest airline, has pushed to expand its partnership with Air France-KLM. They were already associated in SkyTeam but grew closer last year when Delta merged with Northwest Airlines, a longtime KLM partner.

Profit sharing

Since the merger, the Delta, Air France and KLM logos appear at Delta check-in counters around the world. The airlines split profits 50-50 on flights where they carry each other’s passengers, said Glen W Hauenstein, executive vice president for network planning and revenue management at Delta.

He said such an arrangement was the only way an alliance could succeed. “There is no you, there is no me, there’s only us,” Hauenstein said.
The next step for Delta could be the JAL deal.

Although Delta has not publicly discussed its interest, people with direct knowledge of the talks say the airline is willing to invest money and time in fixing the troubled JAL.
Delta officials are offering to send executives to work with their JAL counterparts on streamlining the airline, echoing the arrangement between the Italian automaker Fiat and Chrysler. Delta’s offer, believed to be as much as $500 million, stops short of an American takeover of JAL, which would be illegal.

The airline also does not want to risk offending employees or the Japanese government, which may bail out JAL.

For the deal to happen, JAL must abandon its relationship with American Airlines through the OneWorld alliance, which American has said it wants to maintain.
Reuters reported last month that American had enlisted Qantas and British Airways, which both want to retain access to the Japanese market.
Leaving OneWorld could result in financial penalties and probably would require the Japanese and American governments to determine that such a move did not violate antitrust laws.

But Delta expects any penalties to be absorbed by the SkyTeam alliance, which lacks a Japanese player, these people said.
Concluding a deal could take months, they said. For one thing, the new Japanese government may want to give JAL every opportunity to fix itself without outside intervention.

That is a reminder of the difficulty in arranging the right airline alliance, Hauenstein said. “Airlines are street fighters,” he said. “We’re so used to punching each other around that it becomes like diplomacy after a war. It takes time to adjust your sights.”