Mar­riage of Con­ve­nience

Polygamy has be­come the se­cret to suc­cess among legacy car­ri­ers. Here’s why air­lines are join­ing forces and what it means for trav­el­ers

Business Traveler (USA) - - CONTENTS - By Jenny Southan

What air­line JVs mean for trav­el­ers

Ex­chang­ing vows with your arch ri­val is not com­mon among peo­ple, but for air­lines strate­gic knot-ty­ing cer­e­monies have be­come more and more pop­u­lar. Stronger than a code­share but weaker than a merger, the first joint ven­ture (JV) was be­tween North­west Air­lines and KLM in 1997, and since then the wed­ding bells have rung non­stop, al­though there’s been a fair amount of in­fi­delity on the way.

Ac­cord­ing to re­search from global man­age­ment con­sult­ing firm LEK, JVs made up only 5 per­cent of global long­haul air­line traf­fic a decade ago, yet by the end of 2016 it was 25 per­cent. In its re­port Reach­ing New Heights To­gether in 2017: How Air­lines Can Max­imise the Value of Joint Ven­tures, LEK states:“We be­lieve that deeper in­te­gra­tion be­tween JV part­ners of all sizes is in­evitable, and that‘vir­tual merg­ers’will be­come in­creas­ingly pop­u­lar. By 2021, 35 per­cent of all global long-haul traf­fic could be part of an im­mu­nized joint ven­ture.” Some ex­perts be­lieve it could reach 50 per­cent. What­ever hap­pens, con­sol­i­da­tion will con­tinue.

What are the ben­e­fits? For air­lines, many. Mar­cel Fuchs is vice-pres­i­dent of At­lantic and Pa­cific sales for United, which has joint ven­tures with ANA, Air New Zealand and Lufthansa .“Through these gov­ern­men­tap­proved part­ner­ships, we jointly co­or­di­nate our sched­ules, sales, mar­ket­ing and cus­tomer ser­vice to of­fer many more travel op­tions than we would oth­er­wise be able to by our­selves,” Fuchs says.

A spokesper­son for Bri­tish Air­ways agrees:“Joint ven­tures al­low car­ri­ers to launch new routes that oth­er­wise would not be vi­able if only op­er­ated by one car­rier – for ex­am­ple, some of our re­cently launched ser­vices to the US (San Jose, New Or­leans and Austin) are as a re­sult of our joint busi­ness with Amer­i­can Air­lines. They also en­sure bet­ter com­pe­ti­tion in cer­tain mar­kets, which is good for cus­tomers.”

New routes, co­or­di­nated sched­ules, more choice, and a greater va­ri­ety of fares are all JV ad­van­tages for trav­el­ers, says Ig­nazio Strano, vice pres­i­dent, head of joint ven­tures and Star Al­liance for the Lufthansa Group.“In a code­share en­vi­ron­ment, when you put the Lufthansa code on a Thai Air­ways flight, for ex­am­ple, I can only of­fer what Thai of­fers me to sell. In a JV, you are talk­ing to each other about prices and ty­ing up con­tracts that al­low each other to ac­tu­ally sell from the high­est

These mar­riages of con­ve­nience are also a re­ac­tion to com­pe­ti­tion from low-cost car­ri­ers

to the very low­est prices. This gives more op­por­tu­nity to cus­tomers to travel on low fares on both air­lines.”

Greater Flex­i­bil­ity

Like mar­riages, not all JVs are the same. In fact – whis­per it – they are not al­ways the mar­riage of equals. They can be ma­jor, head­line-grab­bing tie-ups be­tween air­lines – such as Qan­tas and Emi­rates, which be­tween them have the big­gest fleets of A380 su­per­jum­bos in the world and a com­bined net­work of 2,000 routes – or they can be smaller, more strate­gic part­ner­ships be­tween the likes of Delta and Korean Air, for ex­am­ple.

For the pas­sen­ger, JVs prom­ise “any­where to any­where” tick­ets, with con­nec­tions avail­able on mul­ti­ple air­lines through just one book­ing chan­nel, as well as re­cip­ro­cal fre­quent flyer ben­e­fits such as lounge ac­cess and miles earn­ing and re­demp­tion.

“Joint ven­tures al­low cus­tomers to mix and match book­ings on a wider net­work to best suit their travel needs,” ac­cord­ing to BA. “Once you pur­chase a ticket, you can use ei­ther of the air­lines’ web­sites to check in. If you hap­pen to be a trans­fer cus­tomer mov­ing be­tween the two air­lines at one of the big hub air­ports such as Lon­don Heathrow or NewYork JFK, then there are ded­i­cated fa­cil­i­ties and global sup­port teams on hand.”

Strangely, for air­lines that spend so much mar­ket­ing their dis­tinc­tive brand, in a JV you of­ten don’t know which air­line you are fly­ing on. Known as“metal neu­tral­ity,”for trade body IATA this is “per­haps the defin­ing fea­ture of a JV; the air­lines in­volved share rev­enue and costs on a given route no mat­ter which is do­ing the ac­tual fly­ing.”

It has been es­ti­mated that last year’s sum­mer flight sched­ule saw al­most 80 per­cent of ASKs (avail­able seat kilo­me­ters) across the North At­lantic flown by air­lines in joint ven­tures.

We’ve listed ten sig­nif­i­cant JVs be­low, but it is a fast-mov­ing space. To take one ex­am­ple, in 2012,Vir­gin sold a 49 per­cent stake to Delta; this year it handed Air France-KLM an ad­di­tional 31 per­cent of the pie in re­turn for £220 mil­lion ($300 mil­lion), leav­ing Vir­gin with only 20 per­cent, and no ma­jor­ity con­trol. (To com­plete the cir­cle, Delta is buy­ing a 10 per­cent stake in Air France-KLM.)

What does this mean for trav­el­ers? “Be­fore the Delta joint ven­ture we were sim­ply a point-to-point car­rier be­tween the UK and North Amer­ica,”ex­plains Shai Weiss, chief com­mer­cial of­fi­cer for Vir­gin At­lantic. “Post-trans­ac­tion, we can con­nect to over 200 des­ti­na­tions in the US out of the ma­jor hubs both in NewYork, At­lanta and newly launched Port­land, Seat­tle, San Fran­cisco and Los An­ge­les.”

De­spite los­ing ma­jor­ity con­trol of his air­line, Sir Richard Bran­son was clear about the ef­fect for trav­el­ers. In an open let­ter on vir­gin.com last July 27, he wrote: “One of the best moves we made nearly five years ago was ty­ing up with Delta Air Lines to cre­ate a joint ven­ture across

‘Joint ven­tures al­low cus­tomers to mix and match book­ings on a wider net­work to best suit their needs’

the At­lantic. Part of the ra­tio­nale was to pro­vide a com­pet­i­tive al­ter­na­tive to BA and Amer­i­can Air­lines’ al­liance and it has cre­ated a strong plat­form for us to pro­mote and sup­port our brand in this highly com­pet­i­tive mar­ket.”

Sir Richard’s ex­pla­na­tion con­tin­ues: “Delta has helped us con­sid­er­ably with feed from Amer­ica, but be­cause we don’t have more slots at Heathrow or Gatwick we’re un­able to en­joy feed from Europe or pro­vide ex­tra on­ward jour­neys for those cus­tomers we are now car­ry­ing to Lon­don. To­day, I’m de­lighted to say that we’ve agreed with Air France-KLM and Delta our col­lec­tive in­ten­tion to form an en­hanced joint ven­ture, in­clud­ing Al­i­talia, which will be ex­tremely ben­e­fi­cial to our air­line, our cus­tomers and the brand.”

Low-cost Ri­vals

While JVs have been used to com­bat com­pe­ti­tion from Gulf air­lines for some years, they have also been a re­ac­tion to ri­valry from low-cost car­ri­ers. More re­cently, the emer­gence of low-cost long­haul op­er­a­tions across the At­lantic has cre­ated even more of a shake-up, with the likes of Nor­we­gian, West­jet and Ice­land’s Wow Air si­phon­ing off cus­tomers who might oth­er­wise have flown with BA or Vir­gin At­lantic, for in­stance, to the US.

The bat­tle is set to con­tinue as bud­get air­lines seek out their own part­ners. Ryanair an­nounced a tie-up with Air Europa ear­lier this year, al­low­ing cus­tomers to con­nect to 20 des­ti­na­tions from the Span­ish air­line’s long-haul net­work of des­ti­na­tions (in­clud­ing Bos­ton, Mi­ami and NewYork) via Madrid, and make Air Europa book­ings on ryanair.com.

Mean­while, Nor­we­gian has an­nounced a new re­la­tion­ship with Easyjet to get feeder flights from across Europe on to its low-cost ser­vices to US cities such as Las Ve­gas, LA and Oakland-San Fran­cisco. In the Asia Pa­cific re­gion, low-cost air­line Air Asia has now signed a mem­o­ran­dum of un­der­stand­ing with Air China to launch a new bud­get car­rier called Air Asia China.

Whether it is the last mar­riage of con­ve­nience re­mains to be seen, but for air­lines, while there may be an oc­ca­sional men­tion of love, sign­ing that piece of pa­per is all about busi­ness. BT

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