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

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