WHAT KIND OF COOPERATION TOMORROW BETWEEN LEGACY AND LOW-COST AIRLINES ?
The development of low cost airlines at major airports renews the question of partnerships with legacy companies. One day will they feed transfers at the hubs of conventional operators ? An explosive subject that will have a strong impact on employment.
Tomorrow, what will the cooperation between legacy airlines and low-cost carriers look like ? In other words, how will the former, whose principal activity is based on a system of correspondences between short and longhaul flights, work with the latter, who are specialised mainly in short-haul flights, also known as point-to-point ? This will be one of the major strategic issues of the next few years, even if, in May, several Asian low-cost carriers decided to join forces. At the time of the birth of the low-cost phenomenon in Europe more than twenty years ago, the experts considered these two models to be incompatible. Since then, following the first agreement between a traditional airline and a low-cost company at the end of 2002, namely United Airlines and the young Australian Virgin Blue, other collaborations have emerged, such as Air France with the Brazilian carrier Gol in 2007 and the Canadian Westjet in 2010, as well as that of Emirates and Easyjet in 2013. But these agreements remain marginal. However, with the strong development of low-cost carriers at the major hubs, the difficulties of legacy airlines in making their short and medium-haul network profitable and with their creation of low-cost subsidiaries, all the ingredients for intensive cooperation between the both types of companies appear to be present. There are many sorts of partnership. Especially when, in order to penetrate those markets locked into the low-cost carriers, legacy companies have no choice but to ally with them. This is the reason behind the agreement between Air France and Gol. The code-sharing agreements with the Brazilian low-cost carrier allow Air France to place its flight code on Gol’s Brazilian domestic flights in continuation with flights from Paris and thus allow it to offer its passengers destinations it does not serve itself. Even though they raise the question of product harmonisation over the whole trip, these agreements increase the de facto presence of legacy companies in certain markets and in return bring to additional passengers to low-cost carriers, often welcome during a phase of strong development.
THREE-QUARTERS OF WORLD TRAFFIC
Presently confined to the domain of individual companies, such cooperations are beginning to be elevated to the level of the three major alliances that rule the sky, namely Star Alliance (Lufthansa, United, Singapore Airlines…), Skyteam (Air France, KLM, Delta…), and Oneworld (American, British Airways, Cathay Pacific…), which between them carry three-quarters of world traffic. Star Alliance, the largest, has even decided to knock on the doors of low-cost carriers. In December 2015, it launched a concept allowing its 28 members to propose a connecting flight with a low-cost company at certain hubs. « Our
passengers have expressed the need for access to markets that we do not optimally serve. In most cases, legacy airlines are not
able to fill that void » , explained Mark Schwab, CEO of Star Alliance. At the end of 2016, the South African low-cost Mango will be the first to cooperate with Star. Will this system create a contradiction for these major alliances ; that of continuing to offer a global network of destinations (their true vocation) whilst a large number of routes constantly slip through their fingers to the benefit of low-cost carriers, or (and) that some of their members develop a low-cost subsidiary in parallel with their main activity ( Scoot for Singapore Airlines, for example), or even transfer part of their short and mediumhaul activity to such a subsidiary, as Lufthansa does with Eurowings ? Such cooperation can also involve certain companies in the Gulf. The partnership between Emirates and Easyjet allows the Dubaï airline’s passengers to use their air miles on the European network of the British company. Tomorrow, there is nothing to prevent the two companies from signing code-sharing agreements that would allow Easyjet to bring passengers to the European airports from which Emirates’ long-haul flights take off for Dubaï. But above and beyond these agreements, another type of cooperation has been discussed for some years within the airline industry : that of feeding the hubs of the major airlines by low-cost carriers. In other words, the transfer of all or part of a legacy company’s short and medium-haul network to a low cost carrier. Today, many passengers already take the initiative of booking a lowcost flight from a regional airport to Roissy in order to then take a long-haul flight.
IT IS ALL ABOUT THE BALANCE OF POWER
Michael O’Leary, CEO of Ryanair, is a firm
believer in Europe. « Lufthansa, British Airways and Air France will be obliged to change their model. With competition from the Gulf airlines (Emirates, Etihad, Qatar, ed), they can no longer survive with a profitable long-haul network which subsidises a loss-making short-haul network (...). They will continue to lose money on the short-haul network and will hand over some of their short distance routes to companies such as Easyjet or Ryanair in order to feed their international flights from their hub(s) » , he explained last year in La Tribune. It is all about the balance of power. Unlike the aforementioned agreements, where low-cost carriers have adapted to legacy airlines, Ryanair or Easyjet do not want such cooperation with a conventional carrier to distort their model. «For a legacy company, it makes sense to go and see Easyjet. The question for us is what’s in it for us and how do
we make money » , recently explained Carolyn McCall, executive director of Easyjet, stressing that she did not wish to deviate from the simplicity of the model that has made Easyjet so successful: « If we make inter-airline agreements (tariff agreements, ed) or codesharing, it starts to become complicated, we become dependent ». Michael O’Leary shares this point of view and offers his own solution. « Ryanair or Easyjet could operate flights on behalf of Air France over its routes and flight codes since our costs are lower. In this kind of cooperation, Air France could pay us 50 euros per seat for us to operate this or that route », he explained. Out of the question, too complicated, reply the legacy airlines, citing for example the problem of baggage transfer. Above all, handing over the feeding of hubs to low-cost carriers would cause massive job losses and major social conflicts. Such possibilities seem to have been ruled out today. At present it is the time for restructuring and with the fall in fuel prices balance sheets are improving. However, in the long run, unless one imagines that European legacy airlines will manage to emulate those in the United States and reduce their costs to the level of low-cost companies, the issue of feeding hubs by low-cost carriers will arise. Not so much for the « low-cost pure-players » such as Easyjet or Ryanair, but more for the low-cost subsidiaries of the major legacy airlines; Eurowings for Lufthansa, Vueling for British Airways and Iberia, as well as Transavia for Air France-KLM. This topic is an explosive one on the social front for these large groups. In the longer term, if some of these low-cost subsidiaries end up by collapsing in the struggle against the pure-players, Michael O’Leary’s prophecy could one day come true. ■