Since its inception, aviation has been a global business, ferrying people and goods across vast distances long before the concept of a global economy was established. While there have been great seafaring nations since the dawn of history, flight made it possible for every nation to gain access to the broader world. Hence the 1960s postwar quip that to be a nation you need two things: a flag and a national airline.
This mindset led to the development and protection of flag carriers, airlines designated by nations to be their face to the world, providing a cultural glimpse that projected the nation across the globe. And while U.S. deregulation in 1978 began a long process of breaking down those protective walls, the full arc of true integration has been far slower to evolve than in other business endeavors. Virtually every other form of commerce — banking, manufacturing, petro-chemical, technology — easily jumped national borders and became established far from its home base.
But not airlines. In an interesting twist of fate, these pioneers of global reach are, in most nations, closely monitored as to ownership and control with little enthusiasm for letting “foreigners” have a piece of the action. The United States, pioneer of deregulation and open skies, is adamant when it comes to who may own its airlines. This mindset limits access to global capital and investment, a restriction that applies in few other businesses.
As the cost of operations increased and the need to provide a global network became even more vital to success, the airlines sought a solution that would allow a semblance of global integration without running afoul of these legal restrictions. And so the airline alliance was born.
PRIOR TO 1997, when Star Alliance was founded, there were many attempts at this concept. Most worked for a while, but the only one to succeed over time was the 1993 tie-up between Northwest and KLM, the first union that took full advantage of the synergies available, early on enjoying the antitrust immunity that protected the arrangement.
In May of 1997, Star Alliance was established with its first five members: United, Air Canada, Lufthansa, Scandinavian Airlines and Thai Airways. Varig joined soon thereafter. Less than two years later, American Airlines, British Airways, Cathay Pacific and Canadian Airlines united to form oneworld, with Finnair and Iberia brought in quickly. And finally, in June 2000, SkyTeam launched by Delta Air Lines, Air France, Aeromexico and Korean Air — soon joined by Czech Airlines.
Each grouping had a similar rationale: to make the benefits enjoyed by frequent travelers of each member carrier valid across the group, vastly enhancing the number of places where perks and preferred treatment could be obtained. The MileagePlus Gold member was invited to use the Thai Airways lounge, and the traveler able to use premium check-in desks with American could now do so in Hong Kong as well.
While occurring not that long ago chronologically, the alliances emerged onto a different aviation landscape. The tech bubble was still growing, corporations and individuals were paying top dollar for premium treatment and, but for Southwest in the United States, there was nary a low-cost carrier to be found. The established standards of what was expected when traveling by air were still firmly in place.
The alliance model took hold in the industry, and all three alliances expanded according to the parameters established: New members were all full-service carriers with significant international networks, bringing a contingent of frequent travelers that would add value to the group’s customer base.
NONETHELESS, IN THE EXPANSION process, these similar groupings adopted quite different strategies. Star Alliance, which quickly grew to be the largest, welcomed all comers if they could add new reach to the group’s network. Hence, there was no prohibition to adding carriers that essentially had the same catchment area. In Europe, Lufthansa, Swiss International Air Lines, Austrian Airlines and SAS — once rivals — now had to adjust to the concept that their new partners remained prime competitors. The alliance was also the first to have a strong central administrative office that served as a marketing headquarters and a resource for members seeking to establish programs and offers. It also built the brand by requiring a certain number of aircraft in each fleet be painted in a Star Alliance livery.
Oneworld adopted a different philosophy, claiming to be a collection of quality airlines that was, and generally remains, dedicated to allowing members some dominance in their home region. For instance, in Europe the members are British Airways, Iberia, Finnair and airberlin — each with a market position that minimally impacts the others.
SkyTeam, being the last to emerge, followed a middle ground between the models established by its predecessors. Both SkyTeam and oneworld have designated affiliated members, while Star does not, which includes subsidiaries as part of the parent, if applicable.
Joining remains an expensive proposition that requires significant preparation — especially to IT systems. Facilities need to accommodate a much larger group of passengers eligible for special treatment, and staff members require training to deal with an influx of passengers whose primary value is realized by a partner carrier.
AS WE ALL KNOW, THE aviation world was upended in September 2001. It marked the beginning of the end of air travel as we knew it up until that time. Almost no established airline escaped hard times, and many faced bankruptcy — some, liquidation. In every geography, low-cost entrants emerged, challenging established airlines with their simplicity, cost structure and straightforward business propositions.
For much of the next decade, the alliances were buffeted by developments out of their control as member carriers disappeared, merged, revised their business models or simply succumbed to economic realities and, especially in economy class, radically changed the level of service.
HOW WILL ALLIANCES continue to evolve? A look at adaptations they’ve made in the past decade may provide clues to their future relevance.
First, as the three alliances expanded, carrying between them roughly 60 percent of the world’s passengers, cooperation among members of each alliance has steadily grown. On most major routes, members established joint venture models that result in a “metal neutral” arrangement where revenues are shared among the partners irrespective of whose aircraft operates the flight. However, onboard service levels can vary considerably.
Second, as the number of eligible airlines declines worldwide, there has been an increasing emphasis by the alliances to fill in “white spaces” where their global networks are seen to be weak. A prime example is India, which has but two major international carriers: Air India and Jet Airways. A third, Kingfisher, was slated to join oneworld but has since disappeared. With two airlines, three alliances and Air India to join Star Alliance in 2014, someone will continue to have a “white spot.”
Third, the initial idea that joining an alliance was a “’til death do us part” arrangement has also seen notable decline. Numerous airlines disappeared in the past decade, some to bankruptcy and others in different ways. Star Alliance’s Air Canada absorbed oneworld’s Canadian Airlines; previous Star members TAM and US Airways are headed, through mergers, to oneworld. Mexicana first joined Star Alliance, then moved to oneworld and finally disappeared entirely. While the groupings are basically stable, changes are more frequent than was originally anticipated.
Fourth, given the limited inventory of desirable partners, some airlines have chosen to simply play in everyone’s sandbox. In North America, WestJet, JetBlue and Alaska Airlines established codeshares with a plethora of partners, seeing more benefit to this approach than to aligning with a single group. In South America, the rich Brazilian market has no more players to be absorbed, so GOL, Brazil’s relatively new carrier based on a low-cost business model, was originally wooed by oneworld but is now partially owned by Delta Air Lines. Yet despite strong links with SkyTeam, it also has ties to oneworld’s Iberia and is rumored to be talking to Star’s TAP Portugal as well, resulting in a mix of links that not even a flowchart can clarify.
Fifth, when established, the three airlines of the Gulf — Emirates, Etihad Airways and Qatar Airways — railed against the alliances as being unfair cartels, with the network carriers having their own set of complaints against the Gulf trio. And yet Qatar is now a member of oneworld, one of those stunning reversals that left the industry scratching its collective head.
And finally, bear in mind that alliances are simply placeholders for the outcome that many hope to eventually see — crossborder ownership and truly global airlines. The process has made headway in Europe, where ownership has mimicked alliance bonds, with Lufthansa owning Star Alliance partners SWISS, Austrian and Brussels airlines; oneworld’s British Airways and Iberia forming IAG (International Airlines Group); and Air France/KLM both in SkyTeam. But that model has not transferred to South America, where oneworld’s LAN took over Star member TAM.
To sum up, alliances were conceived as a way to expand networks and market share in a time when the traditional airline model thrived. As the industry morphed over time, alliances and their members had to rethink and revise the ways in which alliances will remain advantageous arrangements. That process will only end when aviation suppliers are allowed to unite and operate as truly global companies. Until that time, there will continue to be surprises.
At a Glance
Star Alliance | oneworld | SkyTeam | |
Members | 28 | 13 | 20 |
Aircraft | 4,701 | 2,488 | 2,963 |
Passengers (millions) | 727.42 | 353.53 | 588 |
Daily Departures | 21,900 | 10,117 | 15,723 |
Countries Served | 195 | 151 | 178 |
Headquarters | Frankfurt | New York | Amsterdam |
Future | + AI, -US, JJ | +US, JJ, UL | – |
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Lotte Hotel Seoul
2014 / February 2014
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