Alliances grew out of aviation’s regulatory constraints. Recognizing that the antiquated bilateral system denied them the commercial freedoms found in other industries, airlines hit upon a unique solution. The groupings have proved a very valuable tool for many carriers.
The first alliance dates back to the 1930s, but it was the 1997 formation of Star Alliance that marked the beginning of the modern trend. Star Alliance has been followed by oneworld and SkyTeam, and together these three groupings now represent more than 70% of international scheduled traffic. Only two of the world’s biggest 20 airlines are unaligned.
The alliance business model is centered on the needs of the high-value international traveler, but delivering revenue and cost saving opportunities to member airlines has gained in importance.
For example, interline revenues generated within oneworld have grown 150% during the past 10 years, from less than $1 billion to $2.5 billion. Added together, they total $16.2 billion for the decade, or 3% of its member airlines’ total passenger revenues. And revenues from alliance fares and sales activities have grown by some 330%.
Oneworld Managing Partner John McCulloch believes the oneworld figures make clear the value the alliance has added to all its key stakeholders. “In an industry where profit margins are thin at best, revenues and cost savings from oneworld have made an increasingly important contribution to our member airlines’ financial standings,” he says.
Changing the rules
Alliances have made an enormous difference to the industry. And their efforts to gain antitrust immunity are a pointer for a brighter future even if they also illustrate the challenge involved.
The US granted antitrust immunity to Northwest and KLM as far back as 1992 following the signing of US-Netherlands Open Skies. The struggle to overcome transnational barriers is ongoing, however. As recently as February 2010, American Airlines had to apply for antitrust immunity with its oneworld alliance partners British Airways, Iberia Airlines, Finnair and Royal Jordanian Airlines. And United Airlines, Continental Airlines and All Nippon Airways have applied for immunity across the Pacific.
lliances have played their part in overcoming regulatory restrictions in the past 10 years. The creative change for the next decade lies in full liberalization. A level playing field and a normal commercial framework would be the cornerstones of a more resilient industry.
IATA’s Agenda for Freedom is tackling these important issues. Countries that have signed up to the initiative include Chile, Malaysia, Panama, Singapore, Switzerland, the United Arab Emirates, Bahrain, Kuwait, Lebanon, Qatar and the US. It has also been endorsed by the European Commission.
“The world has changed,” says IATA Director General and CEO Giovanni Bisignani. “Airlines are real businesses. Their bottom lines are subject to the harsh discipline of the market that has seen the industry lose nearly US$50 billion since 2001. Airlines made global business possible, but they remain a highly fragmented industry unable to cover their cost of capital.”
President of the Council of ICAO Roberto Kobeh Gonzalez, who witnessed the signing of the Agenda for Freedom, agrees that greater economic freedom is a critical element for aviation. “While promoting safety, security and environmental responsibility, governments and industry must also find a platform for financial sustainability in civil aviation,” he says.