The Benefits and Challenges of Airline Alliances:  SH&E Webinar, 2009
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The Benefits and Challenges of Airline Alliances: SH&E Webinar, 2009

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Discussion of recent trends in airline alliances, the value that carriers can gain from different forms of alliance agreements, and issues that airlines are likely to face in negotiating and ...

Discussion of recent trends in airline alliances, the value that carriers can gain from different forms of alliance agreements, and issues that airlines are likely to face in negotiating and implementing alliance agreements

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The Benefits and Challenges of Airline Alliances: SH&E Webinar, 2009 Presentation Transcript

  • 1. FACING THE GLOBAL AVIATION CRISIS The Benefits and Challenges of Airline Alliance Agreements
  • 2. The economic downturn and volatile oil prices have driven a dramatic collapse in airline profits . . . Global Airline Net Profit 2004 - 2009 $20 $15 $12.9 $10 $5 ($0.1) $0 -$5 ($4.1) ($4.6) -$10 ($9.0) ($10.4) -$15 2004 2005 2006 2007 2008E 2009F Source: ICAO (2004-2007), IATA (2008-2009) 1
  • 3. … resulting in a large number of airline failures in 2008 – and certainly more to come 2
  • 4. Airline mergers and acquisitions were accelerating even before the economic downturn RosAvia + + + + + + / + + + + + + + 3
  • 5. In the current environment, joining an alliance has become almost a prerequisite for smaller, non-LCC airlines, to enable them to remain competitive – particularly in liberalized markets Alliance Advantages: Increased critical mass, enabling airline to remain competitive with “mega-carriers” Economies of scale and scope Enhanced network reach Increased flow traffic Leverage alliance partners’ resources – capacity, distribution networks, terminals, FFP’s, purchasing power “Presence” advantages – and potential yield premiums -- at key airports and on key routes Note: Reflects airlines approved for membership and anticipated alliance switching 4
  • 6. Benefits of alliance membership can be considerable for a prospective partner carrier SH&E was recently engaged by a mid-size European carrier to quantify the potential benefits to it of membership in two alliances under consideration Enplanements, Thousands Revenue, USD $ Millions Profits, USD $ Millions 600 $270 $100 $90 $262 $90 500 483 $260 450 $80 $73 $70 400 $250 $60 300 $240 $50 $40 $229 200 $230 $30 $20 100 $220 $10 0 $210 $0 Alliance 1 Alliance 2 Alliance 1 Alliance 2 Alliance 1 Alliance 2 5
  • 7. The three Global Alliances now account for more than 60% of scheduled capacity worldwide – and dominate key markets such as North America-Europe and North America-Asia Estimated Alliance Share of Global Alliance Share of Scheduled World ASK’s, 1996-2009 ASK's by Market: North America-Europe: 85% 100% SkyTeam North America-Asia: 81% oneworld Europe-Asia: 79% 90% Qualiflyer (Swissair) Intra-North America: 68% STAR Intra-Asia: 58% 80% Wings (NW/KL) Intra-Europe: 39% 70% 60% 60% 60% 59% 60% 56% 54% 55% 53% 54% 10% 53% 12% 16% 50% 11% 11% 11% 20% 18% 18% 18% 40% 17% 40% 16% 16% 16% 15% 16% 30% 15% 4% 3% 15% 25% 14% 14% 15% 20% 4% 4% 20% 19% 20% 20% 21% 19% 14% 15% 15% 28% 21% 21% 21% 24% 10% 6% 10% 9% 9% 8% 8% 6% 6% 6% 6% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E Based on published schedules for August of each year. Source: OAG 6
  • 8. Antitrust immunity among alliance members is likely to increase, making them even more powerful Recent and Pending U.S. Immunity Grants Immunity enables carriers within the alliance to operate virtually Recent as a single entity – Coordinated capacity planning, scheduling, pricing, revenue AF / KL / DL / NW / AZ / OK management and sales – Revenue sharing With U.S.-Europe air transport CO + 10 Star members plus liberalization, immunity applications CO / AC / LH / UA joint venture have been more favorably received (Tentative) In spite of the liberalization and Pending “carve-outs”, it is difficult for non-aligned carriers to compete in markets that are dominated by AA / BA / IB / AY / RJ immunized alliances 7
  • 9. The threat to smaller, stand-alone carriers remains considerable Advantages of M&A and Alliances: Implications for Stand-Alone Carriers: Gain incremental traffic, revenue & profit Traffic and revenue siphoned off Higher yield from increased market share, Yield dilution service frequency, “S-Curve” benefits Greatly extend network reach – with little Network remains circumscribed increase in assets and operating costs Circumvent difficulties in obtaining Network expansion may continue to be international route authority blocked by restrictive bilaterals and government route allocation policies Defend against organized aggression by Increased vulnerability to strengthened other mega-carriers & alliance groups competitors Scale and scope economies in distribution, Sales remain limited to single carrier marketing & publicity programs distribution network and interlines More advantageous GDS listings to off-line Inferior GDS listings to off-line destinations destinations Exploit scale economies in operations and Comparatively higher costs of operations procurement and procurement Greater access to capital markets Limited access to capital markets 8
  • 10. While alliance benefits are undeniable, planning, negotiating and implementing entry into a global alliance can be time consuming and the outcome is not guaranteed Evaluate and Plan Negotiate Implement Assess Select Identify Make Case Interim Plan FFP Align Product Marketing & IT Links Alliance Preferred Alliance for Entry to Bilateral Implemen- Links Pricing & Improve- Distribution and Options Option(s) Sponsor Existing Code- tation RM ment Links Upgrades Alliance Sharing Members with Alliance Members Develop Alliance Plan Formally Invited to Join Alliance Airline Becomes Alliance Member 1+ Years 12 – 18 Months Costs can be incurred as schedules are refined, revenue management practices aligned, and systems upgraded. Benefits may not be seen for an additional few years 9
  • 11. As alliances have grown, they have become increasingly selective about new partners – and are imposing stringent requirements for entry As alliances have gotten larger, the likelihood of a prospective new member competing with existing members has grown There are fewer and fewer regions of the world that are not already covered by global alliances Existing alliance anchor carriers may prefer to serve a region themselves rather than acquire a new partner based in that region For the alliance, there can be diminishing returns and increased costs and complexity with each new member added New alliance members may lose some commercial independence, and in some cases be forced to sever existing bilateral code-share arrangements Members may be encouraged to give up their own FFP program, losing a valuable marketing tool Membership fees can be high Depending on the alliance, a new member may only receive “associate member” status, and have little decision-making authority within the alliance New members must adhere to strict policies regarding product quality, safety and security 10
  • 12. Bilateral code-sharing with partners in different geographic regions can be a viable alternative to Global Alliance membership, providing many of the same benefits Even anchor members of Global alliances continue to pursue bilateral code-shares outside the alliance framework Some Non-Aligned Carriers Recent Bilateral Have Been Able to Partner Code-Sharing Agreements Across Competitive Alliances 11
  • 13. Bilateral code-shares can also offer the first step towards possible acceptance in one of the three main alliances STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 / Airlines expand Airlines expand code-share to code-share to major aligned major aligned airline airline / Airlines expand Airlines expand relationship relationship to include to include synergies through synergies through FFP links, etc. FFP links, etc. / Existing alliance Existing alliance Airlines form Airlines form member carrier member carrier bilateral code- bilateral code- sponsors “adopted sponsors “adopted Airline becomes full Airline becomes full shares based airline” for alliance airline” for alliance or associate member shares based or associate member on region and membership membership of a Global Alliance on region and market market / of a Global Alliance 12
  • 14. Partnership agreements should be reviewed periodically to determine if they continue to provide optimum benefits Code-sharing: scope of code-shares, regional exclusivity, audit of listings Route and schedule coordination Revenue sharing: SPA’s, code-share commissions Inventory allocation: Block space (hard, soft), free-sale Pricing, revenue management: joint fares, booking terms & conditions Product and service: Quality standards, audit provisions Marketing, advertising, branding Loyalty program linkages: Accrual and redemption policies, value of miles Cargo IT: Linkages, required upgrades Procurement 13
  • 15. Most recent partnership trend: airlines have begun to use technology to complement or bypass the need for actual code-sharing Carriers are using their own website distribution channels to jointly market potential connecting services with partner carriers + + + Linkages may be across traditional definitions of “network”, “point-to-point”, “low cost” and “legacy” carriers, but nonetheless make commercial sense 14
  • 16. SH&E offers an array of services that help carriers identify, develop, negotiate, implement and improve code-sharing and alliance agreements Assistance in identifying and selecting prospective code-share or alliance partners Valuation of alliance opportunities – Utilizing SH&E’s proprietary NETWORKS route planning model Assistance in “selling” carrier to prospective alliance partners Negotiation assistance Implementation assistance Evaluation and optimization of existing partnership agreements 15
  • 17. Thank you for your time! Mark Diamond mdiamond@sh-e.com +1-617-218-3546 Arik De ade@sh-e.com +1-617-218-3561 sh-e.com icfi.com LONDON NEW YORK BOSTON WASHINGTON, DC ICF CORPORATE HEADQUARTERS +44 20 7242 9333 +1 212 656 9200 +1 617 218 3500 +1 202 572 9400 Fairfax, VA • +1 703 934 3000 london@sh-e.com newyork@sh-e.com boston@sh-e.com washington@sh-e.com info@icfi.com LOS ANGELES PORTLAND CHICAGO ADDITIONAL ICF OFFICES +1 310 471 9118 +1 503 265 3212 +1 503 265 3217 Albany • Charleston, SC • Dallas, TX • Dayton, OH • Denver, CO • Houston, TX losangeles@sh-e.com cam@sh-e.com cam@sh-e.com Irvine, CA • Lexington, MA • Los Angeles, CA • Middletown, PA • Ogden, UT Oklahoma City, OK • Research Triangle Park, NC • San Francisco, CA • Washington DC © 2009 ICF International. All rights reserved. London • Moscow • New Delhi • Rio De Janeiro • Toronto 16