June 2011

An airline industry shaped by alliances changes the competitive landscape for airline service. As a result, airport operators must evaluate how these changes affect

their airports and identify opportunities to improve financial and operating performance.

The Forces that Shape Airline AlliancesAirline alliances are being shaped by a global marketplace. Airline alliances emerged from a need to create seamless inter-national air travel. Globalized industries increasingly require access to local markets beyond a country’s primary international gateway. In response to this requirement, large, strategic, branded airline alliances were formed, together with code-sharing and other marketing arrangements, to mitigate the effects of restrictive bilateral agreements, ownership restrictions, and licens-ing and control regulations. Airlines based in different countries formed alliances to facilitate access to specific markets and to leverage their local knowledge, relationships with suppliers, and specialized marketing and distribution channels.

The liberalization of international aviation-related treaties contributed to the development of airline alliances, including the creation of more than 100 U.S. Open Skies agreements. Recent U.S. Department of Transportation (DOT) decisions are affecting the shape of alliances, including requirements

for joint ventures with provisions for cost and revenue sharing and the operation of flights by any airline within the alliance (also referred to as “metal neutral” joint ventures). The most integrated airline alliances include a grant of antitrust immunity (ATI), which allows allied airlines to legally set prices, allocate routes, and otherwise operate as though they were one airline. Since 2007, the U.S. DOT’s approval of ATI agreements for the major airlines in the three global alliances (Star Alliance, SkyTeam, and oneworld) has been based on the fulfillment of these requirements, as well as the existence of a signed U.S. Open Skies agreement.

Airline networks enhance alliances as airlines around the world link their networks to capture efficiencies and provide service to a

FINDING THE OPPORTUNITY IN CHANGE

The prolonged recovery from the financial and economic crises of the last few years has prompted new thinking

about airport planning. New challenges created by volatile oil prices, an aging infrastructure, scarce funding sources, and ongoing restructuring in the airline industry suggest that airport planning will need to be responsive to a constantly changing environment. This focus piece is the first in a series addressing challenges airport operators face in finding the opportunity in change.

FINDING THE OPPORTUNITY IN CHANGE “Metal neutral” joint ventures are structured so that

partners in the venture are indifferent as to which

one operates the ‘metal’ (aircraft) when they jointly

market services. Metal neutrality can be achieved

through cost-, revenue- and/or comprehensive

benefit-sharing arrangements.

Airline Alliances Responses to a Global Marketplace

In an increasingly global economy and air travel market, airline alliances provide opportunities for airport operators to expand the global reach of their airports.

2

Airline Alliances—Responses to a Global Marketplace

larger number of city-pair markets – particularly longer-distance, under-served markets. One objective of airline alliances is to increase traffic in markets behind and beyond international gateways, as shown on the map on the previous page. Another approach to achieving this objective is for airlines to evaluate opportunities to expand the geographical reach and market share of their network through mergers.

Advances in technology also shape airline alliances. The integration of new airlines into an alliance is, to a large extent, facilitated by the use of a common information technology plat-form to coordinate flight schedules, book single-ticket itineraries on multiple airlines, manage frequent-flyer programs and airport lounge access, and promote consistent customer service.

Airline Alliance Cooperation Takes Many FormsCooperation among alliance partners ranges from basic arms-length arrangements to highly integrated joint ventures. Airline alliance cooperation can take many forms and is changing in response to new challenges, including increased competition from low-cost carriers, the high cost associated with developing service to new international destinations, and the volatility of fuel prices. The figure below illustrates the range of airline alliance cooperation as it exists today. The range extends from the least alliance cooperation – where there is limited cooperation on specific routes (e.g., interlining, frequent flyer program credits, and airline lounge access) – to the most alliance cooperation, where there is a merger-like integration. The most integrated airline alliances include ATI agreements; revenue, cost, and benefit sharing; and “metal neutral” joint venture arrangements.

The Role of Airline MergersAirline mergers have increased the opportunities for alliance partners to serve markets behind inter-national gateways. Since the merger of Air France and KLM-Royal Dutch Airlines in 2004, most of the recent mergers have been between U.S. airlines. In contrast to the Air France/KLM merger, in which each airline continues to operate separately, mergers of U.S. airlines have resulted in single-branded entities with consolidated operations and facilities. The result is a combined airline that serves a greater number of destinations within the United States and throughout the world than the individual airlines before the merger. For example, as a result of Delta Air Lines’ merger with

AIRLINE ALLIANCES ACCOUNTED FOR NEARLY TWO-THIRDS OF

U.S. AIRPORT CAPACITY IN 2010Percent of scheduled departing seats

Notes: Low cost carriers include AirTran, Allegiant, America West (merged with US Airways in 2005), Frontier, JetBlue, Southwest, Spirit, and Virgin America. Airline alliance members are listed in this document. Includes domestic and international capacity.

Source: O�cial Airline Guides, Inc., online database, accessed May 2011.

2000

42.9%

Non-allianceairlines44.2%

Low costcarriers12.9%

StarAlliance12.4%

SkyTeam16.7%

oneworld13.8%

2010

66.2%

Non-allianceairlines

7.4%

Low costcarriers26.4%

StarAlliance30.5%

SkyTeam21.3%oneworld

14.4%

Limited cooperation on speci�c routes

Interlining Frequent �yer programs

Airline lounge access

LEAST ALLIANCE

COOPERATION

MOST ALLIANCE

COOPERATION

Merger-like integration

Antitrust immunity

agreements

Revenue, cost, and bene�t sharing

joint venture

“Metal neutral” joint ventures

Expanded cooperation to develop joint network

Code sharing Direct coordination on prices, routes, scheduling, and facilities

3

Airline Alliances—Responses to a Global Marketplace

Northwest Airlines in 2008, the combined airline (including regional affiliates) now serves 28 additional U.S. destinations and 15 additional world destinations, more than Delta alone served before the merger. Similarly, as a result of United Airlines’ merger with Continental Airlines in 2010, the combined airline (including regional affiliates) now serves 50 additional U.S. destinations and 79 additional world destinations, more than United alone served before the merger. The objective from a U.S. airline perspective is to strengthen the competitive position of their alliances by expanding their U.S. networks.

Airline Alliance Presence at U.S. AirportsAirline alliances have redefined the competitive landscape.With the development of airline alliances, the pursuit of passen-ger market shares shifted from competition among airlines to a contest between airline alliances. In 2010, the three global airline alliances—Star Alliance, SkyTeam, and oneworld —accounted for two-thirds (66%) of scheduled departing seats at U.S. airports, up from 43% in 2000. During the same period, the low-cost carriers doubled their share of U.S. airport departing seats. The participation of U.S. legacy airlines in global alliances has allowed them to remain competitive with the low-cost car-riers by expanding their global networks, making their network service more attractive to business travelers, and accessing markets that are not yet subject to low-cost carrier competition.

Of the three global alliances, the Star Alliance accounted for the largest share of capacity at U.S. airports in 2010, except at medium-hub airports. The large low-cost carrier share at medium-hub airports reflects, in part, the strategy of these car-riers, such as Southwest Airlines, to provide service to secondary airports, particularly in multi-airport regions. At this time, the three global alliances do not include any U.S. low-cost carriers, largely because the complexity and integration costs of alliances are inconsistent with the business model of these carriers. There are, however, examples of simplified and less costly forms of

alliance cooperation among U.S. low-cost carriers, such as JetBlue Airways’ arrangements with Aer Lingus, American Airlines, El Al Israel Airlines, Emirates, Icelandair, LAN Airlines, Lufthansa German Airlines, and South African Airways and Southwest’s code-share arrangement with Volaris.

THE STAR ALLIANCE ACCOUNTED FOR THE LARGEST SHARE OF CAPACITY AT U.S. AIRPORTS

IN 2010, EXCEPT FOR MEDIUM HUBSPercent of scheduled departing seats

6.3 8.4 8.0

21.1

7.4

21.8

44.2

30.59.2

26.4

16.4

9.6

10.5

12.214.4

22.1

17.2

20.928.0

21.3

33.4

20.630.1 29.5 30.5

0

10

20

30

40

50

60

70

80

90

100%

Star Alliance SkyTeam oneworld

Low cost carriers Non-alliance airlines

Notes: Low cost carriers include AirTran, Allegiant, Frontier, JetBlue, Southwest, Spirit, and Virgin America. Airline alliance members are listed in this document. Includes domestic and international capacity.

Source: O�cial Airline Guides, Inc., online database, accessed May 2011.

Largehubs

Smallhubs

Nonhubs

All U.S.hubs

Mediumhubs

“The Delta alliance is a key plank in our strategy to build an international network of airline partners that offers global coverage. Now that we have DOT approval, we will move quickly to implement the joint venture and plan to have it up and running by the end of the year.”

John Borghetti, Chief Executive Officer,

Virgin Australia Airlines, press release, June 10, 2011.

“By pooling resources to improve the overall service offering, and by sharing financial gains and losses, we find that the partners are able to harmonize the global network and become indifferent as to which of them collects the revenue or operates the aircraft over a given itinerary. They are thus able to focus their efforts on gaining the customer’s business by providing the best available fare, schedule, and routing between two cities.”

U.S. Department of Transportation, Final Order Joint Application of the Star Alliance,

July 10, 2009.

“The Delta alliance is a key plank in our strategy to build an international network of airline partners that offers global coverage. Now that we have DOT approval, we will move quickly to implement the joint venture and plan to have it up and running by the end of the year.”

John Borghetti, Chief Executive Officer,

Virgin Australia Airlines, press release, June 10, 2011.

“The Delta alliance is a key plank in our strategy to build an international network of airline partners that offers global coverage. Now that we have DOT approval, we will move quickly to implement the joint venture and plan to have it up and running by the end of the year.”

John Borghetti, Chief Executive Officer,

Virgin Australia Airlines, press release, June 10, 2011.

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Airline Alliances—Responses to a Global Marketplace

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Prepared by Linda Perry.

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Global ConsiderationsAirline alliances have the potential to expand the global reach of airports. As airlines increasingly rely on global alliances, airline service at U.S. airports is likely to be evaluated in terms of its contribution to an alliance’s market share and overall profitability. Future decisions about service at a specific airport may be influenced by the intensity of fare competition and the contribution of each additional passenger to the bottom line. The challenge for airport operators making financial and planning decisions is to consider the changing role of their airports in accommodating global airline alliances. The opportunities for airport operators will depend on the types of airline service provided at their airports and may include:

• Co-locating alliance members, evaluating facility use, and identifying other revenue-generating uses of returned

space. Co-locating alliance members reduces connection times and promotes more efficient use of facilities and space.

• Identifying additional rentable space for shared uses, such as alliance lounges, the costs for which would be shared among alliance members. Sharing facilities, such as baggage claim, lounges, ticketing, and check-in counters, improves the customer experience and strengthens the alliance brand.

• Exploring itineraries from spoke airports through alternate hubs and gateways for both connecting and origin-destina-tion opportunities to increase passenger choices and diversify the airline service base, particularly in response to lost or reduced service in already developed markets.

• Engaging the local community and businesses in promoting the role of the airport, exploring opportunities to connect the local region to international destinations and to provide low-cost carrier choices, and possibly providing alternate revenue sources for economic and air service development. n

Alliance Principal U.S. airline

Transatlanticjoint venture

partners

Transpacificjoint venture

partners Other airline members

Avianca*Continental Airlines

COPA Airlines*TACA*TAM AirlinesUS Airways

Air ChinaAir IndiaAir New ZealandAsiana AirlinesSingapore AirlinesThai Airways

Adria Airways

Aegean Airlines

Blue 1Croatia Airlines

EgyptairEthiopian Airlines*

LOT Polish Airlines

SASSouth AfricanSpanairTAP PortugalTurkish Airlines

* Member elect airline that has stated its intention to join the alliance and is currently completing the steps required for integration.** In August 2010 suspended operations indefinitely.

Americas Europe & Africa Asia & Pacific

Aerolíneas Argentinas*

Aeroméxico

China Airlines*China Eastern Airlines*China Southern AirlinesGaruda Indonesia*Korean AirMiddle East Airlines*Saudi Arabian Airlines*Shanghai Airlines*Vietnam Airlines

Aeroflot Russian Airlines

Air EuropaCSA Czech AirlinesKenya AirwaysTAROM Romanian Air Transport

Americas Europe & Africa Asia & Pacific

LAN AirlinesMexicana**

Cathay Pacific AirwaysKingfisher Airlines*Qantas AirwaysRoyal Jordanian Airlines

Air Berlin*FinnairIberiaS7 Airlines

Americas Europe & Africa Asia & Pacific