the benefits and challenges of airline alliances: sh&e webinar, 2009
DESCRIPTION
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 agreementsTRANSCRIPT
FACING THE GLOBALAVIATION CRISISFACING THE GLOBALAVIATION CRISISThe Benefits and Challenges of Airline Alliance AgreementsThe Benefits and Challenges of Airline Alliance Agreements
1
($4.6) ($4.1)
($0.1)
$12.9
($10.4)($9.0)
-$15
-$10
-$5
$0
$5
$10
$15
$20
2004 2005 2006 2007 2008E 2009F
The economic downturn and volatile oil prices have driven a dramatic collapse in airline profits . . .The economic downturn and volatile oil prices have driven a dramatic collapse in airline profits . . .
Global Airline Net Profit2004 - 2009
Source: ICAO (2004-2007), IATA (2008-2009)
2
… resulting in a large number of airline failures in 2008 – and certainly more to come… resulting in a large number of airline failures in 2008 – and certainly more to come
3
+
+
Airline mergers and acquisitions were accelerating even before the economic downturnAirline mergers and acquisitions were accelerating even before the economic downturn
+
+
+
+
+
+
+RosAvia
/+
++ +
4
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
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
Note: Reflects airlines approved for membership and anticipated alliance switching
Alliance Advantages:Increased critical mass, enabling airline to remain competitive with “mega-carriers”Economies of scale and scopeEnhanced network reachIncreased flow trafficLeverage alliance partners’ resources – capacity, distribution networks, terminals, FFP’s, purchasing power“Presence” advantages – and potential yield premiums -- at key airports and on key routes
5
Benefits of alliance membership can be considerable for a prospective partner carrierBenefits of alliance membership can be considerable for a prospective partner carrier
483450
0
100
200
300
400
500
600
Alliance 1 Alliance 2
$229
$262
$210
$220
$230
$240
$250
$260
$270
Alliance 1 Alliance 2
$73
$90
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
Alliance 1 Alliance 2
Enplanements, Thousands Revenue, USD $ Millions Profits, USD $ Millions
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
6
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
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
6% 6% 6% 6% 10% 9% 9% 8% 8%
14% 15% 15%19% 20% 20% 19% 21%
21% 21% 21% 24% 28%
4% 4%
4% 3%15%
17% 16%16% 16% 15%
14% 14% 15% 15%16%
10% 12%11% 11% 11%
18% 18% 18%20%
16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E
SkyTeamoneworldQualiflyer (Swissair)STARWings (NW/KL)
Estimated Alliance Share of Scheduled World ASK’s, 1996-2009
North America-Europe: 85%North America-Asia: 81%Europe-Asia: 79%Intra-North America: 68%Intra-Asia: 58%Intra-Europe: 39%
Global Alliance Share of ASK's by Market:
6%
20%25%
40%
60% 60%56% 54% 55% 53% 53% 54%
59% 60%
Based on published schedules for August of each year. Source: OAG
7
Antitrust immunity among alliance members is likely to increase,making them even more powerfulAntitrust immunity among alliance members is likely to increase,making them even more powerful
Immunity enables carriers withinthe alliance to operate virtually as a single entity
– Coordinated capacity planning, scheduling, pricing, revenue management and sales
– Revenue sharing
With U.S.-Europe air transport liberalization, immunity applications have been more favorably received
In spite of the liberalization and “carve-outs”, it is difficult for non-aligned carriers to compete in markets that are dominated by immunized alliances
Recent and Pending U.S. Immunity Grants
Recent
AF / KL / DL / NW / AZ / OK
CO + 10 Star members plusCO / AC / LH / UA joint venture
(Tentative)
Pending
AA / BA / IB / AY / RJ
8
The threat to smaller, stand-alone carriers remains considerableThe threat to smaller, stand-alone carriers remains considerable
Gain incremental traffic, revenue & profit
Higher yield from increased market share, service frequency, “S-Curve” benefits
Greatly extend network reach – with little increase in assets and operating costs
Circumvent difficulties in obtaining international route authority
Defend against organized aggression by other mega-carriers & alliance groups
Scale and scope economies in distribution, marketing & publicity programs
More advantageous GDS listings to off-line destinations
Exploit scale economies in operations and procurement
Greater access to capital markets
Advantages of M&A and Alliances: Implications for Stand-Alone Carriers:Traffic and revenue siphoned off
Yield dilution
Network remains circumscribed
Network expansion may continue to be blocked by restrictive bilaterals and government route allocation policies
Increased vulnerability to strengthened competitors
Sales remain limited to single carrier distribution network and interlines
Inferior GDS listings to off-line destinations
Comparatively higher costs of operations and procurement
Limited access to capital markets
9
While alliance benefits are undeniable, planning, negotiating and implementing entry into a global alliance can be time consuming and the outcome is not guaranteed
While alliance benefits are undeniable, planning, negotiating and implementing entry into a global alliance can be time consuming and the outcome is not guaranteed
IdentifyAlliance Sponsor
IT Linksand
Upgrades
Marketing & Distribution
Links
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
AssessAllianceOptions
ProductImprove-
ment
InterimBilateralCode-
Sharing with
AllianceMembers
Make Casefor Entry to
Existing Alliance
Members
Plan Implemen-
tation
FFPLinks
SelectPreferredOption(s)
Evaluate and Plan Negotiate Implement
Develop Alliance Plan Formally Invited to Join Alliance Airline Becomes Alliance Member
12 – 18 Months1+ Years
AlignPricing &
RM
10
As alliances have grown, they have become increasingly selective about new partners – and are imposing stringent requirements for entry
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
11
Bilateral code-sharing with partners in different geographic regions can be a viable alternative to Global Alliance membership, providing many of the same benefits
Bilateral code-sharing with partners in different geographic regions can be a viable alternative to Global Alliance membership, providing many of the same benefits
Recent BilateralCode-Sharing Agreements
Even anchor members of Global alliances continue to pursue bilateral code-shares outside the alliance framework
Some Non-Aligned Carriers Have Been Able to Partner
Across Competitive Alliances
12
STEP 1
Bilateral code-shares can also offer the first step towards possible acceptance in one of the three main alliancesBilateral code-shares can also offer the first step towards possible acceptance in one of the three main alliances
/
STEP 2 STEP 3 STEP 4 STEP 5
/
/
Airlines form bilateral code-shares based on region and
market
Airlines form bilateral code-shares based on region and
market
Airlines expand code-share to major aligned
airline
Airlines expand code-share to major aligned
airline
Airlines expand relationshipto include
synergies throughFFP links, etc.
Airlines expand relationshipto include
synergies throughFFP links, etc.
/
Existing alliance member carrier
sponsors “adopted airline” for alliance
membership
Existing alliance member carrier
sponsors “adopted airline” for alliance
membership
Airline becomes full or associate member of a Global Alliance
Airline becomes full or associate member of a Global Alliance
13
Partnership agreements should be reviewed periodically to determine if they continue to provide optimum benefitsPartnership 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
14
Most recent partnership trend: airlines have begun to use technology to complement or bypass the need for actual code-sharingMost 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
+
+
15
SH&E offers an array of services that help carriers identify, develop, negotiate, implement and improve code-sharing and alliance agreements
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
16
Thank you for your time!
Mark [email protected]
+1-617-218-3546
Arik [email protected]
+1-617-218-3561
sh-e.com
LONDON+44 20 7242 [email protected]
NEW YORK+1 212 656 [email protected]
BOSTON+1 617 218 [email protected]
LOS ANGELES+1 310 471 [email protected]
icfi.com
CHICAGO+1 503 265 [email protected]
PORTLAND+1 503 265 [email protected]
WASHINGTON, DC+1 202 572 [email protected]
ICF CORPORATE HEADQUARTERSFairfax, VA • +1 703 934 3000
ADDITIONAL ICF OFFICESAlbany • Charleston, SC • Dallas, TX • Dayton, OH • Denver, CO • Houston, TX
Irvine, CA • Lexington, MA • Los Angeles, CA • Middletown, PA • Ogden, UTOklahoma City, OK • Research Triangle Park, NC • San Francisco, CA • Washington DC
London • Moscow • New Delhi • Rio De Janeiro • Toronto© 2009 ICF International. All rights reserved.