Airline Alliances: A Path to Greater Centralisation of the Aviation Industry

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An aircraft with ‘Star Alliance’ livery

A majority of today’s airlines in the aviation industry are part of what’s called an ‘Airline Alliance’. In theory, an alliance of this nature is an agreement between several different airlines e.g. United Airlines and Air China, to cooperate with one another, meaning passengers enjoy a better experience whilst traveling via more than one airline.

Toby Hill at hopper.com describes airline alliances as so:

They offer passengers an extended network through code sharing agreements, where two or more airlines share the same flight, listing it in both their reservation systems; this makes booking easier and moving between connections more efficient. Flight times are therefore reduced, and – with operational costs more streamlined – ticket prices lowered (though of course alliances can also lead to a loss of competition on some routes and so occasionally have the opposite effect).

Furthermore, frequent flier rewards can be accumulated across airlines within the same alliance, reducing the time it takes to reach those sky-high mileage rewards. And round-the-world tickets can be bought far more easily, and cost a lot less, as the alliances work together to formulate an overall offer.

The three dominant airline alliance groups are Star Alliance, SkyTeam and Oneworld. Let’s take a brief look at each one in turn:

Star Alliance

  • Star Alliance were the first airline alliance, coming to fruition in 1997.
  • They have 27 members across the world including Air Canada, a founding member, and EgyptAir.
  • Over 640 million passengers a year use airlines within the alliance
  • 192 countries are covered by the alliance, with destinations reaching 1,330
  • Their fleet size is 4,657 aircraft
  • Daily departures stand at 18,500
  • Revenue of all airlines combined is $179 billion

Oneworld

  • Oneworld were the second airline alliance, founded in 1999
  • They currently have 15 members which include founding members American Airlines and British Airways
  • 557.4 million passengers every year use an airline under Oneworld
  • 161 countries are serviced spanning 1,016 destinations
  • Their aircraft fleet size is 3,560
  • Daily departures come to 13,814
  • Revenue amounts to more than $130 billion

SkyTeam

  • SkyTeam became the third airline alliance, originating in 2000
  • They possess 20 members that include Air France, a founding member, and China Airlines
  • 665.4 million passengers use their airlines per year
  • SkyTeam service 177 countries across 1,062 destinations
  • Aircraft fleet size stands at 3,937
  • Daily departures reach 17,343
  • Revenue for all 20 members totals just under $141 billion

All three alliances combined demonstrates just how much of the aviation industry is involved:

  • 62 Airlines
  • 1.86 billion passengers per year
  • A fleet of 12,154 aircraft
  • Daily departures of 49,657
  • Revenue of $450.95 billion

Alliances do exist outside of the big three, but on nothing like the same scale and with airlines less renowned. They are:

U-FLY Alliance

  • The World’s first alliance of low-cost airlines, with headquarters in Honk Kong
  • 5 members, 23.6 million passengers every year, 9 countries spanning 197 destinations and a fleet size of 116

Value Alliance

  • The second alliance to only consist of low cost airlines, established in the Asia-Pacific region
  • 8 members, 47 million passengers a year, 25 countries spanning 160 destinations, a fleet size of 176 and daily departures of 298 aircraft

Vanilla Alliance

  • Founded with 5 members to improve air connectivity within the Indian Ocean
  • 2.3 million passengers a year, spanning 82 destinations and a fleet size of 45 aircraft

One airline not connected to any airline alliance is Virgin Atlantic, who were ranked number 28 out of 100 in the Skytrax world airline awards for 2016. Virgin’s founder, Richard Branson, had in the past made overtures about joining an alliance. In 2012, the Telegraph reported that Virgin Atlantic were months away from doing so, with Branson backtracking on original comments about how airline alliances are anti-competitive. But, in 2014, Sir Richard’s stance had changed once more, as covered by The Wall Street Journal:

“The regulators in their wisdom have decided to create a number of very big alliances,” Mr. Branson said. “My instinct is that competition brings better fares and quality than cooperation”.

Virgin do, however, have codeshare agreements with other airlines, which include Air China, Delta Air Lines and Singapore Airlines. They are just not connected through an airline alliance.

Britain’s low cost carriers Ryanair and easyjet are also not part of any alliance. This is because that these airlines are chosen by passengers primarily on the basis of getting a better deal, which is what Ryanair and easyjet specialise in.

The other major airline not attributed to an alliance is the Dubai based airline, Emirates:

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  • Emirates has a fleet size of 251 aircraft, with its hub at Dubai International Airport
  • They cover 61 countries and 136 destinations
  • They flew 51.9 million passengers in 2015-16, and reported a profit of $1.9 billion
  • Ranked 1st in the Skytrax world airline awards for 2016

This report from the Financial Times in May 2016 covers some interesting points about the performance of Emirates:

It is thriving as one of the most disruptive forces in global aviation.

The fast-growing Dubai-based airline recorded a robust performance even as it was hit by the negative effects of a strong US dollar and economic slowdowns in oil-producing countries.

State-controlled Emirates, founded in 1985, has over the past 20 years put pressure on longer established airlines in Europe and Asia, and is now increasing its presence in the US.

This has prompted some of these airlines to demand actions by governments against Emirates and the other fast-growing Gulf carriers — Etihad Airways and Qatar Airways.

In the most recent dispute, US carriers last year claimed the three Gulf carriers had received $42bn in hidden subsidies over the past decade, and said these violated aviation agreements between the US and the UAE and Qatar. The Gulf carriers deny the claims.

Declining oil prices have put the brakes on economic growth in important markets for Emirates, including oil-producing countries in the Middle East, as well as Russia and some nations in Africa and Asia.

Here is yet another example of tenuous relations between the East and the West, primarily instigated by the political establishment of the West.

As well as Emirates, Etihad Airways of Abu Dhabi are also not part of the leading airline alliances. Instead, they formed a partnership of 8 airlines under the heading, ‘Etihad Airways Partners‘. Together, this partnership – which does not include Emirates – has a combined network of over 400 destinations across six continents.

A piece by Global Flight explained:

Etihad has now surprised the market by announcing its own “alliance” Eithad Airways Partners with five of its equity partners, including Oneworld partner Air Berlin and Jet Airways – but interestingly enough not with two of its key partners, Virgin Australia and Alitalia. The alliance will also be open to any other airline, even if they are already member in another alliance. The purpose of the alliance is a coordination of schedules and harmonisation of Frequent Flyer Programs.

This leaves Emirates’s – ranked the world’s top airline by Skytrax and growing in profitability by the year – as being independent from an airlines alliance or partnership. An article by The National published in in August 2015 looked into this in more detail:

The world’s top-50 airlines ranked by brand value includes 36 alliance members. Of those for which comparative data is available, member airlines saw a total average 3.4 per cent decline in their 2015 brand valuations.

But airlines that are not alliance members saw an average rise of 12.3 per cent in their brand values, the data shows.

Savio D’Souza, the associate director at Brand Finance, which also has operations in Abu Dhabi, says the likes of Etihad and Emirates have turned the alliance model “on its head”. Indeed, it “probably doesn’t work any more”, he says.

For alliance members whose values rose, the average growth was just US$53 million between 2014 and 2015. But for non-alliance members with rising value, the average was $320m.

The UAE’s two biggest airlines are not members of the three big airline alliances. Emirates’ president Tim Clark said in May alliances were “the old way” of doing things, while its chairman Sheikh Ahmed bin Saeed Al Maktoum has said the Dubai airline could not have grown as big by joining an alliance.

James Hogan, president and chief executive of Etihad, said last year that the model is “fractured”.

Tim Clark’s words that alliances were ‘the old way‘ of doing things is interesting, given that two of the three biggest alliances are located in Germany and the other in America. It’s perhaps another example of The West seeing their hegemony being steadily challenged by the East.

As I speculated on recently, a possible link exists between severe flooding in China and the ongoing dispute in the South China Sea. Does a similar link exist between the growing number of fires inside some of Dubai’s towering skyscrapers?

Alissa Walker at Gizmodo wrote a piece on this back in January after a massive blaze engulfed The Address Hotel on New Year’s Eve in 2015. The issue of fires breaking out inside Dubai’s skyscrapers dates back to 2012. Most recently, a fire broke out at the  75-storey residential Sulafa tower.  And before this, a high rise tower near Dubai caught fire. I leave you to draw your own conclusions.

Of direct note to Emirates, though, was a story that broke on Wednesday 3rd August 2016. One of their jets crashed landed at Dubai International Airport, and whilst none of the people aboard were seriously injured, a firefighter was killed in the aftermath. It is speculated that the landing gear on the plane did not engage resulting in the aircraft landing on it’s underside.

This is perhaps nothing more than coincidence, but it is noteworthy nonetheless.


Returning to airline alliances, what we are seeing amongst the vast majority of airlines is, as with engine manufacturers, a coming together. 62 airlines are part of 3 alliances. The alliances will say that because of this union between airlines it ensures passengers get a better deal. Many leading lights in the industry, including Richard Branson and growing economies in the East, would disagree. Emirates are managing to build continuously year on year without being under the jurisdiction of an alliance. This might explain why the Financial Times reported that there had been calls from US airlines for Washington to reduce Emirate’s access to the American market.

Outside of airline alliances, we see similar examples of centralisation in other industries, and indeed whole political unions such as the EU. And notice that all the while the talk is off separate companies and corporations going up against one another, when in fact if you look at what is happening it is clear that corporations are steadily converging. The field is narrowing. Cooperation is becoming the chosen model. In the West at least.

Centralisation is the cornerstone of the aviation industry. But on the surface at least, it doesn’t appear that Emirates want to be part of it.

I will explore this more in my next investigation about the manufacturers of aircraft and how competition continues to be deferred in favour of singular corporate dominance.

 

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