Airline alliances prove their worth

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The major airline alliances -- Star Alliance, SkyTeam and Oneworld -- are proving their worth as carriers cope with troubled times and target China, one of the fastest growing travel markets.

The three partnerships, originally set up around the key Transatlantic routes, now count some 50 companies in all, carrying millions of passengers and operating thousands of flights daily across 180 countries.

"Over the last decade, the alliance system has developed into a critical component of the industry," said Giovanni Bisignani, head of the International Air Transport Association (IATA).

"Today, alliances cover over half of global travel," Bisignani said, recalling how they were first set up to get around restrictions on an airline industry which is based on national jurisdictions.

Airline takeovers and tie-ups are fraught with difficulty as many countries impose limits on foreign ownership so as to favour the national carrier and protect their domestic markets.

The alliance system was set up in part to get around such hurdles and to allow cooperation so that member airlines could enjoy the advantages of scale provided by belonging to a bigger group.

"Alliances exist because airlines cannot offer comprehensive global coverage the way consumer brands like Nescafe or Coca Cola do," said Olivier Fainsilber, aviation consultant with Oliver Wyman.

"An alliance will strengthen an airline's network by reaching out to more destinations through partner carriers," Fainsilber said.

"Travellers, on the other hand, tend to trust their preferred airline's partners. They appreciate the expanded schedule choice and collect frequent traveler points for their entire journey.

"Everyone wins with alliances, which is why airlines and travelers like them and that competition authorities accept them," he said.

Yan Derocles, analyst at Oddo Securities, said that for the smaller airlines, an alliance "offers a real network for their passengers and (allows them) to attract clients who they would otherwise never get."

For example, Air France offers some 200 destinations in the United States via partner Delta Air Lines while it flies direct -- on its own -- to about 15 US cities.

"Obviously, we could not serve all these destinations profitably (on our own). It's mutual help -- we offer them our network in Europe, the Middle East and Africa and they offer us theirs in North America," an Air France official said.

As a result, competition between companies has become competition between alliances, said Star Alliance spokesman Markus Ruediger.

"If you look at how SkyTeam has tried to get Japan Airlines to leave Oneworld, clearly (you can see how) the alliances have become strategially important," Ruediger said.

A key market is China, with third-ranked airline China Eastern joining the SkyTeam alliance where China Southern has been a member since 2007.

The authorities estimate Chinese air traffic will be above 700 million passengers annually by 2020 and double thereafter by 2030.

"Apart from SkyTeam being well placed on the North Atlantic market with a 29 percent share, with (China) Eastern and (China) Southern it will have a very strong position in what will be the world's biggest market," said Derocles of Oddo Securities.

India is another key emerging market and the alliances have been busy there too -- Oneworld has signed up Kingfisher, the country's top airline, while SkyTeam are trying to get IndiGo on board.

For IATA's Bisignani, the alliances are the only way forward for airlines facing intense competition and wafer thin profit margins.

"Over 1,000 airlines compete in an industry that has an historical profit margin of 0.1 percent. That is not sustainable," he said.

© 2010 AFP

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