Airlines: Another Look at Business Partnerships

The Business of Airline Parternerships

Understanding the Business Benefits of Airline Alliances

 

The Business of Airline Parternerships

 

We recently had an article discussing partnerships for small businesses, and the benefits that strategic partners can bring to a company. But having recently booked a business trip to Warsaw, Poland, I feel compelled to revisit the topic. Partnerships, when maximizing on the expertise and strengths of each partner, are just all around good business for any firm. In this case, we’ll look at the benefits have on large companies, specifically, airlines.

When I booked my ticket last week, I went to the United Airlines website. The flight that best suited my desired travel time was actually on Lufthansa via Munich. I was then given return flight options, and selected a flight on Austrian Airlines that connected in Vienna. The flight through Vienna gave me enough time for a final meeting with the client in the morning, but would still have me home by dinner time. I booked the ticket with a chuckle, recognizing that I booked seats on two different airlines on the website of a third.

The Airline Industry

When looking at the airline industry, it is a notoriously difficult business to be in. Large aircraft can cost €100M and then some. Infrastructure, like baggage tracking systems, cargo handling equipment and fleet maintenance hangars are capitally intensive. Larger airlines employ tens of thousands of employees, each of which represents incremental cost to the company. And there are things like our beloved fuel prices, which simply show up in your ticket price as the enigmatic ‘fuel surcharge,’ a number that, to consumers, resembles your results at a blackjack table: random.

So the airline industry, as many would conclude, is tough business. Expensive, competitive and as we know with the price of fuel, unpredictable. How, then, does the modern airline protect itself among such challenges, yet ensure it provides the best service, options and overall product to passengers? In one word: Partnerships.

The Airline Partnerships

For much of the world’s major air travel, there are three primary partnerships and alliances out there. There is Skyteam, consisting of players like Delta and Air France. The Star Alliance includes United Airlines and Lufthansa. And Oneworld is bolstered by the likes of British Airways and Hong Kong-based Cathay Pacific.

When the Delta, Air France, KLM (and now Alitalia) Joint Venture formed, a 2009 Travel Weekly article described it as a major turn in the industry, describing it as “the next step in the evolution of airline alliances.” The article cites that the Joint Venture enables these massive airlines to pool and share revenue on 100 daily transatlantic flights with nearly 50,000 seats.

Air India joined the 27-member Star Alliance earlier this year, and sees its membership not only as a trigger to turn the airline around, but also as a means of becoming a key player in the global aviation market. With India as a rapidly developing country, and such a key player in the business arena with technology hotspots like Bangalore and Chennai, Air India’s geographic presence makes travel to and within the region easier for global passengers.

The Benefits of Partnerships to Airlines

If we look at these partnerships more closely, we can begin to identify as outsiders, the how they can lead to good business. We’ll list a few of them here:

Customer Satisfaction – From the customer’s standpoint, airline partnerships offer convenience, flexibility and options. Like my trip to Warsaw, I can leverage the strength and options of three separate airlines all though a single booking with no complication. Further, my frequent flier status will be recognized by all three and I can therefore travel with the same perks I normally receive. Finally, I don’t need to worry about checking my flight time or status via three different websites or companies – all the information I need for my trip is stored in a single app on my smartphone.

Revenue Creation – The underlying fundamental in the airline industry is that revenue is only generated when seats are filled (we’ll ignore the fact that things like cargo and shipping also create cash). If we consider the Delta, Air France and KLM Joint Venture again, the pooling of revenue regardless of who actually operates the flight is a major bonus to the firms. Why? Without things like codesharing and the ability for one airline to sell seats on another, each airline would have to fight to sell every seat on its own aircraft. For example, if Delta has one Boeing 767 leaving New York’s JFK at 6PM for Paris, its ticket sales depend on who can be at JFK for a 6PM flight, assuming it gets in to Paris at the desired time. The same would hold true for Air France for its 8PM flight out of New York. When we combine them, though, both airlines can now offer two flight time options to their passengers, and only have to worry about selling roughly half the seats on each flight. While Delta may only be able to sell 100 seats for the 6PM flight, Air France may be able to sell 100 of its own tickets for the same flight, doubling the total seat occupancy of the flight. The same can hold true for the Air France flight leaving at 8PM. In essence, the partnership optimizes the operation of the two airlines.

Better Use of Resources – Continuing with our simple example, to generate the same amount of convenience for its customers without an alliance, Air France would have to utilize two aircraft flying to New York from Paris, one at 6PM and another at 8PM. However, with the alliance and partnership model, Air France only needs to use one aircraft, since the other is operated by Delta. The result: Air France can use the second aircraft to add service to say, Johannesburg, improving its overall network options for passengers.

A similar case can be made for things like equipment, airport lounges, check-in counters and the like. Both airlines do not require their own ground equipment (baggage carts, shuttle buses, etc) at every airport. Rather, by pooling resources, both airlines can benefit from a single set of resources as provided by one of the two partners at a given airport.

Options and Flexibility – As a frequent traveler, I have experienced all the frustrations that come with going from one place to another: weather, mechanical problems and lost baggage. Sometimes, it can be a perfect day for flying from your city, but the aircraft can’t make the trip because it’s stuck in a snow storm 4000km away. At some point in time, such frustrations are inevitable. The ability, therefore, for an airline to offer alternate arrangement on a partner airline when there are issues within the system is a major advantage, not only for the airline, but for the passengers. Most passengers are going to opt for ‘the first flight out’ and not ‘the first Air Canada flight’ available. This flexibility is of value to customers, and a major source of stability for a single airline.

Reduced Competition – While not exactly the best for passengers, partnerships with airlines reduces competition, which is good for business. As mentioned before, Oneworld, SkyTeam and the Star Alliance represent a bulk of the world’s major international carriers. Things like ticket pricing, flight times and flier benefits are reflective of an environment of just three mega-airlines, and not a business environment where 75 different operators are competing for your business. Among the codesharing, the revenue sharing and the consolidation of other pooled resources, when passengers book travel, they’re not really booking a ticket on Australian-based Qantas, they’re really just booking a ticket on Oneworld, as operated by Qantas.

Partnerships are Better Business

So when it comes to airlines, joining and participating in partnerships makes for good business. As we’ve seen in the examples above, partnerships offer improved customer satisfaction, optimized operations and financial stability.

But you don’t have to operate fleets of 150,000kg aluminum cylinders to benefit from partnerships. Nor do you have to be a small business with limited resources to make sense of partnerships and allegiances. Business alliances – when mutually beneficial to all parties and improving overall value to customers – can lead to win-win situations for the companies and the customers. Simply put, business does not necessarily have to be about beating the competitor. More often than not, successful business is about enhancing the efficiency and value provided to paying customers while protecting the health and stability of firms.

 

Additional Resources:

The Impact of Technology on Business (Blog Post)

Partnerships as Business Strategy (Blog Post)

Multigenerational Technology Planning (White Paper)

How a SWOT Analysis Can Help Your Business (Blog Post)

The Strategy of Incremental Progress (Blog Post)

 

 

 

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