Joining forces – the rise of the airline alliance

posted on 5th June 2018


The global recession and rising fuel prices have had a major impact on trends in global route. Financial pressures have forced the strengthening of links between global airlines, as well as the growth of hubbing as a means to reduce costs.

The twin phenomena of hubbing – the principal of using a radiating ‘spoke’ system of routes to draw passengers into a central hub – and global airline alliances are intimately connected, according to Richard Connelly, a senior consultant with UK based air transport consultancy York Aviation. “The alliances have changed the way airlines fly in the last few years. For example, we’ve seen British Airways drop a lot of direct routes to Asian destinations like Manila, Seoul, and Taipei, and become reliant on their partners,” he noted.

“This means that hubs in some strategically important parts of the world have grown in importance. These hubs are often a good indication of where routes are developing on long-haul flights.” Connelly added: “A lot of people, for example, think the China Eastern service from London to Shanghai is about feeding passengers to and fro between those two countries, but statistics show a lot of passengers move straight onto another plane and fly out elsewhere. Sydney, for example, is a popular destination.”

Dubai is currently the fastest-growing hub location in the world. The number of seats to the UAE city grew by 11 percent year-on-year up to October 2012, according to the UK based analytics company Official Airline Guide (OAG Aviation). Beijing was in second position in terms of seat growth with a rise of 5 percent.

Andreas Åkerman, from Airline Network News and Analysis, believes the hubbing growth in the Middle East has often been fuelled by recent alliances with major European airlines. “The more traditional airlines in Europe have been struggling so much in the recession they have had to change their attitude to the three big Middle East airlines. In good times, they would all remain independent of Emirates, Etihad or Qatar, but they have been forming partnerships.”

British Airways invited Doha based Qatar Airways into the oneworld alliance on October 8 this year. The British airline hopes the more dynamic Qatar Airways will revive the alliance’s flagging fortunes. Qatar has been expanding rapidly, with 15 new routes added in 2012 alone.

Also in early October, the Air France-KLM Group secured an alliance agreement with Abu Dhabi based Etihad Airways, the third-biggest Gulf carrier. It provides Air France and KLM with five Asian, or Australian, connections apiece on Etihad flights via Abu Dhabi, while the Gulf carrier can sell tickets to 10 European cities beyond Paris and Amsterdam. The deal also brings Etihad closer to Air France’s SkyTeam alliance.

Even more significant as an indication of the rising significance of the Gulf based airlines was the decision this September by Australia’s Qantas Airways to ditch its 17-year pact with British Airways in favour of an agreement with Dubai-based Emirates, the biggest Gulf carrier.

“Legacy airlines would rather partner Gulf airlines than face them as competitors,” pointed out Åkerman. “Gulf airlines benefit from a more dynamic economy, the strategic location of Dubai, and huge financial reserves. But Lufthansa has refused to cooperate with them. They argue that when good times return the other airlines will regret giving customers away to big competitors.”

The rise of the Middle East and China as hub locations is in contrast to falling figures for hubbing at major European airports. OAG data for London Heathrow showed a 1 percent fall in seats and a 2 percent fall in flights year-on-year. Heathrow’s closest rival, Paris Charles de Gaulle fell by 1 percent in terms of seats and 4 percent in flights. However, in the US, Atlanta maintained its position as the world’s biggest hub location, with 3 percent growth.

Paradoxically, the biggest growth of routes anywhere in the world is between Western Europe and the Middle East, which will grow by 8 percent. But that is the sole expanding Western European market. Routes between North America and Western Europe, for example, are down in both flights and seats, by 4 percent and 3 percent respectively.

The expansion plans of the Middle Eastern airlines into European airports will give them great access to the whole of Western Europe. Emirates Airline is launching routes into Lyon and Warsaw, whilst Qatar Airways is planning flights into Warsaw and Belgrade. Once these routes are up and running in the early months of 2013, the big Gulf airlines will serve 27 European countries all over Europe, from Russia in the East to Portugal and Ireland in the West. The European growth fits into the bigger picture for the Middle East, which is the fastest-growing region for flights to and from other regions. Seat sales will grow by 8 percent, whilst flights will increase by 5 percent year-on-year.

For the Asia Pacific region, the picture is more complex. Although the region is performing well as a whole, there are great divergences, especially between India and China. India’s booming growth is now stuttering, whereas China is continuing to progress, said Åkerman.

“There’s a sharp contrast between India and China. India has a deregulated market along Western lines, whereas the Chinese market is regulated and decisions about new routes are politicised. Airlines need the Beijing government’s permission to establish international routes,” noted Åkerman.

China’s market has not been deregulated along Western neo-liberal lines, but it has not stopped growing. Data from the Civil Aviation Administration of China (CAAC) shows that in the first seven months of 2012, passenger numbers on Chinese airlines grew by 8.8 percent compared with the same period in 2011. According to the CAAC data, domestic traffic was up by 8.5 percent while international traffic grew 13.2 percent.

Åkerman points out that several airlines have launched new routes this year. Air China has put on flights from Shanghai Pudong to Paris CDG, from Beijing to London Gatwick and Beijing to Copenhagen. China Southern began weekly flights from Guangzhou to London Heathrow. And there were other flights to and from China launched by Air France, Finnair, LOT Polish Airlines, Lufthansa, SAS and Swiss. He also pointed out that a number of carriers were launching new services to and from Chinese airports this winter

A different picture emerges among Indian airlines. Statistics from Airports Authority of India (AAI) showed passenger numbers falling by 6.3 percent in July 2012 compared with July 2011. Domestic traffic dropped by 7.9 percent to 9.1 million passengers and international traffic fell by 1.5 percent to 3.32 million passengers. The country’s two main international airports, Delhi and Mumbai, which handled almost exactly half of all international traffic, enjoyed different fortunes. Delhi reported a small increase of 0.7 percent in international passengers, but Mumbai’s international traffic fell by 2 percent. Among India’s major international airports, the biggest drop was at Calicut Airport, in Kerala, which was down by 21.1 percent.

“The Indian market fell victim to its own hyper-competitivity,” noted Åkerman. “It expanded like crazy, but it all backfired when the economy struggled and fuel prices rose. The biggest casualty has been Kingfisher Airlines, which has struggled to make a profit for a long time.”

Kingfisher Airlines, whose share of the Indian domestic air travel market fell to just 3.2 percent, was forced to suspend international operations in April. Then the Indian Directorate General of Civil Aviation (DGCA) suspended its flying license on October 20 and it faces an uncertain future, to say the least.

Taken as a whole, however, Asia Pacific is where the action is, according to Åkerman. He points to research showing that Asia’s 12 biggest airlines plan ASK (available seat kilometre) growth of 8 percent this winter. Indonesia’s Lion Air and India’s IndiGo are both growing by around 30 percent, as is China’s Xiamen Airlines. Of China’s big three airlines, Air China and China Southern are both looking at ASK growth of around 8 percent, and China Eastern is even more aggressive with a target of 12 percent ASK growth this winter.

“Asia Pacific is where the route development is happening,” said Åkerman. “The market in North America is a bit stagnant and the African market is so regulated it’s quite chaotic with the exception of a few airlines, such as South African, Kenya and Ethiopian.

“South America is not nearly as dynamic, although our research shows Brazil is an exception. The Brazilian market grew by 14 percent in May, 13 percent in June and 9 percent in July. International traffic also grew in May by 7.5 percent and June by 10 percent, although it fell by 1.1 percent in July. Brazil can sustain growth because has a large enough domestic market,” he added.

Europe’s moderate performance is also true of the low-cost airlines, where capacity within Europe was down by 8 percent in flights and seat capacity. However, this figure was mainly a result of reductions in domestic and international capacity in Germany and Italy, as well as major cuts in Spanish international seat capacity.

In the UK, the financial pressures of the recession and the imposition of Air Passenger Duty have forced changes in strategy at both low-cost and traditional airlines. This has meant some strategic overlap.

Gareth Kitching, a senior analyst at consultancy RDC Aviation, commented: “They’ve been forced to take ideas from each other. EasyJet, for example, has been moving closer to the traditional airlines by launching business-oriented routes. And full-service airlines have adopted some of the methodologies of low-cost airlines, such as charging for baggage. The low-costs and the legacies remain distinct, but there is more crossover. The recession has also seen Ryanair pulling back from the UK’s domestic air travel market because the profit margins are so low.”

York Aviation’s Connelly noted that the easyJet strategy was motivated primarily by the need to drive efficiency from the aircraft by using them throughout the day. “Maximising of an aircraft’s potential to make money is the biggest change to route structures. It means the low costs are straying into business route timings. We are also seeing the legacy airlines refine their networks for the same reasons. For example, British Airways is trying to maximise the use of its aircraft during the day by mixing business and leisure.”

EasyJet is now the dominant airline at London Gatwick, with close to a 100 routes. According to Airline Network News and Analysis, it has added Bari (Italy), Fuerteventura (Spain) and Kefalonia (Greece) since last summer, but dropped Gothenburg (Sweden) and Istanbul (Turkey). From spring 2013, it will introduce a route to Moscow Domodedovo after winning the bid for the route over Virgin Atlantic and British Airways.

Although Air Passenger Duty has disproportionately impacted on low-cost airlines, the recession has provided them with some trump cards, too. “Lots of airports have lost traffic so they are more eager to attract and please the airlines. Some airlines, such as Ryanair, demand quite a lot from airports. They call it ‘marketing sponsorship’, but it’s essentially being paid to fly from an airport,” explained Åkerman. “More and more airports are willing to take that step to have Ryanair use them as a base airport. Manchester used to be inflexible in this regard and Ryanair stayed away, but come the recession, the airport showed a willingness to compromise and Ryanair has returned with a considerable presence.”