A Framework For Successful Airline Partnerships
More than ever, airlines seek to partner with other airlines to maximize revenue through collaboration. Following a specific framework can help airlines identify prospective partners and weigh the pros and cons of each.
Strategic parternships offer airlines a unique opportunity to engage global airlines in an effort to increase customer choice, maximize revenue and drive retention.
Global alliance brands such as oneworld, Star Alliance and SkyTeam have thrived on building strong ties among member airlines that give customers options to reach nearly every point around the world. Other carriers, such as Emirates and Qantas, have engaged in major bilaterlal alliances outside of a traditional global alliance. For airlines interested in less engagement, bilateral and codeshare partnerships offer fewer complexities while still enabling a seamless travel experience for their customers.
Partnerships have been common in the marketplace for decades and come in all shapes and sizes, generally increasing in complexity as they deepen. The evolution of the airline industry has supported the development of partnerships from simple bilateral interline arrangements, allowing one carrier to ticket and transfer baggage on another, to the deepest form of cooperation: joint ventures.
However strong a relationship, partnerships offer customers destinations beyond those an individual carrier can profitably serve through seamless connectivity, shared ground facilities and reciprocol frequent flyer benefits. When established correctly, partner traffic increases revenue and creates a consistent travel experience while driving loyalty.
To what extent should an airline engage another? A framework for selecting the right partner begins with an examination of demand using historical data and forecast models. Market opportunities and schedule compatibility are then identified, followed by the outlining of various potential partnership scenarios. The framework closes with methods to measure the effectiveness of the partnership.
As a result of the interline agreement between Aer Lingus and JetBlue, customers flying from Rochester to Dublin, for example, can enjoy a seamless experience without having to book two round-trip tickets on two different flights. This partnership drives business for both airlines while giving passengers more travel options.
For years, airlines and travel agents have stressed the benefits of maintaining a single itinerary for each customer journey, especially when multiple segments and carriers are involved. The benefits to the customer include a single ticketing airline, through-checked baggage and the ability to recognize and better respond to possible schedule changes and misconnections. Benefits to the airline include having a history of its passengers’ offline (served by a partner airline) segments and destinations, which can guide future network decisions. This historical data is invaluable in identifying routes that an airline’s customers would like it to serve.
Querying this history for the most frequently traveled offline segments is the first step in identifying the travel trends of an airline’s customer base. An analysis of segments that feed an airline’s network, as well as those that extend it, will naturally provide a list of partners and segments “pre-selected” by an airline’s loyal customers for potential partnerships. However, simply because an airline is a customer’s choice for offline travel doesn’t automatically make it a good choice for a strategic partnership.
Looking beyond the offline segments flown by airline customers and focusing on final destinations can also yield insights that may lead an airline to partner with a different carrier to drive traffic through an alternate connection point other than the one currently preferred by its customers. This strategy, if successful, may allow an airline to keep a non-profitable route or station in its operational network by driving additional connecting traffic.
Once a key group of candidate markets and segments have been identified, historical demand analyses and simple volume forecasts are combined with external information about population growth and economic forecasts, along with other market data, to develop a demand forecast. Based on these forecasts, potentially lucrative markets and segments are identified and prioritized for potential implementation.
As appealing as a partnership may sound for maximizing revenue and profits, without careful planning, it can also be dangerous when an airline enters into a multi-year contract that delivers more loss than profit. How an airline selects its future partners is key to the success of its strategic direction.
If an airline is looking for an opportunity to expand its current network, it should first perform a health check of its network and then look at the opportunities in existing and new regions. Identifying market share gaps in underserved markets can help an airline quickly identify potential areas for improvement. These are usually reflected in the markets that are underserved but have a high potential. For instance, an airline may identify markets that it needs to serve but cannot justify the cost based on its current traffic.
Once a market of interest is defined, identifying potential partners currently serving that market is the next step. A partner analysis involves researching potential regulatory obstacles that may prevent the partnership and determining if a particular airline can offer multiple offline destinations. This research evaluates the products and services potential partners offer and how compatible they are with those of the investigating airline. Once the major compatibility comparisons are made and the potential market share is identified, the next step is to determine whether the potential partner has the technology to support a seamless partnership, which in turn will define any implementation timelines.
Network alignment is the next critical step. The profile of a contemporary world traveler is characterized by a strong preference for minimum time spent en route. As a result, airlines that offer a seamless experience are more likely to be chosen by connecting passengers. Therefore, revenue maximization occurs when traffic flows efficiently through an airline’s channels and those of its partners.
An airline’s choice of a schedule-compatible partnership is impacted by two major factors:
- Connectivity — Through a connectability matrix, the airline identifies the partners that offer the most opportunities for connections.
- Strength — Once the first-level selection is completed, the airline evaluates the strength of prospective partners’ schedules, looking for the most optimal connection times.
Forecasting demand is of critical importance to selecting the most beneficial and lucrative partnerships.
After identifying the best potential partners, the next major step is to analyze whether or not the partnership can drive the desirable incremental traffic and revenue. Once the revenue and traffic are forecasted from the baseline schedule, various schedule scenarios are created to identify schedules that are compatible for connections. In some cases, those schedules can be modified to optimize the connections.
After establishing parameters and adding the host code on partner flights and partner codes on host flights, the codeshare schedule is created using a scheduling tool, such as Sabre® AirVision™ Schedule Manager, and results are forecasted. Multiple partner scenarios are forecasted using the same methodology until the optimal combination of markets is determined.
Once the scenarios are established, data is available to forecast traffic and revenue that may be driven by the future partnership. By comparing the baseline with the forecasted scenarios, an airline is able to measure the profit impact by evaluating the differences in revenue at the system level and, if desired, as detailed as the segment.
The profit change for the host airline is determined by changing a few parameters identified during the primary partner analysis. Parameters include:
- Ratio of miles between the host and partner airline on a given itinerary,
- Published fares by both the host and partner airline on the analyzed routes,
- Prorate values of the potential agreement,
- Demand for codeshare traffic on the analyzed routes,
- Point-of-sale of the two airlines for the particular route,
- Current route load factors.
If the number of favorable interline opportunities drops below a low threshold determined by the airline, then the potential partner is likely not suitable.
The key to choosing a partner is to focus on the revenue that will be generated for the system and for the evaluated segment. If system revenue is higher, but segment revenue drops, a partnership is still possible. However, the airline should ensure the revenue increase covers indirect expenses such as administration-related costs. If both segment and system revenues increase, then it is an ideal partnership situation. Even then, however, the agreement and the relationship should be evaluated frequently to maintain their equability.
The accuracy of such analysis is critical and can be more accurately determined using analytical tools such as Sabre® AirVision™ Profit Manager and Sabre® AirVision™ Schedule Manager for scheduling and profitability.
Potential Partnership Scenarios
To what extent should one airline engage another? What level of complexity is optimal?
The progression of most agreements includes:
- Interline (ticketing and baggage),
- Special Prorate Agreement (SPA),
- Frequent flyer program,
- Anti-trust immunity,
- Joint venture.
Low-demand airlines with simple fare structures generally gravitate toward an interline ticketing and a baggage agreement. This type of partnership usually prorates revenue based on mileage, which is an IATA standard. This is an ideal arrangement for airlines looking to minimize costs associated with partnerships while still enabling connecting traffic.
A Special Prorate Agreement is the next type. A limited partnership reduces revenue risk and is typically used by airlines that are not interested in a codeshare agreement but would like to gain greater access to additional markets. It requires minimal involvement and communication between the partners, following the creation of the agreement. This agreement works best in low- to medium-demand markets for airlines with more complex fare structures.
The next level of complexity and commitment between partner airlines involves frequent flyer program agreements, which allow customers to accrue and redeem mileage between the different carriers’ loyalty programs. This type of agreement sets the stage for the addition of a codeshare agreement, which involves schedule and market coordination. With codesharing, a greater range of fares is published by both the host and partner airline and generally allows for greater access to inventory. As a result, yield management manages the revenue risk. Codesharing is ideal for medium- to high-demand markets and well-branded airlines with established networks and advanced technology.
When implemented correctly, codeshare agreements offer a revenue upside by enabling an airline to extend its network without utilizing additional aircraft, crew and ground resources. Airlines that are capable of supporting a codeshare and those that already have a number of such agreements in place are usually considered critical members of an airline alliance, or a strong candidate for joining an alliance.
However, no matter how appealing a codeshare may appear, it also has certain limitations. Implementing or increasing existing codeshare agreements is not necessarily in the best interest of an airline. Large network carriers generally have a limited number of flight numbers to allocate and, in some cases, regulations may prohibit codesharing all together. Returns may also diminish as an airline adds additional codeshare flights. Achieving optimal revenue depends on the revenue-sharing scheme established by the partners.
The remaining levels of partnership include anti-trust immunities and joint ventures, which are the closest forms of cooperation where partners can coordinate on pricing, share revenues and, in some cases, share costs. In the case of a joint venture, the revenue is shared between partners on selected routes, creating a “metal neutral” relationship. Such relationship allows airlines to coordinate on pricing, marketing, promotion and sales.
Also, airlines in an immunized partnership are able to offer passengers a stronger schedule because they can coordinate schedules and flight times that can optimally support capacity at peak times. In addition, partners can agree on spreading the departures throughout the day versus flying the same routes simultaneously.
Beyond schedule coordination, airlines involved in a joint venture can benefit on many other fronts, including:
- Consistent customer handling,
- Corporate contracts that cover all joint-venture airlines,
- Metal neutral frequent flyer accrual and redemption,
- Cost savings due to optimal scheduling,
- Coordinated reporting.
While joint ventures offer substantial revenue benefits, there are risks involved that must be thoroughly evaluated. In many cases, despite the high level of coordination required, an individual airline within a joint venture may act in its own best interest versus the interests of the alliance, which can potentially offset any benefits and can even lead to revenue loss.
Some risks associated with joint ventures include substantial capacity increases within the scope of a joint venture and engagement with airlines outside the joint venture. Additionally, many regulatory approvals must be obtained, which can be an extremely involved, time-consuming process. These types of risks and many more can be mitigated by maintaining a strong, open relationship as well as through contractual language that may limit certain behaviors.
Measuring the effectiveness of a partnership through various key performance indicators (KPIs) is crucial and must be done regularly. Several KPIs should be considered, including:
- Market share,
- RASK and load factor,
- Beyond revenue per passenger,
- Percent sold,
- Inward and outward balance,
- Codeshare usage.
Natural Partnership Progression
There is a natural progression across the various types of airline partnerships. Low-demand airlines with simple fare structures opt for the interline agreement to minimize partnership costs while enabling connecting traffic. On the other end of the spectrum, joint ventures come with higher risks but also deliver much greater benefits for the partner airlines.
Ultimately, the goal for an airline entering a partnership is to increase unit revenue by improving its market share and extending the scope of its network. Before an agreement is created, the expected market share numbers are derived from sources of market data such as Marketing Information Data Tapes (MIDT). Once the agreement is signed, the forecast numbers are then compared with actual results to identify whether the codeshare or interline partnership is meeting its intended objectives in terms of revenue and traffic.
RASK And Load Factor
An increase in both these indicators is a sign that the partnership is yielding positive results. However, increased load factor with a reduction in revenue per available seat kilometer (RASK) may indicate revenue dilution, which can be caused by the displacement of higher-value online traffic by lower-value interline or codeshare traffic.
Beyond Revenue Per Passenger
Beyond revenue per passenger helps determine the value of an interline passenger. This measurement ensures partner-related traffic is not displacing higher-revenue host-airline traffic and identifies the trends in the relationship between interline and host traffic. For example, a drop in interline revenue per passenger may indicate a misalignment between fares and the reservation booking designators, the codes used in reservation transactions to identify booking classes.
Along with the KPIs mentioned above, it is also important to identify the percent of sale between the two partners. Understanding which airline is driving more sales is a key component to understanding the inward/outward balance of the relationship.
Inward/outward balance tracks the balance of revenue between partners. A large revenue imbalance may indicate that a sales and purchase agreement is not working effectively for both sides. However, sometimes it does not necessarily represent a problem, if the overall revenue from the agreement is still profitable.
Measuring and comparing the volume of traffic brought by the partner airline marketing an entire itinerary versus those itineraries that are not marketed by the partner but are associated with it will indicate the usefulness the codeshare.
By choosing the right partners, an airline can extend its network and/or increase the density of service in various markets without investments in equipment and manpower. Partnering is a powerful tool that, when leveraged correctly, assists airlines in meeting and exceeding customer expectations in a fiscally sustainable manner.
During the last decade, the airline industry has changed significantly. As a traveler becomes more global, the ability to reach any destination from anywhere with a seamless experience attracts high-value customers. Airlines around the world have found partnerships an effective way to respond to these global needs. As a result, global airline alliances and pools of partnerships that involve a range of agreements dominate a significant portion of the total market.
Airlines’ interest in maximizing revenue through collaboration is stronger than ever. Joining a global alliance or engaging in any form of partnership is a complex process, and ensuring that an airline’s partner of choice is mutually beneficial is even more difficult. The suggested framework can help airlines effectively evaluate partnership choices along with their advantages and disadvantages.