Partnering For Success

Finding The Right Kind Of Partnerships

Careful due-diligence and analysis is a prerequisite in partnering for success when planning codeshares, acquisitions, joint ventures, alliances or mergers.

For decades, airlines have been looking for the best path to sustain their business and increase shareholder value in the face of stiff competition and uncertain economic environments. When organic growth options require taking on higher risk, or barriers to entry exist (such as bilateral limitations), partnerships with other airlines become increasingly attractive.

There are a host of options used by airlines to form partnerships, including mergers, acquisitions, joint ventures, codeshares and alliances. They are used as instruments to:

  • Gain competitive advantage or serve as defense mechanisms;
  • Enter markets and break down barriers to entry;
  • Expand network coverage;
  • Lower costs as airlines proceed along paths to globalization, consolidation and sustainability.

Airline partnerships have shaped the landscape, with global alliances playing the dominant role. Approximately 58 percent of all capacity is operated by airlines in one of the big three alliances — oneworld, Star Alliance or SkyTeam. Some carriers prefer to stay out of alliances and opt instead for expanded codeshare agreements. For example, Etihad and Emirates list codeshare agreements with 33 and 12 airlines, respectively, and Alaska Airlines has agreements with 13 airlines.

However, many of the fundamental tenets of alliances are now being challenged and new alliance approaches are being tested. Airlines are looking to greater flexibility and exploring options in developing business relationships.

Recent partnership trends among carriers include:

  • Looking beyond their alliance to fill gaps. As recognition that alliances do not offer everything, members are turning to other places outside their alliance to fill gaps in their network as they grow or look for new opportunities. IAG Chief Executive Officer Willy Walsh said oneworld is relaxed about its members looking beyond the alliance. Some examples prove this point: oneworld founding member Qantas signed a five-year partnership with Emirates to replace Singapore for Dubai as a stopover point for European services. All Qantas flights to Europe will operate through Dubai under a comprehensive partnership to coordinate pricing, sales and flight scheduling. There will also be a profit-sharing agreement on flights between Australia and the United Kingdom. The partnership will help Emirates reach into the lucrative corporate market in Australia, which is also being targeted by rival carrier Etihad. Meanwhile, oneworld member airberlin is in codeshare discussions with SkyTeam member Air France.
  • Terminating codeshares between alliance members. Within Star Alliance, Lufthansa ended its codeshare agreements with Turkish Airlines. The speculation was that the relationship ended due to the strong growth by Turkish and its presence in secondary cities in Germany.
  • Low-cost carriers are being included in the mix. Airlines are looking into forming links that were unthinkable a few years ago as traditional network airlines’ service offerings have blurred and some LCCs have moved to hybrid models. In some instances, working with LCCs may be the only viable option when competition is limited (such as West Air in Canada) or where other airlines are already involved in other partnerships and the only dance partner is an LCC.
  • LCC subsidiaries of full-service carriers are becoming more common. There should be 20 alliance members with LCC subsidiaries or affiliates by the end of 2014. These subsidiaries are likely to fill gaps in markets assigned by the parent companies.
  • There are many groups and holding companies managing portfolios of airlines ranging from full to partial ownership. A few examples include IAG, Lufthansa Group, Etihad Aviation Group, Hainan Group, Irelandia Aviation and Indigo Partners. The central goal is to leverage purchasing power, coordinate planning and expand network reach, as well as to realize synergy benefits overall.
  • Changing rules of the playing field, such as recent pre-clearance of U.S. Customs at Abu Dhabi. Similar to preclearance facilities in Canada, Mexico and the Caribbean, pre-clearance at Abu Dhabi will help passengers avoid long U.S. Customs lines when they arrive in the United States by instead clearing customs at the new facility in Abu Dhabi. The benefit is that passengers may be lured to fly direct from Abu Dhabi on Etihad Airways. Etihad happens to be the only nonstop service to the United States from Abu Dhabi. The airline is likely to reduce passenger connect times to further take advantage of pre-clearance. Following Abu Dhabi’s lead, Qatar has also applied for U.S. Customs pre-clearance.
  • Joint ventures to form new airlines. Singapore Airlines and Tata of India, for example, have joined forces to launch a new airline in India and have funded it with an initial investment of US$100 million. SIA expects commercial synergies by expanding in the important Indian market, while Tata Group will continue to build its aviation-related businesses such as catering, ground handling and engineering.

Due to government restrictions on domestic ownership and control, the battle ground for alliances continues to focus on access to emerging international markets.

In the United States, the big three network airlines, American Airlines, Delta Air Lines and United Airlines, control nearly 60 percent of U.S. domestic capacity. In Europe, the big three groups, Lufthansa Group, IAG and Air France/KLM, control only 20 percent of E.U. domestic capacity with the bulk controlled by LCCs such as RyanAir and easyJet.

Economies in Brazil, China, India and Asia have made mergers and acquisitions and new business models (example: long-range LCCs) more pronounced in the global market to gain market share and stimulate new business. The result of these trends and activities are the breaking and formation of new partnership models.

Successful Partnership Models

Fifty-eight percent of capacity, measured by ASKs, is controlled by the three global alliances oneworld, SkyTeam and Star Alliance. Despite their dominance, other successful partnership models have evolved including holding companies, LCCs and joint ventures.

Reasons To Partner

One of the fundamental reasons that airlines engage in partnerships is to address competition. Airlines have found that consolidation will allow them a stronger market presence and power to claim a position of dominance.

With intense pressure on airlines to cut costs and earn profits, acquisitions offer a channel to increase scale and leverage the sheer size of the resulting partnership. Carriers have resorted to acquisition to reduce costs, increase loads and improve profitability. Strategic alliances also allow companies to leverage each other’s core competencies.

Mergers and acquisitions are usually resorted to either for increasing scale or cutting costs, while alliances are often used as a way to enter new markets. Some markets may have high barriers to entry such as regulatory constraints, established competitors or highly volatile markets that do not justify initial entry investments.

In such cases, alliances are the preferred option because they allow airlines to leverage their existing knowledge and resources through collaboration. On the other hand, where barriers to entry are low, airlines can gain a very strong foot hold in the market either through merger or through acquisition.

Synergies And Resources

Along with the previous factors, synergies and resources are equally important in deciding among the options available to airlines. Mergers and alliances between companies have been proven to work efficiently if there is a high level of synergy between companies. Synergies can be found in corporate culture, product portfolio, strategic goals, and supply chain or logistic systems. When such synergies exist, companies can productively implement a merger or form an alliance.

“Alliances don’t guarantee success,” IAG’s Willy Walsh said. “You need to have a robust, profitable business in its own right.”

Analyzing Partnerships

Key components to evaluating partnerships include addressing several “how to’s”, specifically, how to assess the partner fit, how to access an expanded passenger base, and how to realize efficiencies and economies of scale.

Depending on the type of partnership, there is a range of levers that can be pulled to realize synergies — network rationalization as well as airport and other facility consolidation — removing duplicate overhead, fuel purchasing and engineering savings, and working capital and balance-sheet restructuring, such as renegotiating aircraft leases.

To evaluate and measure the benefits of potential partnerships, there are steps in analysis that are typically performed.

U.S. And E.U. Domestic Capacity Share

The United States is characterized by high concentration due to mergers: American Airlines, Delta Air Lines and United Airlines control 63 percent of U.S. domestic capacity, measured by ASKs. In Europe, IAG, Air France/KLM and Lufthansa Group control only 23 percent of E.U. domestic capacity, with the remainder spread between LCCs and smaller national carriers.


The value of codeshares can be measured by simulating traffic that would move over flights with codeshares and comparing results to a baseline prior to adding the codeshare flights. To perform this simulation requires a suite of tools and data.

A scheduling tool, such as Sabre® AirVision™ Schedule Manager, is used to modify the baseline schedule to place the partner’s code on the operating airline’s flights. A forecasting tool, such as Sabre® AirVision™ Profit Manager, is used to forecast traffic, revenue costs and profits. Databases containing schedules, market sizes and fares as well as costs are needed. Sabre Airline Solutions® develops inputs such as market sizes, fares and schedules using a variety of data sources including its own airport data intelligence, which contains global O&D and MIDT-adjusted data, and schedules.

To analyze results, two forecasts are made: a baseline forecast representing the state prior to the codeshare, and a future forecast to measure the codeshare flights. Comparing results of the two forecasts will reveal the increased traffic, revenues and profits related to adding the codeshare flights. Detailed analysis of the results will indicate where the benefits occur.

Alliances, Joint Ventures, Mergers, Acquisitions

Complex analysis for alliances, joint ventures, mergers and acquisitions include examining ways to unleash value to obtain the greatest benefit from these types of partnerships. Similar to codeshares, a “before-and-after” evaluation takes place.

For alliances, the application of codeshare flights is extensive. In the case of mergers, acquisitions and joint ventures, analysis will typically examine the value of using a single code instead of separate codes.

Furthermore, these types of partnerships may incorporate significant network adjustments to further enhance alliance value, such as:

  • Retiming and adding flights in overlapping markets to get better and more complete time-of-day coverage,
  • Re-assigning fleet to optimize aircraft utilization,
  • Synchronization of bank timings between hubs to optimize traffic feed between partners,
  • Adding new flights to accommodate spill that results from converting interline traffic to online,
  • Testing the addition of new markets to take advantage of a stronger network,
  • Partnership studies may include identifying the “S” curve effect, the benefit associated with partnerships offering a more complete range of services, thereby resulting in improved airline preference by consumers.

In addition to scheduling and forecasting tools, an optimization tool, such as Sabre® AirVision™ Fleet Manager, may be used to maximize the value and deployment of fleet assets and for fleet planning. For complex networks, Sabre® AirVision™ Network Manager is used to minimize passenger misconnections, ensure optimization of passenger connections and determine new market timings.

Transparency And War Games

The correct use of methodology, tools and data enable transparency and the evaluation of results for all players. Each company within a partnership will be able to identify the benefits it can expect from the partnership as well as the benefits it offers its partners.

The same tools and data that have the capability to perform analysis of scale and scope for the partnership can also be applied to competitors. As a result, different scenarios can be conducted such as measuring the impact a partnership will have on principal competitors, or evaluating the effect of carriers switching alliances or forming joint ventures. These tools can also be used to simulate results of potential competitive responses.

Conducting these “war-games” scenarios can reveal insights to strengths and weaknesses of different competitive strategies.

Independent Analysis

Sabre Airline Solutions offers consulting services that cover the full range of partnership analysis to assist airlines and investors independently test scenarios, perform analysis and recommend solutions. The consulting services provide several benefits to airlines, including:

  • Leveraging deep airline knowledge and extensive experience in performing partnership projects. The consulting practice develops detailed, practical recommendations that can be measured and operationally implemented.
  • Consultants use a full portfolio of integrated decision-support tools to perform partnership projects.
  • The data analysis is supported by an operations research team that collects and analyzes industry data that might not otherwise be readily available.
  • The consulting team consists of experts who have mastered scheduling and planning, gained from working for airlines around the world, and applied their expertise to help airlines successfully evaluate partnerships.
  • A standardized delivery methodology ensures consistency and value measurement.
  • Training and knowledge transfer ensures sustained, long-term success for airlines.

There’s some art and some science in determining which airlines make better partners and what types of partnerships are most suitable for specific airlines. The process is anything but simple; however, with the right tools and expertise, airlines can build a successful strategy around current and future partnerships that will support today’s objectives as well as those of the future.

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