Moving on from airline alliances

07 April 2017

The best days of airline alliances seem to be over, with other forms of cooperation models gaining importance in the airline industry. This might complicate things for frequent flyers, but doesn’t make them necessarily worse. And new challenges are on the horizon for loyalty managers.

Until a few years ago, alliances were en vogue. Usually, each of them added at least one new member per year to extend its coverage. But this came to an abrupt stop: If you don’t consider Avianca Brasil as truly independent alliance member in its own right (it joined Star in July 2015), the honour of being the last airline to have joined an alliance actually goes to Air India, having joined Star back in July 2014.

And more significantly, nobody is currently in the process of joining an alliance, although they might still grow a bit in the future by the likes of Royal Air Maroc or Air Astana. All alliances still have their holes on the global map as well, such as mainland China, India or Africa for oneworld, Russia for Star or Oceania for SkyTeam.

In one word, alliances seem to have reached the ultimate level of maturity they can reach – we nevertheless only talk about a lose framework for cooperation – and the industry is moving ahead to the next thing. And that next thing are bilateral partnerships.

But don’t get fooled: This is indeed more than the old form of partnerships, which have been around for decades (and alliances were actually an evolution of that concept). These new partnerships are much stronger as they often include a financial dimension. So rather than pure marketing or code-share agreements, we talk these days about joint ventures and equity deals. Obviously, lighter versions of cooperation will still exist and are even being developed – as the recently announced code-share agreement between Cathay Pacific and the Lufthansa Group -, but those closer financial ties will actually change the face of the industry over the next couple of years.

You can already witness today how power shifts. Take the SkyTeam Transatlantic joint venture between Delta, Air France KLM and Alitalia: Those airlines work very closely together – in spite of some bilateral frictions between Air France KLM and Etihad-controlled Alitalia -, much to the dislike of fellow SkyTeam Transatlantic operator Aeroflot, feeling (rightly) being left out of the game. AeroMexico might have similar thoughts, but has its own joint venture with Delta covering the US-Mexican market it can focus on.

While many of these relationships actually use the grown relationships within the alliance frameworks, they are not limited to them. You can observe both relationships including non-alliance members (Delta-Gol) as well as cross-alliance deals as the recently announced equity deal between American Airlines and China Southern, clearly pursuing individual bilateral opportunities in a pragmatic manner.

Such moves are obviously motivated by larger strategic considerations beyond the limited loyalty dimension – but do pose some new challenges on loyalty managers. Under the traditional revenue-sharing model of JVs, total revenue is split among the carriers in function of the capacity split between the operating carriers. So once that split has been set for a season, a Finnair sales manager doesn’t really care anymore whether his client travels physically on Finnair or British Airways metal – but his only concern is to ensure that he does not travel outside of his JV. This is a complete change of mindset since cooperation at alliance levels always puts members in the delicate position to have to cooperate to certain degree with partners, which might be competitors at the same time as well. Think of Qatar Airways and Qantas or of Copa and Avianca.

But for loyalty managers, such things as JVs do not exist. For understandable reasons related to customer ownership issues, it is still business as usual, i.e. everyone for himself. From a loyalty perspective, a British Airways customers opting to credit his points to the Finnair Plus program is only of limited value to the British Airways loyalty management since corresponding customer information is not transparent and exploitable to them. As such customer has a loyalty potential beyond his JV Transatlantic flights (other routes, non-air partners etc.), exploiting the full potential would, however, be desirable – and is actually expected by management.

With the cooperation models evolving in the industry, loyalty managers need to become more sensitive than ever to this issue. While the difficulty to find the balance between satisfying its own needs and not offending its partners could already have been observed within alliances, it actually continues to apply in evolved forms of cooperation – but with an increased need not to act too ostensibly against its partners and facing potentially reduced understanding from top management to pursue an own loyalty agenda.

The ultimate solution can only be differentiation of program propositions. Loyalty managers need to ensure that their own program matches fully the specific needs of their core customers, while not becoming less attractive than the offerings of their partners. More than ever, full benchmark knowledge and familiarity with best global practices will be required in order to respond to that ownership necessity, not only in the home market, but also in international markets, where most airlines would typically generate 40-50% of their revenues. This might/hopefully translate into better times for frequent flyers in the form of more attractive and relevant schemes.

At least until the next level of cooperation in the industry – cross-border mergers under global airline brands -, the work for loyalty managers looks like becoming a bit more complicated again. But more challenging and interesting at the same time.