Joint ventures up the ante in terms of airlines' relationships, potentially boosting consumer benefits

Joint ventures (JVs) are springing up across the aviation world, helping airlines deliver choice to consumers and grow their businesses. Examples include Air France-KLM-Alitalia and Delta over the Atlantic; Japan Airlines-British Airways and Finnair linking Japan and Europe; and the ANA-United JV across the Pacific. Some analysts have gone as far as suggesting that close to half of all long-haul traffic will be flown on a JV in the years ahead.

According to Gareth Evans, CEO of Qantas International and Freight, they make sense in “larger markets where the regulatory framework allows antitrust immunity and give both carriers skin in the game.”

Metal neutrality is perhaps the defining feature of a JV, meaning the airlines involved share revenue and costs on a given route no matter which is doing the actual flying.

Metal neutrality is significant in that it maximizes the opportunity for pro-competitive efficiency gains from density economies.

The North Atlantic market has been particularly affected by this model of cooperation, a result of the Open Skies agreement between the United States and the European Union that came into effect in 2008.

This “access all areas” development encouraged JVs to such an extent that it is estimated that in the summer 2016 schedule about 78% of available seat kilometers across the North Atlantic are being flown by a JV.

Evans notes that by 2034 the global travel market will support seven billion people, “and no one airline is going to be able to fly everywhere.”

Reducing risk

There is evidence that suggests that travelers worldwide benefit as a result of deeper airline partnerships. JVs, it is argued, are a logical response to customer demand for an “anywhere to anywhere” ticket.

By reducing the economic risk of adding new routes—or indeed, making new routes possible in the first place—the airlines involved in JVs create value for all aviation stakeholders, including the end customer.

ANA president and CEO, Shinya Katanozaka, has noted the success of its agreement with United Airlines, for example. “Thanks to increased convenience, passengers connecting on flights between ANA and our JV partners have more than doubled in the past five years,” he says.

Similarly, the JV between American Airlines, British Airways and Iberia allowed the partners to begin services on a number of US-Europe city pairs, including London to San Diego, which could never have been profitably served by BA alone. The increased access to feeder routes and connecting traffic provided by the JV partners made it possible.

Metal-neutral JVs, with complete indifference over which flight passengers take, form the backbone of these benefits. They enable the partners to coordinate schedules and flight times, provide the right capacity at peak times, and spread departures more evenly throughout the day. Arrival and departure times can also be managed by the allied airlines to improve connectivity.

In fact, evidence suggests closer forms of airline cooperation lead to fare reductions, with IATA reporting in an economics briefing on JVs that interline passengers may benefit from fares 27% lower under immunized alliance partners compared with an interline fare between non-aligned airlines.

“The evidence from many studies in recent years points to the benefits for consumers that can be generated by the closer cooperation of airlines in an Open Skies environment, producing a more efficient and convenient combination of services on their joint networks,” says Brian Pearce, Chief Economist at IATA.

The softer side of the JV business model also has its advantages. JVs should entail a quality passenger experience through such areas as airport lounges, gate location for connecting services, onboard amenities and service quality, baggage policies and problem resolution, frequent-flyer plans, and refunds and exchanges. As these aspects are integrated and jointly managed, the customer receives a correspondingly simplified and consistent service.

Hold the front page

Little surprise, then, that JVs and equity shareholdings have knocked global alliances and codesharing arrangements off the front page. Alliances, it is argued, continue to suffer from an inconsistent customer experience and the difficulty airlines have experienced in finding ways to significantly save on costs.

Qantas’ Evans points out, though, that “oneworld has provided a foundation for a number of the JVs we have developed over the past few years” and cites the relationship with American as an example of that.

“oneworld is a key part of our Qantas alliance strategy, and we always look to work with our oneworld partners as a priority where possible,” he adds. “Importantly, oneworld also offers flexibility. The alliance understands that airlines need to partner outside in some markets where it makes sense to do so.”

But even though alliances may still have a role to play, JVs and other forms of deeper airline partnerships provide a tantalizing glimpse of the consolidation that many see as the key ingredient of a successful and sustainable industry.

JVs potentially create a more efficient airline industry as a whole, and offer many benefits to airlines, customers, and the global economy.

Equity share

JVs aren’t the only way forward, as airlines strive for what they consider to be much-needed consolidation. Qatar Airways and Etihad have taken a different approach to the search for greater efficiency, for example. Qatar is adding a 10% share in the Latam Airlines Group to its 15% holding in the International Airlines Group.

Meanwhile, Etihad Aviation Group President and CEO James Hogan says his airline’s strategy has “created a compelling alliance of partners to build global networks, increase passenger traffic and connectivity, grow cargo volumes, and improve revenue streams while sharing business and cost synergies that are driving benefits straight to the bottom line.”

Hogan reveals that Etihad’s return on investments into its seven equity partners has already proved extremely positive. He goes as far as noting that “for an equity investment smaller than the cost of three new aircraft, we have not only built our global network significantly but also have attracted five million new customers, generated $1.4 billion of revenues, and shared massive cost synergies.”

The resulting big picture, according to Hogan, is a new environment of competitive choice for air travelers in key markets around the world, which is good for consumers, good for tourism, and good for trade.

Etihad’s strategy has occasionally had a bumpy ride. Its 29% stake in Air Berlin was endangered in 2015 when the German Ministry of Transport denied approval of 29 codeshare routes between Air Berlin and Etihad. The airlines have since had the decision for the majority of these routes overturned.