Airline mergers, acquisitions and the business traveller
2 September 2019
May 2019’s news that Virgin Atlantic may take over Thomas Cook’s struggling airline came as a timely reminder of the ever-shifting status quo in aviation, and of continuing consolidation amongst the world’s carriers.
In Europe, a spate of mega-mergers began in 2004 with Air France and KLM, followed by Lufthansa's acquisitions of SWISS and Austrian, and ended with the consolidation of British Airways and Iberia to form IAG in 2011.
Europe's aviation market is fragmented compared to North America. Europe's top seven airline groups controlled 55% of seats to/from/within Europe in 2018, compared with 82% in the North American market by their top seven.
Types of partnerships
The ways in which airlines partner with each other to enable their respective customers to travel on multiple carriers through a single purchase have evolved. From interline agreements put together by travel agents, to codeshares put together by airlines.
Codeshares are still a popular form of cooperation. Qatar Airways has a 20% stake in IAG, enabling BA and Qatar to codeshare, whilst in March 2019, Virgin Atlantic, Air France, KLM and Delta launched a codeshare partnership. The deal opens up 58 new routes from 18 UK airports across the Atlantic via Paris and Amsterdam, whilst Air France and KLM customers have access to 24 new North American routes operated by Virgin and Delta.
It is expected this codeshare agreement will morph into a joint venture in the near future. When finalised (assuming it secured regulatory approval) there will be three major transatlantic joint venture agreements in place, each opening up multiple routes across the US and into Europe:
- The Lufthansa Group (which includes Austrian Airlines, SWISS and Brussels Airlines has implemented three joint ventures. The A++ transatlantic joint venture with United Airlines and Air Canada offers customers a choice of nearly 10000 flights daily to 570 destinations in Europe and North America.
- The J+ bilateral Europe/Japan joint venture with All Nippon Airways (ANA) covers all 196 weekly flights on 11 of the participating airlines’ routes between Japan and Europe, whilst the commercial Europe - Southeast Asia and Southwest Pacific agreement with Singapore Airlines effectively expands existing codeshares.
In some cases, the partnering airlines collaborate to set pricing, co-ordinate routes and share revenue even if they’re not actually operating a route directly. For example, the joint venture between British Airways, American Airlines, Finnair and Iberia enables customers to mix and match fares across all four airlines.
Joint ventures allow carriers to expand their networks due to the support they receive in each partner’s home markets. Based either on revenue or profit share models, such agreements can also include equity share, such as Delta Airlines’ 49% stake in Virgin Atlantic. In these cases, instead of focussing on a specific region within the scope of the JV (e.g., USA – UK routes and markets), Delta is helping to improve Virgin’s performance without affecting its own brand.
Elsewhere, the joint venture between Qantas and Emirates has been a huge success for Qantas. The carriers have consolidated routes, between Melbourne and Sydney to Dubai, and from Dubai to London, enabling Quants to deploy its smaller fleet in other markets to give passengers more options. Qantas estimates that these changes will provide an annualized net benefit of 80 million AUD from 2019.
Mergers and acquisitions make up the final phase of airline cooperation. Though heavily limited by regulatory frameworks, the US market has demonstrated how consolidation has worked to the benefit of airlines and their customers. In 2009, the eight largest carriers accounted for 86% of seat capacity. In 2019, four - American, Delta, United and Southwest – make up 77% of capacity share.
Mergers can produce different outcome. Some brands disappear completely – as happened to Northwest when the carrier was bought by Delta Airlines in 2008. Two years later, the same happened to Continental Airlines when it merged with United Airlines. In 2013 American Airlines and US Airways merged but the US Airways brand was dropped. One consistent consequence, however, has been greater financial stability for US carriers compared to competitors in other regions.
Business travellers too have benefitted from airlines being able to invest in their products. The trio of US carriers American, United and Delta have all revamped and upgraded their cabins, seats, pre-flight processes or other elements. Travellers have access to better connections and support in the event of flight disruption too, whilst TMCs have fewer agreements with more airlines, providing clients with access to a full range of discounted net fares across multiple carriers.
Frequent flyers can accrue points on different carriers through a single membership. In June 2019 Virgin Atlantic announced it is joining Bluebiz, the corporate loyalty programme of Air France, KLM, Delta and Kenya Airways. In the UK, Bluebiz members can earn credits whenever they fly with any of the five and use those credits to offset their CO2 emissions related to flights with those carriers.
As to the future, applications for JVs between Hawaiian and Japan Airlines, Delta and WestJet American, and Qantas and American and LATAM Airlines Group are awaiting approval. Meanwhile continuing uncertainty around Brexit could create issues for UK and European partners of US airlines in the North Atlantic.
Aviation may not be anywhere near the merger mania of other, less-regulated sectors, but it’s getting there!
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