The Debate BECOME ONE WHEN THREE
Airline mergers and acquisitions continue to gain momentum, with the BA-AA-Iberia tie-up among the latest, but what does it mean for fares and competition? We speak to three experts…
THE INDUSTRY EXPERT Peter Dunkin, aviation advisor There are few industries more challenging than civil aviation. Fierce competition, overcapacity, low yields, volatile fuel prices and susceptibility to external events such as terrorism, ash and snow are all among the obstacles to success. The situation is not helped by some airlines growing too quickly, seduced by the vanity of volume, ahead of the sanity of profitability. This has forced the need for consolidation. In reality, the immediate drivers behind consolidation have been about survival, cutting costs and shareholder value. According to IATA, the industry lost over $50billion in the last decade with over 100 airlines going bust in Europe alone. Since the Air France/KLM tie up in 2004, five
mega airline groups have formed as a result of consolidation. British Airways has found its long- awaited partner Iberia in the latest merger. As a result, the oneworld alliance has edged closer in size to the SkyTeam and Star alliances. But the fact that the largest group has over 1,000 aircraft and carries 144 million passengers a year is of little consequence to the corporate traveller. The move towards a potential oligopoly of five major airline groups is perhaps not what aviation regulators and politicians had in mind. Is this integration good for corporate customers?
If it leads to a more stable industry there will be less disruption to operations due to airline failure. Improved margins will allow further investment in the latest aircraft, products and services. Other benefits can include more convenient choice of flights and departures, and more opportunities to ‘earn and burn’ with frequent flyer schemes. Corporate negotiations are potentially simpler
with fewer suppliers involved. However, the supplier may have more leverage on contracts. While airlines need to increase their prices, there is still enough competition to contain fare levels. Despite claims by airlines, integration will not always lead to more choice of flights. A key attraction of consolidation is surely to reduce duplication and over-capacity. Other benefits to the airlines include cost savings through economies of scale and buying leverage. Schedules and systems can be harmonised and load factors improved, and duplicated roles can be removed or reduced.
There will always be uncertainty for airline employees over job security during the often lengthy merger and alliance process, and keeping them happy and motivated is key to the customer experience. Ensuring good employee relations will be crucial for British Airways and Iberia, who both have a history of industrial disputes. BA are confident of achieving £344million savings by year five, improving profitability, and continuing to invest in their product. Access to Iberia’s South American network has been promoted as another benefit of the alliance. Most UK customers would prefer to fly non-stop to South American points rather than via Madrid. However, there will be demand where there are no direct services or a price advantage. The joint venture and revenue sharing agree-
ment with American Airlines is also a significant move forward for BA, considering the importance of the transatlantic market. BA has more airline acquisitions in their sights. Watch this space! Airlines work miracles every day by operating
safe and punctual services. Those who will prosper are the ones who genuinely put their customers and employees at the centre of everything they do. The profits and longer-term shareholder value will then follow.
THE TMC Adrian Woodward, director of group supplier and industry relations, HRG Faced by rising oil prices in recent years, and then a ruthless global recession, there's no denying that airlines have experienced some very challenging circumstances. It is no great surprise that, against such a backdrop, airlines have fought for revenue, reduced costs and created new income streams as they seek to position themselves for success in an increasingly competitive environment. Acquisitions and mergers, together with initiatives to maximise ancillary revenues, are all ways in which the airline industry hopes to re-shape and re-size in order to meet the changing conditions. First up were the airline alliances: oneworld,
SkyTeam and Star Alliance. Membership alliances have allowed access to a wider market, synergies in network, product – including loyalty programmes – and support services. Airlines need networks to be as big as possible to benefit economically and meet consumer demand, and for this they need foreign partners. But – and this is where the problems lie – ownership restrictions do not generally allow for
18 I THE BUSINESS TRAVEL MAGAZINE
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