How Joint Ventures Have Improved the Global Airline Industry
The following is a report I composed for an Airline Economics class. A list of sources can be found here Global airlines belong to one of the most competitive industries in the world. The success of the airlines is largely out of control of their respective owners and operators, being greatly affected by external factors such as oil prices, governmental policies, competitors and world conflict. Because of this, it is of great importance that airlines make partnerships and alliances that allow for a more efficient operation of the entire industry. One of these types of partnerships is the Joint Venture (JV), where airlines align service offerings and share costs, revenue, profit and risks. These Joint Ventures have transformed the global air transportation market and have been a key factor in the rapid consolidation that the industry is experiencing today. Although some may argue that these Joint Ventures reduce competition in the industry, there is extensive evidence that both the airlines involved and consumers benefit from such partnerships. Since the first airline began operations in 1914, air carriers have been subjected to an innumerable amount of negative forces, both internal and external. These include things like constantly changing oil prices, conflict throughout the world, natural disasters, weather and even other airlines. One of the largest problems that traditional “Flag Carrier” airlines are faced with today is the increasing presence of Low Cost Carriers (LCCs). These LCCs do whatever possible to cut costs in order to offer fares at the lowest price. These carriers have forced national airlines such as Delta Air Lines, Lufthansa, Air France and dozens of others to cut their airfare prices on short-haul domestic routes in order to remain competitive. As a result, the national airlines are relying more and more on long-haul international travel to make their profits. One way to accomplish this is through a Joint Venture. In a Joint Venture, two or more airlines will essentially share resources and split revenue over a defined route network with the goal of optimizing profitability. A defining feature of a Joint Venture versus a traditional alliance like SkyTeam, OneWorld or Star Alliance is the concept of “Metal Neutrality”. This means that the revenue that each member of the JV receives on a defined route is independent of which air carrier actually flies the passengers. For example, Air France and Delta Air Lines, who are transatlantic JV partners, both fly multiple flights from New York to Paris every day. The total profits (or losses) received are split equally amongst the carriers, even if the Air France flights are full and Delta’s planes leave empty. Essentially, a JV is a merger that applies only to certain defined routes. Several factors have led to the rapid growth of airline JVs worldwide since the first agreement was signed between Northwest Airlines and KLM – Royal Dutch Airlines in 1997. The most important development was the Open Skies agreement signed by the governments of the United States & the European Union in 2008. This made it possible for European airlines to fly into any city in the U.S. without restriction. In return, U.S. carriers gained increased access to airports in Europe. Since then, several JVs have been formed for networks across the North-Atlantic. These include partnerships between Air France, KLM, Delta and Alitalia; Lufthansa, Air Canada and United; British Airways, Iberia and American; and Delta and Virgin Atlantic. The depth and scope of these JVs is massive. The Delta, Air France, KLM, Alitalia Joint Venture allows the four airlines to promote more than 250 daily nonstop transatlantic flights with connections to over 500 destinations worldwide. This JV alone accounts for over 25% of the total airline capacity between North America and Europe. Mergers between airlines in different countries as well as cabotage, where an airline flies domestic routes within a foreign country, are widely forbidden. The only way for airlines to have access to destinations abroad is through an alliance or a Joint Venture. Having access to these foreign airports is critical to an airline’s success, as many customers demand a “from anywhere to anywhere” ticket. It would be nearly impossible for an airline to efficiently offer direct flights to every country or city that its customers wanted access to. With JVs, a customer in the United States can purchase a ticket directly from Delta Air Lines for a flight from Nashville to Austria, even though at least one leg will be operated by a foreign carrier. One region where Joint Ventures have not been developing as rapidly is in the Middle East. The strong cash position of the airlines based in the region, many of which are backed by their respective governments, has allowed them to refrain from aligning with other carriers as they aren’t overly concerned about operating costs. The “Middle East Three” (Emirates, Qatar Airways and Etihad) are continuing to expand their service offerings with direct flights to almost every region of the world. The growth of Joint Ventures isn’t slowing down either. Some forecasts predict that within the next ten years, more than 45% of all long-haul traffic in the world will be a part of a Joint Venture. The rate of expansion will be especially great in JVs that will connect already developed countries with regions of the world that are still developing, specifically Africa and Latin America. Although Joint Ventures may eliminate some direct competition on specific routes, there is overwhelming evidence that suggests that both the airlines involved and travelers worldwide are better off as a result of these partnerships. For the airlines, JVs have allowed them to operate much more efficient international networks. Since passengers have access to flights operated by their partners, airlines have been able to reduce capacity on routes that were previously over served. For Delta Air Lines, this has allowed for an annual savings of at least $150 million since 2013. This also frees up aircraft and allows them to be reallocated to new routes. When the transatlantic JV between American Airlines, British Airways and Iberia was formed, the partners were able to launch new routes from Chicago to Finland, New York to Hungary, Los Angeles to Madrid, and London to San Diego. The CEO of British Airways explained how the route from London Heathrow to San Diego was never possible in the past because it couldn’t deliver a profitable return for British Airways alone. But now that they had access to the networks of two other airlines, he expressed that he was “entirely confident that by working with [his] colleagues, it will [deliver a profitable return].” One reason for this is that JVs allow the airlines to obtain economies of density due to increased access to feeder routes and connecting traffic. This allows them to operate larger and more efficient aircraft which leads to decreased costs per passenger served. A great example of this is the route between Detroit and Amsterdam, which Delta serves each day with four A330s or B777s, both extremely large, widebody aircraft. Obviously, there aren’t over 1,500 people each day going solely between those two cities, but with Delta’s hub in Detroit and KLM’s hub in Amsterdam, the JV is able to serve hundreds of origin and destination combinations using that single transatlantic route. Another benefit afforded by JVs is that airlines are now able to spread out departures that otherwise would have been at the same time when the partner airlines were originally competing head to head. The best example of this is the newly formed Joint Venture between Delta Air Lines and Virgin Atlantic. The JV now offers flights from New York to London leaving every half hour during peak periods with other flights spread evenly throughout the day. British Airways, American and Iberia have formed similar strategies in London, New York, Chicago and Miami. As the airlines are able to operate more efficiently and profitably, the benefits are passed on directly to the customers in the form of improved service offerings and lower airfares. Other benefits to travelers include shorter travel times due to the availability of better connections and reciprocal access to the frequent flyer programs and airport lounges of all carriers in the JV. For example, any member of AAdvantage, American Airlines’ frequent flyer program, can earn miles on flights that are operated by any of the three airlines in their transatlantic JV. The emergence of so many JVs has also drawn some criticism from airline industry analysts and those airlines that may not belong to such agreements. The most commonly cited problem of JVs is that they lead to a lack of competition on certain routes where the only two competitors become part of the same partnership. An example is the route between New York and Amsterdam, which has traditionally been served only by Delta Air Lines and KLM. These two airlines are now a part of the same JV and therefore there is technically no competition on that route. The fact is, however, that most passengers will be attracted to connecting flights if it makes sense price-wise. Therefore, Delta and KLM are actually competing with every other way to get from New York to Amsterdam, whether it be through Germany on Lufthansa, England on British Airways, or Ireland on Aer Lingus. Also, with the Open Skies agreement between the U.S. and the E.U., it is extremely easy for another carrier to jump in and start service on a route if a carrier decides to take advantage of a lack of competition and charge ridiculous fares. Regulators from governments around the world constantly monitor data from the JVs to ensure the rights of travelers are being adhered to and that no monopoly situations exist. Some partnerships have even been forced to give up slots on certain routes solely as a precaution to prevent a noncompetitive environment. For example, Lufthansa was forced to give up a slot on its popular New York to Frankfurt route after its JV with Air Canada and United was formed. The airlines were also banned from cooperatively setting fares and aligning services on routes between Chicago and Frankfurt and Washington and Frankfurt. This shows that even in the very small amount of situations where JVs may lead to a lack of competition, steps are taken to ensure that passengers have the right to competitive fares. Clifford Winston, an economist at the respected Brooking Institution in Washington has stated that “there’s no concern that I see for consumers in the alliance, on either the service or the fares.” It is evident that Joint Ventures have led to a more efficient airline industry as a whole and that such partnerships offer many benefits to airlines, customers and the global economy.