Alliances of convenience

Word is – and there has been some talk about it for several months – that there may be some significant changes afoot in the makeup of Asian airline membership in the various global alliances. It has been reported, in the China Morning Post and elsewhere, that the region’s biggest carrier, Guangzhou-based China Southern Airlines (CSA), is set to ditch its membership in SkyTeam to join rival oneworld and that Hong Kong’s Cathay Pacific could even opt out of oneworld and move into the Star Alliance.

Considering what it costs to get into alliances, the relationships that are built up while there and the high cost of opting out, on the surface this seems like a big step to take for either of these operators. On the other hand, airlines are extremely pragmatic these days about partnering with whomsoever they think will best profit their bottom lines, no matter what alliance ties they have.

For example, Qantas (oneworld) has a deep partnership with China Southern (SkyTeam) and with Shanghai-based China Eastern Airlines (also SkyTeam). Clearly, since oneworld doesn’t have a mainland Chinese member, the Australian carrier had to throw oneworld loyalties aside in order to better penetrate the Chinese market. It did the same when it came to that once controversial but now highly successful and profitable partnership with Emirates Airline (a non-alliance player).

Another case is Cathay Pacific (oneworld), which has codeshares with Air New Zealand (Star).

But there are deeper reasons why China Southern should be considering change. The operators which effectively lead SkyTeam are America’s Delta Air Lines and the Air France/KLM group. Back in 2015, Delta forked out US$450 million for a 3. 55 percent stake in China Eastern (also in SkyTeam), CSA’s major local rival. It has become increasingly clear that CSA is being treated as the poor cousin within the alliance structure and it is feeling the pinch. So much so that CSA President Tan Wangeng was recently quoted as saying the future of its alliance membership was “a sensitive topic”.

That in itself amounted to a clear expression of disquiet with the situation. Besides, Dallas/Fort Worthbased American Airlines (oneworld) earlier this year moved to strengthen its position in China by agreeing to pay $200 million for a stake in China Southern. The two plan to codeshare extensively and are exploring cooperation in other areas. Along with the partnership it already has with Qantas, it would seem to make a lot of sense for the three to end up in the same alliance.

As for Cathay Pacific, its desertion from oneworld would seem more unlikely, even though its relationship with alliance partner Qantas hasn’t exactly been the smoothest over the years. Much of the talk revolves around the fact that Beijing-based Air China (a Star member) has a 30 per cent stake in Cathay, therefore it would make sense for them to be in the same alliance.

However, that has been complicated in recent times following the arrival of Qatar Airways (oneworld) onto Cathay’s share register as its third biggest investor.

Talk that global airline alliances are approaching their use-by date, given that most member airlines now freely get into bed with other partners, is nothing new. But airline chief executives who are involved unanimously reject that view. They still see benefit in membership, particularly through areas such as joint marketing, alignment of IT systems and, to a certain extent, joint purchasing in various areas. In the latter case that hasn’t extended to critical high value buys such as aircraft and fuel, which it was hoped would be in the early days of alliances.

Nevertheless, they are still seen as a valuable part of the fabric of their overall operations and network strength.

And the alliance managements themselves have adapted to changing times. Star, for instance, used to be fairly strict in not allowing its members to stray outside the structure when it came to serious co-operation.

That is no longer the case and Star members, like those in oneworld and SkyTeam, are free to tie the knot with whoever fits their individual plans, in or out of the alliance.

The bottom line? If you were a betting man, or woman, a small wager on China Southern jumping ship will probably be worthwhile. But when it comes to Cathay Pacific, keep your coins in your pocket.

Of course, when it comes to speculation in the airline industry, the best approach is to figure out what is the most unlikely and put your money on that.

‘Airlines are extremely pragmatic these days. ’