Trends in the Airline Industry Partnerships

In essence, traditional flag carrier airlines have experienced increasing pressure and competition from low cost carriers, primarily due to their low-cost strategy in offering fares to consumers. In consequence, national airlines, including Air France, Lufthansa, and Delta Air Lines, have been forced to do the same. They have cut their airfare prices on domestic flights, which are mostly shot haul, to remain competitive. Joint Ventures have been instrumental in accomplishing the decreased airfare prices. The strategy enable two or more airlines to share resources, and in turn, split their profits and revenues over a specified and defined route the airlines have agreed on. The main goal is to optimize their profits. According to Durnst (2015), the overriding feature of JVs compared to traditional alliances, such as Star Alliance, OneWorld, and SkyTeam is the notion of Metal Neutrality. The concept means that the revenue Each JV member is remunerated on a specific route is mainly independent of which air carrier conducts the actual operation of flying the passengers from one location to another. For instance, Delta Air Lines and Air France, who entered a transatlantic Joint Venture partnership, fly multiple flights in the Paris-New York route on an everyday basis. After the business operations, they split equally the total profits or losses amongst themselves, even in instances when either Delta Air Line or Air France planes are full or empty of passengers upon leaving. As such, it can be derived that the JV can be considered as a merger between two airlines over a defined route.

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Various factors have contributed to the growth of JVs in the airline industry since the signing of the first agreement between KLM and Northwest Airlines in 1997. However, the most important development was the OpenSkies Agreement between the EU and US in 2008 that made it probable for EU airlines to fly to US cities without any restrictions. In consequence, US carriers also benefited via increased access in European airports. Other JV partnerships include Delta, Alitalia, Air France, and KLM; United, Lufthansa, and Air Canada; American, Iberia, and British Airways; as well as Virgin Atlantic and Delta. The JVs scope and depth is massive, for example, the JV between Alitalia, KLM, Air France, and Delta allows the airlines to promote over 250 nonstop flights in the transatlantic on an everyday basis and has connections to over 500 destinations globally. In addition, this JV accounts for over 25% of the total capacity of airlines in Europe and North America. As presented below, Air France, Delta, Alitalia, and KLM form the largest transatlantic JV.

In addition, since mergers between airlines to in different nations and cabotage for domestic routes are forbidden, airlines can only do so via JVs or alliances. However, the only place where JVs are not growing is the Middle East, where Etihad, Qatar Airways, as well as Emirates, commonly referred to as the Middle East Three offer direct flights to almost every global region. The growth of JVs is not slowing down, and as Durnst (2015) predicts, within the next ten years, 45% of all long haul flights will be part of a JV. The partnership is very advantageous both for clients and the airlines. For instance, Durnst (2015) asserts that Delta Air Lines made savings since 2013 from the JV of at least USD. 150 million. In addition, they enable airlines to operate larger and efficient aircrafts, which results in decreased cost for every passenger served. For example, in the KLM and Delta route between Amsterdam and Detroit, the hubs in the cities have allowed the airlines to serve hundreds of destination and origin combinations by just a single transatlantic flight.

b. Equity Alliances

Another trend in the airline industry partnerships is the resurgence of the equity model, which is commonly referred to as the equity alliance. The strategy has been associated with the Middle East Airline, Etihad, but is also leveraged by other airlines, such as Delta. In essence, this model allows the carriers to buy stakes, and thus, have a substantial control over their investee allies, and this includes utilizing them to nourish into their connecting hubs, and also enabling them to avoid national restrictions on foreign airline ownerships, specifically in Europe. As opposed to the traditional partnerships which used code sharing, the partnerships using the equity model enjoy efficiency and cost benefits that are mainly extracted via a closer coordination in operational areas, such as maintenance and procurement. As such, the alliance partnerships allow for deeper cooperation between airlines by allowing one to buy equity stakes in another carrier, which range from buying small tickets to acquisitions. For instance, Delta bought a small stake of 3.5 percent in China Eastern Airlines, and an acquisition of 49 percent stake in Virgin Atlantic. As such, the small equity stakes are adopted to secure partnerships, specifically critical airline markets. For example, Qatar Airways purchased a stake in IAG. However, for the larger equity stakes, which lead to acquisitions, airlines exert a substantial control over the acquired airline. However, from the Delta equity alliance, both these paradigms have been exercised.

In the example of Etihad Airways, the equity stakes function more attractively. The airline, in the last five to six years has purchased large stakes from troubled airlines, including Air Berlin, Air Seychelles, Virgin Atlantic, Alitalia, Indias Jet Airways, as well as Etihad Regional which was in the past known as Darwin Airline. As such, the equity alliance have enabled a deepened partnership and cooperation among the airlines by providing a strategic flexibility in reshaping the airline networks in the best way the carriers deem fit. The Etihad case, however, has come close to securing cross-border mergers, except on the legal aspect. The trend, however, is set to increase significantly with IAG looking forward to investing worldwide once it makes...