Let’s talk alliances before anything else.

 

There is a huge battle taking place over who gets to have Japan Air Lines (JAL) business.  The financially struggling airline has suddenly become a hot property and American Airlines (OneWorld) and Delta Airlines (SkyTeam) are fighting over JAL like it’s a supermodel.   Both airlines are offering hugely attractive financial packages to JAL and I suspect the poor airline has no idea of who to nod their head towards. 

 

Ultimately, I think JAL will stay in Oneworld.  There is more at stake here than what is offered as a financial rescue package.  Japan is still a very nationalistic country and keeping the identify of what is, for most purposes, its flag carrier will be important.  It has a solid relationship with Oneworld and American Airlines and compared to the risk of joining with SkyTeam and the possibility of being a second tier player in that relationship, JAL has a safer bet with Oneworld. 

 

In addition, I don’t think JAL can afford to wait for anti-trust immunity to act with airline partners and it won’t have to by staying with Oneworld. 

 

The Middle East:

 

I continue to think that the major international airlines (Emirates, Qatar, Etihad) of the Middle East are more at risk than they claim.  Yes, they’ve experienced phenomal growth and, yes, they continue to purchase aircraft like a 5 year old buys candy but what’s next for them and their route systems? 

 

The Middle East doesn’t offer a good connecting point for North or South America.   Airlines in North America can reach their markets non-stop with existing aircraft and why would a passenger choose to connect via an airport in the UAE (United Arab Emirates) when they can fly non-stop at a competitive price.  Better service product won’t attract these customers.  

 

There is very little business between South America and Africa, India, The Middle East or Southeast Asia and, so, South America isn’t a place that could serve as a growth area for those airlines. 

 

Emirates, Qatar and Etihad have succeeded by offering a hub between Europe and the Middle East, India, Southeast Asia and (to some extent) Australia/New Zealand.  However, even European airlines are adding longer range aircraft and are able to reach each of those destinations non-stop  more and more with the exception of Australia and New Zealand. 

 

In addition, each of those airlines is bankrolled to some extent with oil profits and the uncertainty of those profits and the uncertainty of other investments in the Middle East has to raise the risk for that continued bankrolling.   I don’t see any of these airlines failing in the next year but I do see them perhaps deferring orders and re-organising their fleets. 

 

India: 

 

What a catastrophe!  No airline in India will do well for now and there has to be some consolidation in this market in the near future.   Kingfisher and Jet Airways are both excellent candidates for takeovers and, perhaps, they are excellent candidates for each other.  Kingfisher bet on Airbus by ordering A330 and A340 aircraft first.  Their A330 fleet doesn’t quite have the range it really needs to expand outside of its current markets and the A340 was a terrible choice for long range flights.  So much so, it got rid of the aircraft on order. 

 

Now, Kingfisher has a few A350 and a few A380 aircraft on order for deliveries starting in 2014.  While it could desperately stand to have the A350 now, I don’t see how it can wait until 2014 for the aircraft.  I also seriously doubt it will ever take up the A380 both because of cost and an inability to fill the aircraft enough for regular flights. 

 

Jet Airways also has a great service product but bought too big of an aircraft for the routes it needed to compete on.  Jet Airways purchased the 777-300ER when it really needed the 777-200ER/LR for the international routes it proposed to serve.  Now 4 of the aircraft are leased to Turkish Airlines and 3 are going to Royal Brunei leaving just 3 for Jet Airways. 

 

Both Kingfisher and Jet Airways have a great service product and good networks across India and neighboring countries.  They would be better served by merging and using one brand for their national service and another for their international services.  Kingfisher for India and Jet Airways for international service. 

 

The Far East:

 

China has a lot of problems coming to roost with the inevitable decline in their economy which is heavily dependent on North America and Europe.    Look for some consolidation in this market.  I do think that Chinese airlines face potential issues from government mandates to purchase indignenous aircraft being developed now.  There is little chance that the aircraft being built will be competitive internally or externally.  At least for this first round of development.

 

While JAL is suffering and ANA (All Nippon Airlines) isn’t performing that great at present, I see no major changes in the Japanese markets.  This is an area that will bounce back but only after a long fight.    The same is true for Korea. 

 

Oceania: 

 

Australia will be interesting to watch.  I’m tempted to guess that the status quo will remain in most cases.  The competition between the US and Australia only continues to grow more fierce and something has to give.  I still think that United Airlines may well be the airline to withdraw from this market and only because of the rather unique market relationship formed between Delta and V Australia (and Virgin Blue). 

 

 QANTAS will continue to own a large piece of all air travel from its home nation and they could be helped along with some deliveries of the 787.  At some point, QANTAS must grow and growth means a lot of long and thin routes to be added. 

 

South America: 

 

I don’t think there will be any major news from this continent over the next year.  LAN will continue to succeed by operating smart and honest.   Brazilian airlines will continue to fight things out but there is enough international business for each of them and their real threat comes from Azul on a domestic basis. 

 

Look for Azul to consider adding a larger aircraft to its fleet and don’t count Boeing out on that deal.   It would be easier for David Neeleman to add the Boeing 737 to his fleet in Brazil because he could outsource maintenance more easily. 

 

Aerolineas Argentinas:  Well, what can I say?   This disaster is much like the country itself.  It won’t go away but it won’t perform either.  No outside airline will consider taking it over after what happened with Grupo Marsans’ ownership.   They lack an appropriate fleet for their flying, a strategic plan for stabilizing their revenues and no clear plan for future growth.  But the Argentinian government also won’t let them go away.  It is a matter of national pride.

 

LAN Argentina is growing in Argentina but somehow I remain skeptical that it will be allowed to succeed too well.  Why?  For one reason, the government of Argentina owns Aerolineas Argentinas and it has a vested interest in that airline earning money.  For another reason, LAN Argentina is owned by the LAN Group of Chile.  Look up how Chileans and Argentinians feel about each other.

 

Colombia and Venezuela: 

 

Avianca Airlines has joined hands with Grupo Taca and I suspect that will be a good thing for both airlines.  Avianca could benefit by the exellent managment of Grupo Taca and Grupo Taca could benefit from greater access to South American markets.   Its almost certain that the two will harmonize their fleets and service products for greater economies while maintaing the two identies for greater acceptance throughout Central and South America.

 

Venezuela:  All airlines erode further due to the increasing interference of the Venezuelan government and, more specifically, Hugo Chavez.  I lost hope for Venezuela’s airline industry when they forced Conviasa (in partnerhsip with Iran Air and originally using an Iran Air 747-SP) into a route between Caracas and Tehran with an intermediate stop in Damascus.  This is the ultimate in “this route makes no sense.”  If the government can do that, then they’ll do other things to damage the industry.

 

Europe:

 

The European continent’s airlines are hunkered down just as much as the US based airlines.   There isn’t much to be expected in Europe for the next 12 months but let’s look at it anyway.

 

British Airways is kind of the American Airlines of the UK.  They’ll always somehow manage to survive and generally pretty well.  They have their own labour troubles but, again, they seem to be capable winning these for now.  British Airways needs to cut costs a bit more so I wouldn’t be surprised at some order deferrals and/or hastening the exit of the 747-400. 

 

The one airline I continue to wonder about in Europe is Lufthansa.  While they have a good service product and an excellent reputation, they also seem to have some weaknesses.  Lufthansa continues to purchase weaker sisters in Europe such as SWISS, Brussels Airlines, Austrian Airlines, Lauda Air and, now, BMI.  

 

20 years ago, this would seem reasonable in that European countries were pretty nationalistic.  Now, not so much.  Yes, there are some pockets of nationalism that exist but I wonder at maintaining so many different brands, fleets and networks now.  It would seem that the brands could be pared down to 2 or 3 mainline airlines and 3 to 5 regional airlines.   BMI wasn’t an airline that was succeeding in any great way and what does Lufthansa get for their purchase?  I see little of value.   I don’t know that BMI gets Lufthansa an entry into the UK that is of any more value than the Lufthansa brand itself.

 

I also wonder about their fleet.  They have a large fleet of A340 aircraft serving medium to long haul routes and that cannot be very efficient or profit enhancing.  Yet, Lufthansa has made no real move to correct this problem.   Their one major aircraft order in the past several years was for the four engined 747-8i.  They have no orders for the 787 (although Boeing would no doubt happily accomodate them with early delivery positions) nor the A350 (and I’m certain Airbus ould love to add them to the order book as well.) 

 

This puts Lufthansa into competition with British Airways who has moved towards operating more twin engine, long haul aircraft (777 and 787) as well as KLM/Air France (777).   Yes, they do own some A330 aircraft but their true long haul equipment is the A340 and 747.

 

KLM / Air France:  Not much here.  I don’t see an order for aircraft coming from them unless Airbus magically announces a GE engine for the A350-1000.  Otherwise, I seem them holding their cards close to their vest and waiting to see what happens in Europe.

 

The BA/Iberia merger:  I never saw the attraction myself.  It’s a low rent copy of the KLM/Air France union and I suspect there are many issues to resolve before the two really combine.   Personally, I think the odds of this merger actually taking place is, at best, 50/50. 

 

 Their alliance with AA over the Atlantic will continue to be a strong issue for the US Justice Department.   The BA/AA strength on the US/UK routes and the the IB/AA strenght on the US/Spain routes is really a bit too much.   I think the DoT/FAA is willing to let this alliance go forward but I think the DoJ is going to speak loudly and force a request for concessions.   Concessions that I think, this time, BA and AA may meet with some negotiation.

Filed under: Airline Service by ajax