After a decline in alliances, every airline now seems ready to either renew a partnership or start a new one. Aviation Week Network air transport editors explore why collaboration is back in vogue.

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Rush Transcript

Karen Walker:

Hello, everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm Air Transport World and Group, Air Transport editor-in-chief Karen Walker. And I'm delighted to be back with you for Window Seat. Welcome on board. And this week I'm joined by my colleagues, Aaron Karp, Routes and ATW senior editor. And Lori Ranson, senior analyst Americas at CAPA. So it's great to be with everyone. And this week we're going to be taking a look at what seems to be a fast growing trend, certainly in the Americas and Canada, but actually worldwide, to pursue or grow cross airline partnerships, alliances and codeshares.

Turn the page back just a few years and there was quite a bit of cynicism about the value of being in a global alliance. And whether they had grown too big. Beyond that, some were questioning the risks of equity partnerships, and there were some notable intra alliance spats and splits with Qatar Airways group CEO publicly stating, he might take his airline out of oneworld, and issuing sharp remarks about American Airlines' leadership.

Now all that's changed, every airline seems ready to begin or renew a partnership, and indeed Qatar Airways has announced today a new quite extensive codeshare with Air Serbia. So some of these new alliances are quite startling. I'm thinking Emirates and United, but not everyone is celebrating the sort of kumbaya that airlines seem to be discovering. The US Justice Department has sued to block the Northeast Alliance or NEA, between American Airlines and JetBlue Airways. And the decision on that is expected as soon as the end of this month. So let's backtrack a little bit here. Before we get into the specifics of who's doing what with whom. Let's take a look at the big picture of why airline partnerships seem to be back in vogue. Aaron, I'd like to start with you. Did the pandemic instill a sort of an industry sense of, a better to do this together than alone?

Aaron Karp:

Well, I think there's been a mix of factors coming out of the pandemic that is driving this. One is that there's just been exceptionally high demand. Higher demand than the airlines anticipated. Secondly, there's been the very well publicized issue, airline hiring staff, there's training backlog. And thirdly, there's issues with aircraft deliveries, partly because global manufacturing supply chains are slowing down. Partly because of some regulatory issues, particularly with Boeing. Planes are just not coming as fast as the airlines would like. And so this has made a lot of airlines decide that if we can't extend our networks, as far as we'd like, or as much as we could have before the pandemic. So, a low risk way of extending those networks is to go into partnerships. And so you see, a lot of co-chairs, like you said, a lot of sort of unexpected co-chairs, really big airlines, with really small airlines. Or airlines like Emirates and United, I think were at loggerheads for a long time.

And it's just a way for airlines to extend their networks without having to use their own planes, their own crew. And I think the recognition that as far as the passenger is concerned, if you fly United on one leg, and Emirates on another leg, and the service is good on both legs, and the transfer is pretty good, the passenger doesn't really notice the difference. And so I think, this is a continuing trend and airlines seem to think let's do this, at least for now. We could see some airlines pulling back when they're fully staffed, and aircraft deliveries are a little more predictable. But right now this, as you said, seems to be the trend and I think it's these various factors emerging from the pandemic that have driven airlines in this direction.

Karen Walker:

Yeah. In many ways obviously a codeshare or even something a bit stronger than that, a partnership could easily be described as the cheapest way to extend your network. And if you're not seeking an antitrust type of relation, it's usually the fastest way as well. It's down between the two airlines to agree. You just mentioned United, Emirates, that was a big one that happened towards the end of last year. Let's just look a little bit at some of the big ones like that. Lori, just tell us a little bit more about that United, Emirates deal, and because Canada is part of this story too.

Lori Ranson:

Yeah, definitely. So Air Canada and United near the end of last year announced somewhat surprising deals with Emirate, just given the history. Air Canada has sort of a antagonistic history with Emirates along with United. And I think what has happened in a post pandemic world, or what these carriers emerging from the pandemic is, we want to grow our networks. To Aaron's point, we want to grow our networks. And United specifically said, look, we don't have access to a lot of destinations in the Middle East, Africa, that we would like to serve. And it's a combination of aircraft availability and low risk. I don't think United wants to launch its own [inaudible 00:06:11] to these destinations, that Emirates has served for a while, and Emirates has a brand and the reputation and access.

And it's the same for Air Canada as well. Air Canada was a bit territorial when Emirates was serving Canada pre pandemic and argued that Emirate should have limited growth. But it's a whole different world, in terms of how you're trying to rebuild your network now, versus 2017, 2018, 2019. You want to maximize your revenue and you want to do so in a way that as Aaron said, is low risk. And I think that's the key. One of the key factors to a lot of these relationships is, they're co-chairs, they're low risk. Could end them pretty much at any time you like, if they're not working out. So why not become friends with your old frenemies that have a significant revenue base as passenger demand shows no sign of waiting.

Karen Walker:

Absolutely. And then here specifically and some interesting things happening here in the US in terms of these types of partnerships. Let's start with the West Coast one, another big deal that both airlines are very excited about, which is American Airlines and Alaska Airlines, with their West Coast partnership. And the interesting thing of course, is that Alaska is one of the newest members, I think actually the newest member of the oneworld alliance. So American is a founding member of that, but they've gone and also done their own deal with that. Aaron, why was that so significant for American, and I think even more so maybe for Alaska?

Aaron Karp:

Yes, I think for Alaska it's really key. So for example, their code is now on the LA-Sydney-American route. So it allows Alaska passengers to go to Australia on one itinerary, which wasn't possible before. And for American, I think it just allows them to reach further into particularly Pacific Northwest without having to put their aircraft, particularly on some of the smaller routes. But I think Alaska joined oneworld. American's, one of the signature members of oneworld. And so Alaska jumped on this as a way to just extend their reach, and so that their one sort of weakness was that you couldn't book a ticket on Alaska internationally. Long distance internationally, and now you can. And so I think, it really is a way for Alaskan to extend its network without sitting around saying, well do we have to buy 787s? Do we have to dramatically change our fleet? No, we can just partner with American.

Karen Walker:

And I think that one's interesting in that, it also shows a bit of the different way of thinking, the different dynamic that people are thinking about these sort of partnerships, now, typically within those three global alliances, oneworld Skyteam and Star, they don't overlap within a country. What you've got now is two US carriers in the same global alliance, and it's clearly sort of, again they're not looking and saying, we don't need another... We don't want to have two carriers overlapping each other. They clearly have brought something extended, the alliance by bringing in Alaska. Now on the East Coast, the other big one, and as I said earlier, there's potential news coming out soon, is the American JetBlue Northeast Alliance, NEA. Again, those two carriers are both talking very excitedly about that. But the DOJ is challenging that. Lori, what's happening there?

Lori Ranson:

So the trial ended, I think late last year. There's a trial in front of a single judge, [inaudible 00:10:32] for DOJ. Basically [inaudible 00:10:32]. This alliance was very competitive, essentially a merger between these two airlines. [inaudible 00:10:54] The airlines argue this is actually good for the consumer, because it injects a two level competition into the market that neither airline could inject themselves, on an individual basis. So those are the two sort of top line arguments where, as you said, we're waiting for a decision to be handed down by the judge, which we think could come sort of any day now, definitely by the end of the month. And I think the general consensus that we all see out there is, it will probably not be wiped out. The judge won't rule totally against it, but some concessions may be necessary, such as, relinquishing of wishing of some slots at LaGuardia and maybe some gates at Boston.

So we'll just have to see what sort of happens, what transpires. But what we see is we don't believe, or most people don't believe that the judge will wipe out the alliance entirely. And if you just watch what JetBlue and American are doing, they're going on the offense ahead of this decision, and Aaron can probably speak to this, but they've added a slew of new grounds within the alliance, bulking up their presence, and just showing a sign of public confidence that we believe in what we're doing, and we feel that we're going to prevail. So I guess that confidence for me, can come to fruition.

Karen Walker:

Yeah. Aaron, tell us what that alliance, that partnership does, what that alliance does, both in American and JetBlue, but also for customers, for passengers.

Aaron Karp:

Essentially, American and JetBlue are operating in partnership from the New York and Boston. And so what they do is, they set their schedules jointly. And this is really important for JetBlue, because they say otherwise it would not be able to grow in their home turf in Northeast, in the US, because they're just [inaudible 00:12:56]. I note that Elaine Chao, who was the former transportation secretary, approved this alliance, before she left in 2020. And so that means that, it's gone ahead and in fact there's going to be 700 daily departures this year operated, as part of the Northeast Alliance. 300 alone from Kennedy. So I think one of the interesting aspects of this is, if DOJ says no, it would be very difficult to unwind. It's not just like turning off a light switch. And so I think one of the carriers' strategies has been just to be really aggressive, build up these routes so it becomes really hard to untangle.

And I think what Lori says is probably correct. We've been awaiting the judge's decision for a couple months now, and I think one thing he's probably weighing is, how disruptive it would be if he just said, this is done. And if there are concessions that have to be made, how will those concessions happen? And I think the other thing to throw in here, is that JetBlue is now under scrutiny by DOJ for their merger with Spirit and will probably have to make some sort of concessions to get that approved. So, they could be looking at the full slate of concessions to get this alliance and this merger through.

Karen Walker:

Yeah. Interesting. So as you point out, Aaron, the Northeast Alliance, JetBlue, American has already been under a lot of scrutiny, of course. As you say, it got through DOT, albeit under a administration, but it's been under scrutiny. One could argue that yes, it's been challenged a lot from the other airlines, particularly the other network airlines. But the reason they challenged it so fiercely, is because they do see it as bringing in a lot of competition, new competition with those two airlines working together. So that sort of makes the case, doesn't it, that it does bring in competition that's good for the passengers. Lori?

Lori Ranson:

Definitely. And I believe that American’s airports in the Northeast and now they can come out and speak to other large airports in it's network. So that just shows what the benefits are from a business perspective. I think that JetBlue has said that the very early stages of partnership with the Alliance generated about 100 million in revenue for JetBlue, and you know it's only grown since then, because they've expanded pretty fast over the last year. So, the benefits to combining those operations, to move the airlines from a business perspective, you can't argue with. But obviously that has no bearing on the judge's decision just looking at it from just a pure customer standpoint, a competition standpoint.

Karen Walker:

So let's look at this sort of north and south ends of the United States, because there's been also quite a lot of sort of new partnerships forming cross US and South America, Mexico. And then also same thing across Canada. And in terms of either, like I said, creating new relationships or reinforcing, and building on those, let's start Lori with you on Latin America. Some of the big things that are happening there.

Lori Ranson:

So you have two, [inaudible 00:16:57]. They're trying to [inaudible 00:17:03] 2022 if memory serves me correctly. And they've already gotten approval from Mexico's competition regulators, and they're awaiting approval from DOT. I imagine that the DOT probably wouldn't issue a decision until after the FAA reinstates Mexico's safety rating. The FAA downward graded Mexico's safety rating in 2021. So carriers can't really expand on the transporter market. So I would imagine the DOT will issue a decision until, after that safety issue gets resolved. And it's hard to say how DOT will feel about this. Allegiant and Viva, argue that this will allow Allegiant to actually enter the Mexican market, which Allegiant has tried to do at least one time before, and thought it was too cross prohibited. Allegiant is also investing 50 million in Viva Airbus. So Allegiant has a big stake in this. And their argument is, they need this immunized relationship to really be able to grow and develop transporter... Their own respective transporter networks.

So we'll see what happens. We'll see if the DOT agrees with them. Basically I think what they're trying to do, they're trying to build a precedence in more secondary markets, in the transporter space. So maybe DOT might do that variable. It's just hard to say. So that's something to watch out for sometime this year, in terms of DOT issuing its decision. And then you have the Abra group in South America. SACO and Avianca are trying to create this umbrella group of airlines, just to give the company more scale. Originally Viva was going to be included in that group. Avianca was doing a separate transaction to try, and purchase Viva, but Colombia regulators have blocked that for now. Citing competition concerns. Avianca and Viva came back in with several concessions including, we'll give up some space, [inaudible 00:19:32] , which is really constrained. Colombia's government has yet to respond to the concessions that they've offered. So those are sort of two things to watch out for.

I think that Abra has received approval from Ecuador's government, but they have to get approval from several governments including Brazil. Brazil just has its own geopolitical problems right now. So those are the things to watch out for. So all of these relationships in Latin America really comes down to how governments respond, and how governments view combinations that these airlines are trying to create. It's very interesting to watch [inaudible 00:20:16].

Karen Walker:

Yeah, absolutely. And then Aaron, on the northern end, things happening as well in Canada, I think WestJet, the low-cost carrier, WestJet is one of the interesting ones in what it's doing on the partnership side. Tell us on that.

Aaron Karp:

Well, WestJet coming out of the pandemic decided that they were going to retrench to Calgary their base, and focus on their traditional Western Canada network. Before the pandemic, they've been trying to really become sort of a global airline, and compete with Air Canada. But instead their 787s, they will all be based in Calgary. All the routes that they operate internationally will be based there. So what they've done is, for the first time they've entered into co-chair partnerships with Asian Airlines. So [inaudible 00:21:06] will be placed on Vancouver to Tokyo-Narita route. WestJet's Code, I'm sorry, will be placed on the Vancouver, Tokyo-Narita route. WestJet's code will be placed on Korean Air's, Toronto to Seoul Route. And also Vancouver to Seoul Route, they've also entered a partnership, a co-chair partnership with KLM, so that their passengers can fly to Calgary, and... Fly from Calgary... Let me start that over. So their passengers can fly from Canada to Amsterdam and connect from there.

And so what you see here is WestJet saying, look, we don't think we can afford to have [inaudible 00:21:50] we'll run some 787s out of our Calgary base, but we're going to extend our network via Japan Airlines through Tokyo, via Korean air, through Seoul, via KLM through Amsterdam. And so I think it's really interesting strategy on their part to acknowledge that they have to retrench, but that doesn't mean their passengers lose access to expanding what the network [inaudible 00:22:22].

Karen Walker:

Yeah. So this is really the crux of what we're talking about here about, that gets to the point of why are all these partnerships and co-chairs, et cetera being formed? Because even when you've got a long range aircraft, a wide body like the 787 as WestJet has, there are airlines that are saying, the better way to expend our network is through partnership. That's the most efficient way to still be able to offer an expanded network, but one that comes with less risk, and less cost. So I think that goes right back to the thing of the global alliances. As I said at the beginning of this, there was a little bit of cynicism creeping in about the point of the global alliances, before the pandemic. That seems to have changed to me now.

I think it's almost as if the global alliances have become regarded for the potential that they bring to a network. And for an airline, American Airlines part of oneworld, as I said before, is making quite clear that it's really going to leverage its oneworld partners for its long haul network. Do we think we'll see more of that? Will the Global Alliances grow? Lori, what do you think?

Lori Ranson:

The growth, I think is a little hard to predict because airlines are just trying to figure out their own strategies, as they emerge from the pandemic. For those two airlines, I think it makes sense to join an alliance, but you've got other airlines that actually say we're going to remain independent. Sort of like, WestJet or JetBlue, to see more of these strategic sort of partnerships versus [inaudible 00:25:00] larger airline. But I don't think the alliances are of any danger at all. And I think the first step definitely breeds benefits from being in that larger grouping. So I think that, at most, status quo will remain in effect, and there is some possibility for growth. I think that once we really emerge, once all regions reopen, in full effect and carriers have their strategies going forward, you could see some movement on the alliance front. Definitely.

Karen Walker:

And then the other news that came out this week, of course just announces that... Not surprise, but it's been a long while coming, is that Lufthansa confirmed today that it is making a bid to acquire initially just a small stake, I think in ITA in Italy, but with the intention of ultimately acquiring ITA. So what's interesting here is, you've got a lot happening, some airlines are... You mentioned JetBlue and Spirit, some are pursuing the acquisition and merger route, plus a lot of airlines that you didn't think would ever be partners or doing everything from an alliance down to a simple co-chair. Aaron, do you think that's going to be the trend for the next couple of years?

Aaron Karp:

Yes. And I think in terms of talking about alliances, one of the things that's interesting now is that airlines are doing a lot of partnerships across alliances. They're not saying, oh, we can't do a co-chair with that airline, because it's not in our alliance. One of the issues with the alliance, that it's always been... And at a certain point you run out of the really big airlines. And so I think the alliances are all at the point now where it's a matter of looking where they have small white spots, and filling those white spots. So I don't expect significant crew, but carriers are also looking for ways to be creative. And I think you're just see so many [inaudible 00:27:10] partnerships. One that struck me recently was Turkish Airlines, they took a co-chair with MIAT Mongolian Airlines.

And so passengers of Mongolian Airlines now will have access to Istanbul and all the Turkish flights from there. And that's the sort of partnership I don't think we would've seen before the pandemic. And it shows that there's just a lot of... The airlines are being very creative, not being held to traditionally how they thought about partnerships not being held to how they traditionally thought about their alliances. And so I expect to see more co-chairs, more partnerships and more kinds of alliances and partnerships that would've been unexpected four or five, six years ago.

Karen Walker:

So more thinking out of the box. Aaron, Lori, thank you once again. It's always great having these discussions with you, so thank you for your insights. Thank you also to our producer, Andrea Copley Smith. And thank you to our listeners. Make sure you don't miss us each week by subscribing to the window Seat podcast on Apple Podcast, or wherever you listen. And until next week, this is Karen Walker, disembarking from Window Seat.