There has been a lot of industry talk about the end of global alliances, particularly since the high-profile tie-up of Oneworld member Qantas with unaligned Emirates and two large mergers that crossed alliance boundaries. However, while the alliances' roles and identities may be changing, the three big groups continue to expand market share in international air travel.

Alliance members account for almost 55% of seats flown and 61% of worldwide available seat kilometers (ASK), Innovata data show. Star Alliance, Oneworld and SkyTeam play an even more dominant role in the international long-haul travel market, the segment they have identified as their core business. The rest of the industry is split between low-fare airlines, independent-minded regional carriers and those that have little to offer partners.

The smallest of the three global groups, Oneworld, offers almost as much capacity in terms of ASKs as all low-cost carriers worldwide combined—without even taking into account the sizable expansion to the alliance through the addition of US Airways and TAM Airlines. For its part, the Star Alliance, the biggest of the three, operates 23% more flights than the world's LCCs jointly, according to Innovata data. Surprisingly, Star's 32% growth in seats flown over the past five years also exceeds the 26% recorded for the global LCC industry and stands out against the 2% contraction in capacity of full-service unaligned carriers.

Yet, some new developments have raised questions about whether alliances are still the dominating paradigm in air travel. Oneworld member American Airlines is about to merge with US Airways, a Star Alliance carrier. LAN Airlines and TAM and their respective affiliates and subsidiaries have merged to form the Latam Airlines Group, which will lead to TAM leaving Star and joining LAN in Oneworld. Likewise, Shanghai Airlines exited Star following its acquisition by SkyTeam member China Eastern Airlines, and Continental Airlines transitioned from SkyTeam to Star with its merger with United Airlines.

Alliance membership status apparently does not keep members from merging across the groups and leaving their former partners behind, or maybe as Mark Diamond, principal at aviation consultancy ICF SH&E notes, “in effect, the merger or acquisition was a prelude to the alliance, rather than vice versa.” Bankruptcies, such as those of Malev Hungarian Airlines and Spanair, sometimes lead to the loss of members. On the other hand, so far only one airline has exited an alliance because it found membership benefits uncompelling as it changed business models: Aer Lingus, which left Oneworld.

Officially, there was support all around for the deep bilateral partnership between Emirates and Qantas, although Qantas was forced to give up its long-standing relationship with fellow Oneworld member British Airways and left other partners, such as Cathay Pacific Airways, unhappy. But Etihad has built partnerships and equity ownership regardless of alliance affiliation, and Oneworld member Air Berlin is soon beginning to work with Air France, British Airways, Etihad and Qatar Airways all at once.

There are various joint ventures among individual airlines, too, such as Air France-KLM, Delta Air Lines and Alitalia on transatlantic routes; the Atlantic Plus Plus arrangement involving Lufthansa, United Continental, Air Canada, Swiss International Air Lines, Austrian Airlines and Brussels Airlines; or Japan Airlines and American Airlines on transpacific flights. These allow for much deeper integration, cost and revenue-sharing—and in some cases, even profit-sharing—and appear to be reaching the level of efficiency that has so far eluded the alliances.

“Ultimately, the key weakness of the alliance model was relatively little economic incentive to deepen cooperation. This changed dramatically with the emergence of immune joint-venture groupings within alliances,” says John McCulloch, senior principal at the Seabury Group. “With the economic incentives in place, these have quickly developed into the 'clubs within a club.' The latest joint ventures with unaligned carriers are an extension of this—carriers will follow the economic imperative, and if this is not within the alliance, the traditional alliance model will not hold them, unless it is flexible enough to accommodate.”

Star CEO Mark Schwab says alliance membership “signifies that you want to cooperate with like-minded members and deepen the ties within the alliance. But realities change over time.” He does not see the emergence of joint ventures as competition to the alliance concept. “Star is worth billions to our carriers. That is the foundation. Then come the bilateral agreements and the joint ventures. It is no coincidence that the joint ventures are happening within Star.”

SkyTeam CEO Michael Wisbrun remarks that despite the publicity generated by the Qantas/Emirates or the Air France-KLM/Etihad deals, they affect a relatively small market segment and are essentially a “borderline issue.” Some members forge tactical bilateral relationships outside the alliance, and these can be relevant for certain gateways, but “the dominant [traffic] flow of inter-alliance cooperation is exceeding any growth of working with non-members,” Wisbrun asserts. The number of ASKs code-shared with another SkyTeam member grew 15% in the 2012-13 winter timetable compared to the same period a year ago, Wisbrun says.

He insists he is “more than OK” with the formation of joint ventures under the umbrella of the alliance. “Airlines that have consolidated within their continents will look more and more toward creating joint ventures for their activities between continents. The transatlantic [joint venture] was the first mover, and this is now expanding to the transpacific and between Europe and Asia. If, in a couple of years, we have five joint ventures operating under the umbrella of SkyTeam, we are ready for that,” Wisburn says.

“It has never been clear to me that the role [of alliances] has been articulated specifically,” says Oneworld CEO Bruce Ashby. “So it is difficult to define where they stand.” To Ashby, the alliances are still about a “mutually supportive” way to improve members' network scope, thus creating an incentive for business travelers “to pool their money with you.” He argues that joint ventures “don't make that obsolete,” as they are not covering entire networks and cannot offer worldwide reach.

Schwab concedes that the rise of joint ventures “does create some tension in the alliance, because there is some concern among carriers that are not part of them.” While no airline has left Star after entering into a joint venture, “we talk about it, we worry about it,” he says. On the other hand, the math is not simple because “you are going to walk away from a lot of revenues.”

Even if it seems to hurt the common cause, Ashby says he understands the rationale behind Qantas's move. “If you are a Qantas passenger and want to get to continental Europe, you always had to do two stops: Singapore (or Bangkok or Hong Kong) and London. With Emirates, it is only one stop, so Oneworld could not match that. We were not carrying those people anyway.”

But is it really as simple as that? Alliances have always allowed their members to forge relationships outside of the groups, particularly when they did not compete with another partner. Yet, it still seems that some are pushing the boundaries. Air Berlin joined Oneworld in early 2012 and almost simultaneously brought unaligned Etihad on board as its largest shareholder. Largely because of Etihad's backing, Air Berlin now code-shares with Air France and channels most of its Asian traffic through Abu Dhabi. But Air Berlin competes with Air France for European feed and Etihad is a fierce rival of future Oneworld member Qatar Airways.

Industry executives close to Star say those arrangements would never be allowed in its camp. But Willie Walsh, CEO of International Airlines Group (IAG), says it is perfectly understandable why Air Berlin acted the way it did and hints that without Etihad the airline would not be around anymore. Walsh has also been very tolerant of the Qantas decision to terminate a 17-year-old joint venture with British Airways, part of IAG, in favor of Emirates.

On the other hand, senior executives in the Oneworld alliance assert that even the liberal approach the group takes vis-a-vis its members' outside activities has its limits, and Air Berlin may soon have to ask whether membership still makes sense. Oneworld CEO Ashby says there is “an informal obligation to serve traffic flows within the alliance first” and that Air Berlin “is a test case for flexibility.” He makes clear that “when the majority of things is outside, [alliance membership] becomes absurd,” although Ashby stresses that Air Berlin is “nowhere close to that.”

Recent comments by Air Berlin CEO Wolfgang Prock-Schauer indicate that the airline may be closer than Ashby believes. Prock-Schauer notes that Etihad alone delivers more traffic to Air Berlin than the entire Oneworld alliance.

Etihad CEO James Hogan is convinced the days of alliances are waning. “The traditional airline alliances have evolved into slow-to-respond, bureaucratic organizations which struggle to deliver added value to their member airlines, many of which are no longer compatible with each other,” he told the International Aviation Club in Washington recently. “If we look at the consolidation currently occurring throughout the airline industry, we are also seeing more fragmentation within the alliances,” he observes. “This is going to continue as members seek ways to operate profitably in a very competitive environment with high fuel costs and generally slower global economic growth.”

Of course, Hogan promotes his own “equity alliance,” consisting of Etihad and airlines in which it holds minority stakes: Air Berlin, Air Seychelles, Virgin Australia and Aer Lingus. The central idea of his version of alliances is that they should be bound by equity and cut costs as much as possible, which is where the three global groups have largely failed.

Realizing meaningful cost-savings between alliance partners generally requires harmonization of asset and capital strategies between partner carriers—a common fleet and branding, and compromises that drive consistency across the travel ribbon. “For an airline management team that has a fiduciary responsibility to its shareholders, it is not an easy decision to head down the path of long-term, difficult-to-reverse cost-related changes,” Diamond points out.

In contrast, the types of revenue-side marketing cooperation that are common features of alliances, such as network connectivity and harmonized pricing, are easily reversible. “Therefore, in order to get meaningful cost savings, you need some congruence in shareholder goals, which is where equity stakes help,” Diamond says while emphasizing that “not every airline is willing—or in a position—to throw capital at other airlines, and assume the attendant risks.”

Tap the icon in the digital edition of AW&ST to see how the airline alliances compare around the world in main hubs, flights, seats and ASKs per week, or go to AviationWeek.com/alliances

Global Alliance Numbers
Member Airlines per Region
Oneworld SkyTeam Star Alliance
Americas 2 3 6
Europe 5 7 11
Middle East & Africa 1* 3 3
Asia-Pacific 5* 5* 7
Total members 12 18 27
Countries served 155 187 194
Aircraft in fleet 2,473 2,734 4,570
*Plus one member-elect
Sources: Airline alliances