Small airlines seek to unlock the full potential of their alliance membership
Finnair's former CEO, Mika Vehvilainen, described the role of an alliance as “crucial” and he asserted that every airline in an alliance benefits from it, “but as a smaller carrier we probably benefit more than the majors.” Yet, alliances can be intimidating and many smaller members battle for relevance in the scope of their dealings with larger partners. This will usually prevent them from maximizing benefits.
“In some instances, we have noticed that smaller carriers have not always implemented the level of cooperation that would let them approach the full level of theoretically attainable alliance benefits,” says Mark Diamond, principal at the aviation consultancy service ICF SH&E. For example, there might be a lot of intra-hub code-sharing between alliance partners but only relatively limited reciprocal code-sharing beyond the hubs, particularly in the case of the smaller airline's code on the larger partners' aircraft.
Potential reasons may include smaller carrier reluctance to pay the costs involved—such as global distribution system (GDS) fees for listings, code-share commissions, staff time required to keep fares up to date, uncertainty about the benefits, and “larger partner resistance particularly if the partner feels that having the smaller carrier code on its flights may siphon off some passengers that it could otherwise carry itself,” Diamond asserts. There might also be some regulatory constraints, for example limits on “beyond/behind” code-sharing in bilateral air service agreements that prevent smaller airlines to fully use the alliance potential.
In addition, sometimes there can be an almost psychological aspect to a smaller airline's resistance to full implementation. Diamond: “It may mean transitioning away from their scrappy “we fight for every customer in every market” set of tactics. Joining an alliance means cutting that umbilical cord and letting 'scope' and 'presence' and 'loyalty' and 'connectivity' drive passengers. A small airline may find it difficult to let go.”
The benefits of alliances for smaller airlines can be quite substantial, however. Alliance membership offers a smaller airline access to markets worldwide that it would never be able to serve itself and with frequent-flier program linkages, the smaller airline's customers benefit from vastly improved mileage accrual and redemption opportunities. “Being inis a clear asset. It allows us to sell the networks of the member carriers and flow passengers to and from origins and destinations across the planet—our own network of 59 destinations suddenly extends to a comprehensive network of more than 1,000 destinations globally thanks to SkyTeam,” Chief Operating Officer Mbuvo Ngunze says. “It is a strong leverage for us.”
Kenya Airways joined SkyTeam in 2007 as one of the group's first associate members and it upgraded three years later to the status of a full-fledged member. Its entry in the grouping was sponsored by its near 27% shareholder. Kenya Airways Group Managing Director/CEO Titus Naikuni admits that joining SkyTeam and fulfilling all the requirements initially was challenging, and the outdated infrastructure of Nairobi Jomo Kenyatta International Airport does restrict the scope to offer all SkyTeam benefits and customer service standards.
The airport's new terminal, which is now scheduled to be ready in the first quarter of 2014 after a series of delays, should bring some solace and will provide Kenya Airways the opportunity to elevate the quality and size of the common lounge and extend the size of the SkyTeam transfer center. And the planned new greenfield terminal will be dedicated to Kenya Airways and its SkyTeam partners. While awaiting for more space at the airport, which is handling three times its design capacity of 2.5 million passengers annually, Kenya Airways has completed the implementation of several SkyTeam systems, including the SkyPriority and SkyBilling modules.
“SkyTeam helps us to drive our standards and the simplification of processes,” Ngunze notes. “Being a full member of SkyTeam is also a strong endorsement, it lends us credibility—a lot of Europeans would probably not fly Kenya Airways if we were not associated with SkyTeam and big brands such as, KLM and Delta.” This means not only an ability to generate greater traffic volumes, but also the important ability to attract higher quality traffic, e.g. higher yield and higher front-of-cabin seat loads, Mark Diamond says.
For John McCulloch, formerly managing director of Oneworld and now senior principal at Seabury Group, there is no doubt that small or regional carriers benefit from brand extension, network reach and feed disproportionately to larger carriers by entering an alliance. “If they are not in an alliance it is likely their feed is being eaten by another alliance, or by the mega-hubs and joint ventures. Assuming that they strike the right deal to balance their prorated revenues upon entry into the alliance, this benefit should outweigh expense,” he says. Kenya Airways' CEO is adamant that the SkyTeam membership is more an “enabler than a cost” and also Naikuni emphasizes that SkyTeam is “very fair with us” in regard to fees.
In a next step, the airline is looking to forge deeper commercial ties or even a joint venture with other SkyTeam partners. It has already has a cost- and revenue-sharing joint venture with KLM on the Amsterdam-Nairobi route and “we would like to conclude a strategic partnership with a member in Greater China,” says Ngunze. “We're really excited about the possibilities.”