Mergers vs. alliances: Airlines’ growth strategy in the years to come

These days airlines are concerned with one simple thing — how to survive. Sure, most have kept things in check by shrewdly adjusting their cost structure and by charging flyers extra fees, but in the long run, most are wondering how much longer they can stay in the red and endure.

For years analysts have speculated that consolidation was the key: Around the world, healthier airlines would swallow up the weaker ones in order to gain market share and expand their global reach. Throughout 2009, airlines did merge, but not to the extent I think analysts predicted.

There were some major global deals, though. On the heels of the mammoth Delta/Northwest merger, this year has seen German giant Deutsche Lufthansa acquire Austrian Airlines and take full ownership of British Midland Airways (known as bmi). Also, British Airways has been engaged in merger talks with Iberia (Spain’s #1 airline) since mid-2008.

When it comes to mergers, however, some analysts are changing their tune. For one thing, mergers are expensive, typically involve layoffs and the closure of regional hubs, and often include stockholder/union hold-ups that stop the deal from happening in the first place. As airlines rethink their growth strategy, most are looking to enter global code sharing alliances with partners to boost their international reach.

Code sharing, which enables airlines to sell tickets on one another’s flights in order to serve more destinations, is nothing new for the airline industry. (FUN FACT: The term code sharing was first coined in 1989 and was first utilized by Qantas Airways and American Airlines. Well, fun fact for me at least.)

There are three major code-sharing alliances within the industry: Star Alliance (consisting of carriers such as United, US Airways, and Lufthansa), SkyTeam (Air France-KLM, Delta, and Continental), and Oneworld (American, British Airways, and Japan Airlines).

Initially, these agreements were formed to combine flight systems so that passengers could travel to more places. Now, insiders predict these alliances could include everything from sharing profits and employees to pooling resources to share the cost of buying additional planes.

This new alliance strategy has recently come to light thanks to the precarious predicament of Japan Airlines (JAL). The carrier is financially strapped and under orders from its government to come up with a survival plan. US airlines are now chomping at the bit to enter a partnership or alliance with JAL, since the US domestic market isn’t expected to rebound for several more quarters.

Since American Airlines and JAL both reside within the Oneworld Alliance, you might expect American to have a leg up when it comes to sharing revenue and resources with the Japanese carrier. However, Delta has jumped into the fray, with industry buzz indicating  it’s interested in investing as much as $500 million in the troubled carrier. In order for any Delta/JAL partnership to ensue, JAL has to sever its relationship with American Airlines and the Oneworld alliance. (Sometimes these alliances within alliances can get pretty complicated.)

So in the months and quarters to come, expect more airlines to try and claw and scratch their way into additional global partnerships. As one high-ranking executive put it:

“Airlines are street fighters,” he said. “We’re so used to punching each other around that it becomes like diplomacy after a war. It takes time to adjust your sights.”

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Photo by A. www.viajar24h.com, used under a Creative Commons license.