Aviation Alliances Explained: The Reasons Airlines Enter into Global Alliances

What an Airline Alliance Actually Is

An airline alliance refers to a multi-party agreement where disputing airlines are collaborating at a significant level, i.e., sharing routes, lounges, ground services, frequent flyer programmes, and in many cases, negotiating joint buying power. Most alliances have begun as mere codeshare arrangements, with one carrier selling seats on the flight of another airline under its own flight number. Subsequently, these developed into much more extensive networks that are largely interconnected in the industry today. Members retain independent ownership, governance, and brand identity; alliances are partnerships, not mergers

How Alliances are Formed: The Star Alliance Blueprint

According to reports by IATA, the modern alliance era was initiated on 14 May 1997 when five airlines, namely United Airlines, Lufthansa, Air Canada, Scandinavian Airlines, and Thai Airways, announced forming an alliance named Star Alliance. Its original advertising budget was only 25 million dollars, something that indicated commercial ambitions. The success of the alliance led to competitors reacting: Oneworld was established in 1999 and consisted of American Airlines, British Airways, Cathay Pacific, and Qantas.

Subsequently, SkyTeam was created in June 2000 and is an expansion of an earlier strategic partnership between Air France and Delta Air Lines, as reported by Simple Flying.
Membership in the alliances is limited to high standards of safety audit, standards of service, IT integration procedures, and mutual frequent flyer recognition. The entry would demand bilateral government approvals and, most importantly, in the transborder market, antitrust exemption by the regulators. According to IATA reports, the US provided antitrust immunity to Northwest Airlines and KLM due to their alliance, and this was a seminal administrative precedent that continues to influence the legal structure of international alliances of airline companies today.

Why Airlines Enter into Alliances: Economic Reach and Partnership

The business case is simple: there is no airline that has the fleet, slots, and bilateral rights to serve all the markets that a global traveler requires. Alliances provide economies of scale in terms of shared operations; catering facilities, ground handling staff, check-in desk, and computer system. Moreover, commercial benefits are also realized in terms of codeshare network growth and volume-based purchasing discounts.

There are structural adjustments made in accordance with the alliance: member airlines get their timetables in step with each other, transfer timings are synchronized, terminals are co-located, and in certain instances, a proportion of the fleet is painted in alliance livery. Equity structures and shareholding, however, are not to be changed - foreign ownership regulations in the aviation industry have blocked inter-jurisdiction equity mergers in the majority of jurisdictions.
Membership in alliances has a visible signal on stock markets. According to the reports published by Simple Flying, in December 2012, when Delta Air Lines acquired a 49 per cent stake in Virgin Atlantic (from Singapore Airlines) at a price of PS 224 million, the move eventually plunged Virgin Atlantic into the orbit of SkyTeam, which the carrier joined in full in March 2023. Equity interests are very often the antecedent or catalyst to alliance change.

Industry Voice

As the CEO of IAG, Walsh was directly involved in the entry of Qatar Airways into One world, one of the most strategically important additions to an alliance in the last ten years.

Looking Ahead

According to AltexSoft, the three major airlines, including Star Alliance, SkyTeam, and Oneworld, control about 43 percent of the world aviation market, and the remaining 57 percent is divided among non-aligned airlines and bilateral alliances. The strategic rationale of alliances will keep increasing as IATA forecasts global air demand to increase at 2.9-3.3 percent per year to almost 8 billion passenger journeys in the year 2050. The shuffles of Lufthansa-ITA-SAS 2024-2026 and the antitrust immunity wars are evidence that the alliance map can never be closed. In the aviation business, every alliance is about power play moves, and the sky is still divided.