In light of the grim future painted by the International Air Transport Association (IATA) at its annual summit held in Beijing recently, Qantas chief executive Alan Joyce, it seems, thinks the airline industry faces an overcrowding problem. He said at the summit: “The number of airlines in the industry is too many. It’s too fragmented.” And the solution that he suggested: Consolidation.
Joyce is re-championing an old strategy that more than 20 years ago was predicted to inevitably see the number of competitors reduced substantially to a few mega airlines. One suspects that Qantas, struggling with a money-losing international operation, is crying foul over the competition posed by airlines such as Emirates Airline and Singapore Airlines (SIA) that not only are more efficient operationally but also provide superior customer service.
Qantas has also found its wings clipped by resistance at home in its effort to set up an overseas base for a proposed regional premium carrier, and subsequent talks with potential partners that include Malaysia Airlines had been in vain. On the other hand, the Australian flag carrier has not wasted time in setting up budget joint-ventures and expanding the Jetstar network that includes operations in New Zealand, Singapore, Vietnam and Japan. Hong Kong is slated for launch next year, subject to approval by the relevant authorities.
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While one may suspect the self-driven agenda of Qantas, the recent spate of new mergers, particularly of giants like British Airways/Iberia, Air France-KLM, United Continental and Delta-Northwest, seems to suggest a return to a strategy that was a bitter pill for SIA to swallow when it bought stakes in Virgin Atlantic in 1999 and Air New Zealand in 2000. The Virgin stake was a not-so-glamorous-after-all marriage which SIA has for some time now indicated interest in dissolution if it could find a suitable buyer. The ANZ marriage turned out to be a fiasco, and was subsequently dissolved at a loss. That perhaps explains a more cautionary approach that SIA seems to be adopting today, preferring a less binding collaborative relationship such as the commercial arrangement inked with Virgin Australia.
Consolidation is expected to come with the twin-merits of sharing costs and risks, and of confining, reducing or eliminating competition. In the present climate, cost is likely to be the primary driver in this direction. The LATAM merger, made up of Chile’s LAN and Brazil’s TAM, is expected to save US$700 million in operating costs over four years. At the same time, LAN hopes to be able to spread its wings further across the Brazilian terrain.
While some mergers may have been triggered by the white knight riding to rescue a financially crippled candidate, there is reason to believe that size matters, when it comes to protecting one’s turf. The chain effect is best illustrated by the mergers of American airlines to form mega-entities. However, the industry is far from seeing the business monopolised by a minority few. Apart from geopolitical encumbrances, a successful – perhaps a more appropriate word would be ‘beneficial’ – marriage demands more than just an exchange of vows, particularly when it crosses culture and geography, when it is held together by unequal strengths, and when both or more parties that are involved uphold and practise different management ideologies.
That probably explains how the proposed tie-up between Malaysia Airlines and compatriot budget airline AirAsia, seen as a timely move to shore up the finances of the national carrier and a sensible strategy for the two airlines to together take on the competition posed by other regional airlines, came to naught before they could consummate the relationship. It also explains the difficulty that prevented the Malaysian flag carrier from working together with Qantas to jointly set up a regional premium carrier that would have most likely been based in Kuala Lumpur and be a boon to its airport.
Qantas itself went through that rough patch with British Airways, which outbade SIA for a 25% stake in the Australian flag carrier in 1993. That partnership ended in 2004. Then in 2008, rumours resurfaced of a possible Qantas-BA merger that never did materialise.
Consequently, most mergers are share swaps that do not materially alter the entity of the individual partners, such as the Air France-KLM alliance. The partners may share secrets and recipes of their success, but there is no guarantee that within their individual cultural confines they will not continue to confront their own demons that the partnership would and wisely prefer that they be contained locally. So as there are tie-ups, there will be break-ups.
Whether consolidation is the answer to the woes faced by the industry today is an old question that needs no new answer. It would be more exciting that in hearing Joyce, one wonders who will be hopping into bed with the flying kangaroo next.
Image Courtesy of Bloomberg