Finding Your Partner
Outlook: Alliances, JV’s M&A’s
Dr. Emre Serpen
Executive Vice President
InterVISTAS Consulting Group
WORLD ROUTES 2012, ABU DHABI, UAE
Air transport growth is greater in emerging
economies in Asia, Latin America, Middle East,
 Shifting market growth: The GDP growth of
emerging economies is significantly higher than
mature economies
Small growth in GDP translates to significant market
growth in Asian, Latin American markets
Partnership and cooperation with
airlines in emerging markets is critical
for future growth
Airbus August 2011 Forecast
1
Using geographic advantage Gulf Carriers and TK are growing
connecting emerging markets in particular Asia, Middle East and
Africa
The emergence of Gulf/Middle East carriers causing shift in global traffic flows
across major connecting hubs
2
With significant new aircraft orders, growth is set to increase in
coming years
3
Source: Diio Mi Sept 27th, 2012. Both directions total.
Emirates supported its network thru code shares
 Profitable year-on-year growth
Second brand worldwide
 Significant marketshare in India, many
African states
Changed dynamics of Kangaroo route
Emirates
Continuing growth
More market penetration in
US Canada
FlyDubai expanding
regional routes
Positioned to take
advantage of markets with
significant potential – Iraq.
Iran etc
4
Source: Diio Mi Sept 27th, 2012 (For Sept 2012).
Emirates/QANTAS Partnership Signals Change in Traditional
Alliance Relationships - Immediate impact on One world
QANTAS Before Emirates Partnership:
•
5 One-Stop Destinations in Europe (via QF
operations or code shares)
•
No service to Middle East/North Africa
Did BA had to use
its aircraft in flights
beyond Singapore
?
Reduction in feeder
traffic with CX code
shares ?
:JAL – BA Start 1st
October
•Include Paris /FR
•19 Flights
LHR/NRT
•March 2013
? Deal with CX, MH
QANTAS After Emirates Partnership:
•
Stop flying from Singapore and BKK to Europe
•
Drop Frankfurt Service
•
Drop code share plans with MH to 5 European Countries
•
Discontinue BA code share (SIN/TPE), CX (HK/Rome)
•
32 One-Stop Destinations in Europe & 31 One-Stop Destinations in
Middle East/North Africa via DXB
•
Revised service to SIN/HKG/KUL for better connectivity to Asia
5
Source: Sample Summer 2012 schedule
Etihad using code shares supporting its growth
Source: Diio Mi Sept 27th, 2012
6
Etihad adding partnerships to support its growth
strategy
2011 profitable
Interim 2012 revenues 30% increase
800,000 passengers from passenger airlines
$ 281 Million from partner airlines
Since 2008 growth fro 2 to 35 code share partners
Mergers and Acquisitions key to 20 year plan
10 year strategic partnership with Virgin Australia
40 %Stake in Air Seychelles
29% Air Berlin Stake, access
to high yield European Markets
? Partnership with Air France &
KLM – one world indicated no
issues with Air Berlin
Economies of Scale in 787 fleet
, 56 aircraft common activities
7
Source: Diio Mi Sept 27th, 2012 (For Sept 2012).
Strategic Partnerships Cross Alliance Boundaries and
are Becoming More Complex
Sample of
selected
strategic
partnerships of
Etihad and
Emirates
Cooperation
under
discussion
Codeshare/
FFP benefits
under
Discussion
8
Alliance focus on emerging markets, Asia, Middle
East, Latin America
The three Global Airline Alliances continues see strong coverage in the
Americas, Europe and Asia. Nevertheless, there is notable absence of
membership in the Middle East and India.
Passengers carried by Middle Eastern
airlines that belong to a global alliance
account for only 2.4% of total alliance
passengers and 1.8% of daily departures.
9
There may be further impacts on Alliances due to JV
and Merger activity
Membership in Global Alliances is very fluid.
LATAM, Emirates-Qatar Deal
join SkyTeam
exits SkyTeam
& joins Star
join SkyTeam
joins Star
Malaysian
Sri Lankan
join SkyTeam
join oneworld
10
Source: OAG Max
Ownership laws, national interests typically
restricts industry consolidation
Perceived national Interest
•
Ownership rules
•
Singapore/China Eastern
•
Public opinion against foreign multinationals
•
Some improvements (Malev, Air India)
Competition Law
•
The interpretation of the competition law often
inhibit ed consolidation EU/US
•
In 2001 DOJ blocked United/US merger on the
grounds that the fares would increase
Practicalities
•
Fleets, cultures, work practices, IT, seniority lists
Hence level of airline consolidation is still
relatively low compared with other industries,
Airlines Share of Industry
Distribution Company Share of Industry
12 months ending March 2007
12 months ending March 2007
Delta
12%
United
16%
Continental
12%
Northwest
10%
US
Galileo /
Worldspan
30%
Sabre
34%
Top-3
95% of Industry
AirwaysRevenues
4%
Other
5%
Amadeus
31%
Rental Car Company Share of Industry
Top-3
American
48% of Industry
20% Revenues
Other
26%
12 months ending March 2007
Avis / Budget
20%
National /
Alamo
9%
Hertz
29%
Network carriers reduced From 20 Carriers to 8 (90-06)
Regional Carriers Reduced From 150 -70 (90-06)
Thrifty / Dollar
6%
Other
5%
Top-3
80% of Industry
Revenues
Enterprise
31%
Note: Other based on estimates from industry reports
Some consolidation has started within EU, also
some flag carriers ceased to exist
Lufthansa


The synergies from integration with Swiss,
exceeded 200 million Euros
•
expanded route network with more destinations and better
connections
•
interlinked frequent flyer programmes and mutual lounge
access
Total synergies from integration of Austrian are
estimated at around EUR 80 million Euros (both
revenue and cost)
•
•

improved access to international passenger flows and joint
international marketing,
Nonstop Total Weekly seats Operated by Lufthansa Group
Aug. 2003–Aug. 2008, Dec. 2008
cost advantages and economies of scale
The scope of integration Swiss /Austrian were
similar
•
Autonomous carrier own business management, own crew
and fleet
•
Zurich integral part of Lufthansa’s multi hub strategy
Air France / KLM

The airline related savings of €525 million over
three years by combining purchasing, sales and
information technology.
Depending on further progress of discussions between FAA
– EU in future we could see similar deals between US/EU
Joint ventures increasing in across the board
Joint Venture / Anti-trust Immunity relationships allow for better coordination in
scheduling and pricing to offer passengers more convenient travel options.
14
Short haul routes : LCCs have quadrupled their intraEuropean market share in the last ten years
RAPID LCC
EXPANSION ACROSS EUROPE
LEADING TO
INCREASED MARKET SHARE
2001
2008
2012
FSC
LCC
2001
Source: OAG, 2011; Lit search;
2004
2008
2012E
Similar patterns in Asia, Middle East , also closer business models
may lead to further cooperation between network and LCC
Focus on short haul profitability, reduction in
CASK, Eg Malindo, Air Asia,
Cooperation between Network and LCC carriers
-Eg LH/Jetblue. Etihad/VA et
Network carriers to leverage LCC relationships
much better
Air Arabia
Do we have more opportunity for further
partnerships between Network And LCC ??
Flydubai
16
Source: Diio Mi Sept 27th, 2012 (For Sept 2012).
Increasing Joint Ventures and “Innovative
Partnerships”
Alliances and •
Joint Ventures
•
•
•
Mergers
Cross-Border •
•
•
Innovative
Partnerships
•
•
•
Central Africa / India / Middle East / CIS carriers likely next to consider Global
alliances membership
Potential new JVs to form in light of recently announced Emirates / Qantas Joint
Venture and codeshare partnership
Global Alliances attracting LCCs to join via hybrid partnership platform (SkyTeam)
Within the EU: Lufthansa with Austrian, Swiss, Brussels Airlines;
IAG: British Airways and Iberia
Latin America – AviancaTACA; LATAM Airlines Group
Potential US-EU airline mergers? (Pending regulatory approvals)
China Eastern & Qantas (carriers in different competing Global Alliances) to form
Hong Kong based LCC
Etihad /Australia
Porter (small, regional Canadian airline) signs interline partnership with South
African Airways via Washington IAD
Finding Partner: Analysis, Strategy, Execution
Analysis Overview Identify changes in region and market
level in both demand, supply, considering circuitry and yield
RegionRegion
EU-NO
NO-EU
AP-AF
AF-AP
Circuitry
108%
109%
107%
106%
1.
Relative growth of region to
region flows considering yield
and circuitry
2.
Benchmark connectivity with
key competitors considering
yield
Yield
Aug-09
8.8
8.7
9.4
9.4
Onboard O&D
Aug-09
Aug-10
Aug-10
9.0
9.1
9.3
9.3
869,909
835,797
657,943
655,028
1,019,118
986,496
703,314
701,660
Industry O&D
Aug-10
Aug-10
8,330,229
8,330,229
5,776,835
5,776,835
8,479,367
8,479,367
5,630,906
5,630,906
Region
EU-EU
LA-EU
EU-NO
AP-EU
Connect
Markets
CDG-MED
DAM-MXP
PEK-ODS
BKK-TLV
3.
Historical growth O/D growth
4.
Relative growth of airline
Connect
Markets
market share share compared BKK-ARN
PEK-TIP
to O/D market flow
IKA-YYZ
considering yield and circuitry ALG-MED
Service Share
Jan-09
0.8%
0.6%
1.4%
50.2%
Jan-10
0.9%
0.7%
1.3%
100.0%
2005
87
1,452
847
2006
391
35
2,050
1,294
O&D Share
2009
2.0%
1.6%
7.3%
86.0%
Growth
A1 Share
A1 Industry of Industry
17.2%
18.0%
6.9%
7.1%
A1
6.2
9.4
9.1
9.5
2007
853
29
1,195
2,308
A2
6.6
9.2
9.1
9.1
2008
793
56
1,539
3,745
% Change
2010 Service O&D
3.3%
8%
61%
2.9%
4%
79%
8.9%
-9%
23%
86.3%
99%
0%
1.8%
1.8%
-2.5%
-2.5%
12%
12%
12%
12%
A3
Yield
8.5
9.6
11.0
9.1
10.6
9.0
8.8
9.3
2009
1,717
2,347
2,539
3,679
2010
2,566
2,561
2,528
2,499
CCt
101%
101%
110%
117%
O&D
6,786
5,968
5,674
5,196
Focus on city pairs we want to develop/improve
19
Yield
3.0
3.0
2.8
7.7
Strategic Evaluation - is critical to establish competitive
strengths and determine scenarios for growth opportunities
Market analysis -the
demand and supply,
competitor activities
and strategic change
Market Growth
compared with Client
Growth, where client
growth may be
slower than market
growth, also vis-a-vis
fare changes.
Strategic evaluation
is used in the of the
development
scenarios
20
Strategic Evaluation Market Analysis and SWOT
Market share growth compared with total market growth
 lose marketshare whilst reducing its average fares.
marketshare growth and fare protection in growing markets
21
For example growth of competitor activities at airline’s hub. This analysis
shows though this particular client is growing y-o-y 25% on its hub serving
top 500 markets,
22
Other deeper analysis include analysis of an airline’s hub which may be poorly designed
with the lack of a clear arrival/departure bank structure. This for instance equates to lost
opportunities in connecting O/D markets
23
Market forecasting to determine priorities
Top-down elements include GDP-driven
passenger growth.
There is an established correlation
between year-over-year GDP growth
and corresponding growth in passenger
volumes.
For increased accuracy, the GDP of
respective countries on a route network
and point-of-sale data are considered in
the analysis
 This smoothes temporary fluctuations
of bottom up analysis
The bottom-up elements include
regression analysis utilizing IATA Paxis
and MIDT flown passenger data.
The market forecasting results are then
used as an input to network
optimisation tools.
24
Development of Route Strategy
 Selected scenarios evaluated to establish
route strategy and route structure
Test different scenarios and business models
and evaluate respective differences in
variable contribution towards selection of the
best model
 Use of optimisation models.
New destinations with better market growth,
and yield advantages. The route structure
that maximises marketshare, and variable
contribution improving competitiveness is
selected
Identify key changes to Long Haul, Medium
Haul, Regional and Domestic
Identify key changes for better use of
alliance and code share partnerships
25
Deciding on code share, alliance, Joint Venture
Strategies
Strategic Plan
Market
Forecasting
Network Planning
Long & Medium
Term
Capacity
growth (incl
competitors)
Average Fares
Costs
Service
Objectives
Scenario
Development
Hub
Optimisation
Changes to
Fleet Plan
Network
Design
MIDT/BIDT
Shorth Term Strategic Plan
Network Planning
Long & Medium
Term
Scenario
Development
MIDT/BIDT
Network
Design
Identify value
of current
codeshares
Identify new
codeshare
opportunities to
improve
sustainable
variable
conytribution
Monitor
Performance of
current
codeshare
agreements
Identify alliance
to opportunitie
improve
sustainable
variable
contribution
Monitor
execute
changes to
improve gains
from the
current alliance
Identify Joint
Venture
Partners to
improve
sustainable
variable
contribution
Monitor
Benefits from
JV partnership
Alliances
Shorth Term
Pricing
Alliances
Contact
candidate
airlines and
initiate new
codeshare
agreements
Develop code
share
agreement
Execute
codeshare
agreements
Contact
alliances to
initiate
membership
execute
Alliance
Participation
Contact JV
Partners
towards
agreement
Execute Joint
Venture
Agreement
26
Revenue
Determination of code share benefits
Following the network optimisation analysis,
bilateral and codeshare development
opportunities can be identified and examined
 or long-haul flights with codeshares to other
alliance hubs including beyond points,
medium/short-haul flights in a feeder role.
As some alliances selectively restrict code
shares with rival alliances, the value of current
code shares must be evaluated. beneficial for
the airline.
Example: Value of Current Codeshares
27
Evaluation of Alliance Benefits
Network Benefits
Additional pax due to
meaningful and advantageous
connections.
Develop the best strategic fit
with the alliance for own
strategy
Different Objectives
feeder to alliance hubs
protect stratetic interests
Bilateral agreements
excluding other airlines
.
28
Evaluation of ATI Benefits
ATI Benefits:
Commercial and operational
alliance-wide cooperation,
reciprocal participation in each
other’s FFP,
proration of passenger fares,
 co-operation on facilities and
passenger handling,
 lounge exchange program,
common promotion and
advertising
Category
Low High Revenue Com es From …
CRM
1.5
1.5
FFP
5
15
Opportunity cost of not having ATI/Open Skies
0
0
Low er COUNTRY distribution costs
6
9
Reduce commissions/overrides
Net Fares in COUNTRY mkts
0
0
Better coordination of net fares
Target corporate accounts
0
0
Internet sales increase
0
0
Increase in COUNTRY sales
30
30
Competitive effect in COUNTRY marketplace
0
0
Low er Country distribution costs
39
39
Negative competitive effect in domestic
marketplace
0
0
Franchise Country CTO's
0
0
CRM improvements
Increase costs per KM to
suppliers using Alliance FFP.
Could lose many benefits
currently offered from Alliance
Offer corporations deals for their
entire travel needs
Joint coordination of sales
campaigns & promotions
Combination of pricing, RM, sales
& marketing
Competitive response (pricing,
RM, sales & marketing)
Reduce distribution costs
Competitors erode Client market
share
Spin-off Country CTO's through
franchise concept
common procurement
29
Joint venture success requires careful planning,
stakeholder engagement and change management
 Realistic assumptions, especially on yield
increases
 Governance of network, pricing, revenue
management, distribution
Cultural fit
Tone of the Joint Venture Discussions
Clear execution and communication plan
towards JV, M&A activities
Focus on revenue growth not just cost
reduction
Equity, ownership issues/value part of the
business plan, as well as network and other
benefits
Emphasis of the alternative scenario during
discussions
30
Critical success factors for successful JV’s and MA’s
Benefits
Economies of Scale
Purchasing Synergies
IT Synergies
 Pre-merger Agreements

Delta/Northwest
 Sufficient time Both Planning and
Execution

AF/KLM
 Business Case + Communications
Plan + Funds

US Airways / United was blocked.
 Realistic expectations + Benefits
 Cultural fit + Change management
 IT
 Don’t Touch Brands
 Governance and organisation for
JV M&A management
Maint. Synergies
Corp. Planning Synergies
Marketing Synergies
Financial Synergies
Economies of Scope
Network Optimization
Alliances & Mergers
New Market Growth
Mergers
Economies of Destiny
Alliances
Hubbing
0%
20%
40%
60%
80%
100%
Source: Dr Iatrou, Global symposium on Air Transport Liberalisation ICAO Dubai,
results of global survey of 32 airlines
InterVISTAS’ Client Experiences
Selected Current
Clients
• Qantas
• Malaysian Airlines
• Garuda
• Turkish Airlines,
• MAZ Holding,
• DAS Holding,
• Oman Airways,
• Sri Lanka Airlines,
• RAK airlines,
• Royal Jordanian
• Porter Airlines
• Etihad
• British Airways
• Amadeus
• Belleair
Sectors
Team Members’ Client Experiences: 60+ Airlines
Regions
• Europe,
• Middle East,
• South Asia,
• Eastern Europe
32
32
Our Airline Practice Service Lines are Focused on Airline
Strategy and Airline Performance Improvement
Strategy and Finance
Strategy – Develop strategy, feasibility studies and
business planning
– Market Forecasting (Airline, Airport, MRO, Cargo)
– Start up Airline and MRO feasibility and business plan
– Mergers and acquistions planning
Network and Fleet Planning – Develop and
optimise network and route plans for airlines
– Route Planning and Schedule Development, Alliances
– Hub design and optimisation, slot remarketing
– Fleet planning , Aircraft leasing and remarketing
Financial Services – Evaluate airline investment
opportunities
– Due diligence (Airline, Airport, MRO, Cargo, GH)
– Privatization and spin-off and financing of Airline, MRO, Pilot
School, GH, Cargo
Performance Improvement
Commercial Improvement – Airline Revenue
Improvement
– Pricing and Revenue Management
– Marketing, Sales and Distribution
– Technology solutions supporting revenue growth
Operations Improvement – Airline
Productivity Improvement and Cost Reduction
– Diagnostic and Cost reduction
– MRO
– Crew Resource Management
– Integrated Operations Control
Restructuring & Change Management –
Airline Transformation and Turnaround
– Restructuring (Airline, MRO, Cargo, Aerospace)
– Start up Implementation
– Performance management
– Organisation improvement and change management.
IT Strategy
IT Implementation
33
Thank You!
Emre.Serpen@Intervistas.com
+447944163891
www.InterVISTAS.com