Introduction to Consolidation

Over the past few years, the airline industry across the globe has come to embrace the idea of consolidation. The degree of consolidation grew to its height (or so we thought) when US Airways purchased and merged with American Airlines. Everyone thought that, at least for the time being, no more mergers would be happening. Well, as we know from last April, Alaska Airlines is in the process of merging with Virgin America. This phenomenon is not just a US thing, its been happening throughout the globe. We have seen IAG (British Airways and Iberia’s parent company) purchase Aer Lingus, and then they be in turn purchased (in part) by Qatar Airways. Etihad has gone on a shopping spree and has bits and pieces of airlines throughout the world. Qatar in the last few months purchased 49% of Meridiana (an Italian Airline).

The past few weeks have been, once again, very newsworthy in the aviation world. From Boeing getting approval to sell jets to Iran, to Elon Musk’s Mars Colony, the week was packed with news. Yet, the more customer-impacting news has been in the mergers/consolidation/joint venture arena. The past 8 days (as of September 28) have yielded news from Lufthansa and Qatar Airways and Air France/KLM.

 

British Airways Cozies Up With Qatar Airways

Qatar Airways A350

Qatar Airways A350

British Airways 747

British Airways 747

In order to better cooperate with one of their largest shareholders, British Airways has decided to enter into a joint venture with Qatar Airways. This business plan will allow revenue sharing, price coordination and a more seamless experience between both carriers. Their main reasoning, according to the Financial Times, is the ability to funnel more passengers to Australia from BA’s network to Qatar Airways new and expanding route network to that continent. On the reverse side, the idea is to expand the number of passengers into BA’s regional and trans-Atlantic flights, by taking passengers from Qatar’s Asia markets.

From a market standpoint, it makes perfect sense for Qatar Airways to do this. BA is one of the largest players in the industry when it comes to trans-Atlantic traffic. That way, Qatar can garner further revenues from those flights, without irritating the already on edge US carriers. For BA, this will facilitate connections to and from the Doha and London hubs. The JV will better allow Qatar-IAG to compete with Etihad, which has a series of partners throughout Europe and beyond. For customers, this should mean better connections, better mileage accrual possibilities, and (in the long run) an improvement of BA’s premium product, which is lagging compared to Qatar’s.

 

Lufthansa and Air China

Air China 747

Air China 747

Lufthansa A333

Lufthansa A333

Lufthansa and their Star Alliance partner Air China formalized a Joint Venture deal the past week. This will allow the companies to better synergize between Lufthansa’s comprehensive European network, and Air China’s access to the fastest growing aviation market in the world. Per Reuters, the deal will kick off in the summer of 2017, and will include Swiss Air and Austrian Airways. The deal should benefit passengers in terms of creating better access to scheduling, access to better slots at constricted airports, and permit people to connect with less problems in all the respective hubs for each of the four carriers. The deal will permit the carriers to “share revenues and risks, and endeavor to cooperate in other areas without elaborating” according to the Air China chairman, Cai Jianjiang.

 

Lufthansa Board Agrees to Purchase Brussels Airlines

Lufthansa A333

Lufthansa A333

Brussels Airlines Avro 100

Brussels Airlines Avro 100

Probably the least shocking, but most saddening, is the decision of the Lufthansa Board to purchase Brussels Airlines. The Belgian carrier is a niche carrier with limited footprint outside Africa and, to some degree, America. It has a small regional fleet which it uses to funnel passengers to its limited long-haul network. The airline offers a distinct flare, for example, their Tomorrowland flight every year. With the purchase by Lufthansa, this means the airline could be restructured, or worse, rebranded. According to sources, there are plans to merge Brussels Airlines regional fleet into Eurowings, the low-cost carrier arm of Lufthansa (per OMAAT). I can imagine that the long haul fleet would still be based in Brussels. Yet, it would be reduced.  They would probably funnel most of the traffic to America via other hubs in the Lufthansa system.

The deal should not come as a surprise though. Lufthansa purchased 49% of Brussels Airlines in 2009, and had since then tried to purchase the rest. They loaned them a total of 75 million Euros, which reduced the purchase price to a meager 2.6 million Euros. Brussels Airlines already participated in the Miles and More program of Lufthansa, and had an extensive codeshare agreement with them and its partners. They are also members of the Star Alliance. The transaction is slated to close by the beginning of 2017.

 

Jet Airways Plans a Joint Venture with Air France/KLM

KLM 737

KLM 737

Air France A380

Air France A380

Jet Airways A330

Jet Airways A330

It also seems that Jet Airways of India is starting to court Air France/KLM. The Indian carrier switched in operating base to the US from Brussels Airport to Amsterdam-Schiphol recently, and began code-sharing with Delta (mileage accrual and redemption to follow soon). With these actions, the airline seems to be looking into more revenue generating opportunities, by signing a JV with AF/KLM. This would not come as a major surprise, since Jet Airways is owned in part by Etihad. Etihad also has agreements with AF/KLM. The JV will cover routes in Europe, India and to North America.

The JV could be critical for cash-strapped Jet Airways. With a JV, they might be able to better deploy their wide-body fleet to Europe and permit them to make a profit from those flights. If the cooperation continues, there is a chance for 777 flights to North America once again. Jet Airways used to fly them to the US before the economic downturn.

 

Landing Thoughts

I am a big fan of cooperation between airlines, so long as it benefits the customers just as much as it benefits the bottom line. I believe that all the JV proposed will have a net positive impact on consumers. It would be in the form of increased frequencies, more efficient plane deployment and possibly improvements in cabin services.

That being said, the Lufthansa-Brussels Airlines marriage is probably one that will make me sad. I feel that if the Brussels Airlines regional fleet is to be absorbed into Eurowings, then the main impact of the brand will be diminished. Maybe even to a point where it might not even be feasible for the airline to continue to operate as its own brand. That being said, that is just my speculation. Does it make financial sense? Yes, it does, as Lufthansa is fighting the encroachment of LCC on its home turf. Hopefully, the Lufthansa management will also seek the best interest of the customer and push to make this deal one that will benefit everyone equally.