Joint Aircraft Purchases - Taking Alliances to the Next Step

World Airline News, May 12, 2000

In this month's review of industry issues for World Airline News, Chantilly, Va.-based consultancy Avitas takes a closer look at the increasing depth being reached by alliance members, and the implications that closer bonds will have on the purchasing power - and the decision-making process - of airlines.

Oneworld alliance partners British Airways [BAB] and Qantas Airways took strategic partnerships to a new level with the recent announcement that the two carriers would begin joint operations on two routes. Starting in October, British Airways will operate a new segment from Johannesburg to Perth and Sydney as a continuation of its daily London-Johannesburg flight. Qantas, in turn, will operate a Los Angeles-London segment as a continuation of its existing Sydney/Auckland-Los Angeles route.

The reasoning behind the move, according to BA, is to improve utilization for what is otherwise a long, idle turnaround time at both Johannesburg and Los Angeles. However, looking a little deeper, this strengthening of their relationship is but the latest move in a growing operational relationship between the two carriers, which just two months ago, saw Qantas agree to lease seven Boeing [BA] 767-300s from British Airways.

So, do these recent announcements represent a new level of operational collaboration between alliance partners, or are they merely incidental blips on the global alliance radar screen?

The concept of group aircraft purchases began in 1998 when three Latin American carriers, LAN Chile, TAM, and Grupo TACA - which had joined forces regardless of their independence and lack of mutual alliance membership - pooled their purchasing power to acquire 90 firm orders and 89 options for new Airbus A320s. The arrangement was noteworthy in that none of the carriers on their own could require enough planes to obtain the discounts that are granted to large airlines with large orders.

The next significant event was the establishment of Flightlease AG, the leasing arm of the SAirGroup, whose member airlines currently include Swissair, Sabena, TAP Air Portugal and Crossair. Flightlease, and its joint venture partner GATX Flightlease, ordered 38 aircraft from Airbus, with the intention of leasing them to the SAir partner companies. The acquisition not only provided volume discounts, but was a concrete step toward standardizing the partners' aircraft types, making intra-alliance trading more feasible.

The gospel of aircraft standardization has long been preached by a cadre of leading airlines, perhaps most vocally by Lufthansa. The German carrier believes that greater standardization of aircraft helps the airlines through:

* Lower cost;

Reduction of prepayment periods (lead times) and such financing costs;

* Reduced complexity - an important element, but difficult to quantify; and

* Improved resale values as cost of conversion for new users will be considerably lower.

At Lufthansa, fleet harmonization within its own operating groups has become a strategic objective. Having long since assumed a leadership role in this field, it is now looking for other carriers to come forward with ideas - both technical and procedural.

And this does not only benefit airlines, according to Lufthansa. Manufacturers will also benefit by lowering development, manufacturing, and financing costs through decreased lead times, the airline claims.

So Near, Yet So Far

So where does the industry stand? Lufthansa COO Karl-Friedrich Rausch acknowledges that alliance-wide fleet acquisition is the future, but considerable obstacles must be overcome to achieve that goal. Most Star Alliance members, including United Airlines [UAL] and Lufthansa, operate 747s; however SAS does not. But eventually, there will be one negotiation process on behalf of the alliance.

KLM Royal Dutch Airlines' Vice President for Corporate Fleet Development Rene Kalmann sees common specifications among alliance partners as the first step toward ultimately participating in joint aircraft purchasing, as was the intent with the aborted merger with Alitalia. But this will take time, as most airlines remain reluctant to share even purchasing contractual data. Information sharing will be a prerequisite to coordination of joint aircraft purchases.

Avitas believes the airline industry will continue to see steps in the progression toward ultimate joint aircraft purchases. Increased standardization among alliance partners will encourage greater aircraft movement between partners. New entities, such as Flightlease, will spring up for the purpose of coordinating fleet types on a sale or lease basis. For short-term balancing of supply and demand, standardization will lead toward increased wet leasing of aircraft, in which one alliance partner will actually fly another's aircraft, as in the BA-Qantas deal.

These tentative moves may signal the next level of alliance economics, as joint aircraft purchasing offers much more than just volume discounts. By operating a common fleet, alliances have the potential to establish the framework in which they can gain real operational flexibility and cost savings through crew sharing, shared maintenance, and short- and long-term aircraft transfers.