oneworld, in a complex solar system
oneworld is the smallest in size of the three global alliances but advertises itself as highest quality in terms of members and awards received. oneworld has strength in financial centres, is the alliance for the world's largest airline (American) and with LATAM is a powerhouse in Latin America. It is also the loosest of the three major alliances, often described as more of a linked collection of bilateral partnerships.
It has some unique attributes: oneworld is the only alliance with a member in Australia and the only global alliance to have as a member one of the Gulf three superconnectors: Qatar Airways, which in turn is the only superconnector member of a global alliance. oneworld has no member in India or Africa (aside from the BA franchise Comair in South Africa) but Qatar Airways provides coverage to both areas. Aer Lingus is due to re-join the oneworld alliance now that it is under the ownership of IAG.
oneworld may be the smallest of the three global alliances but it has long promoted itself as the highest quality, with resulting yield premiums. oneworld's initial members are based in some of the most blue chip or iconic travel markets in the world: British Airways in London, Cathay Pacific in Hong Kong, American Airlines in New York (although it has lost market share) and Qantas in Sydney. BA, Cathay and Qantas do not have a full size peer in their home market.
This collection of cities would appear to support the notion the alliance is uniting the world.
Yet increasingly passengers question whether the oneworld alliance's name is intentionally ironic. Members are fragmenting and sometimes reluctant to work with each other. Notably, oneworld's members are variously connected closely with all of the Gulf airlines - but not the same ones.
The Cathay-Qantas rivalry is one of the deepest in the industry. It has seen Qantas partner with Cathay's competitors China Eastern and China Southern. Malaysia Airlines has a significant partnership with Emirates, but Qantas' Emirates deal is bigger in size and significance: Emirates replaced British Airways as Qantas' European partner. Although BA said it understood, it was not pleased - but is now partnered with Qatar Airways, an Emirates foe.
Then there is American Airlines, which maintained and grew its Etihad partnership even after Qatar Airways joined. Cathay is hands-off with most alliance members. JAL, well settled into the alliance, has not embraced full cooperation as much as ANA has with Star. LATAM works well with other members but is mostly focused on service within Latin America, limiting direct competition.
Airberlin, part owned by Etihad, has not been accepted into oneworld's trans-Atlantic JV, but Finnair has (in addition to joining IAG and JAL's Europe-Japan JV). Airberlin's exclusion limits growth opportunities: airberlin intended to open a Berlin-Dallas service but decided against, reportedly because it would not have the commercial support of American and BA. Other members - Royal Jordanian, S7, SriLankan - remain small and focused on their home market.
oneworld may historically have seemed disparate since anchor members in the world's prime premium market - American and BA between the US and UK - were prohibited from working with each other until EU-US open skies and the unlocking of slots at London Heathrow airport. Now their partnership is arguably the strongest and most important in oneworld.
With the trans-Atlantic market secured for oneworld, its focus turns to the east. This is home to the alliance's two most pressing matters (although not all members agree).
oneworld's absence in mainland China is the largest challenge of any of the global alliances, if excluding how to respond to Gulf and low cost operators. Star Alliance has Air China, the country's flag airline and recipient of special treatment from Beijing. Air China subsidiary Shenzhen Airlines has joined and Air China is eager for privately owned, Shanghai-based, Juneyao Airlines to join.
Juneyao would boost the alliance's presence in Shanghai and be a nudge up against SkyTeam China Eastern-dominated Shanghai. SkyTeam has not just China Eastern but also China Southern and, more recently, China Southern subsidiary Xiamen Airlines.
oneworld in comparison has no members in mainland China. There are no oneworld-operated flights within mainland China. Cathay Pacific in Hong Kong sees itself as oneworld's China solution but this has aeropolitical and commercial setbacks. Aeropolitically, Hong Kong and mainland China are different. Cathay cannot operate domestic flights within mainland China while mainland Chinese airlines cannot fly from Hong Kong to non-mainland Chinese points - or at least not yet; Air China would like to fly long haul from Hong Kong.
oneworld members cannot access a member's behind-gateway cities from their flights into mainland China. Their alliance access is via Cathay and wholly owned subsidiary Dragonair. This has numerous commercial problems. Airlines want feed from their mainland destinations. China's geography is so expansive that connections via Hong Kong can be highly circuitous. From Europe and North America, Hong Kong is farther in distance than any mainland Chinese city.
Finally, oneworld members complain Cathay does not make available the fare class inventory for basic interlines enshrined in oneworld commercial agreements airlines must agree to. While Cathay is vehemently opposed to a mainland Chinese member in oneworld - which would undermine Cathay - Cathay is not helping with even a token solution. Cathay is having its moon cake and eating it, too.
There are no easy solutions to oneworld's China absence. Hainan Airlines is by far the largest unaligned mainland Chinese airline. Yet potential membership in oneworld raises its own challenge and the question of whether the Chinese government would allow it; the three state-owned airlines in competing alliances - Air China, China Eastern and China Southern - could easily combine to block Hainan.
If Hainan joined oneworld, there would be thorny questions about sister airlines also part of the HNA Group, of which Hainan Airlines is the flagship airline. Would commercial ring fencing be necessary with HNA's Hong Kong Airlines and HK Express, which are based in the same city as Cathay? Perhaps the question is irrelevant if Hainan membership in oneworld were accompanied by Cathay exiting oneworld. For at least the medium term, it is difficult to see Hainan Airlines' value outweighing a potential loss of Cathay, at least for British Airways. Presumably Air China (already part owner of Cathay) and Star would quickly welcome Cathay into their fold.
oneworld's interest in Hainan and Hainan's interest in oneworld has been a flirtation for some years. They are now likely starting to think differently about each other. Hainan, perhaps taking cues from Etihad, sees potential value in being unaligned and working with whatever airlines it wishes. American's experience with Hainan has shown it that while Hainan is fourth largest, its growth is constrained by the Chinese government. Hainan does not have sufficient capacity for its own O&D traffic, let alone inventory to make available to partners.
A grand coup for oneworld would be the defection of China Eastern. There is a school of thought that China Eastern made the wrong decision when it joined SkyTeam. China Eastern itself may believe that now to be correct; it had a historical relationship with JAL which, like China Eastern, dithered on an alliance decision well past the time most other flag airlines aligned themselves. China Eastern and JAL's partnership was for China-Japan routes (and the relationship continues today); there is extensive codesharing with each other. China Eastern has no SkyTeam partner in Japan while JAL has no oneworld partner in mainland China. Shanghai was a historical gateway for Japanese businesses.
China Eastern has felt constrained in SkyTeam. Domestically, China Southern is larger than China Eastern. To Europe, SkyTeam leaders Air France-KLM are large. Although there are joint ventures between AF-KLM and China Eastern (as well as China Southern and Xiamen Airlines), those JVs are very limited. To North America, Delta and Korean Air are large competitors.
China Eastern's oneworld ties are growing. Following its JV with Qantas, China Eastern and BA agreed to a codeshare in Aug-2016 after years of discussion. The codeshare gives each airline behind gateway access. It will help BA with its second Shanghai service, which will be an overnight departure from Shanghai - its first overnight from mainland China and only other overnight from Asia outside Singapore, Kuala Lumpur and Hong Kong.
This sacrifices aircraft utilisation but is better for premium yields. Thus is the importance BA is attaching to Shanghai and the China Eastern relationship.
British Airways' China Eastern move grew partially out of frustration with Cathay. In BA's view, the relationship had become imbalanced, with Cathay not making interline inventory available while BA was doing so and thus helping Cathay sustain five daily flights to London Heathrow. The relationship came close to collapsing when BA threatened to pull all codeshares available to Cathay.
China Eastern had been evaluating an alliance switch in the lead up to significant long haul expansion. The commercial analysis was essentially that oneworld was the stronger option for the future - but the decision rested with senior management, which retains close personal relationships with Delta. The matter became more complicated when Delta in 2015 invested in an approximately 4% share in China Eastern. In Delta's view, that hopefully cemented the relationship, an important stepping stone towards Delta establishing a JV between Delta and China Eastern. But, whatever direction China Eastern takes, no such venture will be possible until China-US has open skies, a prerequisite for JV approval in the US.
A second, more unlikely opportunity would be Korean Air also leaving SkyTeam to join oneworld. SkyTeam's value to Korean Air has dampened because of Delta's aggressive tactics in response to Korean Air declining to join a JV with Delta. In Korean Air's view, it is the market leader amongst Asian airlines across the Pacific and a JV would bring Korean Air minimal benefits while greatly helping Delta. In response, Delta has pulled codeshares and significantly lowered the frequent flyer mile earning agreement so as to dissuade Delta flyers from taking Korean Air.
If Qantas and BA are nurturing China Eastern, then perhaps American is doing the massaging with Korean Air, although to a much smaller extent. American and Korean Air formed a very limited partnership on the Dallas-Seoul Incheon route, which they both operate. American gained interline access to some of Korean Air's second and third-tier Chinese cities. Delta has alienated Korean Air with its move on China Eastern and failed attempt at working with Japan's Skymark Airlines to establish a Pacific JV.
oneworld's new member admission is reportedly based on a majority vote from existing members, although a form of consensus is sought. Star, in contrast, requires unanimous agreement. In any theoretical discussion of China Eastern and Korean Air weighing up oneworld membership, there would predictably be opposition from Japan Airlines (besides Cathay).
Yet JAL might be agreeable. As with China Eastern, JAL and Korean Air are on friendly terms. They partner on Japan-Korea routes, where, as with China Eastern in China, JAL has no oneworld partner in Korea while Korean Air has no SkyTeam partner in Japan. Both of their rivals, ANA and Asiana, are members of Star and partner, placing them in a stronger local position.
The second challenge for some of oneworld's members is Qatar Airways. Its entry was controversial within the alliance and has now changed following Qatar investing in two of oneworld's groups: IAG (British Airways and Iberia are members, and Aer Lingus is due to rejoin) and LATAM. When Qatar made its initial purchase of IAG via the market (and not newly issued shares), it was a minority interest but already IAG's single largest shareholder. In 2016, Qatar increased its shareholding to 20%.
In Jul-2016 Qatar bought 10% of LATAM via new shares, giving LATAM a comfortable USD613 million of funding. Prior to increasing its IAG stake from approximately 16% to 20%, Qatar had already spent USD2.5 billion on airline equity investments.
Qatar's investment in IAG has a solid rationale: the group is Europe's best, although an airline strictly focused on financial return could always fund better investments. IAG, through CEO Willie Walsh, was instrumental in bringing Qatar into oneworld. Qatar could help IAG grow to the east, where by some measures it lags. An IAG-Qatar JV has been discussed but is yet to eventuate. Qatar's initial 10% stake - like Delta's in China Eastern - was little more than a gesture, but now at 20% it is serious, even if Qatar says it does not plan to increase the stake further or seek a board seat on IAG. Qatar's LATAM investment has less clear rationality given the comparatively small market opportunity for Gulf airlines in Latin America; but it does place a firm foot in the door.
In announcing the Qatar stake in LATAM, both airlines were at pains to emphasise this was a transaction within oneworld and not meant to disrupt the alliance. Qatar's statement said: "As a leading airline in Latin America, and key member of oneworld, this investment provides potential opportunities for Qatar Airways' global network, alongside our successful investment in IAG." LATAM remarked Qatar's stake was "reaffirming our bond as existing members of the oneworld alliance."
Qatar and its airline investments do not seek to undermine oneworld but they risk dividing it. Qatar's investments represent a significant commitment and risk being too powerful a show to other alliance members. To some members, the investment may risk tilting the alliance towards Qatar. Star and SkyTeam share similar issues, but there the captains of the alliances - the Lufthansa Group and Delta-Air France - have many aligned interests.
JAL, whose home market and traffic corridors are not exposed to Gulf airlines, has little to do or say in this space. But for other oneworld members there are impacts and relationships to be considered.
The Qatar-Cathay Pacific JV ended quietly but on probably less than friendly terms, although some codesharing remains. Qatar and Qantas have little to do with each other given Qantas' JV with Emirates, and this limits Qatar's visibility in the Australian market and access to domestic Australia.
And then there is American Airlines. American is strategically wed to IAG and looking to tie the knot with LATAM for a JV. American is now faced with the fact that its partners in its two main markets - Latin America and Europe - are partly owned by Qatar Airways. American has been a participant, although largely passive and not as vocal as Delta, in the accusations against state-owned Gulf airlines (which appear unlikely to be pursued by the US government). American has contemplated entering deep partnerships, even JVs, with Gulf airlines but nothing has eventuated - yet. 2017 is likely to bring that news.
If American were to select Etihad - to which it is closest at present - as its sole or main partner that would add considerable complexity to the alliance. Alternatively, selecting Qatar brings American in line with key partners IAG and LATAM. Emirates is Qantas' partner, but Australia is a smaller play for American and Qantas-Emirates routes scarcely overlap with American. A Qatar-American partnership would become more complicated if or when Emirates entered trans-Pacific routes from Australia/New Zealand or Asia to North America.
What is certain within oneworld is that complexity will grow. At task to lead the alliance is incoming CEO Rob Gurney. oneworld is the last alliance to undergo leadership change in recent years. Most recently he was an executive at Emirates and previously at Qantas and British Airways. He thus represents the established oneworld (the anchor Qantas-British Airways JV, the closest tie in the alliance before American-BA) as well as the new oneworld of partnership proliferation and uncertainty of new model operators like Emirates.
oneworld has always been the most flexible in outside partnerships and member requirements. Yet this looseness can be a drawback. Outside partnerships are becoming more important and deeper in value. Within the alliance, views and directions may be biased by ownership stakes.
Ultimately an alliance needs its members to be strong individually before they can reap the benefits of bilateral and alliance partnerships. The question for oneworld is whether the changes at play produce stronger members or create complexity and alienation.
oneworld needs to show it remains a singular entity - as its name implies - and does not become a solar system of individually rotating planets, let alone disparate galaxies. It is easy for passengers to feel lost in alliance protocols and member sub-rules. Rather than navigate, many will simply discard loyalty. In some respects, the Star Alliance or SkyTeam may not over-promise a unified world.
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