Next up is a topic of much debate: what of the alliances? LAN is a member of Oneworld since May 1999 and TAM just joined Star Alliance, earlier this year, in May.
Both TAM’s CEO Líbano Barroso and LAN’s CEO Enrique Cueto have said that they will not make a decision on alliances before the completion of LATAM, expected for mid-2011. For now TAM intends to stay in Star while LAN also has no plans of leaving Oneworld; so says Barroso: "First of all we have six to nine months on the integration period and during that we have to look for the external third-party authorization - meaning regulatory, stock exchange offer and so on. Beyond that as we integrate and decide on the comprehensive network for the joint combined companies will be time for us to discuss if we will maintain two independent alliances - meaning Star for TAM and Oneworld for LAN - or if we discuss in future a single alliance for LATAM" (via Flightglobal).
As both carriers stated, it is way too soon to be talking about alliances, but one can speculate. Right now, looking at the current status quo, Oneworld makes sense for LAN and Star makes sense for TAM.
Why does Oneworld make sense for LAN? There are a number of reasons. Let’s start with the historic background, shall we?
For starters, pretty much all independent countries in South America, with the exception of Brazil, are Spanish speaking countries and have historical ties to Spain. This ‘bond’ to Spain is still very strong and Madrid is nowadays ‘the gateway’ into Europe for South America – again, with the exception of Brazil. All local South American carriers of Spanish speaking countries flying to Europe, without exception, fly to Spain. More specifically, these airlines all serve Madrid. And Madrid just so happens to be Iberia’s stronghold. And guess what?! Iberia just so happens to be the second carrier to be recruited into the Oneworld alliance back in February 1999 and has just recently announced its strategic tie-up with Oneworld founding member British Airways. One could certainly argue that if LAN chose to reroute its Europe traffic via one of Star Alliance’s gateways, they could certainly make it work, to certain extend anyway, but they would not be able to fight off the historic/cultural ties that exist between the Spanish speaking South America and Spain. Furthermore, Iberia has built and is further expanding it intra-european network at its home base in Madrid-Barajas.
Another destination which is very popular within South America - including Brazil this time around – is Florida, in particular, Miami. Miami’s International Airport is considered to be the largest gateway between the United States and Latin America. This also in part due to its proximity to tourist attractions (including Orlando), the local economic growth and the large Latin American population which resides in Florida. The State’s geographic position and its proximity to Central America, the Caribbean and South America also contribute to further strengthening the region as popular destination and highly sought destination among Latin Americans. What’s more, bear in mind that up until recently, Miami was actually a hub for passengers travelling from Europe to Latin America and not too long ago – up until 2004 to be exact – Iberia actually had a hub operation established in Miami.
Miami also serves as one of American Airlines’ and American Eagle’s most important hubs: both carriers are Oneworld members. More importantly, American Airlines and its regional subsidiary American Eagle are the only two carriers to use Miami as a hub. If all the facts I listed in the previous paragraph aren’t strong enough an argument, this fact alone makes Miami the logical distribution hub to/from the United States for LAN.
These two destinations represent the core of the intercontinental traffic ex South America. Brazil is a bit different though, Miami is certainly a top destination, much in the same way it is for the rest of Latin America, but the intercontinental traffic to Europe ex Brazil is much more ‘evenly spread out’. With LAN covering most of the Spanish speaking countries in South America (Chile, Argentina, Peru, Ecuador and as of 2011 also Colombia), an association to the Oneworld alliance makes much more sense. Star Alliance, though much better represented from a global perspective, can’t match the tight network/product coverage to/from Latin American markets (save for TAM in Brazil).
Now, if we leave the Spanish speaking countries behind and turn our attention at Brazil and TAM, we quickly come to realize that Star Alliance is indeed the best alliance for TAM. Brazil’s international traffic is much more ‘diverse’ than that of other South American countries, meaning that an alliance with a much better global presence, which Star Alliance has, makes much more sense.
Let’s start by having a look at TAM’s current intercontinental network: their two North American destinations as well as most of their European destinations can hold their own as “stand-alone destinations”, meaning, there is enough local traffic at both ends to support the routes. Summing up, TAM wouldn’t really need a single alliance partner to continue selling these destinations. In fact, TAM’s former strategy to form local partnerships within North America and Europe made much more sense as without being part of an alliance the airline was able to really choose the best of both (or three in this case) worlds. However TAM’s grasp is reaching (well) beyond North America and Europe as the carrier now aims to increase its presence in Asian markets, most notably in China and Japan. And therein lies a huge challenge and through an alliance the chances of success are boosted significantly.
Looking at Star Alliance and Oneworld, both have strong partners (and for the sake of this argument, let’s assume that JAL’s recovery will be a successful one) in both China as well as Japan though Star Alliance does offer much better gateways to Asia. Be it from a geographical stand-point or from the airport infra-structure itself. Now, before we go any further though, we need to clarify an issue which is of the utmost when speaking about local passenger demand from Brazil to Asia: historically the vast majority of the local traffic to Asia was sent via North America, primarily through the United State’s west coast. However since the United States started demanding a (rather expensive) transit visa, the number of passengers travelling via North America has dropped considerably. In light of this travel restriction, local demand to Asia shifted to, primarily, European legacy carriers, particularly, Air France, Lufthansa and British Airways – and more recently also to Emirates and Qatar Airways –; depending on the final destination also South African Airways. In any event, the preferred gateway to Asia for Brazilian passengers has become Europe, that fact is undisputable. And that’s where Star Alliance leads Oneworld (and SkyTeam for that matter): Lufthansa, with its Frankfurt hub offers a much better product for connecting traffic than both, Oneworld’s British Airways and its London Heathrow hub, and Sky Team’s Air France and its Paris Charles de Gaulle hub.
Frankfurt airport has a much better image in the eye of the passenger: Skytrax rates the airport as a four-star airport. Meanwhile London Heathrow lags behind, being rated a three-star airport and it gets even worse when we look at Paris Charles de Gaulle: the airport isn’t even rated – though judging from the passenger reviews posted on Skytrax’s website, between the three hubs, CDG would most certainly be the worst-rated. As if that wasn’t enough, both London and Paris are destinations which fall under the passenger ‘final destination’ category, meaning, there is enough local demand at both ends to fill the flights.
Getting back to Frankfurt, aside from having a better image in the eye of the passenger, and the fact that geographically it is best located for flights between Brazil and Asia, Frankfurt is also home of Star Alliance founding member Lufthansa, the leading European carrier in terms of frequencies and destinations in Asia. Not to mention that, as already stated, Frankfurt’s geographical position, ‘right at the heart of Europe’, makes Lufthansa the ideal partner for TAM in terms of feeding/defeeding its long-haul service within Europe. As if that wasn’t enough, product-wise Lufthansa fits the description of what TAM looks for in a partner airline: a carrier fully committed to offering its customer the best in terms of premium products while at the same time striving for service excellence. Additionally, with Frankfurt being the home of one of the (if not ‘the’) leading Star Alliance members, TAM will automatically have access to a wide-range of other Star Alliance members, including its Asian affiliates – which rank among the best, two of which (Asiana Airlines and Singapore Airlines) are five-star rated airlines according to Skytrax. Naturally, Star Alliance becomes TAM’s alliance of choice, after all this is the alliance that is most likely to boost its chances of growing into the Asian market.
Now, does that mean that Oneworld wouldn’t complement TAM and increase its chances of succeeding in Asia? By all means, no. Obviously TAM would also be able to expand its services to Asia via its LHR service in cooperation with Oneworld partners British Airways, Japan Airlines, Cathay Pacific and future alliance member Kingfisher Airlines. However London Heathrow isn’t the best airport for connecting passengers and more importantly, British Airways and it’s Oneworld partners don’t cover the network quite in the same way as Lufthansa and it’s current and future Star Alliance partners do: Air China, ANA, Asiana Airlines, Singapore Airlines, Thai Airways and Air India.
Then there’s another very important point which speaks volumes in favor of Star: the Brazilian (and South American) market itself. Before TAM joined Star Alliance earlier this year in May, the only global alliance which had a local representative in South America was Oneworld in the form of LAN. The only other local carrier to have participated in any alliance was VARIG which ceased operations in July 2006. VARIG was one of Star Alliance earliest members having joined the alliance only a couple of months after it had been officially created in 1997. After the demise of VARIG in July 2006, Brazil, South America’s country with the highest growth rates in terms of passengers, was in effect left up for grabs and considered to be a big ‘blank spot’ on the map for global alliances. At that point Brazil had two alliance contenders (with three major alliances in play); meaning the one who had more to offer would also get the best benefits. The two contenders up for grabs were Gol and TAM. The first was basically your regular no frills carrier, while TAM, though in some areas similar to Gol in terms of its product, was attempting to ‘fill the shoes of VARIG’ as the country’s ‘legacy flag carrier’.
TAM had a good head start: unlike Gol, the ‘magic red carpet airline’ was already a member of IATA (Gol only joined in June of this year) and had several code-share and interline agreements in place with both North American as well as European carriers. What’s more, TAM had successfully ‘absorbed’ VARIG’s international expertise by hiring several key staff members - even before VARIG was grounded – which would eventually play a pivotal role in the upcoming negotiations to join a global alliance.
More importantly, Star Alliance was (and still) is the best known global airline alliance among local passengers and companies, mostly due to the groundwork laid down by VARIG. Historically VARIG has, despite all its financial and product difficulties faced in the last decade, been a reference in terms of flight safety and technical reliability in Brazil. TAM on the other hand has been plagued by an image of faulty maintenance and generally as an ‘unsafe airline’. This meant quite simply that to this day TAM still was (and to some extent, still is) avoided by some passengers. The announcement that TAM had been ‘chosen’ to ‘fill VARIG’s shoes’ at Star Alliance helped the airline to shrug off part of the image and finally gain the trust of a very large portion of passengers – some have kept their belief and still avoid, when possible, flying TAM. Still, the final verdict clear: Star Alliance helped TAM to disassociate itself from a troubled reputation. This alone was a huge gain, and something that an alignment to neither Oneworld nor Sky Team would have brought with it.
Nevertheless, in the end it comes down to the numbers: both alliances would have brought an added value to TAM while at the same increasing the revenue inflow but Star Alliance was the better option for a single reason: TAM would have access to all corners of the globe with a much more tightly nit network than Oneworld and the potential revenue gains were higher, both abroad and at home.
But that still leaves us with the big question: will LAN switch to Star or will TAM switch to Oneworld? Or could perhaps LAN stay with Oneworld and TAM with Star? From what we just saw, LAN has much more to loose by leaving Oneworld than TAM does by leaving Star and teaming up with Oneworld – LAN’s loss couldn’t possibly be entirely made-up by the tie-up with TAM and subsequently Star Alliance. This means that unless LATAM somehow manages to have two airlines of a single group aligned to different global alliances, TAM will have to let Star go. Looking into this scenario, if TAM was indeed to join Oneworld it would undoubtedly loose some of the revenue gains and the added value it had earned by joining Star, however if you weigh the benefits of a tie-up with LAN and a subsequent move in the direction of Oneworld, those losses become rather insignificant – bare in mind that TAM would also have benefited from a tie-up with Oneworld; the only difference to Star is that the gains with the latter were/are higher. Furthermore, lets not forget, though Oneworld is still the ‘shyest’ of the three global airline alliances, it is making efforts on expanding its global presence, having already announced the addition of new full-time members such as Russia’s S7, India’s five-star airline, Kingfisher Airlines and Germany’s Lufthansa arch-rival, Air Berlin. To sum up, though officially we will only see something regarding this subject after LATAM is up and running (circa one year from now) and anything we say right now is but a hunch, my gut tells me TAM will leave Star and joint LAN at Oneworld. It just makes much more sense.
Finally, to speculate a little bit more, I've prepared a couple of graphs which show the current Alliance market share distribution and two possible scenarios which might result from LAN and TAM's merger: a) TAM joining Oneworld and b) LAN joining Star Alliance.
Graph 1: Status Quo
Graph 2: TAM joins Oneworld
Graph 3: LAN joins Star Alliance
As always, comments, suggestions and critics are very welcome. Be sure to check back next week when I upload part 3 of the LATAM Analysis/Comment.
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