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Tue 22 Apr 2014 11:48 AM

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Cracking the code

Strategic codeshare agreements are a win-win situation for gulf carriers

Cracking the code

If last year’s spate of codeshare agreements were anything to go by, the Gulf airlines sustained efforts to expand their destination networks appear to be paying off. Viewed as a strong strategic tool, these partnerships have been central to opening up new destinations for the airlines. Providing advantages in terms of passenger satisfaction and profit-margins, codeshares promise to provide a ‘win-win’ scenario for both partners. With their strong position in today’s global airline industry, it comes as little surprise that many international carriers are specifically seeking out the region’s airlines for codesharing opportunities. But what are the real strategic benefits of teaming up with your biggest competitors?

As Simon Elsegood, senior analyst at CAPA (Centre for Aviation), points out, by its very nature a codeshare is a reciprocal agreement where airlines allow a flight by one carrier to be marketed by another. This includes a revenue sharing and seat inventory arrangement and is usually accompanied by schedule coordination, joint marketing efforts, joint frequent flyer cooperation and other, more detailed cooperation. “This gives the airlines the opportunity to broaden their network, increasing their reach internationally or into markets that may otherwise be closed off,” says Elsegood. “It can also lead to significant additional revenue for the airlines involved, and at a comparatively lower cost as someone else is operating the flight.”

With so many advantages involved, it is not surprising that some of the region’s leading airlines have adopted the codeshare strategy as part of their own expansion plans. But the fast-paced growth of these airlines – coupled with the rate at which some (namely Abu Dhabi’s Etihad Airways) have been gathering codeshare agreements – has led to some industry critics complaining about unfair advantages and plots to dominate the global airline market. Elsewood is dismissive of these claims.

Although he acknowledges that codeshare partnerships may be used to dominate a particular route, he believes that both airlines enter the relationship with only their own benefit in mind. “There is no ‘side’ that is driving any agenda, as it is all part of doing business as an airline,” Elsewood stresses. “All airlines seek competitive advantage through their partnerships, whether equity partnerships, alliance partnerships or codeshare partnerships, or other methods.”

CAPA’s own analysis of the codeshare partnership between Etihad Airways and Spain’s Air Europa last year is a case in point. The deal appears to be about much more than straightforward access to Spain and the UAE, they point out, with each party gaining access to parts of the other’s wider network that complement their own. Under the agreement, Etihad also gains better access to Latin America (more than any other Gulf carrier) whilst Air Europa gains a better foothold in Asia Pacific and the Middle East.

“Etihad Airways has developed a new airline business model, using codeshares as one of its three strategic pillars,” says Elsegood. “Its codeshares and other partnerships allow it to offer a ‘virtual network’ of destinations, served via its relationships with other airlines, that is far broader than that which it could serve with its own aircraft.”

Another recent Etihad codeshare, this time with Greece’s largest commercial carrier Aegean Airlines, shows similar mutual strategic thinking. The agreement provides Etihad with access to 16 Greek destinations as well as a further ten cities across Europe, whilst Aegean benefits from routes between Athens and seven new destinations. “By partnering with Etihad Airways, Aegean gains access to the Gulf region and South Africa, as well as increasing connection opportunities to Australia,” says Dimitris Gerogiannis, managing director of the airline. “Aegean will also open up points on its network to Etihad Airways customers, and will enhance access to and from Greece via Abu Dhabi.”

Having already collected around 41 codeshare partners, Etihad’s ever-rising figure has led some to conclude that the carrier may be creating an airline alliance of its very own. But as CAPA’s Elsewood points out, it makes sense that more carriers will seek codeshare relationships with airlines in the Middle East, as the region becomes more commercially attractive and the Gulf carriers continue to expand. “Their global reach alone means that regional carriers can offer partner airlines a wide range of destinations that they would not be able to otherwise serve,” he says. “Their high standards and favourable infrastructure and regulatory outlooks also indicate that this attractiveness should persist.”

In a key strategic move to strengthen its global network, Emirates Airlines’ big win with Australia’s flag carrier Qantas a couple of years ago represented the pinnacle of this perceived codeshare attractiveness. Long before the announcement of the ten-year alliance with Qantas, Australia has been progressively pinpointed by the Gulf’s airline industry as a destination with huge prospects. Despite Etihad Airways and Qatar Airways both vying for a way to break into the lucrative Australian market, it was the Dubai airline that came up trumps with its high-profile codesharing arrangement which promised to be a ‘win-win’ scenario for both the airlines.

Earlier this year, Emirates and Jetstar also announced their codeshare agreement, aimed at opening up destinations for Emirates passengers across Australia, New Zealand and South East Asia that were not previously part of the carrier’s network. The codeshare includes seven domestic routes in Australia to add to the 50 that Emirates already codeshares with Qantas, which happens to be a cornerstone investor in the Jetstar Group. Although not to the extent of the neighbouring Etihad, Emirates’ growing global network, together with its conveniently positioned Dubai hub, has made it a popular codeshare partner. As well as Jetstar and Qantas, the airline already counts the likes of Air Malta, Japan Airlines, Jet Airways, Korean Air, Philippine Airlines and Japan Airlines (JAL) among its ranks.

As the only Gulf member of the one-world alliance, Qatar Airways has been keen to capitalise on the codeshare partnerships found within the alliance. Last November, the airline announced an agreement with fellow alliance member Japan Airlines to codeshare services on QR-operated flights from Japan to Doha. According to Jian Yang, spokesperson at Japan Airlines, the partnership will enable the Japanese carrier to offer its passengers more convenience and improved accessibility between Asia and the Middle East, South Europe and Africa. “The Middle East is one of the world’s fastest growing regions for air travel demand,” says Yang.

“Japan Airlines and Qatar Airways can have better access to the markets of both countries and their regions, through the convenience of codeshare.” A reciprocal frequent flyer programme (FFP) will provide further benefits to passengers from both airlines. “Both airlines have started the linkage of their FFP programmes since Qatar Airways joined the oneworld alliance in October 2013,” says Yang. “Through this comprehensive partnership of FFP and codeshare, our passengers can have access to the network of Qatar Airways with almost the same convenience as they would have had flying with us.”

Other regional carriers have also been building up their codeshare portfolio. Earlier this year, Oman Air entered into codeshare agreements with both Srilankan Airlines and Ethiopian Airlines, while Bahrain’s national carrier Gulf Air’s codeshare partners include KLM, American Airlines, Malaysian Airlines and Yemen Airways.

Julia Sattel, senior vice-president for Airline IT for Amadeus has been watching the increasing numbers of airlines placing codeshare agreements at the heart of their strategies for growth. “Codeshare partners are vital when an airline wants to considerably expand its reach and access new markets, while also increasing passenger numbers on its own routes,” she explains.

“By creating a virtual network, the carrier can offer passengers a wider range of destinations without incurring the costs associated with enlarging its fleet and operating additional routes.” As one of the major airline technology partners, Amadeus currently supports over 800 codeshares, and Sattel knows that from a financial perspective, codesharing can be a particularly attractive proposition. “When an airline establishes this type of partnership, it can lead to higher yields,” she says. “Moreover, developing a codeshare agreement that is tailored to the needs of the airlines involved can be a beneficial, cost-effective alternative to the membership costs associated with airline alliances.”

Sattel maintains that the development of codeshare agreements with other airlines has been a highly important, strategic move for carriers from the Middle East, and represents a significant shift in the global airline industry. “Until recently, many traditional airlines appeared to be somewhat resistant to the idea of working with carriers in the Middle East,” she says.

“By contrast, partnerships with airlines from the Middle East are now increasingly common, with a range of carriers from around the world participating in the region’s growing importance as a transport hub.” To give a statistical indication of the region’s tremendous commercial potential as a hub, Sattel points to analysis from Amadeus’ Air Traffic Travel Intelligence solution which shows air traffic volume between Europe and Asia, routed via the Middle East, rocketing by about 20% between 2011 and 2012.

In recent years, Sattel maintains that airlines from the region have prioritised codesharing as a means of growing, and this has helped to drive it up the industry’s agenda. “As a result, carriers elsewhere have begun to recognise the commercial potential of the Middle East as a transport hub, and are now actively pursuing codeshares in the region,” she says.

“The region’s location makes it ideally suited to acting as a hub for long-haul flights, for example.” So does that mean we will continue to witness a rise in codeshare agreements involving Middle East carriers? Sattel believes so. “Whereas some carriers attempt to grow their business by investing in larger aircraft fleets or operating greater numbers of routes, many carriers from the Middle East fully appreciate the importance of establishing partnerships and alliances. Some codesharing agreements involving airlines from the Middle East are undoubtedly game-changing for the industry.”

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