April 2006

Where Next for the SkyTeam Alliance?

With the addition of Northwest in September, SkyTeam Cargo now has a more impressive line-up than ever. But what benefits is it delivering to its members? Peter Conway reports.

At the Air Freight Asia 2006 conference and the IATA Cargoweek in Shanghai in mid February, the eight airline members of the SkyTeam Cargo took the opportunity to get together and discuss how their alliance was progressing.

But what did they talk about? When Payload Asia decided to use the opportunity of having all these cargo managers in one place to take a snapshot of how the alliance was progressing and what benefits it was bringing to its members, they were suddenly overcome by a fit of collective shyness.

In response to such questions as “What concrete benefits has your carrier so far realised from SkyTeam?” or “What concrete benefits do you expect in the year ahead?”, the eight carriers compiled brief printed answers that they said represented a joint statement. Asked individually for more details, they declined further comment.

This was all a far cry from the launch of SkyTeam Cargo at the Air Cargo Forum in Washington in October 2000, or, come to that, the behaviour of the alliance at the Air Cargo Forum in Bilbao four years later. Then SkyTeam staged impressive press events, assembling managers from all its carriers to sing the alliance’s praises. SkyTeam Cargo seemed to be on a roll.

The same silence has recently fallen over WOW, launched originally in May 2000 as NewGlobalCargo in a lavish press event in former royal palace near Frankfurt. For years Lufthansa Cargo made much of this grouping, which also included SAS, Singapore Airlines and JAL.

Marc Boudier

Last March, however, it annouced that it wished to take more of a back seat and let its Asian partners in particular come up with ideas for how to take the alliance forward.

Since then, the silence has been deafening. Officially, the Lufthansa position is “no comment”. Unofficially, the position is sharp disappointment.

So has the alliance experiment failed? Is WOW being quietly shelved and has SkyTeam become merely a pleasant social gathering?

One of the aims of Payload Asia’s approach to SkyTeam members in Shanghai was to elicit evidence to the contrary. Particularly, we were keen to find out what Asian carriers such as Korean Air thought of SkyTeam, and whether it was delivering anything of relevance to them.

The brief official reply of the joint SkyTeam carriers includes the following: that the biggest benefits so far have been in the consolidation of handling services under one roof and implementing a common product line.

The carriers deny that the latter initiative just meant renaming existing products, and insist that “it did actually involve changing some of the services offered”.

No further details are given on either point, however, and nor is it explained how the carriers are “expanding our network through the use of seamless interline services”.

The statement insists that “forwarders continue to consolidate and become more global, and our SkyTeam network provides them with consistent service.....the ability to provide consistency throughout the world is very beneficial to global forwarders, and has resulted for more business for the SkyTeam cargo carriers”. But it does not provide any detailed examples.

On e-booking – surely an obvious area where SkyTeam members could promote their common identity and present a single face to the world, the statement says the alliance is “working on ways to use common messaging and interfaces with forwarders”, but says “this could be through the use of one or more booking portals, or through the use of common connections with the airlines”.

The problem with all of these statements is that they do not substantiate the claims they make, and they do not seem to be having much impact on the market they are targetting, namely global forwarders.

If SkyTeam really provides a seamless network that covers the world, why are large forwarders busy putting together their own preferred carrier programmes? If joint purchasing of handling is producing such powerful synergies, how come global handling companies say they have not noticed?

And if the SkyTeam carriers can’t agree on a single e-booking portal, what can they agree on?

One SkyTeam cargo manager that is prepared to answer some of these questions is Marc Boudier, executive vice president of Air France Cargo. He insists that the alliance HAS had value, though says it is hard to put exact cash terms on it.

“It is always difficult to compute synergies exactly,” he admits. “But over the past five years there have been at least two years when we would have had red ink on the bottom line without SkyTeam.”

So where has Air France seen benefits? One, Boudier says, is in procurement. “If you can approach a handler and with 20,000 tonnes rather than 10,000 tonnes, then that gives you a better price. We know what our price was before and what it was after, and at the least there are several million dollars of gain.” Joint procurement also extends to pallets and ULDs. “There is also some possibilty to coordinate that market by market,” Boudier says.

He also insists that the common product line has been beneficial. Since this has essentially involved the adoption of Air France’s product names by all its alliance partners, this is perhaps not surprising. But Boudier says the extra publicity for the products has helped. “Because the product is shared over seven carriers, it is better known,” he says.

This could well be a factor behind the growth of specialist products at Air France, he speculates.

“For example, Cohesion was three percent of our turnover before SkyTeam and it is now 10 percent, and Equation was four percent and is now 13 percent. Perhaps if it had not been for the alliance, growth would have been less.”

Boudier also insists that the traffic has not been one way. He cites Equation Heavy, an express product for larger items, that was put on the table by Korean Air and adopted by other carriers.

“They showed us that express is not just about small shipments,” he says. “We would not have launched this without their input, or perhaps we might have had the idea, but not until several years later.”

Another example is Variation Pharma, which was proposed by KLM. “Now it is a common asset, and we are promoting it together,” Boudier says.

Interestingly enough, it is the common product names that Boudier reckons is the one compulsory element of SkyTeam Cargo: the rest, he insists, is "a toolkit that any member can use if it wants to”. Air France, he admits, “has used the toolkit much more than any of the others, and it has given us more synergies than those who only did the product portfolio.”

One other part of the toolkit is sales cooperation. SkyTeam impressed the market when it quickly set up a sales joint venture in the US, uniting Delta, Air France and Korean Air, and more recently KLM and Alitalia.

Air France also acts as GSA in Europe for Delta, a role that pre-dates SkyTeam. Sales cooperation is not much talked about these days, however, and even the US sales joint venture seems to be taking a low profile. Why is that?

Michael Wisbrun

One problem that Boudier admits to is antitrust immunity. Northwest, which joined SkyTeam Cargo in September, recently failed in its attempt to extend its antitrust immunity with KLM to Air France, and that, says Boudier, means it cannot for the moment join the US sales joint venture.

“We could try filing a business rule letter, which is what we did originally with Delta, but for the moment, we are limited in what we can do,” he says. He is relatively phlegmatic about the problem. “The US did not say no to antitrust for eternity; just that we would have to codeshare first.”

The other problem with sales cooperation is a lack of a common bottom line. If SkyTeam members won’t talk about this issue, WOW members will.

Kenneth Marx, president and CEO of SAS Cargo, admitted last year that it was this problem that torpedoed its attempts to combine sales with Lufthansa.

“As long as the revenue was allocated to the partner issuing the air waybill, it did not work, even in Scandinavia, where we had antitrust immunity,” he said. “We were simply unable to find ways to share the benefits, and there was an unwillingness to make short term sacrifices for long term gain.”

The same problem besets the creation of “one single global network”, something alliances love to boast of, but are unable to deliver in practice.

Marx observed that “airlines only want to see their capacity to their partners at the very least at a rate they could get themselves”.

Boudier too admits that this prevents SkyTeam members effectively making use of each other’s network.

“Rates for Dimension (SkyTeam’s general cargo product) are very low, and if you split revenues it complicates issues and quickly becomes a nonsense. We are doing some bilaterals, such as between Paris and Seoul, but this kind of thing is easier with KLM than with SkyTeam Cargo,” he admits.

One exception is Equation, the SkyTeam express product, which commands high yields and so is generally welcome on partner’s networks. Otherwise, as Boudier points out, Air France KLM or Korean Air both have the networks to reach almost anywhere in the world anyway, without the need for interlining.

The impression then, is that alliances can deliver some benefits, but that they are fairly minimal. Boudier says things like the common products and the US sales joint venture deliver revenue benefits, but most of the other members seem to want to focus on a few areas of cost savings, and perhaps the chance to get together now and again and share ideas.

Put another way, SkyTeam and WOW offer a toolkit, but it is one only their European founders seem to have any great enthusiasm for using to any significant extent. And in WOW’s case even the European founder is cooling on the alliance idea.

SkyTeam impressed the market when it set up a sales joint venture in the US, uniting Delta, Air France and Korean Air.

When Lufthansa took a 49 percent stake in Swiss International preparatory to eventually purchasing it outright, for example, discussions between the two carriers cargo arms did not mention WOW at all, according to Oliver Evans, Swiss’ chief cargo officer. “We have had no discussions about joining WOW and have no intention to for the time being. We see no need,” he says.

That is not to say that Evans is not interested in cooperating with other carriers, even with WOW members – Swiss has a longstanding cargo cooperation with Japan Airlines and as a result of its relationship with Lufthansa has started talking to Singapore Airlines, Evans says. But he sees these as bilateral relationships. “We talk to lots of carriers, and whether they are in WOW or not is irrelevant,” he insists.

Tellingly, one thing that does interest Evans particularly is doing deals with other carriers in the Lufthansa family – for example, Jade Cargo, the joint venture between Shenzhen Airlines and the German carrier. “That is more interesting for us, because we have one bottom line,” he says.

Start talking to either Marc Boudier or his KLM counterpart Michael Wisbrun, chairman of the joint cargo committee of Air France KLM, about cargo synergies between those two carriers, and the floodgates also open. With a common bottom line, suddenly there is a lot to talk about.

In its joint statement to Payload Asia, the SkyTeam carriers agreed that; “Yes, Air France KLM have been able to create a unique solution with their new cooperation”, but it added: “But it is not practical to think that eight airlines from three different continents can quickly achieve those same results.” That suggests that there could be progress in the future, but in his presentation to the Air Freight Asia conference, Wisbrun seemed a bit less upbeat. “International alliances are by necessity restricted by legal and political barriers,” he said.

“That will remain true for the forseeable future, so our present day alliances are as close as we can get.”

Did you like this article? Let us know what you think about it! Click here

Copyright for texts and pictures: Payload Asia, Singapore. This report is brought to you in partnership with Payload Asia, the air cargo/express magazine for the Asia-Pacific and Middle East regions. To learn more about Payload Asia, please visit their website.