Asia’s airlines challenged by U.S. airline consolidation?

Are big U.S. airlines making it difficult for their Asia-Pacific alliance partners to tap into their lucrative domestic business? Yes, Hawaiian Airlines told Tom Ballantyne.

October 1st 2014

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Recent developments in the U.S. airline industry are having a significant impact on Asia-Pacific carriers, said someone who should know, the CEO of Hawaiian Airlines, Mark Dunkerley. Read More »

To fly from Portland, Oregon to Seoul, in South Korea, via San Francisco, said Dunkerley at a recent regional conference, you should not expect that booking flights operated by members of a global alliance will offer the best deal. And he presented the figures to support his case.

Hawaiian Airlines’ codeshare and interline partners have doubled, to 34 since 2009, said the CEO of Hawaiian Airlines, Mark Dunkerley

Checking offered fares on a particular day, he said, travelers could buy a Portland-Seoul ticket with Skyteam member, Delta Airlines, for US$986. But if that same passenger flew from Portland to San Francisco with Delta and then switched to its alliance partner, Korean Airlines, for the second leg to South Korea, the fare is $2,871, or a 191% increase.

Alternatively flying from Portland to San Francisco with non-aligned Alaskan Airlines and then transitting to Korean Air to fly onto Seoul would cost $961.

“It would appear U.S. airlines are making it more difficult for carriers, in this case from Asia, to gain access to U.S. domestic business,” Dunkerley said.

The Delta case is far from unique. Hawaiian Airlines’ research found that a flight from Washington D.C. to Hong Kong, via San Francisco, on Star Alliance operator, United Airlines, cost $826.

If that same traveler flew from Washington to San Francisco with United and then onto Hong Kong on Star alliance partner, Singapore Airlines (SIA), to Hong Kong, the fare was 182% higher, at $2,329.

Interestingly, ticket prices from San Francisco and Hong Kong hardly varied between United ($720) and SIA ($781). “We have a bunch of examples that tell essentially the same story,” Dunkerley said. “We could demonstrate this with both international to U.S. carriers that involve two airlines in the same global alliance and those not in the same global alliance.”

The fare discrepancies, Hawaiian said, are a consequence of the consolidation of the U.S. airline industry in the last six years. In 2008, Northwest Airlines merged with Delta Airlines, followed by United and Continental and Southwest Airlines and Airtran in 2010 and most recently, American Airlines and US Airways.

“As a result, about 85% of all U.S. domestic traffic is in the hands of four extremely powerful airlines. This is a seismic shift in the nature of the U.S. airline industry that is changing behavior at a very, very, very fundamental level. The four major carriers are free of the skirmishing that typified U.S. aviation for the 30 years since deregulation,” said Dunkerley.

With consolidation has come domestic capacity discipline. Seats offered have been reduced, load factor is rising and yields and profitability are climbing. “To see U.S. airlines at the top of the league table of global financial performance in this industry is truly something I never thought I’d live to see, but we are there today,” he said.

Since 2008, U.S. airline seats to and from Asia have increased by 18%. But Asian airline capacity has expanded by 26%. “You have constrained U.S. domestic supply while international supply into the U.S. is growing quickly,” he said.

“The U.S. industry is sitting back and saying: ‘if we are going to say no to any particular stream of traffic what traffic are we to decline’? I conjecture they will look at the traffic that is of the least strategic value to them. My further thesis is the traffic of least strategic value to the big four airlines are international connections onto their U.S. domestic networks.

“If I am right, you could expect U.S. airlines to reserve seats for their own international connections at the expense of seats provided to their international airline, often alliance, partners.”

And that, according to Dunkerley, is precisely the conclusion he has reached from his research.

How people feel about that depends on where they sit, he said.

“Frankly, over the last 30 years, because of the complete shambles of the U.S. domestic airline market, it has been an enormously good time for foreign carriers seeking to do business in the U.S.

“Foreign carriers have been largely able to divide and conquer, accessing what is still the largest market in the world on extremely favourable terms. From a U.S. vantage point the present situation presents a more reasonable equilibrium. But if you are one of the international carriers flying to the U.S. this new reality could be a moment of tremendous difficulty for you.”

One alternative for foreign carriers is to look at non-aligned operators such as Alaskan or Hawaiian for partnerships. “Although 85% of the U.S. domestic market is controlled by four carriers, that’s not the same as 100%,” he said.

“There are non-aligned carriers. If you do the same itinerary from Portland to Seoul with Alaska Airlines, the fare is cheaper. Clearly, the point I’m making is that non-aligned carriers have tremendous value.” And foreign carriers are obviously looking for opportunities.

“Since 2009, Hawaiian’s foreign codeshare and interline partners have doubled, from 17 to 34. “It’s evidence of the number of carriers, inside or outside alliances, seeking to better access to U.S. domestic traffic.”

Despite the significant growth projected for the Asia-Pacific air travel market, Dunkerley did not envisage a deluge of U.S. airline capacity surging into the region. “There is a new religion afoot [in the U.S.] and that is capacity discipline is good for the industry and for the individual carriers. I predict growth is going to be somewhat muted,” he said.

There could be a tension building at U.S. carriers between those who recognize opportunities overseas but are confined by the capacity control mantra. “They are probably thinking: ‘lets not start another rush to the bottom, which has characterized the U.S. domestic airline world for the best part of 30 years’. They are going to grow into Asia, but not at an explosive rate because of that capacity strategy,” Dunkerley predicted.