If there is one remarkable aspect about Air India, it is that the airline rarely generates boring news headlines.
However, that is probably where all “good” associated with the carrier seems to end, if one even considers that a positive attribute.
The notoriously drama-filled carrier, beleagured on all fronts by unending strings of political, financial, operational and HR-related issues, is once again at it with Star Alliance, seeking remediation after a devastating fall-out from 2011 when its membership application was officially ejected from the group. At the time, Star’s 27 members voted unanimously to place Air India’s membership “on-hold” after the carrier failed to meet a July 31 deadline to fulfill all joining requirements, despite granting AI ample timeline extensions over the course of nearly 4 years to get its act together. On average, in the past, most airlines have been able to satisfy alliance requirements and integrate within 18 months or less.
Amid all of its disastrous PR problems, Air India’s boot from Star was single-handedly one of the most embarassing high-profile blunders in the carriers’ history, as no surviving airline has ever been denied membership from Star Alliance. Finger pointing and rumor circulating continued for months after, but no concilatory actions were taken on either side, and it seemed like the trail had gone cold.
To this day, not a single Indian carrier holds membership status in any of the big three alliances, which is mind blowing. But, there is more to the story.
India, like China, is a volatile aviation market, but cannot be ignored
Last week, I wrote a blog entry about how United’s new route from San Francisco to Chengdu, China underscored a lot of ramifications surrounding high-growth markets like China, India, Russia and Brasil, and the associated challenges for global airlines seeking to expand their presences in such important, yet ever-changing markets.
Back in the mid-2000’s, India, like China, was the place every carrier wanted to be. Despite airport infrastructural issues and a poor state of political affairs associated with its Civil Aviation ministry, India seemed to be drawing carriers from all corners of the globe. In particular, North American carriers, namely American, Delta, Continental and Air Canada, took advantage of deploying advanced technology on their widebody aircrafts to provide extended-range services nonstop to India from their respective US/Canadian hubs.
Meanwhile, on the home front, India’s own aviation sphere was undergoing radical transformations via new entrants, such as Kingfisher, as well as consolidation through the mergers of Air Sahara and Jet Airways, and Air India and Indian Airlines.
Nearing its anniversary decade since formation in 1997, Star Alliance identified India as an obvious “white spot” region in its network, and eyed State-owned Air India as a suitable contender to join its ranks and fill the void. While Air India’s troubled history was not unfamiliar to anyone, AI was undergoing a major rebranding campaign at the time it submitted its application to Star in December 2007. Aside from its merger with Indian, AI was also shedding its aging fleet, rolling out new products across all cabins, introducing a new livery and color scheme and making ongoing efforts to improve its customer services.
All in all, the future looked promising, and the interests on behalf of Star and Air India seemed mutual.
Air India was expected to relieve Star carriers from high overhead costs
Lufthansa, one of the founding carriers of Star Alliance, was selected to mentor Air India into the group. The German flag carrier has a long-tenured history of serving the Indian market, and, prior to the growth of Middle Eastern carriers Emirates, Etihad and Qatar Airways, was as the primary carrier transporting traffic flows between the USA/Canada/European continent and India. At the time of AI’s application submission, Lufthansa was serving 7 cities in India nonstop from its Frankfurt hub (Delhi, Mumbai, Chennai, Kolkata, Bangalore, Hyderabad and Pune) along with two additional flights from its secondary Munich hub to Delhi and Mumbai.
However, the reality was that several of Lufthansa’s Germany – India flights were too costly to operate, with very low-margins, to be sustained long term, largely owing to the growing threat of Middle Eastern carriers, Emirates, Etihad and Dubai, that offered cheaper tickets and benefitted from lower operating costs.
Although India is a high-volume traffic market, its traveling base tends to be heavily weighted towards price-conscious consumers, such as visiting friends and relatives (VFR) traffic. Such will always gravitate towards the cheapest price, even if that requires connections and longer transit time. As such, a more premium network carrier like Lufthansa encountered difficulty in filling up First and Business class seats with full-fare revenue paying customers on Indian routes.
The North America – India flights encountered similar difficulties with razor-thin profit margins. As the Gulf Coast carriers expanded into the Americas, as well as secondary and tertiary cities in India, Star Alliance network carriers from Europe and North America felt the pressure in their Indian markets. So, it was necessary to develop local ties with an Indian partner to help improve the economics on such routes through possible code-share and joint-venture agreements.
The potential benefits were fairly limitless. Lufthansa could rationalize its Indian network to rely on transfer flows over Delhi and Bombay, and drop unprofitable routes to cities like Kolkata and Hyderabad. Reciprocally, Air India could rely on flowing traffic over Lufthansa’s hubs at Frankfurt and Munich, as well as Zurich (Swiss) and Vienna (Austrian) all over continental Europe, and stick to serving core European markets such as London and Paris on its own metal without needing to deploy extra capital on “thinner” routes to other cities on the continent, such as Geneva, Madrid or Birmingham.
The ball is dropped
In spite of its re-branding initiative, which went live in 2007, Air India’s alliance integration process encountered massive delays and hold-ups throughout the subsequent years. The largest pain point was Air India’s ongoing merger with Indian Airlines, which was poorly executed on all fronts. Even to this day, the two airlines have yet to combine their reservations systems under a single airline operating code. Moreover, managerial oversight of the merger platform was stretched thin, and the economic downturn and fuel spites of the late 2000’s certainly did not help matters.
Meanwhile, Air India tried to rationalize its network in order to stem losses. While the 787 delays continued to pull down long-haul route performances, the carrier removed its scissor hub operations at London Heathrow and Frankfurt airports to launch nonstop flights to North America, including Delhi to Chicago, New York JFK and Toronto, as well as Mumbai to Newark, believing that this would help the carrier return to profitability and attain some global visibility on such glamor routes.
This plan turned out to be terribly flawed, as the only thing AI accomplished in their North American long-haul routes was effectively driving out competition from American Airlines and Air Canada, after flooding the markets with cheaper seats, especially in premium cabins. These routes have hemorrhaged cash since inception; in fact, allegedly, the North American long-haul operations account for roughly 40% of Air India’s quarterly losses, even though only 3 of them exist in totality (the Delhi – Toronto flight has not resumed since being suspended due to pilot strikes in 2012).
Air India would have likely been greatly assisted had it sped up the time-frame on its alliance integration as it would reap immense value from a code-share agreement with United on its Delhi – Chicago and Bombay – Newark routes and Air Canada on Delhi Toronto route, three of the largest Star Alliance hubs in the Western Hemisphere, but again, this never materialized.
2011: Deadline approaches
In May 2011, Star Alliance CEO Jaan Albrecht issued a warning to Air India that its invitation to join the alliance would be withdrawn if the integration process was not completed by July 31 of that year. Air India had been given ample extension periods to resolve IT issues, and the line had to be drawn in the sand.
The deadline came and went, and on August 1, 2011, Star Alliance announced to its members that Air India’s membership had been, “placed on hold,” although the nail was pretty much in the coffin: AI would not be joining Star, at least in the near-term.
It was the first time that Star had ever denied membership to an applicant. The ensuing response from Air India only seemed to magnify the drama, while also burning more bridges. Air India claimed it had completed all necessary joining requirements and ticked off all the boxes prior to the July 31 deadline, substantiated by a document confirming that everything was check-marked and ready to go. Star rebutted, saying that this “document” in question was merely a report issued by a Star Alliance project manager, rather than an official confirmation that membership was assured.
There was also another factoid that clouded the issue: it appeared that what sealed AI’s fate was an official voting process that had taken place among Stars 27 members, of which several had collectively decided to veto Air India’s membership altogether. Suddenly, it became apparent that a large contingency of existing Star members simply did not want to include Air India included in the alliance.
This suggested that there may have been an ulterior motive: perhaps many of Star’s influential stakeholders were lukewarm towards having AI join from the get-go, and instead wanted to have one of its competitors, such as Jet Airways, join instead. Air India’s lengthy implementation delays played to their advantage, to the extent that now they had an ideal opportunity to wash their hands of Air India, and could turn their attention towards luring another preferred Indian carrier.
Nobody knows the real truth, as there are two sides to every story. In India, similar to China, the Civil Aviation Ministry treats the flag carrier like the first-born son, which obviously is Air India as the State-owned airline. Unconfirmed reports had always reported that Star really wanted both Air India and Jet Airways to join the alliance in unison – a proposal that the Civil Aviation ministry rejected. It was either Air India or nothing, which is the same state that both parties find themselves in today.
2012: conditions worsen
Unfortunately, 2012 was not a better year for Air India. Though it watched one of its major competitors, Kingfisher, fall through quicksand, Air India suffered from a massive pilot strike that summer, with around 350-400 long-haul pilots refusing to work, and lost $1.4 billion dollars for that fiscal year. Operations were severely disrupted and customer satisfaction scores plummeted.
The 787 delays and subsequent grounding continued to play out an unending nightmare for Air India. Also worrisome, albeit more indirectly, was the realization in September 2012 that Qatar Airways was slated to join the OneWorld alliance. Qatar, a formidable force in the Middle East, has the ability to connect secondary and tertiary cities it serves in India to its vast global network across Europe, Africa and the Americas, further plaguing the un-aligned Air India in the international realm.
The time is now
To that end, Air India now feels that the time is appropriate to settle the lingering Star Alliance holding pattern for once and for all. According to the Standard Business, Air India Chairman and Managing Director Rohit Nandan is in Germany this week to meet with Lufthansa CEO Christoph Franz. If an agreement cannot be mapped out, it is believed that Air India will advance discussions with OneWorld.
There are implications on multiple sides here. For starters, it seems like the icy relations between Air India and Star may have melted somewhat since the 2011 fall-out. Star’s ambitions for Jet Airways to consider joining, in wake of Air India’s missed opportunity, seems to have fallen through after Jet negotiated a stake agreement with Etihad Airways earlier this year. That is neither good news for Star Alliance nor Air India, so at least there is one thing in common to that end.
Moreover, for the first time ever since its inception, Star Alliance currently has no impending members in the process of joining the alliance, ever since EVA Air completed its formalities earlier this summer. With its plate cleared, Star may be in a position to re-negotiate and work with Air India once again, although nothing can be assumed at this time.
What are the implications for Star and Air India?
The first and foremost consideration is, what will happen with AI and Star? That situation needs to either be remedied and mapped out quickly, or cordoned off completely, as discussions have been ongoing for the better part of a decade. Indeed, the humiliation continues to rub off on Air India as many other State-owned, inefficient and or unreliable carriers have managed to turn around their operations within given timeframes to join global alliances. Moreover, the fact that Air India’s failure to meet Star’s entry requirements was pegged largely on IT issues – despite the fact that India has a booming IT industry – adds more embarassment to the concoction.
For Star, it’s pretty much a gravy train: it can choose to swallow its pride, work with Air India once again, and secure a local Indian partner, or save face and turn the other cheek.
The former choice may involve short-term backpedaling chagrin, if not frustration, but with assured long-term gain. The latter decision will do just the opposite, and the Government of India will retaliate. Lufthansa, for example, badly wants to operate its A380s into certain Indian airports, but cannot due to bilateral restrictions. The Indian Civil Aviation Administration will not budge on that end, especially if Air India is not allowed in Star.
What are the implications for OneWorld and Air India?
The second consideration is, what would be the value OneWorld brings to Air India and vice-versa?
For starters, OneWorld would probably need to evaluate the importance of having an Indian carrier. With plans to integrate Kingfisher now out the window, India may be back on OneWorld’s radar. Simply put, the market is too large/important to ignore at the moment. While Qatar Airways’ presence in the Middle East certainly HELPS fill the void, Air India has access to a whole slew of domestic routes that cannot be beat.
However, Air India brings a lot of things to the table that OneWorld does not want. Current members such as British Airways, Cathay Pacific, Japan Airlines and Qantas and soon-to-be Qatar Airways are top-ranked premium carriers that may not want to take on the burden of nurturing a modestly-regarded airline into the alliance. Although, one could argue that OneWorld has bowed recently to several wholly or partly state-owned airlines such as Sri Lankan and Malaysian Airlines, and these two in particular have undergone radical transformation and restructuring programmes recently to boost their global reputations.
According to the Financial Express, Qatar has actually APPROACHED Air India to join OneWorld, assuring its support for AI’s membership, in case the situation with Star falls through. Still, it is presumptuous for an airline, which hasn’t even completed its own integration requirements prior to joining, to voluntarily sponsor another airline into the alliance. Then again, OneWorld is a bit more lax than competitor Star is. The alliance is fairly loosely integrated, so certain lines may be blurred with fewer repercussions.
Hypothetical situation: Air India goes to OneWorld?
If the OneWorld logo were to ever appear on the flying Maharaja, I would have to blink twice in disbelief and pinch myself to make sure it is real.
Ok, jokes aside, while I may be totally getting ahead of myself here, the advantages that Air India, OneWorld and all participating members could gain are HUGE here, pending the fact that everyone works in unison (which is more unlikely then likely, but sometimes, perfect harmony in wishful thinking is blissful).
First, it would give American Airlines (slash US Airways?) a second stab at India, which previously failed on its own metal. The ability to codeshare on Air India’s nonstop US-India routes trumps sending passengers on British Airways via London Heathrow, which involves a horrendous inter-terminal connection between T3 and T5 at LHR. BA’s loss will be mitigated significantly by having access to more Indian markets beyond Delhi and Mumbai.
Qantas, which exited the Indian market in 2011 as part of a major international network restructuring exercise, can codeshare with AI on its two new 787 services to Sydney and Melbourne. Cathay Pacific and JAL also will enjoy the benefits of strengthening their Hong Kong-India and Tokyo-India services through tying up with AI, and provide onward feed on transpacific services to North American west coast gateway markets such as Vancouver, San Francisco and Los Angeles.
IAG subsidiary Iberia may finally be able to connect Spain to India, which would be a huge game-changer in a market where demand is significant, but yields are low. The Air India 787 would be perfect to connect to Madrid, perhaps even Barcelona, and from there, passengers can connect onward to key Latin American business destinations in Central and South America.
Even Qatar will find some relief, rather than cannibalisation, in tying up with Air India via OneWorld. One of its largest competitors, Etihad, found immense value in striking a deal with Jet Airways, which will indeed create competitive pressure for Qatar in Southeast Asia. Air India’s domestic network within India opens up network access above and beyond what Qatar currently offers.
Bottom-line: alliance dynamics are shifting, and Air India needs to act quickly
The nature of global alliances are changing dramatically, as I have blogged about for over a year now, and the current approach is to act individually, if not selfishly, and as CAPA describes, “manage conflict, rather than avoid it.”
In other words, Air India doesn’t stand much to lose by moving forward with Star if relationships are remedied, but if the damage has been done, best to put that situation in the past and proceed immediately with OneWorld. Air India cannot compete as an unaligned network carrier in the interim without sustaining heavy losses.
Fortunately for it, the gears will always be turning and Air India still has a chance to spool the thread, else fall through the cracks and continue to run in place.