Following news from last week about the official confirmation of an Airline Joint Venture deal between Qantas and American Airlines, I thought to myself: what that exactly means? What consequences will bring that deal? And in the end what that whole Joint Venture is? This post is an attempt to answer these questions and to sort out this whole issue. Peter Carter, Delta Chief Legal Officer in simple words formulated what the Airline Joint Venture means:
“You have something, and I have something, and we are able to do more things together.”
Being more precise, based on Cornell University Law School, Joint Venture is a legal organization that takes the form of partnership in which the persons jointly undertake a transaction for mutual profit. This means that all parts of a deal contributes assets and share all the risks.
Why Joint Venture?
Joint Ventures are widely used by companies to gain entrance into foreign markets. Why? Cause if you are an airline based in the USA, it’s easier to open a route from Los Angeles to Sydney if you know someone from Syndey and conversely. You make an agreement with a partner from Australia. You consolidate your frequent fliers program.
Coordinate your planning, prices, and sales. Share profits or revenue and it becomes much easier to open new routes. You skip legal procedures for merging two companies and do it just in an easier “virtual” way. As a domestic company, you meet the governmental requirements and have wide connections in the local industry while a foreign company can bring for example technologies or business practices. Win-Win situation.
Tendency in Joint Ventures
Nowadays, because of many factors, it’s impossible for one single airline to fly everywhere. Thanks to partner agreements it becomes real. Since 1997 when the first agreement between Northwest Airlines and KLM was made, every year we noticed a growing up of JV(Joint Venture) deals. It’s expected that in 2021, 35% of all long-haul traffic could be operated by JV Airlines. Just have a look at the last 10 years presented in the table below to see how frequent are these agreements.
As we can observe, monogamy is oldfashioned. Airlines pick their partners like socks. Delta Airlines wanted to expand in Mexico, there you go…they found a partner in Aeromexico. One year later they decide to develop their East market so they went to Korean Air and gave them the opportunity to use their wide choice of routes within the US in exchange for access to 80 destinations in Asia. That’s the way to build an imperium.
But not so fast! In case when two big companies like for example American Airlines and Qantas want to make a Joint Venture agreement, it has to be firstly approved by the government. If the deal works for the detriment of consumers or against competition rules it will be rejected and approval won’t be issued. And that’s how it was in 2015 when both airlines applied for the agreement for the first time. Back then, the US Department of Transportation had concerns about “virtual merge” as “proposed alliance would substantially reduce competition and consumer choice, without producing sufficient countervailing public benefits”
Passenger Benefits and Disadvantages
So sticking to this US DOT decision, what we/passengers are (or should) benefiting from these agreements? According to the publication about Joint Venture Effects from 4th International Conference on Leadership, Technology, Innovation, and Business Management, we can basically divide our benefits into two types:
- SCALE EFFECTS relates to the size of the network in geographical scope. Access to new services, routes, direct flights and a more flexible schedule as few airlines operate as one.
- LINK EFFECTS which relates to service connectivity such as easy for passengers in making connections where multiple airlines are involved.
Disadvantages are obvious, consolidation of large airlines in Joint Venture agreements eliminates their competitors from the market and that leads to higher fares.
In conclusion, I am afraid that progressive globalization and increasing demand for air travel will bring us to the point where most of the long haul market will be in the hands of Joint Venture partners. It remains to hope that it will not have a devastating effect on our wallets. Because so far it’s clear that the biggest beneficiaries of these solutions are airlines. Even though there are some restrictions it seems like there are no limits in merging new partnerships under Joint Venture agreements.
I hope that you liked this article and it prompted you to think deeper about the Joint Venture Issue. What are your feelings about this subject? I invite you to discuss in the comments and give me feedback on whether you like it or not.