Several years before taking over as CEO of Etihad Airways, James Hogan was a senior executive at British Midland International, a small, now defunct, UK airline and one of the earliest members of Star Alliance.
“It’s like being in a Catholic Irish family with 10 kids,” Hogan once said, describing the experience of attending alliance meetings with executives from other airlines. “If you are at the end of the table, it’s like, ‘Can you pass the beans?’”
The idea of airline alliances was hatched a couple of decades ago, partially as an opportunity to make travel more seamless for customers. Star Alliance was first of the three major global alliances to form, starting in 1997 with Air Canada, Lufthansa, SAS, Thai Airways, and United Airlines.
In Star, like its competitors, OneWorld and SkyTeam, passengers are supposed to be able to use their frequent flyer miles on any airline, and they should have a cohesive travel experience, when flying two or more Star Alliance carriers on the same itinerary. Elite frequent flyers also receive reciprocal perks across all airlines.
The system works most of the time, though travelers sometimes report that some carriers do not make cross-airline travel as seamless as they should.
In some respects, that’s not a surprise. As the Star Alliance has grown — it now has 28 member airlines, based on every continent except Australia — it has been tough to keep carriers focused on the same strategy. Sometimes, every airlines wants something different, and they’re not necessarily equal partners.
Some airlines, like Lufthansa, United, and Air Canada, are much larger and more powerful than newer members like LOT Polish, Aegean, Eva Air, and Tap Portugal. As Etihad’s Hogan alluded to, sometimes smaller players feel they’re not as involved in decision-making.
For the past five years, the job of driving consensus among member airlines has fallen to Mark Schwab, the CEO of Star Alliance. Schwab, a former United Airlines executive, is retiring at the end of December. We met with him recently near Los Angeles for an exit interview to discuss the challenges of running Star Alliance, and the alliance’s plans for the future.
Editor’s note: This interview has been lightly edited for length and clarity.
Skift: Star Alliance will celebrate its 20th anniversary next year, and the global competitive landscape looks much different than it did a couple of decades ago. Do we still need alliances? And what will they look like in five or 10 years?
Schwab: First off, Star Alliance is going to be around. The reason for that is the fundamental driver that brought Star Alliance together. Airlines cannot merge across borders. There was this imperative to connect networks in a more effective, better way to better serve customers 20 years ago when Star Alliance was first created, that was the reason we came about.
I don’t think the regulatory situation is going to move quickly enough to allow for truly global single airline entities. The way you solve it for customers is you put complementary networks together. I think, based on that foundation, Star Alliance is going to be here at the 30th anniversary, 10 years from now. What is going to change at Star is that we have progressively over the last ten years or so been building out the network, having more carriers, filling more parts of the globe that were missing from our global coverage. Today, at 18,500 daily flights and 28 airlines flying to more than 1,300 cities around the world, essentially we have covered the map. This new idea of adding a new airline every year or so is going to step into the background.
The shift is going to be toward focusing much more deeply on the customer experience, making sure that the transition from one airline to another in all levels of the customer journey is a much more seamless experience than it is today. It’s going to be facilitated by technology, where all of us carry around smart devices. We think these are the essential tools that people want to be using to interact with their airlines, to interact with their alliance.
Skift: At a recent conference, Emirates CEO Tim Clark and International Airlines Group CEO Willie Walsh suggested that the alliance model may soon become obsolete. Clark has never loved alliances — Emirates is not in one — but Walsh’s company owns British Airways, a founding member of OneWorld. Do you think they’re wrong?
Schwab: Of course I do. The reason for it is going back to that original proposition, why were the alliances created? There is still a need to [connect] international flyers to the entire world. It’s not going to be solved by one-off partnerships or even multilateral partnerships. It takes a whole globe, 28 airlines, to fill up the world map.
[As a traveler,] you want to know that wherever you are traveling around the world, you have the comfort that you’re going to earn your miles, that you’re going to be recognized along the way [and] you’re going to have access to a thousand lounges that we have all around the world. If you break that down into individual partnerships, you lose that interconnectivity.
Skift: With some exceptions — some of your member airlines have anti-trust immunity for in certain regions — your member airlines are competitors. How can you get your airlines to work together when they’re seeking the same business?
Schwab: When we look to bring new members into this alliance, we’re looking essentially for complementary networks. You want to grow it instead of piling carriers on top of each other. As carriers grow their own networks, there is competition between our carriers. That is always something that we’ve recognized from day one. There is competition within the family.
Skift: And what about these immunized joint ventures? How have they affected the alliance? You have for example, United, Swiss, Austrian, Lufthansa, and Air Canada, which by law may collude on trans-Atlantic pricing. This group competes with other Star Alliance members, such as Lot and Turkish, that are not part of that group.
Schwab: In the recent few years, this phenomenon of these immunized joint ventures have been developing in all geographies of the world. If you looked at this five years ago, there was a handful of these joint ventures being established.
I think at our latest count we’re somewhere close to 20, and there are more being announced all the time. Why is that happening? Because those immunized joint ventures are able to deliver more value to the partnerships when they can coordinate their schedules, when they can coordinate their pricing activities, when they can coordinate their distribution activities. They will deliver higher value than you can get out of a membership in the alliance.
Here’s the key point. Most of the joint ventures that you see being created, at least within the purview of Star Alliance, is happening under the umbrella of the alliance, with very few exceptions. [That’s] happening … because like-minded carriers have been here for many years. They’ve been working with each other. They have a high sense of trust in each other. They have a great cooperation between themselves, and so they’re taking these relationships to the next level by creating joint ventures.
My opinion is that they’re good for the alliance. They create stronger glue within the partnerships, and people get much more focused on delivering real value, better services for their customers. I think it’s a trend that we’re going to continue to see develop.
Skift: Scott Kirby recently left American, where he was president, for United, where he is also president. Recently, he told investors that Star Alliance members did not seem to be as cohesive as OneWorld members. You probably saw his comments. What do you make of them?
Schwab: I have great respect for Scott. Scott, [who was also previously US Airways’ president] was a member of Star Alliance when US Airways was a member of Star. He was a very active contributor to the organization. We’re delighted to have Scott back. He’s a terrific airline executive. He knows certainly what the alliances can do, and I’m looking forward to welcoming him.
I would argue with due respect to Scott that, from what we can see from the outside, the level of cooperation between Star carriers is significantly more advanced than any of the other alliances, without naming one of them. We have more codesharing within our family. We have better quality of codesharing within our family. This is probably recognized as the tightest of the alliance groups out there.
Skift: You’re capping your fifth year leading the alliance. Is there anything you hoped to accomplish but could not compete?
Schwab: [There’s] one area, as I step away, that I would like to have concluded, partly because it’s an emotional attachment for me. You may be aware that I grew up in Brazil. I started my airline career in Brazil [with Pan American World Airways]. I was quite anxious to get a full solution for Star Alliance in the Brazilian market. The reality is we need a second carrier to join Star Alliance in the Brazilian market, [besides Avianca Brasil]. Anybody who has looked at the Brazil market for the last three years knows that they are going through the most difficult economic turmoil in the years that I have been involved in the Brazilian market. We weren’t quite ready to solve that. I will go away feeling a little bit like it was close but didn’t quite get there.
Skift: There is a big unaffiliated airline in Brazil. [Editor’s note: It’s Azul Airlines, headed by JetBlue founder David Neeleman.]
Schwab: That’s right.
Skift: Does that airline interest Star Alliance?
Schwab: That unaffiliated airline we’ve had many conversations with. They’re not ready to make a decision. It is a big undertaking, and it involves the entire company. Lots of IT work. Lots of training that has to happen. Lots of processes that have to be harmonized to become a member of Star. They just didn’t feel like they’re ready to go through that work in the middle of what’s happening in the market right now.
Skift: Do you think Star Alliance has any other gaps in its worldwide coverage? Do you need member airlines in other regions?
Schwab: Well, we have great service to and from Russia. Someday we would like to find the solution for connectivity within Russia. We have good service from the European side, and a fair amount of service coming from the Asia side into Russia, but the connectivity within the huge geography of Russia is still a weak point for us. Over time that needs a solution. The reality of the Russian aviation market is that it’s gone through change and consolidation in the last few years, and it’s not stable yet. It has not sorted itself out completely. That will come at another time.
Other than that, we’ve got the globe pretty well covered, [though] domestic connectivity across the Australian market would be helpful to us. We had Ansett Australia as a member of Star early on. Unfortunately they ceased operations in 2001. There are only two major airlines in the Australian market. [Neither is] an obvious choice for us there.
Skift: You’ve historically had as members only full-service airlines. Are you interested in low-cost carriers, too?
Schwab: You may be aware of this connecting partner model that we announced a year ago. This is an effort on our part to recognize that the competitive set is changing. There are more low-cost carriers becoming more hybrid in their services. They’re going more upscale and offering premium services, and customers are willing to pay extra for those services. By the same token you see many full service carriers unbundling their services and selling parts of the passenger experience that used to be the whole package. There’s a convergence happening of those two models.
What it forced us to do at Star was to step back and understand what that meant, where do we think that’s going. We think more and more it’s going to happen in geographies all around the world. Then the question was how to address it. What we came up with was this connecting partnership which allows us to connect carriers in specific geographies into our network without them becoming full members of Star. It is a less complex way for smaller carriers in defined geographies to provide connecting services to us. What that allows our carriers to do then is to offer sales into and onto networks that right now are not part of our alliance.
Skift: I wanted to ask you about the passenger experience. Your airlines are all separate entities, and though they’re supposed to make a seamless travel experiences for customers, sometimes they fall short. Connections get missed, or bags gets lost. Is this a concern? How can you make the process more consistent for travelers?
Schwab: There’s always work to be done. Let me step back for a second. There was never a promise and never an intention to suggest to anybody that there was going to be a completely homogeneous service experience. The service offerings are different from airline to airline. They serve their local markets. They serve whatever their passenger base is looking for. The job of Star Alliance, the work we do, is on the intersection between the carriers, to make sure that through check-in, to make sure the lounge access, to make sure that the proposition of earning miles [and] using your miles, works as seamlessly as possible.
The reality is that when we got to 28 airlines, trying to interconnect literally hundreds of different IT systems that impact those various aspects of the customer journey, it became increasingly complicated. What we have been doing is we have been building IT hubs at the center of Star Alliance to interconnect these diverse systems. We’ve made enormous progress. There’s always opportunities to do better. That’s [about] shifting focus onto the customer experience to make sure that whatever the small margin or percentage of error that’s happening in these transactions, that we take them down to as close to zero as possible.
Skift: In what part of the operation do you thing the alliance members are least connected, when it comes to looking after passengers?
Schwab: I would argue that the through check-in service actually works quite effectively now. We can start your journey in Auckland, New Zealand, take you to the United States on one airline, connect you to another airline to a second point in the United States, and then have a third airline take you into Canada. That transaction, baggage and boarding pass, all works quite well.
The next focus that we have is on establishing a baggage hub. This part of the equation is minimizing mishandling of baggage between our carriers. Literally hundreds of millions of bags are being exchanged between the carriers on an annual basis. The percentage of mishandled bags is quite low, but each one of those is an irritation to a customer, which in turn is a cost to the carriers. Right now we’re building the first phase of a baggage IT [platform] that will give us the ability to much better track where bags are, connecting bags, where are they on the airplane, where are they in the process of being transferred. Where are the premium bags so that we can deliver those to the baggage claims areas more quickly. If for some reason there is a mishandling at a location, then we can put the bag back together with the customer much more quickly.
Skift: I have one more question. In your five years, you’ve worked with many airline CEOs. They’re important people. At their companies, they’re the boss. But your job is to build consensus. What’s the key? How do you do it?
Schwab: It’s a variety of things. One, I try to make very certain that I’m understanding from each one of them what their needs are, what their aspirations are within the alliance so that I can understand what is possible. Then we work at various levels of their organizations to map out what we think those propositions can be. It’s not as hard as you might think. That’s simply because the airline CEOs and their commercial teams understand the huge value that they get out of Star. We do a calculation for each one of our carriers. What did it cost you to be a member of Star? What did you get out of it? It is well over a billion dollars worth of collected benefit to be a member of Star.
Yes, we have lots of strong personalities in the room, but they work quite well with each other. They’re partners. They’re competitors. When they come to Star, they’re thinking about what’s best for Star.