AA To Enter Joint Venture With PR

21 March 2020

By Will Horton

Forbes

While the coronavirus outbreak has brought American Airlines’ long-haul network down to a handful of flights, American continues its work on a new medium-term strategy. The latest is a reciprocal codeshare with Philippine Airlines (PAL). Since losing partner LATAM to Delta Air Lines, American resumed its codeshare with Brazil’s Gol, made a truce with Alaska Airlines and Qatar Airways, and announced a new Seattle-Bangalore flight.

PAL intends to codeshare on eight of American’s domestic routes from Los Angeles, the U.S. city PAL has the most flights to. American will not codeshare on PAL’s flights between the Philippines and continental U.S. Instead American will fly passengers to Tokyo and then transfer them to PAL’s Tokyo-Manila and Tokyo-Cebu flights. American will also codeshare on PAL’s flights from Manila to Guam and Honolulu, according to a regulatory filing.

In codeshare partnerships, airlines typically benefit the more a passenger is on the airline’s metal. So American would theoretically net more revenue by flying passengers to Tokyo and then transferring them to PAL, instead of putting them on PAL’s flights out of the U.S. (but since they are as non-stops, that would be more convenient to American’s customer base).

Joint-ventures can limit overlapping partnerships, even codeshares, so it is possible American’s JV with Japan Airlines precludes American from codesharing with PAL out of the continental U.S.

American is PAL’s first continental U.S. partner. PAL has long been urged to develop more partnerships, in particular for the U.S., its largest long-haul market. (PAL partners with Hawaiian Airlines for intra-Hawaii travel, and WestJet for Canada.) American is often considered the friendliest legacy U.S. airline for foreign airlines to partner with; hence American partners with both Qatar Airways and Etihad Airways.

Of the three big U.S. airlines, American has the least exposure to the Philippines, a large but typically low-yielding market. Delta has served Manila via Tokyo (and previously Nagoya) but plans to move the stopover to Seoul Incheon.

United serves Manila from Guam. From the continental U.S., United transfers passengers in Tokyo to All Nippon Airways (ANA). Not only does ANA codeshare with PAL, ANA last year bought 9.5% of PAL. The partnership, albeit small, was seen as boosting PAL in the local Japan-Philippines market, which has faced low-cost airline competition. The partnership could also help PAL access more of the U.S. via ANA’s Tokyo hub. There was also the possibility that PAL, which is not a member of any global alliance, would use ANA’s weight to join Star, although ANA noted PAL’s alliance decision was its own to make.

Airline partnerships have become more complex as carriers look for best outcomes and not what is within their alliance or portfolio. Equity has increased overlap and frayed long-standing arrangements. United’s most important Asian partner (ANA) has invested in an airline (PAL) that United’s domestic rival (American) will partner with. American and PAL’s Japan-Philippines codeshare plans indicate ANA is unable to object or has chosen not to despite the competitive overlap – ANA could fly the passenger across the Pacific instead.

The airline interplay will be even more challenging in the short-term. United has stalled PAL’s banal requests to the U.S. Department of Transportation on the grounds United is being discriminated against as the Philippines protects PAL.

First, United delayed a codeshare request between PAL and its subsidiary PAL Express for the Manila-Guam route. Second, United delayed PAL’s request to open a new flight between Manila and Seattle.

United does not object in principle to either of PAL’s requests. Instead, United does not want PAL’s U.S. developments approved until United receives additional slots in Manila so it can grow (United has not said where the additional flight will be to). PAL counters that it does not control Manila’s slots. But United says PAL in Manila has been able to add new flights, including to the U.S., while United has been rejected for additional slots.

The codeshare stalling from United was low-key and did not invite third-party commentators. But United stalling the Manila-Seattle flight was more high profile since it was a new service. The Port of Seattle urged the DOT to look past United’s claim and approve PAL’s proposed new flight.

The current downturn in aviation is unprecedented, but United could delay American and PAL’s codeshare application, which they requested be expedited. Although it seems codeshare urgency is inappropriate given aviation’s crisis – and knowing United could request more time on matter – requesting expedited processing is relatively standard.

The initial American-PAL partnership request does not include transferring passengers in Hong Kong. American’s Hong Kong yields are typically lower than for Japan, providing an incentive to transfer passengers through Hong Kong despite some backtracking on the Hong Kong-Manila segment. But Hong Kong is not as liberal as Japan when it comes to codeshares. Also, PAL has an existing codeshare with Cathay Pacific.