Star Alliance & Fuel Purchasing

BoeingBoy

Veteran
Nov 9, 2003
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Fuel Agreements Working For Star Alliance
Aviation Week & Space Technology
11/01/2004, page 52

Michael Mecham
Seattle

Alliance members discover the old 'discount for volume' rubric is still reliable

Fueling Star

Joint fuel purchasing agreements at three key hubs--Los Angeles, San Francisco and London Heathrow--have saved Star Alliance members $50 million since last year.

Called Star Fuel Co., the joint fuel buying agreement has recently been extended to Charles de Gaulle (Paris) airport, says Star CEO Jaan Albrecht. Star Fuel leverages the joint buying power of member airlines and will expand airport-by-airport throughout the 15-member airlines' worldwide network.

FUEL PRICES, which have climbed to the $60 per barrel range in the past few weeks, are an ever increasing worry. "We thought $40 a barrel was a cap a few months ago," Albrecht says.

With 772 destinations in 133 countries, the Star airline network has nearly twice as many members as competitors SkyTeam and Oneworld. Star accounts for nearly 27% of the world's revenue passenger kilometers compared with 23% and 18%, respectively, for SkyTeam and Oneworld. Currently, its members fly 355 million passengers annually, compared with 341 million for SkyTeam and 223 million for Oneworld.

Speaking here last week, Albrecht and other senior executives outlined a variety of ways the group's members have leveraged their collective world presence to serve high-yield, frequent business travelers. Their goal is to drive down operating costs. But Vice President Brock Friesen, who heads Star's finance and strategy operations, used data from a number of studies to illustrate how far network carriers have to go.

Comparing Southwest Airlines' unit costs for 737-300 operations with U.S. network carriers, Friesen concludes that Southwest has a 50% overall advantage. Gains include 12% from its financial structure and 15% from its work rules. But it holds a whopping 70% advantage in the way it sets up its schedule, processes aircraft operations, distributes costs and simplifies its fare structure.

Some Star members (Air Canada, All Nippon Airways and Scandinavian Airlines System are standouts) have rewritten business models to drive down costs. Air Canada, US Airways and United Airlines have been forced to act because of bankruptcy filings. The jury is still out on their long-term success, although Air Canada has emerged with a complete makeover (AW&ST Oct. 25, p. 68).

ANA was forced to act because a merged Japan Airlines and Japan Air System took away its long-time dominance of domestic routes. ANA has consolidated its branding, established a low-cost labor pool to run a discount subsidiary and is reducing nine jet types down to three, the Boeing 737, 7E7 and 777. Its domestic and regional hub operations will expand with the opening of new facilities in Nagoya, Tokyo and Kobe over the next five years.

MUCH OF THIS three-year reorganization effort is about driving out costs internally, but key elements depend on network advantages it gains through its Star Alliance membership. Star's executives spoke as ANA took delivery of the first of six 777-300ERs coming into its fleet. The aircraft is the first of four 777s ANA will operate in a Star livery.

With two-thirds of international passengers flying on one of the global airline alliances, building alliance loyalty has become as important as building airline loyalty. Passengers see some of the effort directly, but much of it is behind the scenes. Star members are:

*Introducing interline electronic ticketing to give passengers one paperless ticket throughout the Star network. This StarNet effort is expected to cut 3 euros ($3.81) per ticket from processing costs when it begins next month.

For promotional purposes, members paint 3% of their international fleets in Star Alliance liveries. ANA's new 777-300ER is one of four aircraft it will commit to Star colors.Credit: BOEING

The key to StarNet is a software application that allows user airlines to interface with their legacy computing systems. Based in Frankfurt, it will handle some 18 million transactions a month.

*Introducing Star Connection Teams to improve passenger and baggage services. Opened last year in Frankfurt and Los Angeles, the concept saved 4 million euros. After opening recently at Chicago's O'Hare International Airport it saved 2.5 million euros in its first 21 days of operation.

*Developing Common Baggage Service Facilities for traditional lost-and-found issues. CBSF is at Washington's Dulles International Airport and is shared by six Star members. It will open in Budapest, Munich, Paris, Vienna and Zurich next year.

*Beginning trials of Star Alliance self-service ticketing kiosks in Munich, Tokyo and London with an extension to 50 selected airports set for next year.

*Buying Intranet bandwidth as a commodity. The effort got underway this year and is expected to save tens of millions of dollars annually, Friesen says.

*Starting round-the-world and regional fares that allow business travelers to use multiple Star Alliance member airlines.

*Leveraging members' collective advertising expenditures. Joint media buying is expected to cut more than 20% of members' costs.

*Sharing aircraft performance data and jointly evaluating new models. Joint aircraft specifications have been set for Bombardier and Embraer regional jets. Rockwell Collins prompted Star members to make joint sourcing agreements on common parts numbers. Similarly, members hold an umbrella service contract with Novell for network security.
 
The Star Alliance still seems to me to be a somewhat untapped area for realizing cost savings. I'm really surprised, for example, US-LH-UA don't share staff resources more. US could easily handle all of LH's flights in PHL and CLT and maybe elsewhere, while LH could easily handle of all of US's flights in FRA and MUC -- without needing to hire outside contractors. Also, why does UA have its own RCC in PHL? Why does US need its own Club in SFO? Assuming the gates are relatively close to one another, why can't they share one club (i.e., just put a UA agent with computer in PHL's B-C Club and just put a US agent with computer in UA's RCCs in SFO)?