In a rapidly consolidating international air transport market the bottom line for Aer Lingus is that a strategic alliance with major partners is necessary to ensure its medium to long-term survival.

Core operating revenues and profits are being increasingly squeezed as competition intensifies in a market where strategic alliances are making major airlines stronger competitors.

As a small national airline without partners in a global marketplace Aer Lingus would have found its opportunities to increase revenue diminishing as partners in strategic alliances channelled passengers between the services of their partners. But even more critical for the airline would have been the risk of loss of revenue as alliance members change schedules and services to squeeze out non-member competitors.

Aer Lingus came late to the process of finding a strategic partner. When other airlines were forming alliances Aer Lingus was sorting out other problems, from financial restructuring with asset sales to agreeing cost savings with the unions and the sale of TEAM.

The Aer Lingus type of air transport business, based on offering a quality service, is a relatively high cost operation where driving up revenue is vital to increasing profits. Measures to control costs are already in place, though tougher cost reduction measures may be required if the company planned to seek a stock market flotation.

But within the current environment the focus has to be on driving up revenue, particularly high margin revenue on transatlantic routes, and an alliance is a vital part of this strategy.

Alliances involve transferring passengers between the services of the different airlines within the alliance creating a wide network of routes for the airline selling the tickets. Because airlines within alliances can usually offer their customers a full route service for long-haul travel they can retain the full fare for the entire journey within the alliance.

But the main revenue gains for the partners in an alliance come from the opportunity to increase passenger numbers by feeding from the routes and hub points of their partners. One of the keys to a successful alliance is careful integration of the schedules of the partners to make it attractive for passengers to complete the full journey with then, thus freezing out competitors.

Locking "premium" customers into the alliance services is a crucial factor in increasing revenues and profits. This is done through "frequent flyer" type programmes. Premium customers are the most profitable segment of customer for Aer Lingus - business and first class travellers. Every airline has its own scheme to retain their custom, usually "points" for journeys made which can be used to take "free" flights.

In the US these "point" programmes have proven very effective in retaining key customers. In any alliance the interchangeability of points between airlines is a key issue. So, for example, with Aer Lingus within the Oneworld alliance its points could be used with, say, British Airways points to buy a "free" flight on an American Airlines flight in the US.

Alliance partners give each other a percentage of the profits earned on the passengers handed over thereby boosting revenue. In addition there are synergies from co-ordinated marketing, including special fare deals, and co-operation in passenger services and ground handling. And, depending on the type of alliance there can be cost savings, through greater buying power, on the procurement of goods and services.

With the airlines within alliances channelling their passengers through their alliance partners, being outside an alliance makes an airline very vulnerable to losing existing customers and to being unable to compete for new business.

While Aer Lingus has the advantage in the current booming economy of strong growth in passenger numbers, the consolidation in the market through alliances would have made it increasingly difficult to expand revenue, particularly on the most lucrative transatlantic routes. And competition on these routes is intensifying with the arrival of Continental on the Newark route and Delta on the JFK New York route in July.

At the moment some 20 per cent of Aer Lingus passengers, one million travellers per annum, continue their journey to their destination with another airline. These passengers could be channelled on to the services of an alliance partner. Aer Lingus needs strategic partners that will allow it to build its business heading both west and east. But the transatlantic market offers the greatest potential for boosting profits.

For Aer Lingus the transatlantic route is by far its most profitable as a long-haul route, with less costly take-offs and landings relative to flying time than short-haul routes and less price competition. These routes carry less than one-fifth of total passengers but generate about 40 per cent of profits. Aer Lingus flies into/out of New York, Newark, Boston, Chicago and Los Angeles.

But about half the US tourists to Ireland do not fly directly into the State - many arrive via London. Through an alliance with American Airlines these US passengers could be routed first to Irish airports as Aer Lingus passengers.

Aer Lingus could feed in passengers from other airports to Dublin and Shannon for its onward transatlantic flights to the US and then channel these passengers to the services of its US partner from US airports within the US and to other locations such as Australia and New Zealand using its alliance partners services.

While Aer Lingus needs a partner/partners on operational grounds to open access to a wide range of international routes, its dependence on its State shareholder means that its best option would be a strong financial partner who could take an equity stake in the airline. A strong equity partner would ensure that funding would be available to back future investment in fleet replacement and development.

Sales of assets and the State injection of some £175 million in new shareholders funds have reduced the airline's debt burden. But access to new sources of funds will be important to finance the new fleet required if the airline is to continue to expand passenger numbers.

Its potential alliance partner is expected to take a small equity stake. The airline is a well regarded European brand with good repeat levels of business. For a potential shareholder the important issues will be the profit growth potential and the liquidity of the shares.

As an alliance partner the potential shareholder will be crucial to driving profit growth through providing new revenue opportunities. The liquidity of the shares will depend on the prospects of achieving a successful flotation which in turn is dependant on having a strong alliance in place.

But potential partner/partners could help Aer Lingus's funding position in other ways too, for example, by advancing loans to the airline or guaranteeing loans, or leasing aircraft to Aer Lingus.

For Aer Lingus the bottom line is that a good alliance arrangement is crucial to securing its future and a public flotation to fund future growth and development will only be a viable proposition when a suitable alliance is in place.