Airline alliances related issues

The literature on international airline alliances can be classified into three major categories: theoretical, empirical and comprehensive. Theoretical studies are focused on analyzing the economic benefits for alliances, such as outputs and profitability. Park (1997) examined the effects of alliances on carriers’ outputs and profits, air fare and economic welfare. The profits of allied carriers were increased after the introduction of the alliance.

For the complementary alliance, air fares decreased in the aviation markets, and thus consumers in the markets were better off due to the alliance. On the other hand, air fares increased in the market where the parallel alliance occurred, while air fares decreased in the other markets. In addition, for the complementary alliance case, economic welfare increased when the size of the markets was sufficiently large, while it decreased for the parallel

alliance case under the same condition. Wen and Hsu (2006) developed an interactive airline network design procedure to determine international code-share alliance-based networks. The bargaining interactions between two partner-airlines and various objective functions of partner airlines in alliance negotiations were also incorporated into their model.

They showed that all alliance partners enjoyed more profit under alliance conditions than before alliance. Under complementary alliance conditions, the allied airlines increased their flight frequencies, which further increased their market shares. Under parallel alliance conditions, the allied airlines may produce less if their market shares were lower, so they were more likely to establish a parallel alliance in the markets where they had large market shares. Lin (2004) applied the Stackelberg model to analyze the economic impacts of strategic alliances. It was shown that the joint profits of the allied airlines increased while the profits of the unallied airline decreased, and the consumer surplus of the connecting passengers increased. However, the alliance decreased the consumer surplus of the direct international passengers although their total demand was larger than that of the connecting passengers.

The empirical studies collect data to investigate the current status of the alliances, the impact, features, strategies, and so on. Brueckner (2003) focused on three measures of cooperation, alliance membership, codesharing and antitrust immunity, and showed that these three forms of cooperation lead to a substantial 27 percent reduction in interline fares.

It also showed that the immunity enjoyed by the Star Alliance’s partners generated an aggregate benefit of around $80 million per year for interline passengers in 1991, and codesharing among Star partners yielded a further annual benefit of around $20 million.

Goh and Uncles (2003) carried out an empirical study of the perceptions of consumers, showing that a sizeable minority was unsure of the benefits of global alliances. It also showed that no major differences were perceived in the benefits offered by Star Alliance

and Oneworld. The importance of global alliance benefits in determining airline choice by business travelers was also analyzed, showing that the global alliance benefits were rated relatively low, and the reputation for safety was the most important factor. Oum et al. (2004) examined the effect of horizontal alliances on airline performance in terms of productivity and profitability based on empirical panel data from 22 international airline companies.

They showed that the horizontal alliances made a significant contribution to productivity gains but had no overall significant and positive impact on profitability. Furthermore, the alliances involving high-level cooperation were found to have a stronger significant and positive effect on both productivity and profitability than those alliances involving low-level cooperation.

Albers et al. (2005) explored the relationship between airlines and airports from a strategic management perspective, using the case of the alliance between Lufthansa and Munich airport. Advantages for Munich airport can be realized by the cost saving and risk reduction, where the reduction of costs was achieved by lower investments in airport expansion because the airline paid a share. Iatrou and Alamdari (2005) focused on investigating the perceived impacts by the airlines of alliances, and carried out a survey of the alliance management departments of airlines participating in the major alliance groups.

The results showed that alliances brought about an increase in passenger traffic with a parallel increase in load factors and some reduction in costs, indicating a clear improvement of revenue. In addition, the increase in traffic had mostly been experienced on hub-to-hub routes.

The comprehensive works not only developed theoretical models, but also conducted the empirical analyses of the effects of the alliances. Park and Zhang (1998) examined the effects of airline alliances on partner airlines’ traffic, and formulated a theoretical model

and conducted an empirical analysis using panel data from four major alliances in North Atlantic markets during the 1992-1994 periods. They showed that most of the partners had greater traffic increases on their alliance routes than those on their non-alliance routes. It was due to the facts that partner airlines tended to feed domestic traffic onto their alliance routes but not onto non-alliance routes, and that partner airlines may re-route domestic traffic through their alliance routes.

Park et al. (2001) developed a model to investigate the effect of airline alliances on market outcome, and used panel data of trans-Atlantic alliance routes to estimate the model.

They found that a complementary alliance enabled partner airlines to attract more passengers, which had an adverse effect on the performance of rival airlines. Collaboration between the partners was likely to improve the quality of their connecting services and to decrease the air fares of their connecting services. However, a parallel alliance was likely to decrease total output and increase full price in a market where the alliance was formed.

Chen and Chen (2003) developed a theoretical model and conducted an empirical analysis of the effects of complementary and parallel codesharing on the load factors of international airline operations. They showed that as demand increased resulting from the expansion of a global network, an airline of a complementary alliance needed to increase the seat supply as well in order to maintain a satisfactory level of service convenience. For an airline of a parallel alliance, however, the presence of alliance partners on the same route made a difference, because it could supply fewer seats than its complementary counterpart by conducting risk pooling with alliance partners. As a result, the load factor of the airline of the complementary alliance did not increase significantly as did the load factor of the airline of the parallel alliance. Table 2.3 summarizes main issues and features as well as important results in the existing literature on airline alliances.

Table 2.3 Main issues, features and results on airline alliances related literature Authors Main issues and features Important results Park (1997) Examine the effects of

alliances on carriers’ outputs and profits, air fare and economic welfare

For the complementary alliance case, economic welfare increases when the size of the markets is sufficiently large, while it decreases for the parallel alliance case under the same condition Park and Zhang

(1998)

Examine the effects of airline alliances using panel data from four major alliances

Most of the partners have greater traffic increases on their alliance routes than those on their non-alliance routes

Park et al. (2001) Develop a model to investigate the effect of airline alliances on market outcome, and use panel data of trans-Atlantic alliance routes to estimate the model

Collaboration between the partners is likely to improve the quality of their connecting services and to decrease the air fares of their connecting services, and a parallel alliance is likely to decrease total output and increase full price in a market where the alliance is formed

Brueckner (2003) Focus on the measures of

alliance membership, codesharing and antitrust immunity

The immunity enjoyed by the Star Alliance’s partners generates an aggregate benefit of around $80 million per year for interline passengers, and codesharing among Star partners yields a further annual benefit of around $20 million

Chen and Chen (2003)

Conduct an empirical analysis of the effects of complementary and parallel codesharing on the load factors of international airline operations

Only parallel codesharing leads to higher load factors, since parallel alliance airlines can supply fewer seats than their complementary counterparts by conducting risk pooling with alliance partners

Source: this dissertation

Table 2.3 (continued)

Authors Main issues and features Important results Goh and Uncles

(2003)

Carry out an empirical study of the perceptions of consumers

No major differences are perceived in the benefits offered by Star Alliance and Oneworld

Lin (2004) Apply the Stackelberg model to analyze the economic impacts of strategic alliances

The alliance decreases the consumer surplus of the direct international passengers although their total demand is larger than that of the connecting passengers cooperation are found to have a stronger significant and positive effect on both productivity and profitability than those alliances involving low-level cooperation

Albers et al. (2005) Explore the relationship between airlines and airports from a strategic management perspective

Advantages for Munich airport can be realized by the cost saving and risk reduction, where the reduction of costs is achieved by lower investments in airport expansion because the airline paid a share

Alliances bring about a clear improvement of revenue, and the increase in traffic has mostly been experienced on hub-to-hub routes conditions, the allied airlines increase their flight frequencies, which further increase their market shares

Source: this dissertation

Summary:

The majority of the above mentioned research investigated how alliances contributed to the economic outcomes of airlines by constructing theoretical models and/or using empirical data to estimate models. These outcomes include profits, air fare, welfare, flight frequency, market shares, productivity, passenger traffic and load factor. Little research, however, has been carried out on the effects these alliances have on the connectivity of airline networks, nor on the transportation efficiency to and from cities, nor on access to new cities. That is, there have been few attempts to explore the improvement of mobility and accessibility of passengers contributed by the establishment of international airline alliances, although mobility and accessibility are the most significant measures of system performance and effectiveness for transportation systems.