Assessing the price effects of airline alliances on complementary routes

Abstract

This paper investigates the impacts of complementary alliance on airfares. The conventional wisdom argues that complementary airline alliances reduce airfares for passengers on the flow-through routes as a result of the elimination of double marginalization and efficiency gain. On the other hand, since complementary alliances help improve connecting services through one-stop check-in, better schedule coordination, etc., passengers are willing to pay higher prices for the enhanced services. That is, complementary alliances have both positive and negative effects on airfares for flow-through tickets that counteract each other. The net impact, therefore, is uncertain, a priori. Our theoretical model shows that the overall effects of complementary alliances on airfares depend on the relative strengths of the airfare reducing effects due to cooperative pricing setting and the increased willingness to pay for services improvements. Our empirical analysis based on data from the North trans-Pacific markets in October 2007 finds that member airlines of Star Alliance and Skyteam Alliance appear to charge significantly higher prices for through-tickets than the sum of segment fares on complementary routes, whereas for oneworld Alliance members, the upward and downward effects on airfares seem to counterbalance each other. Moreover, the price markup for through ticket is higher for business passengers than for leisure passengers.