Government and company contracts: The effect on service and prices in international airline markets

Abstract

This paper provides evidence of the impacts of the level of liberalization signed between governments and the type of codeshare agreement signed between airlines in international aviation markets. Our work distils two basic insights: (i) increasing the level of liberalization has a positive effect on service and overshadows the impact of codeshares; (ii) codeshare agreements are heterogeneous in the sense that pooling and royalty agreements generally result in higher airfares whereas block and free sale codeshares are generally associated with lower airfares, although the latter has the most significant impact. Additionally, none of the codeshare agreements impact market frequency. Our results suggest that reducing regulation in the international aviation markets is likely to increase service levels, and that carve outs on non-stop links is unnecessary, rather restrictions should be imposed on horizontal contracts such as the type of codeshare agreement signed by airlines.