International Airline Markets: On Government and Airline Contracts

Abstract

This paper provides evidence of the impact on frequencies and airfares of the type of codeshare agreement signed between airlines and the level of liberalization signed between governments in the international aviation market. Our work distills two basic insights: (i) increasing the level of liberalization has a positive effect on frequency which grows substantially and significantly as a function of the level of freedom and overshadows the impact of codeshares; (ii) codeshare agreements are heterogeneous in the sense that hardblock codeshares, pooling and royalty agreements generally result in higher airfares whereas free sale and soft block codeshares are generally associated with lower airfares. However, these effects may vary by fare class (e.g., premium and economy). Additionally, none of the codeshare agreements have a significant and consistent impact on market frequency. Our results suggest that governments and policy makers should liberalize the international aviation markets in order to increase frequency that stimulates reductions in airfares, and it further suggests that carve outs on the hub to hub links in a codeshare agreement may not need to be enforced, rather restrictions should be imposed on the type of codeshare agreements signed by the airlines.