Airline Alliances Research Articles

The effect of code-sharing alliances on airline profitability

Code sharing and global alliances both have been increasingly adopted by airlines worldwide in recent years. A growing number of airlines, therefore, are embedded in networks of multilateral “coopetitive” (i.e., cooperative, but competitive) relationships that influence their product offering, pricing strategies, operating efficiency, market power, and their overall successes. There has been considerable research analyzing the benefits for airlines from joining global alliances, including bilateral code-sharing partnerships. However, the joint effect of code-sharing and global alliances on airline performance has not been fully investigated. In this paper, we study how the use of code-sharing strategies and their structural embeddedness into global alliances may impact airline performance. Using a unique dataset compiled from Flight Global and Airline Business's Annual Airline Alliance Report, the paper empirically investigates the joint benefits of code-sharing partnerships and global alliances on airline profitability. The results based on a group of 81 airlines during the 2007–2012 period show that the profit margin of an airline is positively associated with the number of code-sharing partners it has. Furthermore, the profit margin gains from code-sharing are greater when an airline has a higher proportion of its code-sharing partners in the same global alliance; i.e., allied code-sharing partners. Finally, we find no significant evidence that the percent of comprehensive code sharing partnerships to total partnerships has an impact on profit margin.

Brand relationship between global airline alliances and their member airlines

Brands and branding are crucial to global airline alliances in establishing competitive superiority. Although most previous studies have focused on the operational and strategic advantages of alliances, this study investigates the brand relationship between global airline alliances and their member airlines. The equity effect of alliance and member brands on passenger purchasing is also examined. A conceptual model is proposed in which member airlines dominating local markets are assumed to directly influence alliance brands, whereas brands that are unfamiliar to passengers are assumed to influence passenger brand attitude toward an alliance through a halo construct. A stratified sampling survey was conducted at Taiwan Taoyuan International Airport to collect empirical data for evaluating the proposed model. Overall, 450 respondents were included: 137 from EVA Air (Star Alliance), 138 from China Airlines (SkyTeam), and 175 from Cathay Pacific (Oneworld). Through structural equation modeling, this study showed that passengers had dissimilar perceptions about member airlines in an alliance, implying that the global airline alliance brand has not been completely integrated with its member brands. The alliance and airline brands were mutually endorsed; however, their effects on passenger purchasing were unequal. Although enhancing passenger perceived equity of individual airlines considerably changed the purchasing of airline and alliance products, improving passenger brand attitude toward an alliance substantially affected the purchasing of alliance products but not airline products. In addition, passenger purchasing behaviors among the three global airline alliances were dissimilar. Finally, according to the results, managerial implications for alliances and airlines are provided.

A comparative performance analysis of airline strategic alliances using data envelopment analysis

As “open skies” agreements became more common among different countries and thus began to open up international routes to further competition, the global airline industry has undergone accelerated structural changes for the last two decades. These changes include the consolidation and expansion of airline strategic alliances throughout different regions of the world. Though airline strategic alliances are generally perceived to be a major driver for enhancing the operating efficiency and the subsequent competitiveness of participating member airlines, the concrete evidence supporting such a perception is still lacking in the literature. This paper is one of few attempts to evaluate the comparative efficiency of the strategic alliances among global airlines and then assess the managerial impact of airline alliances on the airline's comparative performances.

A bargaining framework for the airline alliance revenue sharing problem

The main objective of complementary code share flights is to increase scope of the partner's network. When complementary codeshared flights aim at maximising their combined revenue, it might lead to inequitable distribution of revenue. Through this work, we address this issue of achieving a fair division of the combined revenue generated by the alliance network. Information of an airline's valuation of their product is typically private and could be overstated to increase their share of revenue generated through codeshare agreements. We therefore develop a bargaining framework and derive the conditions under which a specific point in Core of the cooperative game can be achieved.

A bargaining framework for the airline alliance revenue sharing problem

The main objective of complementary code share flights is to increase scope of the partner's network. When complementary codeshared flights aim at maximising their combined revenue, it might lead to inequitable distribution of revenue. Through this work, we address this issue of achieving a fair division of the combined revenue generated by the alliance network. Information of an airline's valuation of their product is typically private and could be overstated to increase their share of revenue generated through codeshare agreements. We therefore develop a bargaining framework and derive the conditions under which a specific point in Core of the cooperative game can be achieved.

The effects of the airline strategic alliance group on member airlines' productivity during pre-mature stage

Airline strategic alliance groups have become an important part of the airline industry and tend to have dominance in many markets. Airlines want to join a strategic alliance group in order to expand their business and reduce their costs. However, the true benefits of a strategic alliance group still remain unclear. This study adopted panel regression model to analyse and reveal the effects of joining a strategic alliance group on airline performance. Our results suggest that alliance group effects are limited in terms of improving airline productivity during the global airline alliance group's pre-mature stage. Airlines joining the alliance group may not necessarily achieve significant productivity gains. Additionally, the study also did not find any significant effect of the size of alliance groups and membership duration on airline productivity change. However, the results suggest that as the number of members in the airline alliance group increases, member airlines' productivity will increase accordingly until a certain point but will then fall thereafter. Furthermore, the study indicates that an airline's productivity level may drop as its alliance membership duration increases initially until it reaches a certain point; after which, performance will start to increase over time.

IATA's new distribution capability and its impact on traditional forms of cooperation in the airline industry

Intensified competition, stagnating ticket sales and increasing operational costs cause airlines to seek for new sources of revenue. Ancillary services and complementing offers are therefore becoming crucial in the airline industry. Particularly in indirect distribution channels, the presentation of products and services, generating extra revenue, depends on the capabilities of the GDS. 'new distribution capability' (NDC) is a technology which will fundamentally change traditional GDS-based distribution processes used for decades. The quintessence of the NDC concept is to position the airline in the centre of an interactive offer-generation process. This impacts commercial cooperations with partner airlines. Nevertheless established forms of cooperations (Interlining/Code Sharing) will basically be maintained. Dynamic interaction between the partners enables more flexible collaboration which will significantly influence forms of cooperation. This affects cooperations within the framework of 'Global Airline Alliances'. Specific consequences and actual implications of NDC cannot yet be defined in detail.

The Effect of Joint Ventures on Airline Competition: The Case of American Airlines, British Airways and Iberia Joint Business

Regulatory obstacles have led international airlines to make extensive cooperation in the provision of service. The global airline alliances that link U.S. airlines to members in other states is the most visible form of cooperation. Moreover, when the alliance members obtain antitrust immunity, they can determine fares for interline trips that were not possible under traditional pricing arrangements. This research attempts to explain the effect of BA, AA and IB joint venture on transatlantic competition.Paired samples t-test results indicate that there is no significant difference in AA's economy airfare after the introduction of joint venture. Similarly, there is no significant difference in AA's business airfare. As for BA, the picture is vice versa in terms of economy airfare. There is a significant difference in BA's economy airfare. On the other hand, there is no significant difference in BA's business airfare.

Revenue management under horizontal and vertical competition within airline alliances

We present a model to optimize a competitor׳s behavior in a network revenue management game within an airline alliance. In particular, we model two forms of competition; horizontal competition with parallel substitutable flights and vertical competition with both competitors operating adjacent connecting flights in a code sharing agreement. We compute pure Nash equilibria with an iterative algorithm presented in an earlier paper. A computational study shows that the algorithm is also suited for computing Nash equilibria taking both types of competition into account and that code sharing increases revenues for both competitors. However, the difference decreases as the network size and mean demand increase.

Coopetitive Supply Chain Relationship Model: Application to the Smartphone Manufacturing Network.

Previous researches for understanding supply chain relationship have mostly focused on its vertical collaboration between buyers and suppliers. However, there have been some instances of volatile and stable collaborative relationships amongst competitors such as Apple-Samsung product manufacturer-component supplier relationship and airline alliances, respectively, which is recognized as coopetition. Even though there have been several qualitative studies and a number of game theory models on coopetition, it is rare to find any attempts on quantitative characterization of such coopetitive dynamic behavior in supply chain relationship. Hence, in this work, we formulated a MINLP model mathematically representing coopetitive relationships in a cost efficient supply chain network. In particular, the coopetition factor was newly introduced to measure the degree of coopetition among supply chain players and determine the optimal level of coopetition to engage in. The utility and practicality of the model were strongly demonstrated using a case study of a hypothetical smartphone supply chain network under different scenarios, thus proposing their strategically viable optimal interactions. Therefore, this exploratory study can herald a new era of global coopetitive business.

Four shades of Open Skies: European Union and four main external partners

The Open Skies agreements are in the centre of the European Union’s external aviation policy. They form the basis of liberalisation of aviation between the EU and the rest of the world, opening up markets and promoting fair competition. The progress made since the original road map in 2005 depended both on the priorities of the European side and the individual strategy of each external partner. This paper discusses the status of the EU’s aviation relations with four important partners: USA, Russia, Morocco and Turkey.Aviation liberalisation is at a different stage of maturity in the four examples. The evolution of traffic over time can give an insight into the impact that gradual liberalisation had in each case: total traffic grows faster when restrictions are lifted, but new demand is not spread equally across airports on either side. The impact on concentration, measured with the Herfindahl–Hirschman Index (HHI) at airport level, varies significantly between the various markets. Political, geographic, demographic and economic factors influence the airline network dynamics and lead to distinct patterns of expansion. Special emphasis is given to the analysis of the role of airline alliances, ownership limitations and specific obstacles such as the visa limitations and the Siberian overflight royalties.

Aeropolitics and Open Skies

In 1944, in Northwest Airlines, Inc. v. Minnesota, a case of first impression about the constitutional limitations upon state power to tax airplanes, Justice Robert H. Jackson wrote in a concurring opinion that, “[p]lanes do not wander about in the sky like vagrant clouds.” Rather, “[t]hey move only by federal permission, subject to federal inspection, in the hands of federally certified personnel and under an intricate system of federal commands.” Indeed, the “moment a ship taxies onto a runway it is caught up in an elaborate and detailed system of controls. It takes off only by instruction from the control tower, it travels on prescribed beams, it may be diverted from its intended landing, and it obeys signals and orders. Its privileges, rights, and protection, so far as transit is concerned, it owes to the Federal Government alone and not to any state government.” Concerns about how to design and manage the airways in the sky was not a concern for American jurists and lawmakers alone, but an international issue in the post-war 1940s.The international aviation community came together on safety issues, but stipulations respecting economic issues — such as protocols allowing foreign airlines to fly wherever they wanted in the other’s territory, as frequently as they desired, and at prices they chose — were elusive. In place of a comprehensive arrangement for international airline operations, therefore, bilateral and multilateral agreements facilitated commercial air travel. But, then, deregulatory impulses eroded protectionist philosophies in the late 1980s and early 1990s as the United States and Europe and other nations and regions pursued “open skies” policies that liberalized wide swaths of international travel. While not entirely free to wander about the sky uncontrolled, airliners could go to more destinations, more regularly, and less expensively.This article overviews the seminal issues of open sky policy, including antique laws of ownership and control. Also presented is a review of airline deregulation policy in the United States, argument in favor of the expansion of so-called cabotage rights allowing foreign carriers to fly domestic routes, and discussion of the emergence of strategic airline alliances. Finally, this article concludes with coverage of an intense controversy between major U.S. airlines, on the one hand, and Persian Gulf carriers, on the other hand, that risks open skies policies in the Middle East. In presenting these issues, this article aims to introduce the reader to the unusual and historically significant ways in which aviation laws are derived domestically and internationally, and in doing so, raise a general question about the welfare of aviation consumers overall. In conclusion, this article criticizes U.S. carriers seeking to reverse hard-won open skies policies. Indeed, the U.S. airline’s industry’s habit of looking to the government to get out of the way except when it comes to their own welfare is inconsistent with principles of free competition, avoids the real market-borne issue of product competition, and is hollow when asserted by carriers who have received substantial protections under U.S. bankruptcy law to survive in a global sector that should be performance — and not subsidy-based.

Assessing ‘meta-services’: customer's perceived value and behaviour

‘Meta-services’ are delivered by firms cooperating together through a network. How customers perceive such services has been scarcely studied. The main assumption here is that, after experiencing services delivered by networked firms, the consumers synthesise their perceptions in terms of the perceived value of the network and that this global assessment will better announce behavioural intentions than the commonly used satisfaction index. Passengers travelling on long-haul flights with a global airline alliance experience such ‘meta-services’ and were questioned through a dedicated survey to test a structural equation model. Most hypotheses are not contradicted by the data. Unlike most recent studies referring to perceived value, this concept is seen here as one-dimensional and is measured by a rather simple scale. This allows distinguishing the value concept from its determinants. Specific variables, such as effective coordination, information and harmonisation, proved also to be useful when measuring customers’ valuation of ‘meta-services’.

Product Quality Effects of International Airline Alliances, Antitrust Immunity, and Domestic Mergers

AbstractMuch of the literature on airline cooperation focuses on the price effects of cooperation. A key contribution of our paper is to empirically examine the product quality effects of airline cooperation. Two common types of cooperation among airlines involve international alliances and antitrust immunity (ATI), where ATI allows for more extensive cooperation. Additionally, this paper examines the extent to which domestic mergers affect the quality of international air travel products. The results suggest that increases in the membership of a carrier’s alliance or ATI partners and domestic mergers are associated with the carrier’s own products having more travel-convenient routing quality. Therefore, a complete welfare evaluation of airline cooperation and mergers should not ignore product quality effects.

Coopetition or Cooperation Under Alliance? AMC Competitive Dynamics Viewpoint

Airline companies join airline alliances to cope with the high level of competition in the airline industry. However, pressure within an alliance is substantial. Few previous studies have investiga...

Leisure Travel: Implications for Airline Alliances

The rationale behind the formation of airline alliances includes the reaping of scale and scope economies and the acquisition of marketing and branding advantages. To really add value to the airline customer, however, alliances should consider the purpose of travel, i.e. they should appreciate and understand the derived nature of the airline product. The relevant literature seems to understate this issue or at best focus on business passengers. Given the rising importance of leisure travel and tourism in the world economy, its implications should be explicitly assessed. The emergence of low cost carriers and the subsequent simplifications in the holiday packages offered by charter airlines have played a major role in boosting leisure travel in Europe at least. Still, the intelligent management of frequent flyer programmes and the creation of a seamless network in long haul (or even intercontinental) air travel may induce leisure passengers to opt for an allied airline instead. This paper addresses the topic by undertaking primary research in the form of semi-structured interviews with airline executives and structured questionnaires addressed to passengers. The interviewees are supportive of the view that alliances of network carriers may offer benefits to leisure passengers although they do recognise the competitive threat posed by low cost carriers. Similarly, the statistical analysis of the questionnaire results reveals that frequent flyers and more affluent respondents are more knowledgeable about strategic alliances and have a tendency to prefer allied carriers for long-haul but not for short-haul flights. This outcome may add to the understanding of airline alliances and consumer behaviour and have important implications for airline strategy at a global level.

Book Reviews

In Book Reviews, we review an extensive and diverse range of books. They cover theory and applications in operations research, statistics, management science, econometrics, mathematics, computers, and information systems. In addition, we include books in other fields that emphasize technical applications. The editor will be pleased to receive an email from those willing to review a book, with an indication of specific areas of interest. If you are aware of a specific book that you would like to review, or that you think should be reviewed, please contact the editor. The following books are reviewed in this issue of Interfaces, 44(5), September–October 2014: Analytics for Managers With Excel, Peter C. Bell and Gregory S. Zaric; Fair Revenue Sharing Mechanisms for Strategic Passenger Airline Alliances, Demet Çetiner; Applied Stochastic Processes, Ming Liao; and Hybrid Metaheuristics, El-Ghazali Talbi.

Consolidation or Fragmentation? European Competition Law in the EU Air Transport Sector: A Policy Analysis

This article analyses the priorities of European competition law in the air transport sector in the light of the ongoing process of the industry’s consolidation. The oligopolistic nature of the airline business results in a natural tendency towards its concentration. From the standpoint of regulatory oversight, the question is how to manage or counteract this tendency in order to achieve defined policy goals. In this vein, European competition law has departed from the model whereby the competitive process in itself is the priority and turned to an instrumental approach, with preference given to the welfare of customers. This analysis will highlight three policy areas relevant to the discussed subject. It begins with antitrust law, with special emphasis on the sector-specific phenomenon of airline alliances; then discusses merger control, especially in the context of pro-competitive remedies, and finally State aid, with particular focus on the effects of the compensatory scaling-down of operations which are imposed on recipients of a rescue and restructuring aid grant.

Robustness of airline alliance route networks

The aim of this study is to analyze the robustness of the three major airline alliances’ (i.e., Star Alliance, oneworld and SkyTeam) route networks. Firstly, the normalization of a multi-scale measure of vulnerability is proposed in order to perform the analysis in networks with different sizes, i.e., number of nodes. An alternative node selection criterion is also proposed in order to study robustness and vulnerability of such complex networks, based on network efficiency. And lastly, a new procedure – the inverted adaptive strategy – is presented to sort the nodes in order to anticipate network breakdown. Finally, the robustness of the three alliance networks are analyzed with (1) a normalized multi-scale measure of vulnerability, (2) an adaptive strategy based on four different criteria and (3) an inverted adaptive strategy based on the efficiency criterion. The results show that Star Alliance has the most resilient route network, followed by SkyTeam and then oneworld. It was also shown that the inverted adaptive strategy based on the efficiency criterion – inverted efficiency – shows a great success in quickly breaking networks similar to that found with betweenness criterion but with even better results.

An option-based hedging mechanism for managing the risk of overbooking in parallel airline alliances

In the context of parallel alliances, this paper proposes and describes an option-based mechanism that allows an airline to transfer bumped passengers to its alliance partner’s flight. The objective of this mechanism is to reduce the overbooking risk borne by the allied airlines. An analytical model is built to calculate the net benefit that can be obtained by the airlines. The simulation results confirm that the proposed mechanism can generate monetary and non-monetary benefits for allied carriers under many practical conditions.