Codeshare Alliances Research Articles

An option-based capacity control mechanism for code-sharing alliances

This study addresses capacity control problems in code-sharing alliances, which deal with the determination of member airlines' booking limits. We propose an innovative option-based capacity control mechanism to overcome the drawback of inflexibility in blocked seat allotment for a two-airline code-sharing alliance. The mechanism incorporates the concept of a straddle, an advanced option strategy in finance, to allow member airlines the flexibility to tackle not only downward but also upward demand variations during the booking process. We design simulation experiments and use a case illustration to show scenarios when the code-sharing alliance can benefit from the proposed mechanism.

Good or bad? Passenger feelings regarding code-share alliances among airlines

Code-share agreements among airlines are common in today's airline industry and have advantages for both airline operations and passenger itineraries. However, certain negative aspects associated with code-share arrangements can displease passengers and cause them to negatively react to their preferred airlines. This study hypothesized various scenarios demonstrating code-share alliances between passengers' preferred airlines and other partners. Then, perception data from 547 Taiwanese airline passengers were collected, and multinomial logistic regression analysis was applied to discover the determinants influencing passengers' behavioral intentions. The results revealed that code-share partners from developing countries, passengers' awareness of code-share schemes, and the perceived risk of service inconsistency among code-share airlines are the key drivers influencing passengers' feelings regarding code-share strategies. Those feelings, good or bad, have clear connections with passengers' coping behaviors in terms of favorable or averse reactions. Additionally, trip purpose, travel type and sociodemographic factors, such as gender, age, and monthly income, have various degrees of influence on passengers' feelings concerning code-shared flights. Furthermore, managerial implications are discussed.

Airport pricing and capacity: Schedule versus congestion delays

This study investigates airport pricing and capacity investment when passengers face schedule and congestion delays. Two countries' airports are served by each country's home carrier. Airports choose their charges on a per-flight and/or per-passenger basis. Given the general observation that carriers that compete on parallel international routes often form codeshare alliances to increase the schedule they are able to provide, we find the following. First, the first-best movement-related per-flight charges do not necessarily need to charge congestion delay costs if there is a positive externality that happens to compensate for the negative congestion externality. Second, when positive and negative externalities cancel out, choosing per-passenger charges alone (known as the second-best approach, in which per-flight charges are weight-related and become equivalent to per-passenger charges) can also lead to the first-best outcome. However, choosing movement-related per-flight charges alone (another second-best approach) cannot do so. Third, under the former second-best pricing approach, capacity investment could be globally efficient. However, under the latter second-best pricing approach, each airport overinvests.

Airport Pricing and Capacity: Schedule versus Congestion Delays

This study investigates airport pricing and capacity investment when passengers face schedule and congestion delays. Two countries’ airports are served by each country’s home carrier. Airports choose their charges on a per-flight and/or per-passenger basis. Carriers choose both quantities and frequencies. Given the general observation that carriers that compete on parallel international routes often form codeshare alliances to increase the schedule they are able to provide, we find the following. First, the first-best per-flight charges (rules) do not necessarily need to charge congestion delay costs if there is a positive externality (an increase in one carrier’s flights can reduce the schedule delay costs for its allied carriers’ passengers) that can compensate for the negative congestion externality. Second, when positive and negative externalities cancel out, choosing per-passenger charges alone and fixing the per-flight charges (known as the second-best approach) can also lead to the first-best outcome. However, choosing per-flight charges alone and fixing the per-passenger charges (another second-best approach) cannot do so. Third, under the former second-best pricing approach, each airport underinvests (overinvests) when the congestion delay effect dominates (is dominated by) the schedule delay effect. Interestingly, when the positive and negative externalities cancel out, capacity investment is globally efficient. However, under the latter second-best pricing approach, each airport overinvests.

Diversity in airline alliance portfolio configuration

Alliances in the airline industry operate as a basic strategy to stimulate competition and both the number and the types of alliances have increased over time. Each airline maintains alliances simultaneously with a variable number of partners. The set of airline's alliance partners constitutes its alliance portfolio. A central theme of these portfolios is the way in which partner selection improve performance. Is the alliance portfolio configuration based on either similar or different partners? We examine how the differences can arise from differences between the partners themselves, from resource complementarity, and from the partners structural positions in the network. The relations between these types of differences and whether they affect firm performance are studied. Codeshare alliances established between airline companies at a global level are analyzed to establish their effects on performance. In particular, the study comprises 135 alliance portfolios all of which from major airlines. The results suggest that structural homogeneity and complementarity improve performance and that alliance portfolio diversity favors network resource complementarity.

Open versus Closed Alliance Networks as a Precaution for Organizational Disruptions

This study explores effective alliance network structures that prevent organizational disruptions by focusing on two types of structures: open and closed alliance networks. Open and closed alliance networks both have potential effects that may help organizations prevent unexpected disruptive events. The former offers organizations great accessibility to diverse knowledge throughout the alliance network that may lead to organizational learning for the prevention of disruptions. The latter generates a social sanction that makes the organization mindful against disgraceful disruptions that may harm their trustworthiness in the alliance network. This study hypothesizes that the latter is more essential for preventing disruptions, and tests the hypothesis using longitudinal data of airline accidents or incidents and code-sharing alliances in the global airline industry. The analysis results show that (1) organizations in a closed alliance network are less likely to experience disruptions, and that (2) such a tendency strengthens when the organizations are stigmatized by their own previous disastrous events, and ultimately disappears when the industry is stigmatized by a disastrous event at the institutional level. The implications for the literature on organizational disruptions and strategic alliances are that organizational mindful behaviors to maintain trustworthiness are an important mechanism for preventing organizational disruptions, and that strategic alliance networks induce such a mechanism.

Entry, Stay or Exit: A Dynamic Model of Route Arrangements under Code-Share Alliances in the U.S. Airline Industry

Entry, Stay or Exit: A Dynamic Model of Route Arrangements under Code-Share Alliances in the U.S. Airline Industry

Sensitivity of Alliance Termination to Prealliance Conditions: Expectation Effects of Alliance Partners

Alliances are formed according to firms’ expectations about postalliance value generated by partners, which are based on certain conditions during the processes of selecting a partner and forming an alliance (i.e., the prealliance conditions). This study predicts that alliance terminations are likely to occur when such expectations are not satisfied, which is likely when partners’ postalliance characteristics are inferior to their prealliance levels, or when firms have heightened expectations of alliance partners because they have forgone superior potential partners before alliance formation. Results of an analysis using data of codeshare alliances in the global airline industry show that alliance termination results from reduced market complementarity or a reduced number of common partners relative to prealliance levels, and from the presence of not-chosen prealliance potential partners characterized by high market complementarity or large numbers of common partners. The results also show a general propensity for these effects to diminish as alliance duration increases.

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.

Embedded Networks and Suboptimal Resource Matching in Alliance Formations

Interest has been growing in alliance networks, and research has demonstrated several advantages of embedded networks, including joint problem solving. How embedded networks function as social capital and promote alliance formation has also been explored. However, less is known about constraints that they impose on firms’ extensive search for partners. In this study, we advance our understanding of the downsides of embedded networks by proposing that embedded networks facilitate alliance formations, but they may also cause suboptimal resource matching in alliance formations. Specifically, we predict that, in alliances where initial resource matching is more important than ex post collaborative activities, suboptimal resource matching is more likely when firms ally with partners with which they have pre‐existing direct or indirect ties and that such alliances decrease firm‐level resource utilization performance in operations. Using codeshare alliance data from the global airline industry, we find support for our predictions.

Paradox of Choice in Alliance Formation: A Network Embeddedness Approach

Prior research on network embeddedness suggests that relational embeddedness (i.e., the duration of previous alliances between two firms) and structural embeddedness (i.e., the number of partners common to both firms) facilitate alliance formation between firms. This study examines the opposite case—namely, the inhibition of alliance formation by relational and structural embeddedness. In this study, by considering these two types of embeddedness as drivers of partner choice sets, I propose that a choice set larger than a certain threshold size with sufficiently low variation in terms of the embeddedness of their options (i.e., relationally or structurally embedded potential partners) enables firms to recognize multiple options within the choice set. I also suggest that this in turn increases firms’ uncertainty about these options’ resources and reliability and inhibits the formation of alliances with them. These predictions are supported by empirical tests of code-share alliance data in the global airline industry from 1994 to 2006.

Airline alliances: Mobilizing network resources

Airline alliances represent examples of resource utilization across a network. This paper examines the need to distinguish between access to and mobilization of the resources held by allies. An ordinary least squares regression was applied to a sample from the Top International Airlines database. Our findings show that mobilization of the destinations of the partner companies through codeshare alliances has a positive and significant influence on the performance of airlines. Moreover, they suggest that the development of network resources mobilizing capability in increasingly dynamic and global environments will only generate an important source of competitive advantage when acted upon.

When Doesn't Network Embeddedness Work? The Role of Partner Choice Sets in Alliance Networks

Prior research suggests that relational and structural embeddedness (i.e., strength of relationships and strength of the relational structures) facilitate alliance formation and persistence. This study examines the opposite case, namely, the inhibition of these dynamics by network embeddedness. By considering network embeddedness as a driver of partner choice sets consisting of multiple embedded options (i.e., potential partners), I propose that firm's recognition of multiple options from the partner choice sets increases uncertainties about the options, inhibiting alliance formation and persistence with these options. These ideas are supported by empirical tests of data on codeshare alliances in global airline industry.

Airline Codeshare Alliances

The paper juxtaposes the challenges that airline codeshare alliances create for analytical information systems on the one hand and their motivation from a marketing perspective on the other. The authors review the state-of-the-art literature on potential marketing benefits and analyze the impact on airline planning systems. In this regard, revenue management systems are of particular interest. Based on a simulation study, the authors infer a severe impact of decentralized codeshare controls as currently widely implemented in the industry on revenue management performance. In the scenarios examined, complementary codesharing reduces alliance-wide revenues by up to 1 %. Losses increase when a carrier experiences high local demand or a high degree of codeshare demand, and disseminate over the whole network. Virtual codeshares also cause losses of 0.3 % to 1.5 % depending on the discount level offered by the marketing carrier and on the demand structure. Finally, the authors formulate a set of managerial implications based on these findings.

Management Insights

Management Insights

Retracted: Dynamics of Unclosed Triangles in Alliance Networks: Disappearance of Brokerage Positions and Performance Consequences

abstract We depart from previous research on brokerage advantages in interorganizational networks by shifting focus to the dynamics of brokerage positions. We investigate causes of the disappearance of these positions and its influence on organizational performance. Using a subnetwork consisting of a broker and its two partners as the unit of analysis, we postulate that the brokerage position disappears either when the two partners develop ties or when the ties between the broker and the partners dissolve. We predict that the patterns of interactions in which this subnetwork is embedded exert multilevel influences on the disappearance, and that embedded structures promoting persistence constrain brokerage advantages. Our analysis of codeshare alliance data in the global airline industry supports the theory and demonstrates that the persistence of brokerage positions decreases broker performance. The findings explain why brokerage positions rarely persist and why the persistence of brokerage positions does not benefit brokers.

The effect of code-sharing alliance formations and terminations on firm value: The role of co-specialization and scope extension

This paper examines how alliance co-specialization and scope extension affect firm value at the time of alliance formation and termination, and whether value creation upon alliance formation also explains value creation upon termination. Building on the relational view of the firm, we develop predictions that are tested using event study methodology and data on code-sharing alliances formed, extended, and terminated between 1994 and 2008. The findings suggest that from a stock market perspective alliance formation and termination can be seen as two interrelated events and that it is difficult to reverse initial valuations past the alliance formation phase. They also suggest that the stock market reacts to alliance formation more critically than to post-formation decisions such as alliance scope extensions and terminations.

The economic impact of the ATA/Southwest Airlines code-share agreement

This paper examines the economic impact of the code-sharing agreement between ATA and Southwest Airlines, the first time Southwest has chosen to enter markets via a code-share alliance rather than direct entry. We examine the impact of complementary code-sharing on incumbent airline's fares and passenger volumes and also the overall impact on consumer welfare in Denver airline markets. Empirical results show that air fares decreased and passenger volumes increased for incumbent carriers operating on code-shared routes. Further, we find evidence that this code-sharing arrangement increased both consumer and producer surplus. Thus, the well-known “Southwest Effect” is observed not only when Southwest enters a route directly, but also when it enters a route via a code-share agreement with another airline.

Airline alliances and entry deterrence

This paper investigates the role of code-sharing alliances on entry deterrence. One major carrier operates a network with one hub that links n cities. It competes with another foreign carrier on one international spoke, while the other spokes are domestic and monopolized. There exists a potential entrant on one of the domestic spokes. We demonstrate that entry may increase or decrease the major carrier’s profits, depending on the network size and the degree of product differentiation. When entry decreases the profits, an alliance between incumbents can be used as a credible threat to deter entrants with no significant cost advantage.

Vertical contracting between airlines: An equilibrium analysis of codeshare alliances

This paper studies the competitive effects of airline codeshare alliances. We consider an airline market with two firms offering two differentiated final products: a direct flight and an indirect flight between two destinations. An intermediate (complementary) flight is needed to complete the indirect flight. When the intermediate flight is offered only by a third airline, codesharing between the two complementary airlines eliminates double markup and lowers consumer prices. When the intermediate flight is offered only by the airline that also offers the direct flight, codesharing does not eliminate the double markup, but, interestingly, it again lowers final prices for consumers. However, if both the third and the direct flight airlines can offer the intermediate flight, then allowing codesharing leads to the exclusion of the third airline and to higher consumer prices.