Airline alliances: parallel or complementary?

Abstract

This article provides a rationale for the present trend towards complementary airline alliance formation, by studying the strategic behaviour of carriers that may decide whether to form an alliance (that may be either parallel or complementary) or stay alone.

Acknowledgements

I would like to thank Jan K. Brueckner, Inés Macho-Stadler and Rafael Moner-Colonques for advice and support. This research was undertaken with financial support from the Spanish Ministry of Education and Science (SEC2002-02506).

Notes

¹ These alliances are predominantly complementary, because they allow passengers to travel along a number of interline city-pair markets by using the network of different airlines. However, there remains some ‘parallel cooperation’ since airlines also rationalize interhub markets, where the network of several airlines overlap. See Brueckner (2001) for an analysis of the effects of airline alliances on these two kinds of markets.

² See Park et al. (2001), Park (1997), Brueckner and Whalen (2000), Brueckner (2001) and Flores-Fillol and Moner-Colonques (2007).

³ This is a hub-and-spoke network where A and B are the spokes and H stands for the hub.

⁴ In other words, the considered game is one shot and therefore players (airlines) can only play once. For instance, if 1 and 3 form a complementary alliance, they cannot play again and then 2 and 4 have to decide whether to form an analogous complementary alliance or remain nonallied. Similarly, if 1 and 2 form a parallel alliance, then 3 and 4 have to decide whether to form an analogous parallel alliance or remain nonallied.

⁵ The linear demand system could be derived from a utility function of the form: , where y is a composite good. Letting p ₁ and p ₂ stand for the price set by each duopolist, we can obtain the inverse demand system. Inverting and renaming leads to Q ₁ = a ₁ − bp ₁ + dp ₂ and Q ₂ = a ₂ − bp ₂ + dp ₁ with b ≥ d. Then, we assume equal demand intercepts (i.e. market size) and b = (3/2)d (with d normalized to 1).

⁶ When the interline market is priced jointly, the stability of the network requires nonarbitrage conditions to apply. These conditions are of two types. The first type prevents passengers willing to make a domestic trip from buying an interline ticket and then get off at the hub airport ; and the second type prevents passengers willing to make an interline trip from breaking down the trip into two parts .

⁷ Flores-Fillol and Moner-Colonques (2007) provide a complete analysis explaining the reasons why complementary airline alliances may be unprofitable.

⁸ The equilibrium travel volumes and profits are available from the author upon request.

⁹ A complete description of all the bounds ensuring positive values (fares, travel volumes, marginal costs and margins) and compliance with nonarbitrage conditions and second-order conditions in all the scenarios, is available from the author upon request.