Airline Partnerships, Antitrust Immunity, and Joint Ventures: What We Know and What I Think We Would Like to Know
Airline Partnerships, Antitrust Immunity, and Joint Ventures: What We Know and What I Think We Would Like to Know
Volodymyr Bilotkach 0 1
JEL Classification 0 1
0 Newcastle University Business School , 5 Barrack Road, Newcastle-upon-Tyne NE1 4SE , UK
1 Airline industry · Alliances · Codesharing · Antitrust immunity · Joint
2 Volodymyr Bilotkach
This paper offers an overview of the state of research on airline partnerships and related issues: antitrust immunity, and joint ventures. While at a high level the potential pro- and anti-competitive effects of various forms of airline partnerships are well understood; a number of important gaps in our knowledge remain. For instance, academic research has yet to develop a clear way to differentiate between codesharing with and without immunity, and joint ventures with the use of the conventional IO modelling apparatus. Developing such theoretical models can be useful for policy makers. Future empirical research should focus on understanding the effects of joint ventures-as well as evaluating efficiency benefits of airline partnerships-and determining whether multimarket contact and repeated interaction could have led to the competitive environment that is conducive to tacit collusion.
D43 · L13 · L40 · L93
The aim of this paper is to take stock of what we know about airline partnerships
and their effects on prices and other product characteristics; identify the gaps in our
knowledge; and suggest a research agenda for the near future. My key message after
reviewing the growing body of work on this subject is: while we have learned a lot,
there is a lot of work that remains to be done if we want to be a source of sound
policy advice on airline partnerships. Furthermore, the issue of airline cooperation
will remain policy-relevant for the foreseeable future.
Alliances between competitors were not invented in the airline industry. Joint
ventures, marketing, technology/product licensing, and research and development
partnerships can be found in many markets. However, it would not be easy to point
to a market where partnerships have become as important as in the airline
industry over the last 25 years. Member airlines that belong to the three global alliances
carry over half of all passenger traffic worldwide. While only a fraction of these
passengers travel on interline itineraries—change operating airline en route—airlines
and their passengers also benefit from these partnerships in other ways. The airlines
benefit from cost savings due to the joint use of airport facilities and coordinated
marketing, while their passengers have the ability to use airlines’ loyalty programs
on flights and in airport lounges that are operated by partner carriers.
The extent and importance of airline partnerships differ across the markets. In the
currently largest segment of global airline industry—the US domestic market—the
use of interlining and other forms of partnerships is minimal. Major network
carriers—American, United, and Delta—are capable of channelling almost all domestic
passenger traffic within their networks—including flights that are operated by both
mainline and regional airlines. US domestic partnerships played a somewhat more
important role before the merger wave of the last decade; since then, however,
interline itineraries in the US market have been a niche product that is used by a small
share of passengers.
On the other hand, members of the four joint ventures on the trans-Atlantic
market—narrowly defined as the market for travel between the US and the European
Economic Area1—control a majority of the seats on non-stop trans-Atlantic flights.
While exact extent of interlining within the joint venture networks cannot be
ascertained from the publicly available data, we can say that interline itineraries are very
common in this market, and many trans-Atlantic links carry predominantly
connecting rather than origin-and-destination2 passengers. Perhaps more interestingly, the
trans-Atlantic market is currently home to various types of airline partnerships: from
ad hoc arms’ length agreements to cost- and revenue-sharing joint ventures. The
latter essentially represents the closest thing to a merger in the current regulatory
Interestingly, there are indeed important gaps in our knowledge on the
matter. On the surface, there are no difficult issues: parallel partnerships—those
involving overlapping parts of the partners’ networks—are anticompetitive, while
complementary ones are pro-competitive, as they lead to the removal of double
marginalization—a classical result. If we add economies of traffic density to the
1 This includes the European Union plus Switzerland, Norway, and Iceland. We treat the United
Kingdom as an EU member for the purposes of this paper, as departure of this country from the European
Union will not happen before March of 2019.
2 In the aviation industry jargon, an origin-and-destination passenger is a passenger who does not
connect to or from other flights.
picture, however, partnerships can yield benefits to consumers even on the
overlapping parts of the joint network through lower average cost with higher
traffic volumes: this is known in Transportation Economics as economies of traffic
density. However, current theoretical research does not fully differentiate between
different forms of codesharing; between partnerships with and without antitrust
immunity; and between partnerships with antitrust immunity and joint ventures.
The issue of incremental benefits of deeper levels of cooperation between the
airlines is only partly addressed by the empirical body of work. The effects of
partnerships on efficiency—much promoted by the partner airlines in their
applications for antitrust immunity and joint ventures—have received only cursory
attention in the academic literature (due in part to limited data availability on the
As our understanding of the incremental benefits of closer forms of cooperation
is limited, we are somewhat in the dark with regard to the effects of the relevant
policy options. While earlier studies demonstrated substantial price decreases due
to antitrust immunity, more recent work shows only modest gains in this area.
Effects of joint ventures are as of yet not studied. It is not clear whether antitrust
immunity should be granted in an open-ended fashion as is the case now; or be
subject to periodic reviews as some in policy circles have suggested. We also are
agnostic as to the implications of repeated interaction and multimarket contact on
international routes; there is, however, clear evidence that multimarket contact
affects airlines’ competitive conduct in the US domestic market.
As full-fledged cross-border mergers in the airline industry are unlikely for
the foreseeable future, there will be demand for further work on airline
partnerships. I suggest the following lines of inquiry as the most promising here: first,
we should gain a better understanding of the implications of different forms of
codesharing, and more generally learn to distinguish between different forms of
partnerships in our modelling exercises. An evaluation of the incremental benefits
of joint ventures appears to be the most fruitful and useful line of inquiry here.
Second, as joint ventures currently only include some of the alliance members;
they have a potential to disrupt the current equilibrium. Alliance members that
are left out of the joint ventures may seek to form different partnerships and joint
ventures. Understanding the airlines’ incentives in this respect appears to be a
promising avenue for future research: both theoretical and empirical. Third, we
need to gain a better understanding of the effects of repeated interaction and
multimarket contact: we need to understand whether airline partnerships contribute to
a tacitly collusive environment in the industry. Last (but not least), I believe that
it makes sense to evaluate the effects of partnerships on non-price product
characteristics and efficiency—if suitable data become available.
The rest of the paper is organised as follows: in the next section, I introduce
the readers to various forms of airline partnerships. This is followed by a review
of the relevant literature. Extensive discussion of both pro- and anti-competitive
effects of these partnerships is offered next. Afterwards, I discuss the current gaps
in research: both theoretical and empirical. Then, I propose a research agenda for
the future, and conclude.
2 Forms of Airline Partnerships, and Policy Response
The key policy-relevant forms of airline cooperation include: alliance membership;
codesharing; antitrust immunity; and revenue-sharing joint ventures. It is also
common in the academic literature and in policy cases to differentiate between
parallel and complementary partnerships. The former refer to partnerships that cover the
overlapping parts of the partner airlines’ networks, whereas the latter apply to
interline trips: journeys where the passenger changes carriers en route. This distinction
played a crucial role in earlier deliberations that were related to antitrust immunity
requests by the British Airways/American Airlines partnership.
For the purposes of this discussion, the term “alliance membership” includes any
other cooperative agreements that do not cover direct arrangements between the
carriers for sales of seats on partner airlines’ flights. Examples include: frequent flier
program partnerships; agreements on shared use of airport facilities; joint
marketing efforts; etc. Currently, many carriers implement such agreements through their
memberships in one of the three global airline alliances; however, ad hoc and even
limited cross-alliance partnerships are also not uncommon.3 Such arrangements do
not affect the pricing of interline itineraries, and may even be entered into by
otherwise unrelated carriers: for example, a carrier that flies into a hub airport may
subcontract its ground handling to the hubbing airline.
Codesharing generally refers to the airline’s including partner airlines’ flights
into its network, and entering into an arrangement to feed its passengers to the
partner airlines’ flights. Codesharing agreements can either be route-specific or cover
substantial parts of the partner airlines’ networks. Codesharing frequently comes
hand-in-hand with other alliance-type arrangements—such as frequent flier program
partnerships. Not all of the codesharing arrangements occur within the three global
alliances; outside of alliance and limited cross-alliance partnerships of this sort do
Codesharing itself takes several forms—depending on the arrangements that the
airlines make for actually selling the seats on the partners’ flights. Overall, the
spectrum of such arrangements ranges from “blocked-space” to “free sale” agreements.
While codesharing agreements themselves are not publicly disclosed, it is my
understanding from communicating with the people who are familiar with the matter that
initially the agreements were predominantly of a “blocked-space” nature, whereas
currently airlines within global alliances are moving more towards the “free sale”
types of arrangements.
The pricing of interline trips under codesharing arrangements is done in a
variety of ways: sometimes a ticketing carrier can have discretion on price setting, with
the operating carrier receiving a payment for accepting the passenger from the
partner airline. In other cases, the operating carrier sets “sub-fares” for accepting the
partner airlines’ passengers; these “sub-fares” are added to the total cost of interline
3 For instance, Air France—a Skyteam alliance member—allows its frequent fliers to earn miles on
some of the flights that are operated by Finnair (a oneworld alliance carrier) and by Austrian Airlines (a
Star Alliance member that is owned by Lufthansa).
itineraries. Under antitrust immunity, partner airlines obtain the explicit right to set
the fares jointly for the interline itineraries. Specifics of price-setting for the interline
trips are usually not publicly disclosed.
At the basic level, a “blocked space” codesharing agreement specifies a certain
number of seats that a partner airline is allowed to sell on a given flight as the latter’s
own. For instance, a KLM flight from Amsterdam to Berlin would have 10 seats that
Delta would be able to sell under its own flight code. One can think about those 10
seats as the virtual Delta Air Lines flight from Amsterdam to Berlin. In the same
way, KLM will have the right to sell 20 seats on Delta’s Amsterdam to Detroit flight
under its own flight code: a virtual KLM flight between the two cities. In the end, if
Delta blocks seats on its Amsterdam—Detroit service to, say, five different alliance
partners, the Delta flight turns into five virtual flights that are operated by a
single aircraft. Under the blocked space codesharing arrangement, each of those virtual
flights will have a certain fixed number of seats.
Blocked space agreements are not very flexible. If we return to our example, once
KLM has sold its quota of 20 seats, it will be unable to sell further tickets under its
flight code—even though it might be able to bring more customers to this flight.
Simultaneously, another carrier might be unable to sell its quota—which means
that the seats on its virtual flight will remain unoccupied. “Free sale” codesharing
arrangements are a way to tackle this problem. One can think about free sale
agreements as the same virtual flights as before, but with flexible capacity. Under such an
arrangement, if KLM or another codeshare partner with Delta on our hypothetical
Amsterdam to Detroit service is able to bring a passenger and sell a seat under its
own flight code, this airline obtains the right to sell such a seat as long as the flight
is not full. Of course, the “blocked space” and “free sale” arrangements are the two
extremes, and in fact some intermediate agreements are also implemented by the
Multi-airline codesharing agreements led to the emergence of global airline
alliances: each of the three current alliances started from a partnership between a US
and an EU carrier. Oneworld developed around the partnership between American
Airlines and British Airways; SkyTeam evolved from the Delta Air Lines/Air France
alliance; and the current Star Alliance is the expanded United Airlines/Lufthansa
partnership. The last 10–15 years witnessed a substantial increase in the size and
depth of airline alliances in international air transportation.
From a size perspective, more and more individual airlines have decided to join
one of the three remaining global airline alliances. For example, while the
respective alliances were founded between 1997 and 2000 by a total of 14 airlines, the
number of member airlines grew to 52 in 2016 27 in Star; 13 in SkyTeam; and 12 in
oneworld. The alliances currently occupy a dominant position in the global aviation
market. Specifically, in 2008 the combined world-wide market share of the three
‘mega alliances’ was about 59%. Airline alliances have particularly high market
shares—at least 70%, based on network capacity—in inter-continental markets, such
as the market between North America and Europe.
The nature of the efficiency benefits that stem from codesharing appears to be
different from those that are due to alliance membership. Whereas alliance
membership mostly reduces the fixed operating costs, codesharing—by attracting additional
traffic through lower prices for interline itineraries—allows the airlines to take
advantage of economies of traffic density.
Antitrust immunity refers to the right of the partner airlines jointly to set the fares
within their joint network. This form of cooperation can be viewed as an add-on to
codesharing; at this time, all groups of carriers that are covered by antitrust
immunity are parts of one of the three airline alliances. Cross-alliance partnerships that
are covered by antitrust immunity currently do not exist. The early studies of
airline cooperation focused on the possibility of reduced competition by parallel airline
partnerships as a result of antitrust immunity. A policy response to this concern has
been the carve-outs—or exemption—of overlapping parts of the airline networks
from the immunity provision.
Joint ventures can be thought of as a further add-on to multi-carrier
partnerships that operate under antitrust immunity. According to the US DOT decision that
approved the corresponding joint venture between the key Skyteam alliance
partners, the JV was supposed to increase the availability of discounted airfares, as well
as to generate additional efficiency benefits. Neither of the two claims have been
verified empirically, and I suggest that an analysis of the competitive effects of the
trans-Atlantic joint ventures is due.
Given the identified increase in the size and depth of international airline
cooperation, the question of whether such a development is in the interest of the consumer
immediately suggests itself. Although it is undisputed that consumers gain from
airline alliances, it is unclear whether the observed increase in the degree of
cooperation is necessary to maximize these benefits. Furthermore, a detailed understanding
of the economic effects of airline alliances is pivotal for an overall assessment of
their respective costs and benefits for society.
Before we continue, let us take a quick look at the extent of the dominance of
airline alliances and joint ventures on the trans-Atlantic market: defined here as
the market for commercial passenger air travel between the USA and the European
Economic Area. With the use of data from the T100 International Segment
dataset, which is collected by the US DOT (this dataset is essentially a census of all
commercial flights between the USA and the rest of the world), I calculated annual
passenger market shares of the airlines that belong to each of the three global
alliances—provided they have at any time been included into a partnership covered by
antitrust immunity or joint venture.4 Note that the shares are computed for regular
scheduled services only; charter flights have been removed from consideration.
Figure 1 shows the evolution of the market shares of the key partnerships from 2001
until 2016. I use 2001 as the starting year here because this is the first full year after
Skyteam—the youngest of the three current alliances—was founded.
4 For instance, Continental Airlines and US Airways are included in the “other” category here. Even
though Continental has been a member of Skyteam alliance, it acted as an independent competitor in the
trans-Atlantic market. The same applies to US Airways, which was a Star Alliance member until US
Airways’ recent merger with American Airlines.
Note that before 2008 we have four partnerships in our picture: Northwest-KLM
alliance operated as an independent entity until the Delta-Northwest merger, at
which time the alliances also merged.
The following facts stand out in Fig. 1: first, 85% of passengers who cross the
Atlantic Ocean in 2016 on non-stop flights between the USA and Europe
(admittedly, a small proportion of those passengers started their trips behind these areas
and/or continued their journeys beyond them) flew with one of the key alliance
members. Second, the largest events that increased the dominance of airline
partnerships in this market have been the United/Continental and (to a lesser degree)
American/US Airways mergers in 2011 and 2015 respectively. These consolidation events
have effectively removed decent-sized independent competitors—Continental
Airlines carried 8.7% of non-stop US-Europe traffic in 2010,5 and US Airways’ market
share in 2014 was 4.8%—from the market. Third, the Delta/Northwest merger—and
the subsequent consolidation of the Northwest/KLM partnership into Skyteam—
made this alliance the largest player on the trans-Atlantic market.
Interestingly, oneworld alliance’s market share has been in slow decline for most
of the first decade of this century, and started growing afterwards. This could
potentially be attributed to the fact that prior to 2010 the American Airlines/British
Airways partnership did not have antitrust immunity. Several applications that were
made by the partner airlines were declined due to the carriers’ joint dominance on
the key trans-Atlantic routes (eight out of ten largest trans-Atlantic segments by
nonstop passenger traffic include London Heathrow airport as one of their endpoints).
When the AA-BA joint venture was approved in 2010, there was a reversal of
fortune for the alliance, which was reinforced by the American Airlines/US Airways
merger in 2015.
5 This market share made Continental Airlines the fifth-largest airline in the trans-Atlantic market that
Last (but not least), since 2010 most of the non-stop trans-Atlantic flights that
were operated by the alliance members are also part of respective joint ventures.6
Overall, 81% of the passengers who flew between the USA and Europe in 2016 were
on a flight that was operated by one of the joint venture member airlines (87% if one
adds Virgin Atlantic to the list—the airline has a joint venture with Delta, without
being a member of either of the three global alliances).
The analysis of airline partnerships in the literature has mostly dealt with the price
effects of airline cooperation. These studies often do not clearly distinguish between
alliances with and without antitrust immunity. The theoretical underpinnings of the
functioning of an airline alliance have been developed by
Barla and Constantatos (2006)
. These models treat
alliances as effective mergers: the partners maximize joint profits over the network—
removing double marginalisation on interline routes in the process—while obtaining
increased market power on overlapping portions of their networks. Efficiency
benefits of the partnerships are (where they are modelled) achieved via economies of
traffic density, which emerge as lower interline fares increase passenger traffic over
the joint network. Bilotkach (2007a) considered a model of an airline that chooses
whether to partner with a carrier with a partially overlapping or purely
Jiang et al. (2015
) consider a more complex setup, with four airlines
and up to two alliances that are formed endogenously in the model.
Chen and Gayle
suggest that the formation of airline alliances could yield market foreclosure.
Brueckner and Pels (2005)
model consumer welfare effects of consolidation of two
alliances; this study was inspired by the joining of KLM/Northwest and Skyteam
partnerships following the Air France/KLM merger.
Brueckner and Proost (2010)
theoretically model the welfare effects of carve-outs.
Models of competition between alliances have been developed by
Flores-Fillol and Moner-Colonques (2007)
These models use different assumptions: for example, Bilotkach assumes price
Brueckner and Whalen (2000)
consider the case of two alliances that
share one hub and compete in quantities. Bilotkach’s model is also able to shed some
light on the differences between cases of alliances with and without antitrust
immunity; the model suggests that immunity will not lead to welfare benefits beyond what
can be achieved via codesharing without the partner airlines’ coordinating their
Zhang and Zhang (2006)
propose a more general model of rivalry between
alliances, where alliance members are modelled as maximising their profit plus a
share of the partner’s profit. With the exception of Brueckner and Whalen’s model,
the theoretical studies of competition between alliances point out that the alliance
6 The Skyteam joint venture was approved in 2008, followed by Star Alliance in 2009 and oneworld in
2010. Some of the smaller member airlines—such as SAS and Finnair—are not included in the
respective joint ventures, so that the market shares of joint ventures are slightly lower than those of alliances.
members find themselves in a prisoners’ dilemma type of situation. When only one
alliance is formed, alliance members’ profits are higher than if they are out of the
alliance. When two alliances are formed, each airline ends up with a lower profit as
compared to the situation without alliances. Entering into an alliance thus becomes
akin to the defection strategy in the prisoners’ dilemma.
While in theory airline partnerships should have an effect on non-price product
characteristics, little work has been devoted to evaluating this aspect of alliances.
Bilotkach (2007b) models airline alliances that choose prices and the degree of
schedule coordination, while
Czerny et al. (2016
) evaluate the effects of alliances on
load factors (the percentage of available seats that are occupied by paying
passengers) and aircraft sizes.
Adler and Hanany (2016)
evaluate the effects of codesharing
with and without immunity on prices and flight frequencies. They find that while the
airlines are best off with immunity; the passengers’ welfare is maximised when the
airlines codeshare without antitrust immunity. Additionally,
offer a general discussion of the sources of efficiency benefits that are
brought about by the airline alliances, with an emphasis on the effects of antitrust
immunity on efficiency.
Bilotkach and Hüschelrath (2011)
provide a more
comprehensive survey of the likely effects of antitrust immunity and codesharing.
Not surprisingly, empirical studies of international airline partnerships have
mostly focused on price effects
(Oum et al. 1996; Park and Zhang 2000;
Brueckner and Whalen 2000; Bilotkach 2007c; Whalen 2007; Brueckner 2003; Brueckner
et al. 2011)
. The former two studies essentially compare airfares on routes that are
covered by partnerships with those in non-allied markets, while the latter five papers
are concerned with measuring the price effects of antitrust immunity as opposed to
partnerships without immunity. The general consensus in the literature is that
partnerships with immunity benefit interline passengers, who enjoy lower prices. Price
decreases tend to be attributed to the removal of double marginalization. However,
this is done based on theoretical supposition rather than hard evidence: after all, the
specifics of the codesharing agreements—which would allow shedding more light
on the mechanisms behind price decreases—are not publicly available. The general
consensus is that antitrust immunity does decrease airfares; however, the magnitude
of this effect appears to be declining over time.
Wan et al. (2009
) focus on evaluating the price effects of airline partnerships on
overlapping parts of the partner airlines’ networks. They find that those effects differ
Zou et al. (2011
) also document differences in price-setting across
Alderighi et al. (2015
) evaluate a sample of offered prices from the
European markets. They find that codesharing increases the general price level, and
also that the marketing carriers tend to quote higher prices for codeshare services as
compared to the operating carriers.
Bilotkach and Hüschelrath (2013)
that is consistent with antitrust immunity’s leading to market foreclosure: Alliance
members increasingly do not accept interline passengers from outside the
immunized partnership. In their later work Bilotkach and Hüschelrath (2017) evaluate the
incremental effects of joint venture on the partner airline’s trans-Atlantic network.
The study finds that joint venture partners add capacity on flights between their hubs
at the expense of other parts of their network. This finding is supported in part by
Fageda et al. (forthcoming). Another interesting finding is that joint venture flights
feature lower load factors as compared to flights by partner airlines with antitrust
immunity outside joint ventures. This can be interpreted as evidence that the
promised efficiency benefits of joint ventures have so far failed to be realised.
Codesharing in US domestic markets has also received some attention in the
Ito and Lee (2005)
present some stylized facts about this practice. In their
Ito and Lee (2007)
find that most of the codesharing itineraries in the US
market are not actually interline trips: while the marketing carrier changes, the
operating airline does not. They term this practice “virtual codesharing”, and also find
that such virtual codesharing itineraries are priced lower than the otherwise identical
“online” trips: journeys that do not involve change in marketing carrier.
et al. (2004
) also find that codesharing decreases fares on the affected US domestic
routes. They attribute this effect to increased competitive pressures following the
establishment of the partnership. Data availability for the US domestic market also
allows—unlike for international routes—structural econometric analysis. Such
studies are offered by
Armantier and Richard (2008)
4 Benefits of Airline Partnerships
4.1 Double Marginalization
Early applications for codesharing and antitrust immunity emphasized the
complementary nature of an interline itinerary: a trip that consists of two or more segments
that are operated by different airlines. It was further suggested that cooperation
between the providers of the two complementary flight segments would result in
a lower price for the interline trip as compared to the case where such cooperation
would not be allowed. The well-known double marginalization result was invoked
for this purpose: when two monopolists cooperate in pricing the composite good
that consists of two complementary products, the price will be lower than in the case
where each monopolist prices its component separately.
Applying this reasoning to airline cooperation, we can suggest that the pricing of
interline trips changes fundamentally when codesharing is implemented; and
pricing may change when antitrust immunity is granted to the airlines that operate a
codesharing agreement. This is in line with what the academic literature indicates.
Further, the empirical studies have demonstrated that antitrust immunity appears to
reduce the interline fares to a greater extent than does codesharing alone. At the
same time, there is no clear theoretically sound argument for why this should be so.
But one mechanism could be that the antitrust immunity yields higher load factors,
with the airlines’ passing cost savings to the passengers—yet, it is not clear why
this theoretically should be so. In fact, while cases of no cooperation and
codesharing with antitrust immunity can be modelled in a relatively straightforward way, the
intermediate case of codesharing without immunity has not been properly discussed
in the literature.
Overall, as far as the removal of double marginalization is concerned, the central
policy issue, in my opinion, is understanding whether and to what extent antitrust
immunity can further reduce interline fares, as compared to simple codesharing.
Empirically, this effect is indeed present; however, the exact mechanism that
underlies the price decrease needs further examination.
I can suggest the following ways for antitrust immunity to put downward pressure
on interline fares:
• Partner airlines’ ability to use codesharing arrangements, which were
off-limits to them without antitrust immunity; this could be the case, for instance, if
antitrust immunity allows the possibility for the airlines to switch from blocked
space to free-sale codesharing.
• Partner airlines’ ability to set fares jointly for interline trips without codesharing.
Antitrust immunity should technically allow the airlines to set prices jointly for
interline trips that involve a change of both operating and marketing carrier: the
interline trips that do not technically involve codesharing as described above.
• Partner airlines’ ability to take full advantage of codesharing arrangements:
genuinely more complete removal of double marginalization. There is, however, no
clear model that would allow us to compare the extent of removal of double
marginalization under codesharing with and without antitrust immunity.
4.2 Product Quality
With respect to the impact of airline partnerships on non-price product
characteristics, the following effects are relevant: first, partnerships can yield increased
frequency of flights between the partner airlines’ hub airports. In the most extreme
cases, codesharing causes the emergence of such non-stop services. For instance,
Amsterdam-Detroit services might not be sustainable without codesharing
agreement between KLM and Northwest, and later Delta. In the same fashion, cessation
of an alliance can lead to such non-stop flights being discontinued: this is what
happened to Austrian Airlines’ Vienna-Atlanta service after its alliance with Delta fell
apart in 2000. Even if additional seats on such non-stop flights are filled with
connecting passengers, travellers who fly non-stop between the hubs still benefit, as they
are now more likely to be able to take a flight that is closer to their most preferred
Partnerships can lead to better scheduling coordination. This reduces the total
travel time, and can increase demand for the allied services. Bilotkach (2007a, b, c)
shows that codesharing that is coupled with antitrust immunity leads to better
scheduling coordination as compared to a partnership without immunity. Further, alliance
membership can increase the value of the alliance member’s frequent flier programs,
as travelers now have more options for earning and redeeming their miles.
The above issues should be examined from a somewhat different angle in light of
the recent consolidation events, which led to effective mergers of alliance activities
following the airline mergers. Consider as an example Delta Air Lines’ acquisition
of Northwest: even if this event does not change the number of non-stop flights from
Delta hubs to Paris and Amsterdam, the following things can happen:
First, changes in scheduling could lead to changes in effective frequency of
service on individual one-stop markets: for instance, where connections to some
airports could have been available via both Amsterdam and Paris prior to the merger,
the merger could lead to the emergence of endpoints, connections to which are
available via only one of these airports, which thus diminishes effective competition.
Second, by offering more route options between the same endpoints, the
alliance—especially within a trans-Atlantic JV—will get more opportunities to
pricediscriminate across these route options: for example, an option with shorter
connecting time may be priced higher. That is, competition between two potentially
vertically differentiated products will be replaced by a multiproduct monopolist—to
the extent that is allowed by competition with other alliances—which is generally
detrimental for consumer welfare.
The efficiency benefits of airline cooperation involve a reduction of the fixed costs
through cost synergies that are achieved through the shared use of airport facilities
and joint marketing and other operations—as well as a reduction of variable costs
that are due to increased load factors, working through economies of traffic
density. These benefits have been frequently alleged by applicants for antitrust
immunity, and assumed by the regulators when approval was granted. However, in the
academic literature there is no empirical study of which I am aware that quantifies
these efficiency benefits. Further, it appears that as the airlines request more freedom
in the cooperative setting of prices, frequencies, and schedules, they increasingly
emphasize efficiency benefits as compared to the removal of double marginalization
to rationalize their requests.
I have indicated above that the reduction of variable cost through the exploitation
of economies of density will likely be directly related to the extent of the removal of
double marginalization. That is, this particular efficiency gain is likely to be
associated with codesharing/antitrust immunity/ joint ventures. In this respect, the
following questions arise:
What is the size of the cost reduction effect that is due to economies of traffic
density? Available estimates are dated.
Caves et al. (1984
) suggested that a 10%
increase in load factor decreases the airline’s total cost by about 2.5%: if an
alliance increases its load factor from 70 to 90%, this would decrease the total cost
by about 7%).
Brueckner and Spiller (1994)
suggest a 3.75% decrease in
marginal cost per 10% increase in load factor.
Do joint ventures yield economies of density benefits beyond what is achieved
via codesharing and antitrust immunity?
5 Potential Anti‑competitive Effects of Airline Partnerships
The most widely recognized—both in the academic literature and by
policy-makers—potential anti-competitive effect of airline cooperation is the reduction of
competition by parallel alliances—especially where the partnership is covered by
antitrust immunity. This concern effectively prevented the American
Airlines/British Airways partnership from obtaining antitrust immunity until 2010, and led to the
emergence of carve-outs for the overlapping parts of the partner airlines networks as
a remedy in cases where antitrust immunity was granted.
Bilotkach and Hüschelrath (2011)
further suggest the following potential
anticompetitive effects of cooperative agreements between the airlines: first, airline
alliances can create entry barriers by increasing the required scale for an airline to
compete successfully with the incumbents. At this time, this appears to be a larger issue
for the trans-Atlantic market than for such important segments of the global airline
industry as the North America/Asia, EU/Asia, and EU/Australia markets. For the
latter, the Gulf carriers Emirates and Etihad have been able to establish themselves
as important carriers while staying out of the global alliances.
Second, airline cooperation—especially partnerships that are covered by
antitrust immunity, and joint ventures—can create the potential for market
foreclosure. The potential for market foreclosure arises as the airlines become unwilling to
accept interline traffic from carriers that are outside of the partnership. This
eventually leads to the outside carriers’ reducing frequency and passenger volumes on
flight segments to/from hub airports of the airlines that operate under immunity.
One important implication of market foreclosure is that this effect can potentially
decrease competition on all of the routes that originate at the hub airports of the
airlines that participate in the alliances that are covered by antitrust immunity—
including one-stop markets that originate at such hubs (e.g., Amsterdam/Phoenix
route). After the granting of antitrust immunity to the American Airlines/British
Airways partnership (within the relevant joint venture), most of the non-stop
transAtlantic flight segments involve at least one hub airport of a carrier, which is a
member of the immunized alliance. What looks like market foreclosure, however,
may amount to network optimization by the alliance members: for example,
American Airlines does not send as many passengers to Paris as before because it channels
more traffic via London.
Third, airline partnerships—especially those that operate under antitrust
immunity—can create an environment that is more conducive to collusive behavior.
Immunized partnerships stipulate a higher degree of cooperation as compared to
more arms-length relationships, and are potentially more stable. This concern is
(in my opinion) especially relevant given the current structure of the trans-Atlantic
airline market, as recent airline consolidation events have led to several previously
important competitors’ leaving the industry. The relationship between the number
of competitors and the ease of collusion is quite well established in the industrial
Airline partnerships can have implications for the partner airlines’ network
development: specifically, it has been empirically demonstrated for the US airline
industry that an airline is less likely to enter with non-stop service in those markets that it
serves with a one-stop flight
. If we apply this logic to the airline
partnerships: an airline that enters a partnership—especially where antitrust immunity is
present—may choose to put on hold its plans to open up new trans-Atlantic routes,
or even close down some of the segments in its network, choosing instead to channel
the traffic via its partner’s hub. Smaller carriers that operate within an alliance—such
as, for instance, Eastern European airlines—may concentrate on feeding traffic to
their larger alliance partners instead of developing their own networks.
6 Issues Solved and Unsolved: Theoretical Analysis
The economics of codesharing seems simple enough at first glance: airlines sell
seats on each other’s flights, and if they are unable to directly coordinate prices—
there is no antitrust immunity—they at least could set different sub-fares for their
partner airlines’ interline passengers as opposed to the passengers who connect from
outside the alliance network. Cooperation also increases flight load factors, which
reduces per-passenger cost through economies of traffic density. Fixed costs could
also decrease through increased efficiency: due to, for instance, joint use of airport
facilities or joint marketing efforts.
Codesharing with antitrust immunity—joint price setting for the interline trips—
is essentially a version of the removal of double marginalisation. The segments in
the interline itinerary—operated by different alliance partners—are nothing but the
two complementary products, and the classical result of a lower price under
coordination applies. In the same way, coordination of service quality parameters—such as
scheduling—could lead to higher product quality—more convenient schedules for
the interline passengers—following
Adding economies of traffic density to the picture complicates the story
somewhat. This phenomenon is typically included in the theoretical models as marginal
cost that is decreasing in traffic on a segment of the airline’s network; a linear
relationship between cost and traffic is typically assumed. While this formulation seems
simple, the analysis actually gets very tedious very quickly. Consider a simple
network structure, as in Fig. 2 below, which is adopted from
we have two airlines operating overlapping hub and spoke networks. Traffic on,
for instance, H1–H2 segment of this network will include passengers traveling in
H1–H2, H1–S3, H1–S4, S1–H2, S2–H2, S1–S3, S1–S4, S2–S3, and S2–S4 markets.
While profit maximisation problems in this setting do have closed-form solutions,
those are not amenable to conventional comparative statics. Starting from
Brueckner’s seminal work, a number of theoretical models of the effects of airline
cooperation under immunity had to resort to simulation exercises: varying values of key
parameters to evaluate the effects of partnerships on prices and welfare in different
markets throughout the joint network.
In the network that is depicted in Fig. 2, the main trade-off here is between
increased market power and lower per passenger cost in the H1–H2 market
following establishment of the airline partnership. Brueckner’s original simulation analysis
demonstrated that—despite the market power effect that is present in the hub-to-hub
market—the overall welfare effect of airline cooperation is positive.
Overall, the theoretical studies of airline partnerships have outlined the expected
effects of airline cooperation, and provided an inspiration for the empirical work on
this issue. The body of theoretical literature is, however, not always careful with
how the specifics of airline partnerships are modelled. Most important, the
theoretical distinction between alliances with and without antitrust immunity is weak.
Many models assume price coordination between the airline partners: alliances with
immunity. While those models do offer a comparison of alliance equilibrium with
that without airline partnerships, they are usually silent on how alliances without
immunity compare to partnerships that have antitrust immunity. Unfortunately, this
is not a straightforward problem:
attempted to introduce
differentiation between alliances with and without immunity in a model of competing
partnerships. The key assumption in his model is that without price coordination airlines
are able to charge different sub-fares to interline passengers that connect to their
flights from their partner airlines’ flights, as compared to passengers who arrive
from non-allied airlines’ services. In that model, antitrust immunity did not reduce
interline ticket prices beyond what was achieved by codesharing without immunity.
Another potentially interesting topic that is not covered by the theoretical body of
work is the issue of potential differences in the outcomes of various types of
codesharing agreements. Generally, codesharing agreements can be placed in a
continuum between blocked space arrangements on one side and free sale agreements on
the other. Under a blocked space arrangement, an airline obtains a fixed number of
seats that it can sell on a partner airline’s flight as its own. On such itineraries, the
operating carrier might change, but the marketing carrier will not. Once this quota
is exceeded, the airline must either stop selling tickets for that flight, or may still
be able to feed interline passenger to its partner airline, with the latter selling those
seats as its own at an appropriate sub-fare; in this case, the itinerary will show the
change of both operating and marketing carrier. Under free sale arrangements, each
airline can sell seats on the partner airline’s flight as its own, as long as there are
seats available: there are no capacity restrictions. Free sale arrangements are more
flexible than blocked space ones, and they are becoming more popular as well. The
implications of different forms of codesharing—both with and without antitrust
immunity—would be an interesting issue for future research.
As was mentioned above, economies of traffic density are frequently present in
theoretical models of airline partnerships. The simulation analysis that is present in
those studies identifies regions of parameter values where coordination yields higher
economic welfare than no coordination. These exercises are, however, not linked
to the empirical studies of economies of density. This actually diminishes the
usefulness of such otherwise rigorous and interesting research, in my opinion. On the
one hand, it may be useful to know that the welfare ranking of various partnership
arrangements can be different—depending on how strong are the economies of
traffic density. However, policy makers would appreciate more specific answers.
Last (but not least), I consider the following two topics for theoretical
exploration of airline partnerships to be the most promising and current: first, as the airline
partnerships have been around for over quarter of a century, we can start
addressing them in the context of repeated interaction: both within and between the airline
alliances. Such issues as the stability of airline alliances, the potential for tacit
collusion, and multimarket contact are worth examining. Second, we have in the last
decade seen the emergence of a new, closer form of cooperation between airlines:
joint ventures. So far these have largely eluded scholars’ attention: We know
relatively little about the JVs, except that they seem to be the closest thing that the
airlines could have to a merger in the current institutional and regulatory environment.
Fageda et al. (forthcoming) presents the first theoretical analysis that incorporates
joint ventures. In their work, joint ventures are modelled as cost-sharing rather than
revenue-sharing partnerships, which simplifies the matter quite a bit.
7 Issues Solved and Unsolved—Empirical Work
When addressing empirical studies of airline partnerships, it pays to note that here
we have two distinct strands of literature: examinations of codesharing in US
domestic and international markets. As we can see from the literature review, there has
been a fair number of studies of US domestic codesharing over the years.
Interestingly, while there have indeed been a number of such arrangements between the US
carriers (one key way in which domestic codesharing differs from that on
international flights is that antitrust immunity is not an option here), they are now virtually
non-existent. When codesharing in the US domestic market was more common than
it is now; the number of passengers who were actually covered by such services was
quite insignificant. Interestingly,
Ito and Lee (2007)
discovered that most of the
itineraries that involved codesharing were not even interline trips—a practice that they
termed “virtual” codesharing.
Key inter-airline relationships that are currently in existence in the US
domestic market are those between the major network airlines and the regional carriers.
Various aspects of those relationships have been discussed in a series of studies by
Lederman and Forbes (2009
, 2010, 2013), and most recently by
mainline/regional airline relationships are entirely different from the partnerships on
which this paper focuses. Under codesharing, each partner airline is an independent
entity that operates its network, retails tickets for its flights, and sets fares, etc.
Mainline airlines, on the other hand, simply hire aircraft and crews of the regional airlines
for flights on “thinner” routes. Regional airlines typically receive a fee per flight; the
mainline carrier does all of the marketing, price setting, and retailing. Regional
carriers typically operate fleets of smaller aircraft (that are also known as regional
aircraft) with seat capacities that are substantially below those of Boeing 737 or Airbus
A-320 narrow-body airplanes.
Most empirical studies of international airline partnerships have dealt with the
estimation of the relevant price effects. As we noted above, theoretical studies
pointed to a removal of double marginalisation on interline routes
, while also suggesting the potential for increased market power and
therefore higher prices on overlapping parts of the partner airlines’ networks.
A key issue in empirical research on airline partnerships has been measurement
of the incremental impact of antitrust immunity on airfares in different markets. The
main dataset that is used for these studies has been the data bank DB1B
International: a restricted access dataset that is very similar to the domestic DB1B
dataset that is frequently used in empirical airline studies. DB1B International does not,
unfortunately, present a complete picture of the market. One condition for granting
of the antitrust immunity has traditionally been that the foreign airlines submit their
tickets sold in the markets that are covered by the grant of such immunity to the
DB1B dataset. However, these itineraries are not made available by the US
Department of Transportation even to those individuals and organisations that obtain
access to the DB1B International data bank.7 Thus, the dataset that is used in
academic research includes online itineraries that are marketed by the US carriers, as
well as the interline itineraries, where at least one segment has been marketed by a
US airline. Tickets for itineraries, where all the segments have been marketed and
operated by foreign airlines, are not included. This, in particular, limits the
researchers’ ability to set up a proper structural model to evaluate the effects of international
partnerships under this framework. Structural econometric studies of US
domestic codesharing are available in the literature
(Gayle 2008; Armantier and Richard
The general consensus from empirical investigation of price effects of
codesharing and antitrust immunity is that while antitrust immunity does yield lower prices
for interline itineraries over and above the effect of codesharing, there is also
evidence that this effect has become much smaller over time. While Brueckner’s (2003)
seminal investigation of this issue suggested that antitrust immunity yielded as much
as 20% lower interline fares, the more recent study by Brueckner et al. (2011) found
only small single-digit price effects at best.
As far as the empirical analysis of international airline partnerships is
concerned, I believe that the following issues are worth investigating: first, the
exploration should reach beyond the issue of the price effects of partnerships. If one
studies the evolution of applications for antitrust immunity over the years, for instance,
one visible trend is that the applicants over time tended to rely progressively less
on the removal of double marginalisation in their attempt to persuade the
authorities to grant them antitrust immunity. Arguments of operational efficiency benefits,
the increased choice of routes for passengers, and better schedule coordination are
increasingly brought to the front. Yet, there is no clear evidence that this is what the
partner airlines have actually delivered. A recent investigation of joint ventures on
the trans-Atlantic market by
Bilotkach and Hüschelrath (2017)
uncovered that while
antitrust immunity is associated with higher load factors as compared to non-stop
7 The full DB1B International dataset has been used in an econometric study, which was commissioned
by the European Commission’s Directorate General on Competition in 2005. Due to the restricted access
to these data, however, this study is not publicly available.
flights that are not covered by immunity, joint ventures appear to yield lower load
factors. Load factors can be considered a measure of efficiency. One could also
argue, however, that higher load factors are an indication of lower product quality,
as passengers increasingly find themselves on crowded planes, and airlines get less
flexibility to re-accommodate their customers that missed their connections at the
Systematic investigation of efficiency benefits might be difficult—if not
impossible—without access to proprietary data; as noted above, perhaps the best publicly
available proxy for efficiency is the data on the flight load factors. However,
investigation of the effect of partnerships on schedule coordination and the availability of a
variety of interline flight options within the partnerships can be attempted. The latter
is an especially salient issue for multi-airline partnerships. One of the arguments that
undelay (for instance) the application for four-airline antitrust immunity—which
was submitted by Air France, KLM, Delta, and Northwest in 2007—was that with
this immunity in place passengers would be able to travel via Amsterdam on the
outward portion of their journey, and via Paris on the return trip. This is a fair point
(and indeed, I have myself made several such journeys over the years). However,
if the data were to show that the new partnership channels traffic to and from, say,
Berlin, via Amsterdam, and passengers traveling to Vienna fly via Paris—whereas
before the multi-airline antitrust immunity was adopted the two alliances competed
for traffic to both European destinations—this would be evidence of potentially
I mentioned in the previous section that theoretical investigations of airline
partnerships should shed some light on the potential for tacitly collusive behaviour,
repeated interaction, and other potential anti-competitive practices. This point is
even more relevant for empirical research.
Bilotkach and Hüschelrath (2013)
provide the first such investigation; we focus on the potential for market foreclosure,
which is brought about by antitrust immunity. There is potential for more work in
Notwithstanding all of the points that were raised above, the key theme for
empirical research on airline partnerships will in the near future be the assessment
of incremental effects of joint ventures. The first paper in this area is
, which generally does not bring encouraging news. Joint
ventures appear to have led to reduced efficiency, as well as fewer seats and smaller
aircraft outside the routes between the joint venture partners’ hub airports. The most
interesting aspect of the current market structure on the trans-Atlantic routes is the
co-existence of various forms of airline cooperation: from ad hoc codesharing
agreements on specific markets to cost- and revenue-sharing joint ventures. Investigation
of the current trans-Atlantic airline market could therefore yield a better general
understanding of cooperative arrangements between firms that produce
8 Going Forward: The Future of Airline Partnerships, and a Suggested
The current setup with three global airline alliances appears stable, at first glance.
Most of the large network carriers are indeed already members of one or the other
alliance (with Emirates being a notable exception). Network carriers are known to
have changed alliance affiliation;8 however, there have so far been no cases of
airlines’ abandoning an alliance strategy in favour of independent operations. The
socalled low-cost carriers (LCCs)—such as Southwest Airlines and JetBlue in the US;
Ryanair, EasyJet, Wizzair, and Norwegian in Europe; and Air Asia, Lion Air, and
JetStar in Australasia—focus predominantly on the leisure market segment. Some
of the LCCs operate mostly or even exclusively point-to-point networks. Attempts
at building both LCC-LCC and LCC-network-carrier partnerships have so far been
unsuccessful. An airline that has no experience moving passengers within its
network will find it pretty much impossible to coordinate transfers with a different
carrier. Passengers are learning to self-connect between the point-to-point low-cost
carriers’ flights; but so far I see only limited attempts by the point-to-point airlines to
respond to this trend by offering proper networks—I guess this would be too costly
for them to do. Academic research on the issues of the point-to-point carriers’
incentives to form partnerships is largely absent. There is some work on self-connection
in the literature
(Malighetti et al. 2008; Fageda et al. 2015)
. Altogether, these issues
strike me as potentially interesting avenues for future research.
There are two ways for new global airline partnerships to emerge: first, such
alliances can be formed by the airlines that are not currently members of any
partnership. The joint venture between Virgin Atlantic and Delta Air Lines could be an
example here. Note, however, that Delta—as a founding member of the Skyteam
alliance—is unlikely to be interested in building up this partnership much further.
At this time, the joint venture serves both members reasonably well. Delta is able
to feed its passengers from behind-the-gateway US endpoints to Virgin Atlantic’s
extensive network of flights to London; otherwise, many of those passengers—if
they wished to travel to London within Skyteam’s network—would have to connect
at both the US and European hub, while Virgin Atlantic can increase its load factors
and benefit from the associated economies of traffic density. Etihad appears to have
plans to develop a new alliance around its equity partnership with Alitalia; however,
this ambition might be derailed by the dire financial state of Alitalia.
The second way that new alliances can emerge is by airlines leaving established
partnerships. I believe that joint ventures have the potential to disrupt current
alliances. Essentially, joint ventures are partnerships within partnerships, which create
a set of “more equal than others” airlines. It is not that all airlines within an alliance
are equal in the first place; rather, joint ventures create an incentive for the airlines
that participate in those JVs to prioritise relationships with the airlines within the
8 Most such changes, however, have preceded the mergers. For instance, Continental Airlines moved
from Skyteam to Star alliance shortly before its merger with United, while US Airways left Star alliance
for oneworld before being absorbed by American Airlines.
joint venture as compared to relationships with the carriers that are outside of the
joint venture—even though they might be in the same alliance. The intuition here
is similar to that behind market foreclosure argument: partner airlines that are
protected by antitrust immunity stop accepting interline passengers from the carriers
that are outside of their partnership.
Last (but not least), I do not believe that transcontinental mergers that create
mega-airlines will be feasible in the foreseeable future. Nationality clauses in
bilateral air service agreements—as well as the foreign ownership restrictions that are
present in the majority of jurisdictions—will ensure that codesharing—with
antitrust immunity and joint ventures, where allowed—will remain the ways for the
airlines to manage cross-border interline passenger air traffic.
We can also consider some upcoming technological changes, which could upset
the current equilibrium. Specifically, the use of composite materials in aircraft
manufacturing will make non-stop long-haul travel economically viable on thinner
routes. For instance, British Airways has deployed its new Boeing 787 (Dreamliner)
aircraft to such previously unserved US destinations as San Jose, Austin, Nashville,
and New Orleans. Previously, passengers traveling from London to those
destinations would have to connect to an American Airlines flight at one of the carrier’s
hubs. Next generation of narrow body Boeing and Airbus aircraft will also feature
extended range; the Boeing 737 MAX will come with non-stop trans-Atlantic flight
capability. Being able to offer flights to more long-haul destinations directly from
their hubs, airlines may decide that partnerships are no longer as useful to them. As
I noted above, partnerships on US domestic markets are not as important to large
network carriers, because they are able to serve many destinations in the country by
Since airline partnerships are here to stay, should we continue devoting our time
to studying them? And if so, what questions should we cover in the future research?
In the previous sections, I have outlined some of the current gaps in our knowledge.
Yet, those gaps should form only part of the future research agenda: we should also
strive to understand how recent developments—most notably, joint ventures—have
changed the incentives of the partner airlines, and what those changes mean for the
First, I believe that we should continue studying airline partnerships. From the
previous sections, it should be clear that there are a number of things that we do
not fully understand about the effects of codesharing, antitrust immunity, and joint
ventures. We therefore have a limited ability to inform policy makers on the relevant
issues. And, despite the above-identified threats to airline partnerships, there will
be demand from the policy side for sound research on how to monitor and regulate
I believe that future work on airline partnerships should develop along the
following lines of inquiry: first, we should gain a better understanding of the
implications of different forms of codesharing, and more generally learn to distinguish
between different forms of partnerships in our modelling exercises. I have discussed
above the spectrum of codesharing arrangements that are used by the airlines: from
blocked space to free sale agreements; however, we have yet to map those to
standard Industrial Organization modelling approaches. On the one hand, this apparent
sloppiness in theoretical research can be understood: after all, we do not usually
have the data on the specifics of codesharing arrangements between the airlines.
Yet, sound theoretical treatment of different codesharing approaches can go a long
way toward informing the regulators—especially if there is correlation between
codesharing arrangements and the regulatory environment: for example, if free sale
arrangements are used by partners with antitrust immunity, while codesharing
without immunity is predominantly of a blocked space nature.
More important, modelling exercises that are available in the literature do not
make very clear the distinction between partnerships with/without antitrust
immunity and joint ventures. Essentially, partnerships with immunity are often treated
similarly to mergers—or cases of an airline’s maximizing the sum of its profit and a
share of its partner’s profit. A clear distinction between these cases is still needed—
nearly 20 years since the first models of airline cooperation were published. I tried
offering a way of distinguishing between codesharing with and without immunity
in my earlier work
; however, my approach only works when there
are competing alliances in the model. Furthermore, if anything, joint ventures are a
closer arrangement to a merger than is antitrust immunity, so we can say that
previous modelling approaches are more applicable now than they were when they were
I have previously discussed various effects of airline partnerships: both positive
and negative. The empirical question of the link between those effects and different
forms of partnerships still remains largely open. Could codesharing by itself yield
removal of double marginalization, even without the partner airlines’ being able to
coordinate interline fares explicitly? After all, in practice nothing prevents an airline
from defining a sub-fare to be charged when an interline passenger comes from the
partner carrier. Do joint ventures yield additional cost savings as compared to the
setup with antitrust immunity only? When applying for joint ventures, the airlines
emphasized the concept of “metal neutrality”: a simple example of how this works
would be Delta Air Lines’ locating its Boeing 757 in a European hub of its joint
venture to operate trans-Atlantic flights to secondary airports (e.g., Providence, RI).
Neither KLM nor Air France have 757 s in their fleet, and using wide-body
aircraft would not work on such a route; and without joint venture, placing that Delta
aircraft in Europe would not be feasible. This is a nice story, but we would need
evidence that joint ventures do indeed yield additional efficiency benefits. Enough
time has passed for such an investigation.
Bilotkach and Hüschelrath (2017)
represent the first attempt at addressing this question—and the “news” is not good for
joint venture advocates. I hope and anticipate to see more work on this topic in the
As joint ventures currently only include some of the alliance members, they have
a potential to disrupt the current equilibrium. Alliance members left out of the joint
ventures may seek to form different partnerships and joint ventures.
Understanding the airlines’ incentives in this respect looks like a promising avenue for future
research: both theoretical and empirical. Existing research on the airlines’ incentives
to enter into alliances is scant
(Gaggero and Bartolini 2012)
. Future studies in this
area should take into account the dynamic nature of the airlines’ decision-making—
something that has so far been missing in the literature.
The current setup with three alliances—and three large-scale joint ventures in
the trans-Atlantic market—has been around for some time. It is therefore time for
us to gain a better understanding of the effects of repeated interaction and
multimarket contact; we need to understand whether airline partnerships contribute to
a tacitly collusive environment in the industry. There is a sizeable body of
literature that examines the effects of multimarket contact in the US domestic market
(Evans and Kessides 1994; Singal 1996; Prince and Simon 2009; Bilotkach 2011;
Ciliberto and Williams 2014)
. It would be interesting to see whether this
relationship holds for international markets, and in what way: whether the relevant
multimarket contact is between individual airlines, alliances, or joint ventures.
Last (but not least), I believe it makes sense to evaluate the effects of partnerships
on non-price product characteristics and efficiency—if suitable data become
available. The closest metrics that can be related to efficiency are load factors and flight
delays. The former was used by
Bilotkach and Hüschelrath (2017)
to achieve an
understanding of the efficiency effect of trans-Atlantic joint ventures. Bilotkach and
Hüschelrath (2013, 2017) also evaluate the effect of antitrust immunity and joint
ventures on flight frequency on non-stop trans-Atlantic routes. Future studies could
examine such issues as schedule coordination (anecdotally, for instance, American
Airlines’ and British Airways’ London-New York services have been spread more
evenly throughout the day after their joint venture was approved); passenger flows
within joint networks; network reorganization within alliances; and the impact of
partnerships on the design of the partner airlines’ customer loyalty programs.
Understanding how airline partnerships affect both joint network structure and
actual passenger flows within the network is important for at least a few reasons: first,
when approving closer cooperation between the airlines, the regulators should have a
good idea about how the choices that are available to passengers will be affected. For
demonstrates (with the use of data for the US domestic market)
that an airline that serves a market with one-stop service is less likely to open a
nonstop flight between the two endpoints. The same could apply to partnerships—with
new aircraft technology’s acting as a countervailing force). Bilotkach et al. (2013)
show that the merger between Delta and Northwest resulted in a network
reorganization: with the largest hubs gaining prominence post-merger. Second, while partner
airlines have repeatedly stated that closer cooperation will allow them to offer a wider
menu of choices to their customers—for instance, one could travel from Chicago to
Berlin via Amsterdam and back via Paris within the Skyteam trans-Atlantic joint
venture network—it is important to check whether this is what the airlines actually do.
Ultimately, future research on airline partnerships should strive to inform
policy making in this area. Reflecting our level of knowledge, regulatory
interventions here have been rather simplistic: approving antitrust immunity unless
partners’ networks overlap too much; imposing carve-outs as remedies in a limited
number of cases; and not reviewing antitrust immunity over time. As we gain a
better understanding of the impact of partnerships on the airlines’ competitive
conduct, we should be able to conduct smarter, better informed policy.
Acknowledgements I am grateful to John Kwoka and Editor Lawrence White for the constructive
comments, which improved this paper. Any errors and omissions remain my responsibility.
Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0
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