Airline Alliances

Airneth column
June 2011
By Volodymyr Bilotkach

Cooperation between the airlines has over the years produced the three global airline alliances. In between them, Star Alliance, Skyteam, and oneworld unite over fifty of the world’s biggest airlines, and carry about 60 percent of the global passenger traffic. Each of the three alliances originated from a partnership on the transatlantic market. Specifically, Star Alliance was started by Lufthansa and United Airlines. The core of Skyteam consisted of Air France and Delta Air Lines. Oneworld grew out of American Airlines – British Airways partnership.

The history of airline alliances includes episodes of failed partnerships and alliance consolidation. A ten year long partnership including Austrian Airlines, Sabena, and Swissair was dissolved in 2002 with bankruptcy of the latter carrier. Earlier, the three carriers’ transatlantic partnership with Delta fell apart. Following the merger of Air France and KLM, the two carriers also consolidated their alliances with Delta and Northwest, respectively, extending the Skyteam partnership. Interestingly, recent high-profile airline mergers have mostly occurred from within the global airline alliances (with the exception of Southwest Airlines – Airtran, where neither carrier has ever been a global alliance member).

Within the alliances, airlines cooperate on several dimensions. The most common forms of cooperation involve codesharing and frequent flier program partnerships. Codesharing refers to including flights services by the partner airlines into your schedule, and entering into agreements to be able to sell seats on those flights to your passengers. This way, an airline is able to expand its network without having to serve additional flights. Frequent flier program partnerships expand the opportunities for the passengers to earn and redeem miles, making each individual carrier’s loyalty program more attractive. The three global alliances complement these partnerships with joint marketing and branding; joint use of airport lounges and some degree of schedule coordination is also common. Some of the carriers within the alliances, especially on the transatlantic market, have obtained the right to jointly set prices and enter into revenue sharing agreement – this is known as the antitrust immunity.Firms form joint ventures in a variety of industries to take advantage of economies of scale and scope, and to tackle problems that a single firm is not in a position to effectively solve. For the airline industry, one such problem is that no single airline is capable of serving all possible airport-pair markets worldwide. Codesharing helps solve this problem, and further cooperation brings additional efficiency gains. This brings benefits to passengers, in the form of lower fares, shorter travel times, and generally better travel experience.

At the same time, the current market structure involving only three global alliances with substantial total market share, and carriers enjoying freedom to jointly set fares brings out important concerns as well. In addition to an obvious issue of the actual extent of competition (if all the carriers on the route are members of the same alliance, can we still say the market is competitive), the following potentially anti-competitive effects of airline partnerships can be singled out. First, alliances can create entry barriers. New carriers will either have to achieve large scale of operations or affiliate with an alliance to be globally competitive. Second, existing carriers will be less inclined to launch new non-stop services on markets where they can channel the passengers through the joint alliance network. Second, domination of few alliances can facilitate tacit collusion.

Overall, airline alliances have been an important innovation, which made global travel easier for millions of passengers. At the same time, current market situation with three alliances carrying 60 percent of all passengers can produce some anti-competitive effects.

Volodymyr Bilotkach