STRATEGIC EFFECTS OF INTERNATIONAL AIRLINE ALLIANCES

The present paper develops a simple model of a network structure to analyze the profitability and the strategic effects of airline alliances in which two complementary alliances, following different paths, may be formed to serve a certain city-pair market. We examine whether airlines that employ the same hub have an incentive to create an alliance, analyze the effects on carriers outside the alliance and study how fares are affected. We conclude that complementary alliances are profitable for a sufficient degree of product differentiation, which implies that competition intensity is low; that an alliance hurts the outsiders; and that fares will decrease. These findings remain valid to the introduction of more competition in the form of a direct non-stop flight. Our results provide a very simple testable implication that relies on demand parameters that measure the degree of product differentiation, and our findings are consistent with some of the observed facts in the industry.