Competition and alliances in the airline industry

Abstract

he air transportation sector has witnessed a number of changes since the deregulation of the US industry (in the 1980s) and of the European industry (in the 1990s). These changes include the intensified competition both in airfares and frequencies, the reorganization of routes into hub-and-spoke networks and, still taking place, the formation of strategic alliances among international carriers. Since my research interests are mainly focused on Industrial Organization and Airline Economics, I have found in this dynamic sector a convenient environment to analyze a number of issues. The first chapter entitled "Strategic Formation of Airline Alliances" (joint with Rafael Moner-Colonques), analyzes the effects and the strategic formation of airline alliances when two complementary alliances, following different paths, may be formed to serve a certain city-pair market. We find out that the formation of alliances is not always profitable even though joint pricing of interline trips eliminates a double marginalization. Although this outcome appears to present a puzzle, the explanation comes from the competitive environment and the fact that alliances hurt rivals. Alliances decrease rivals' interline airfare and travel volume; and rivals' lower interline fare puts a downward pressure on partners' interline fare. This effect increases with competition intensity and, when competition is very tough, alliances lead to very low interline fares both for partners and rivals, lowering allied profits and turning alliances unprofitable. The second chapter "Airline Schedule Competition" (joint with Jan K. Brueckner), builds up a simple duopoly model of where carriers compete both in fares and scheduling decisions. Before the deregulation, carriers faced constraints in fares and route structures and competition was concentrated in scheduling decisions (flight frequency). Only in an unregulated framework, airline competition extended to fares. In spite of the importance of schedu