Revenue Sharing in Airline Alliances

We propose a two-stage game-theoretic approach to study the operations of an airline alliance in which independent carriers, managing different reservation and information systems, can collaboratively market and operate codeshare and interline itineraries. In the first-stage game, airlines negotiate fixed proration rates to share the revenues generated by such itineraries. In the second-stage game, airlines operate independent inventory control systems to maximize their own expected revenues. We derive a revenue-sharing rule that is (i) an admissible outcome of the first-stage negotiation, in the sense that no airline coalition has enough incentives to secede from the grand alliance, and (ii) efficient for the second-stage game, in the sense that the decentralized system can achieve the same revenues as a central planner managing the global alliance network. Our numerical study shows that the proposed proration rates can lead to a significant increase in revenues with respect to other rules commonly used in practice. Finally, because our proposal requires the disclosure of private demand information, we introduce a simple alternative rule that is based on public information. This heuristic performs remarkably well, becoming an interesting candidate to be pursued in practice. This paper was accepted by Martin Lariviere, operations management.