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Airline alliances: current status, policy issues, and future directions

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  • Oum, Tae Hoon
  • Park, Jong-Hun

Abstract

This paper describes the current status of and the government policy towards airline alliances, discusses the effects of intercontinental alliances, and makes some predictions on the future direction of alliance network formation. It also presents the areas of collaboration and joint activities between alliance partners based on a survey of forty-six alliances among the world's top-30 airlines. We conclude that alliances among airlines are not a passing phenomenon but rather a permanent fixture of the industry because they not only create values to customers, but also enhance profit opportunities for the partners. Therefore, strategic alliances among major carriers are likely to be strengthened in the future. In addition, the cost of ending a strategic alliance relationship increases as the partners work closely by investing time, energy and resources to enhance mutual benefits. Also, the opportunity cost of finding another partner will increase rapidly as many airlines find durable alliance partners. These factors will provide an increased stability in alliance structures. Airlines have learned to fine-tune alliance relationships to make the gain-sharing more equitable. Governments began to scrutinize alliances with one-sided gain-sharing. Alliances involving unidirectional equity investment tend to be structured in such a way that the investing carrier gets a major share of gains from the alliance. Because of this and the inherent risks involved in investment, equity alliances tend to be unstable. Therefore, in the future there will be less alliances with equity investment. Already, there has been a decline in the growth rate of equity alliances. The balanced gain-sharing could form a basis upon which to create global alliance groups. Each global alliance group is likely to consist of two-tier systems. Different continental markets are linked essentially via super-hubs of anchor carriers (senior partners in the alliance group), one in each continent to form the first-tier of the global alliance group. Several junior carriers in each continent may form the continental network along with the anchor carrier, and route an increasing portion of their traffic through super-hubs of the alliance group. Gain-sharing between anchor and junior carriers could be structured so that junior carriers find incentives to route an increasing portion of its intercontinental traffic via the anchor carrier's hubs. Since alliances are a positive sum arrangement, and the gains from alliance can be shared equitably among alliance partners as well as between consumers and airlines, it is a matter of time when competing global alliance networks will emerge. Given that there are a limited number of major carriers in each continent that has a good coverage of the continent and thus could become an anchor carrier, a limited number of major global alliance networks (say, five or so) will likely be formed in the near future. These limited number of global alliance groups will be competing for the majority of the world's air transport traffic. The carriers that are left out of this system may find it necessary to become niche carriers.

Suggested Citation

  • Oum, Tae Hoon & Park, Jong-Hun, 1997. "Airline alliances: current status, policy issues, and future directions," Journal of Air Transport Management, Elsevier, vol. 3(3), pages 133-144.
  • Handle: RePEc:eee:jaitra:v:3:y:1997:i:3:p:133-144
    DOI: 10.1016/S0969-6997(97)00021-5
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    Cited by:

    1. David Ramos-Pérez & José Luis Sánchez-Hernández, 2014. "European World Cities and the Spatial Polarisation of Air Transport Liberalisation Benefits," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 105(1), pages 1-29, February.
    2. Brueckner, Jan K. & Pels, Eric, 2005. "European airline mergers, alliance consolidation, and consumer welfare," Journal of Air Transport Management, Elsevier, vol. 11(1), pages 27-41.
    3. Laaser, Claus-Friedrich & Sichelschmidt, Henning & Soltwedel, Rüdiger & Wolf, Hartmut, 2000. "Global strategic alliances in scheduled air transport – Implications for competition policy," Kiel Discussion Papers 370, Kiel Institute for the World Economy (IfW).
    4. Andrea Mantovani & Ornella Tarola, 2007. "Did the Entry of Low Cost Companies Foster the Growth of Strategic Alliances in the Airline Industry?," Rivista di Politica Economica, SIPI Spa, vol. 97(1), pages 189-220, January-F.
    5. Philippe Gagnepain & Pedro Marín, 2010. "The effects of airline alliances: what do the aggregate data say?," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(3), pages 251-276, July.
    6. Hideki Murakami, 2005. "Strategic Alliance versus Competition: Airlines' Choices and their Impact on Economic Welfare," Discussion Papers 2005-37, Kobe University, Graduate School of Business Administration.
    7. Goh, Kevin & Uncles, Mark, 2003. "The benefits of airline global alliances: an empirical assessment of the perceptions of business travelers," Transportation Research Part A: Policy and Practice, Elsevier, vol. 37(6), pages 479-497, July.
    8. Chen, Zhiqi & Ross, Thomas W., 2003. "Cooperating upstream while competing downstream: a theory of input joint ventures," International Journal of Industrial Organization, Elsevier, vol. 21(3), pages 381-397, March.
    9. Wen, Yuh-Horng & Hsu, Chaug-Ing, 2006. "Interactive multiobjective programming in airline network design for international airline code-share alliance," European Journal of Operational Research, Elsevier, vol. 174(1), pages 404-426, October.
    10. repec:hal:journl:hal-00622831 is not listed on IDEAS
    11. Graf, M. & Kimms, A., 2011. "An option-based revenue management procedure for strategic airline alliances," European Journal of Operational Research, Elsevier, vol. 215(2), pages 459-469, December.
    12. repec:jtr:journl:v:18:y:2017:i:1:p:122-132 is not listed on IDEAS
    13. Barros, Carlos P. & Liang, Qi Bin & Peypoch, Nicolas, 2013. "The technical efficiency of US Airlines," Transportation Research Part A: Policy and Practice, Elsevier, vol. 50(C), pages 139-148.
    14. repec:bla:stratm:v:38:y:2017:i:2:p:384-394 is not listed on IDEAS
    15. Gayle, Philip & Xie, Xin, 2017. "Entry Deterrence and Strategic Alliances," MPRA Paper 83233, University Library of Munich, Germany.
    16. repec:spr:orspec:v:40:y:2018:i:2:d:10.1007_s00291-018-0507-5 is not listed on IDEAS
    17. Duval, David Timothy, 2005. "Public/stakeholder perceptions of airline alliances: The New Zealand experience," Journal of Air Transport Management, Elsevier, vol. 11(6), pages 448-454.
    18. Piotr Niewiadomski, 2013. "International airline groups in Africa," Global Development Institute Working Paper Series ctg-2013-36, GDI, The University of Manchester.
    19. repec:eee:jaitra:v:70:y:2018:i:c:p:1-17 is not listed on IDEAS
    20. Allroggen, Florian & Wittman, Michael D. & Malina, Robert, 2015. "How air transport connects the world – A new metric of air connectivity and its evolution between 1990 and 2012," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 80(C), pages 184-201.
    21. Gagnepain, Philippe & Marín Uribe, Pedro Luis, 2005. "Alliances in the Air: Some Worldwide Evidence," CEPR Discussion Papers 5063, C.E.P.R. Discussion Papers.
    22. Yetiskul, Emine & Matsushima, Kakuya & Kobayashi, Kiyoshi, 2005. "Airline Network Structure with Thick Market Externality," Research in Transportation Economics, Elsevier, vol. 13(1), pages 143-163, January.
    23. Oum, Tae H. & Park, Jong-Hun & Kim, Kwangsoo & Yu, Chunyan, 2004. "The effect of horizontal alliances on firm productivity and profitability: evidence from the global airline industry," Journal of Business Research, Elsevier, vol. 57(8), pages 844-853, August.
    24. Zhang, Yahua & Round, David K., 2008. "China's airline deregulation since 1997 and the driving forces behind the 2002 airline consolidations," Journal of Air Transport Management, Elsevier, vol. 14(3), pages 130-142.

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