Collaboration Between an Airline and Railways to Reduce the Cancellation-Risk of Waitlisted Passengers and Improve Seat Utilization

We investigate a setting in which two rivals, an airline and railways, create value through a new joint service that reduces the cancellation-risk of waitlisted passengers. This setting is motivated by a recent collaboration between a railway company and two low-cost airlines in India. Under this arrangement, the railways offers train ticket holders whose reservations are not confirmed the option to upgrade to a flight ticket on the same route for an additional fee. The airline sets the price for the upgrade while the railways charges the airline a referral commission. The new service creates value for waitlisted passengers and thereby stimulates additional demand for the railways and the airline. We analyze the strategic interactions that arise from this collaboration, derive the equilibrium upgrade prices and commission, and compare the outcomes to those under centralized decision-making. Our findings demonstrate that cooperation between two competing service providers can create a mutually beneficial outcome for both firms as well as for consumers. Notably, the airline and the railways can generate profit from the collaboration only if they engage in a sequential game; a simultaneous-move game fails to generate any value. Furthermore, we identify scenarios in which increasing railway capacity also benefits the airline by stimulating additional demand. Finally, we analyze the case of strategic consumers who reduce the value created from the collaboration, and we show that the price difference between early and late booking mitigates such strategic behavior.