Analytical models of international alliances in the airline industry

This paper develops a theoretical model to investigate the effect of airline alliances on market outcome for fairly general demand and cost specifications. Two typical alliance types are examined: complementary and parallel alliances. The complementary alliance refers to the case where two firms link up their existing networks so as to feed traffic to each other, while the parallel alliance refers to collaboration between two firms who, prior to their alliance, are competitors on some routes of their networks. Our model predicts that a complementary alliance is likely to increase total output whereas a parallel alliance is likely to decrease it. The results of an empirical test utilizing trans-Atlantic alliance routes for the 1990-1994 period confirm the theoretical predictions on partners' output and total output. (C) 2001 Elsevier Science Ltd. All rights reserved.