Competitive relationships- Airline Alliances 

An airline alliance is an agreement between multiple independent partners to collaborate with

the ultimate goals of expanding the reach and market coverage, while reducing costs to

participating airlines[ CITATION Tor99 \l 1033 ] Since their introduction in the late 90’s there has

been debate whether the benefits of resources sharing leads to increased revenue, passenger

miles, or if operating independently provides greater long-term benefit. Today there are three

alliances: Star, SkyTeam, and Oneworld. Most major airlines are part of an alliance with a few

notable exceptions (global airlines: Emirates, Virgin Atlantic/ Australia, Etihad; Regional airlines:

Southwest, JetBlue, Ryanair) There are many factors that go into the decisions of participating

in an alliance, where the benefits and costs must be taken into consideration. Airlines see a

variety of impacts (both positive and negative) through the growth of airline alliances [ CITATION

Tor99 \l 1033 ]

Positive Impacts

- Increased network coverage

- Increased traffic volume
- Cost reduction
- Greater market access
- Reduces competition with partner airline

Negative Impact

- Exercise of market power

- Passenger confusion
- Concentration of traffic on alliance hubs
- Impact on fares
Airline Alliance Game Theory

The complex relationships between airlines can be explained through several frameworks of

game theory. The actions taken by one airline will have effects on other airlines, and payoffs an

airline realizes from their strategies may affect the strategies of their competitors. The oligopoly

participants of the airline industry behave cooperatively within alliances, and non-cooperatively

with non-alliance airlines where their competitors’ decisions are taken into account when

deciding their own strategy, regardless of their alliance affiliation. Participants in airline

alliances are playing a public goods game where individual airlines must still invest in their own

strategy in order to be more attractive to customers. As these individual airlines attract more

customers, the payoff to the overall alliance increases. This asymmetric information can put

these airlines in a prisoner’s dilemma to alliance participants as to whether or not they continue

to invest in their airline without knowledge as to other alliance members investments at the

time. As these investments increases, so does the cost to the investing airline. While that cost

burdens the airline, the payoff is shared among alliance participants.

Airlines also face the Akerlof model where they (the sellers) are more informed than the

passengers (the buyers.) Because this can drive market unraveling, airlines look to alliances to

help with positive branding among passengers [ CITATION Mas06 \l 1033 ]

Assumptions of each airline is that they are competing in a game of complete information due

to the transparency in the industry (flight frequency, seat inventory and capacity, ticket costs,

general ability to get competitor information). Each airline, regardless of their alliance affiliation

seeks to maximize their profits. This assumption leads that airlines participating in an alliance
are better off than operating independently. Airlines participating in alliances will also assume

that their chances of fulfilling traveler need, and/or growth of traveler’s miles exceeds their

chances if they operated independently. Airline decisions on capacities and frequency are made

well in advance (weeks if not months) and as such are playing a dynamic game around market

entry and exit which can be seen represented as:

  Company two
Enter/
Company One

Don’t Enter/ Exit

  Exit Market Market

Don’t Enter/ Exit Market X1,U1 X2,U1

Enter/ Exit Market X2, U1 X2,U2
Bibliography
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%20citizens.&text=Foreign%20carriers%20are%20prohibited%20from%20conducting
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Torre, P. F. (1999). Airline Alliances: The airline perspective. Dept. of Aeronautics and Astronautics.
Retrieved from http://dspace.mit.edu/handle/1721.1/68159