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

Tae Hoon Oum and Jong-Hun Park

Journal of Air Transport Management, 1997, vol. 3, issue 3, 133-144

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.

Date: 1997
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