IATA Economics www.iata.org/economics 1 IATA ECONOMICS BRIEFING THE ECONOMIC BENEFITS GENERATED BY ALLIANCES AND JOINT VENTURES Summary Alliances between airlines on international markets have become a dominant feature of the airline industry. Many Đustoŵeƌs deŵaŶd a fƌoŵ aŶLJǁheƌe to aŶLJǁheƌe seƌǀiĐe, ǁhiĐh is iŵpossiďle foƌ oŶe aiƌliŶe to supplLJ effiĐieŶtlLJ, aŶd there are significant economies of density that can be achieved by merging networks. Many city-pair markets would not support a viable regular service on local point to point traffic alone, and a means of channeling connecting traffic to generate sufficient traffic density is necessary. However, cross-border mergers, which would be typical in other industries, are prohibited for airlines in many jurisdictions. The evident need for network cooperation has led to a rapid expansion of alliance relationships, as a close substitute for mergers. More recently, airlines have set up joint ventures to serve specific markets which have made airline partners revenue from the JV independent of the airline which actually flies the passeŶgeƌ. This ŵetal ŶeutƌalitLJ is sigŶifiĐaŶt iŶ that it ŵadžiŵizes the oppoƌtuŶitLJ foƌ pƌo -competitive efficiency gains from density economies. There is now substantial evidence that existing alliance relationships have led to significant consumer benefit for passengers on interlining trips, both in terms of improved service and lower fares. Concerns about anti-competitive effects arising, for passengers flLJiŶg huď to huď itiŶeƌaƌies, ǁheƌe ĐoopeƌatiŶg aiƌliŶes services overlap, should be lessened by the potential for metal-neutral JVs to generate pro-competitive efficiencies. Background Alliances between airlines on international markets have become a dominant feature of the airline industry. Many customers todaLJ, paƌtiĐulaƌlLJ those tƌaǀelliŶg oŶ ďusiŶess, deŵaŶd a seaŵless seƌǀiĐe oŶ iŶteƌŶatioŶal ŵaƌkets fƌoŵ aŶLJǁheƌe to aŶLJǁheƌe. Hoǁeǀeƌ, Ŷo aiƌliŶe is aďle to effiĐieŶtlLJ pƌoǀide suĐh a seƌǀiĐe oŶ its oǁŶ aiƌĐƌaft, aŶd feǁ ĐitLJ - pairs can generate sufficient traffic to justify a daily non-stop service. In order to meet customer demands at an efficient cost, airlines have had to seek commercial partners to help them provide the network and service coverage required. Passengers have always been able to arrange an itinerary on two or more airlines, through the interlining mechanism managed by IATA. However, this arms-length cooperation did not allow the integration and efficiencies that were possible. Cross border mergers, which would be typical in other industries, are prohibited for airlines by anachronistic restrictions on foreign ownership. Nevertheless, since the early 1990s, the need for network cooperation led to a rapid expansion of alliance relationships, as a close substitute for mergers. Northwest Airlines and KLM were the early innovators internationally, although domestic cooperation between regional and hub carriers had been commonplace for many years. Smaller alliances such as Qualiflyer have been and gone. Today there are three major alliances: the biggest is Star Alliance, followed by SkyTeam and oneworld. By the middle of 2011 these three alliances were providing over 80% of capacity across the Atlantic and Pacific and just under 80% between Europe and Asia. Traditional interline trips on nonaligned airlines have become much less important. Airlines have entered into collaborative relationships with other airlines because that has been the only way to produce what many customers want, and realize greater efficiencies in operations. Prohibitions on full cross-border mergers between airlines prevent full integration of international airline services, but alliance relationships have allowed