Journal of Air Transport Management 8 (2002) 401–407 Airline alliances—who benefits? S.C. Morrish, R.T. Hamilton* Department of Management, University of Canterbury, Private Bag 4800, Christchurch 1, New Zealand Abstract The advent of global airline alliances in the 1980s gave rise to concerns that increased monopoly power of major carriers would lead to large and sustained producer surpluses. These global alliances now enjoy dominant market shares in the industry. This review examines some 15 years of alliance experience and finds no conclusive evidence that alliance membership has yielded monopoly profits to the airlines. Improvements in terms of load factors and general productivity levels have, for the most part, been accompanied by fare reductions of similar magnitude, resulting in only modest gains to the carriers. r 2002 Elsevier Science Ltd. All rights reserved. Keywords: Airline alliances; Monopolies; Fare levels 1. Introduction This paper reviews the effect of alliance membership on the performance of international airlines. An airline ‘alliance’ is any collaborative arrangement between two or more carriers involving joint operations with the declared intention of improving competitiveness and thereby enhancing overall performance. Despite a history of instability and failure, alliances are now prevalent among international airlines. Such alliances began on a global scale in the late 1980s with the first Trans-Atlantic alliances. 1 Oster and Pickerell (1986) reported that by 1985, nearly all of the largest 50 commuter carriers had formed code-sharing alliances with a major airline. The companies participat- ing accounted for over 75% of the passengers carried by the commuter airline industry. Other carriers then had little choice because, as Dresner and Windle (1996, p. 10) warned, ‘airlines that do not enter into alliances will find themselves at a competitive disadvantage unable to generate traffic from their alliance competi- tors’. They argued that since alliance groupings with member carriers from all parts of the globe in the future will be few, competition will be between alliances rather than between the carriers. The failure to join a global alliance would leave individual carriers isolated and at a competitive disadvantage (Button et al., 1998). A majority of airline alliances is route based. Park (1997) distinguished two major types of alliances as being either complementary or parallel. The main distinguishing features are that complementary alliances have non-overlapping routes, whereas parallel alliance routes overlapped. Apart from routes, the most com- mon areas of collaboration involve code sharing; block spacing; shareholdings; and franchising. Code sharing allows an airline to sell seats on a partner’s flight under its own designator code, while block spacing is an agreement under which one airline allocates a block of seats on its flights to a partner. Button et al. (1998) suggests that block spacing can generate economies of density for a carrier because it allows for the use of larger aircraft. Shareholding (cross-equity holding) is usually subject to regulation if it involves an airline from another country. Hamill (1993, p. 39) suggests, ‘acquir- ing shareholdings in airlines of other countries allows carriers access to each other’s route network, cross- border operations and improved customer service between long-haul and local follow-on flights’. This strategy also protects subsidiaries from being lured to join other alliance networks. On the other hand, franchising, a strategy widely used by British Airways and to a lesser extent by Qantas Airways has the franchisee paying a royalty to the franchiser in exchange for the privilege of using the latter’s marketing package. This practice is more common in other industries, but ‘in *Corresponding author. E-mail address: b.hamilton@mang.canterbury.ac.nz (R.T. Hamilton). 1 In 1989, the European Quality Alliance (Air France, SAS and Swissair), the Global Excellence Alliance (Delta Airlines, Singapore Airlines and Swissair) and the KLM/Northwest Airlines Alliance were formed. 0969-6997/02/$-see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII:S0969-6997(02)00041-8