Strategic Formation of Airline Alliances Ricardo Flores-Fillol and Rafael Moner-Colonques Address for correspondence: Ricardo Flores-Fillol is at the Departament d’Economia i d’Histo`ria Econo`mica, Edifici B, Universitat Auto`noma de Barcelona, 08193 Bellaterra (Barcelona), Spain (rflores@idea.uab.es). Rafael Moner-Colonques is at the Departa- ment d’Ana` lisi Econo`mica and LINEEX, Universitat de Vale` ncia, Campus dels Tarongers, 46022 Vale`ncia, Spain (Rafael.Moner@uv.es). The authors are grateful to Jan K. Brueckner, Ramon Faulı´-Oller, Ine´s Macho-Stadler, Jose´ J. Sempere-Monerris and to an anonymous referee for their comments and sugges- tions. They are also grateful for the comments received during the congresses XXI Jornadas de Economı´a Industrial, ASSET 2005, XXX Simposio de Ana´lisis Econo´mico and 3rd International Kuhmo Conference and Nectar Cluster 2 meeting on Pricing, Financing and Investment in Transport. They acknowledge financial support from Instituto Valenciano de Investigaciones Econo´micas. The authors also acknowledge financial support from the Spanish Ministry of Education and Science (SEC2002- 02506, BEC2003-01132 and SEJ2004-07554/ECON) and Generalitat de Catalunya (2005SGR00836). Abstract This paper looks at the endogenous formation of airline alliances by means of a two-stage game where first airlines decide whether to form an alliance and then fares are determined. The authors analyse the effects and the strategic formation of airline alliances when two complementary alliances, following different paths, may be formed to serve a certain city-pair market. Alliances hurt rivals and decrease interline fares. Most interestingly, and contrary to what might be expected, the formation of alliances may be unprofitable in a competitive context. This is likely to happen when competition is significant and economies of traffic density are low. Date of receipt of final manuscript: October 2006 427 Journal of Transport Economics and Policy, Volume 41, Part 3, September 2007, pp. 427–449