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wpasad-2005-15 - STRATEGIC EFFECTS OF INTERNATIONAL AIRLINE...

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STRATEGIC EFFECTS OF INTERNATIONAL AIRLINE ALLIANCES* Ricardo Flores-Fillol and Rafael Moner-Colonques** WP-AD 2005-15 Corresponding author: R. Moner-Colonques. Universitat de València, Department of Economics, Campus dels Tarongers, 46022 Valencia (Spain). Tel.: 96 382 87 84 / Fax: 96 382 82 49 / E-mail: [email protected] Editor: Instituto Valenciano de Investigaciones Económicas, S.A. Primera Edición Abril 2005 Depósito Legal: V- 2052 -2005 IVIE working papers offer in advance the results of economic research under way in order to encourage a discussion process before sending them to scientific journals for their final publication. * We are grateful to Inés Macho, José Sempere and Ramón Faulí for their comments and suggestions. ** R. Flores-Fillol: Universidad Autónoma de Barcelona, Spain. R. Moner-Colonques: Universitat de València, Spain.
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STRATEGIC EFFECTS OF INTERNATIONAL AIRLINE ALLIANCES Ricardo Flores-Fillol and Rafael Moner-Colonques A B S T R A C T The present paper develops a simple model of a network structure to analyze the profitability and the strategic effects of airline alliances in which two complementary alliances, following different paths, may be formed to serve a certain city-pair market. We examine whether airlines that employ the same hub have an incentive to create an alliance, analyze the effects on carriers outside the alliance and study how fares are affected. We conclude that complementary alliances are profitable for a sufficient degree of product differentiation, which implies that competition intensity is low; that an alliance hurts the outsiders; and that fares will decrease. These findings remain valid to the introduction of more competition in the form of a direct non-stop flight. Our results provide a very simple testable implication that relies on demand parameters that measure the degree of product differentiation, and our findings are consistent with some of the observed facts in the industry. Keywords: complementary airline alliances, substitute trips, product differentiation.
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1 Introduction The air transportation sector has witnessed a number of changes since the deregulation processes of the US industry (in the 1980s) and of the Euro- pean industry (in the 1990s). These changes include the substantial decline in the number of major carriers, the intensi fi ed reorganization of routes into hub-and-spoke networks and, still taking place, the formation of strategic alliances among international carriers. 1 The present paper develops a simple model of a network structure where passengers in a given city-pair market use two carriers connecting through a hub airport. Passengers can fl y via di ff erent hubs to reach their destination. We examine whether airlines that employ the same hub have an incentive to create an alliance, analyze the e ff ects on carriers outside the alliance and study how fares are a ff ected.
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