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Strategic airline alliance : modelling and empirical analysis

University of British Columbia

During the past years, major airlines have extended their service networks primarily via strategic alliances with other airlines. The purpose of this thesis is to investigate the effects of strategic alliances on market outcomes and economic welfare. Chapter 2 reviews the history of alliances, examines their current status, and discusses the future evolution of alliances. Based on analysis of 46 alliances, it seems likely that strategic alliances will continue to expand and form global airline networks. Consequently, a limited number of future global networks will likely be formed by alliances composed of airlines from each continent. Chapter 3 develops theoretical models to examine the effects on firms' outputs and profits, and economic welfare of different types of alliances: "complementary" and "parallel" alliances. The complementary alliance refers to the case where two carriers link their networks to feed traffic to each other. The parallel alliance refers to collaboration between two carriers competing on the same route. We find that the two types have different effects on total output and consumer surplus. We identify sufficient conditions under which each type of alliance improves total welfare. Empirical test results confirm the theoretical predictions concerning partners' outputs and total output. Chapter 4 empirically examines the effects on air fares, passenger volume, service quality, and partners' stock values and traffic of four major alliances in the North Atlantic market: British Airways-USAir, Delta-Sabena-Swissair, KLM-Northwest, and Lufthansa-United. Equilibrium traffic increases by an average of 35,998 passengers annually, while equilibrium air fares decrease, on average, by $41 on alliance routes. As a result, consumer benefits increase by $130 million, a 12 per cent increase over the without-all iance consumer surplus level during the post-alliance period. Schedule delay times are also reduced, owing to the alliances. Partners' stock values are positively affected by alliance announcements and by alliance operations. Most partners have experienced greater traffic increases on alliance routes than those on non-alliance routes. Government agents should be cautious before granting antitrust immunity to would-be parallel alliance partners. However, the international aviation market could become more competitive by approving more complementary alliances and promoting competition among alliance groups.

Thesis/Dissertation

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2009-04-20

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http://hdl.handle.net/2429/7433

Business Administration

University of British Columbia

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