Airline Alliances with Low Cost Carriers

Posted by D. Daniel Sokol

Tomohiko Kawamori, Faculty of Economics, Osaka University of Economics and Ming Hsin Lin, Faculty of Economics, Osaka University of Economics have written on Airline Alliances with Low Cost Carriers.

ABSTRACT: A major carrier operates one hub linking multiple non-hub cities. It forms an alliance with a low cost carrier whose nonstop service competes with its one-stop service. The alliance’s joint profit is maximized by withdrawing the competing one-stop (nonstop) service when the major carrier’s operating cost and connecting passengers’ hub-through additional time costs are large (small). The realized alliance is welfare-improving (welfare-decreasing) when these costs are large or small (intermediate). These findings suggest the necessity of alliance regulation. In some regions, the necessity of regulation does not monotonically change as the network size increases.