RESEARCH Business Transportation

AIR FARES
Airline alliances lead to lower fares for passengers going abroad

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

8/1/2000

CHAMPAIGN, Ill. -- The trend toward global alliances among airlines has led to lower ticket fares for passengers traveling abroad, according to a study by a University of Illinois economist.

Jan K. Brueckner, an expert on airline economics, found that alliance carriers in the United States and other countries had fares as much as 30 percent below those offered by non-cooperating airlines.

"The results provide strong evidence that airline cooperation in the fare-setting process generates substantial benefits for interline passengers," he concluded in a just-released research paper.

Pricing cooperation has become commonplace as carriers have formed alliances that offer through ticketing to a wide range of destinations. In such alliances as Oneworld (American, British Airways, Canadian, Qantas and others) and Star (forged around United, Lufthansa and SAS), partners sell each other's flights and book seats on each other's aircraft. By combining their networks, the airlines can increase traffic on their trunk routes and reap the economies of scale, according to Brueckner.

This can be done most effectively when the carriers engage in "codesharing" and other price cooperation. Such cooperation, however, has been limited by antitrust laws to certain carriers.

To study the effect of airline alliances on international fares, Brueckner examined more than 50,000 air fares compiled in the fourth quarter of 1999 by the U.S. Department of Transportation's Passenger Origin-Destination Survey. The data included interline trips with thousands of foreign endpoints.

The UI economist found that the average round-trip fare was 8 to 17 percent lower among airlines that cooperated in a partnership than those that did not.

What's more, fares dropped an additional 13 percent ­ sometimes more ­ when airlines enjoyed immunity from antitrust laws and could charge whatever they liked. The exact fares depended on the demand for travel on a specific route.

Air alliances reduce fares because carriers can extend their networks without the cost of operating more flights, Brueckner said. Alliances also encourage coordinated flight schedules and better use of ground personnel.

Prior to the growth of airline alliances, fares among carriers were set by the International Air Transport Association on a distance-based formula.

"Because the adoption of an IATA fare for a particular market required the unanimous agreement among the airlines participating in the conference, the fares tended to be set high enough to cover the costs of the least efficient carriers," Brueckner wrote.

His working paper is titled "International Airfares in the Age of Alliances: The Effects of Codesharing and Antitrust Immunity."