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Alliances as an Integrating Market Instrument: A Case Study of Airline Alliances

Author

Listed:
  • Attiat F. Ott

    (Department of Economics, Clark University, USA)

  • Oswaldo J. Patino

    (Department of Economics, Clark University, USA)

Abstract

This paper offers a novel way of looking at airline alliances by integrating the concept into the study of regional arrangements like common markets or free trade areas. Not unlike a country wishing to join an established common market, an airline seeking admission to an airline alliance seeks to enhance access to the market. Currently there are three major airline alliances: Star Alliance, Sky Team and One World. Given that access enhances potential for returns, the paper models and empirically tests the choice of an air carrier as to whether or not to join an alliance, and if it were to join which alliance. Using the US Department of Transportation Origin and Destination Survey for 2003 and 2008, a latent choice model is estimated. From the Logit estimates the predicted alliance membership rose from 0.39 to 0.62 signifying the attractiveness of this formation. Given that there exists more than one alliance to choose from, using the portfolio principles we ranked the alliances in terms of returns and volatility of return. The results suggest that many international carriers seem to have fared extremely well whereas US carriers did not.

Suggested Citation

  • Attiat F. Ott & Oswaldo J. Patino, 2011. "Alliances as an Integrating Market Instrument: A Case Study of Airline Alliances," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 104-118, February.
    • Handle: RePEc:bap:journl:110109
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    References listed on IDEAS

    as
    1. Brueckner, Jan K & Whalen, W Tom, 2000. "The Price Effects of International Airline Alliances," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 503-545, October.
    2. Goldberg, Michael A. & Levi, Maurice D., 2000. "The European Union as a country portfolio," European Journal of Political Economy, Elsevier, vol. 16(3), pages 411-427, September.
    3. W. Whalen, 2007. "A panel data analysis of code-sharing, antitrust immunity, and open skies treaties in international aviation markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 30(1), pages 39-61, February.
    4. Jong-Hun Park & Anming Zhang, 2000. "An Empirical Analysis of Global Airline Alliances: Cases in North Atlantic Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 16(4), pages 367-384, June.
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    Cited by:

    1. Hugo Ferreira Braga Tadeu & Jersone Tasso Moreira Silva, 2012. "A Theoretical Framework for the Brazilian Airline Competitive Market Environment," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 97-106, May.

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    More about this item

    Keywords

    Airline alliances; Choice model; Portfolio principles of returns and risk;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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