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The Economic Impact of International Airline Alliances

Industry Commission information paper

This paper was released on 29 May 1997.

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The growing trend for international airlines to engage in alliances in providing some services has the potential to lower air fares, according to a report released today by the Industry Commission.

The Commission's report, The Economic Impact of International Airline Alliances, examines the effect of airline alliances on competition in the international airline industry and assesses the potential benefits for passengers and airlines of such alliances.

Alliances between international airlines for the provision of airline services have grown substantially in recent years, both in Australia and overseas. Many of these alliances have incorporated the practice of code sharing which involves one airline selling seats on a flight operated by another airline.

Analysis undertaken by the Industry Commission suggests that on Australian international routes, alliances involving code sharing may have led to a fall in standard economy airfares of about $200. This translates to an average saving to passengers of about 10 per cent.

Concerns about the potential market power available to airlines through alliances will be greatest when there are barriers to entry. At present, these barriers include restrictions contained in air service agreements on ownership and control of airlines and on capacity, and restricted access to airport infrastructure such as landing and take-off slots.

The Commission argues that in some cases, restrictions imposed on the ability of airlines to engage in alliances could reduce the scope for airlines to achieve greater efficiency without necessarily reducing any market power available to the airlines.

Background information

Leonora Nicol (Media, Publications and Web) 02 6240 3239 / 0417 665 443

Preliminaries
Copyright, Contents, Acknowledgements, Abbreviations, Glossary, Summary

1 Introduction
1.1 The structure of the report

2 Recent trends in airline alliances
2.1 The nature of airline alliances
2.2 Growth in alliance activity
2.3 Alliances in the Asia-Pacific region
2.4 Regulation of airline alliances

3 Economics of international airlines
3.1 Supply side factors
3.2 Demand side factors
3.3 Other key factors affecting competition

4 Airline alliances and market power concerns
4.1 Barriers to entry
4.2 The nature of competition
4.3 The features of the alliance
4.4 Potential overlap in applying competition policy

5 Impact of airline alliances
5.1 Empirical evidence of the impact of alliances
5.2 A quantitative analysis of code sharing on Australian international routes

6 Concluding remarks
6.1 Areas for further research

APPENDICES

A Alliances operated by Australian carriers

B Fifth and sixth freedom carriers

C A summary of recent empirical studies

D Model specification and estimation methodology

E City-pair routes used in the quantitative analysis

F Data and derivation of variables

G Detailed results of quantitative analysis

References

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