Airline Alliances, Antitrust Immunity and Market Foreclosure

The development of international airline markets has led to the dominance of three global airline alliances - Star, SkyTeam and oneworld. As part of an overall assessment of the competitive effects of such agreements, the theoretical literature has suggested that members of an international airline partnership might have an incentive to foreclose the beyond-the-gateway markets to the airlines excluded from the respective alliance. It has also been suggested that such foreclosure will likely be most effective when alliance partners have the right to jointly set fares for the interline services, and engage in revenue sharing arrangements - a privilege otherwise known as antitrust immunity. This paper analyzes and quantifies effects of such market foreclosure. We conduct an extensive analysis of the data on non-stop services on the transatlantic scheduled commercial passenger airline market. Merging the data with the information on the structure of the airlines' networks and dynamics of the airline partnerships on the same market over the time period from 1992 to 2008, we are able to analyze whether the airlines enjoying antitrust immunity take steps to exclude interline passengers arriving on the rival carriers’ flights. We find that antitrust immunity leads to a 2.5–6 percent (0.7–1.5 percent in dynamic panel data GMM estimation) decrease in frequency of service by the non-alliance carriers serving a newly immunized hub. The effect on the passenger volumes is even greater (4.8 to 8.5 percent drop in fixed effects, 2.6 to 3.5 percent in GMM; and generally 1.5 to 2 times the effect on frequency). This suggests that excluded airlines switch to smaller aircrafts and/or end up with lower load factors on their services to the newly immunized hubs. We also find evidence (less robust, however) that antitrust immunity may lead to lower passenger volumes on routes between the competing alliances' hubs.

Bilotkach, Volodymyr and Kai Hüschelrath (2010), Airline Alliances, Antitrust Immunity and Market Foreclosure, ZEW Discussion Paper No. 10-083, Mannheim, published in: The Review of Economics and Statistics.