Journal of Air Transport Management Article 2022

The effect of code-sharing alliances on airline profitability
Li Zou*, Xueqian Chen 1
College of Business, Embry-Riddle Aeronautical University, Daytona Beach, FL 32114, USA
a r t i c l e i n f o
Article history:
Received 20 May 2016
Received in revised form
30 August 2016
Accepted 15 September 2016
Keywords:
Codesharing
Airline global alliances
Profitability
a b s t r a c t
Code sharing and global alliances both have been increasingly adopted by airlines worldwide in recent
years. A growing number of airlines, therefore, are embedded in networks of multilateral “coopetitive”
(i.e., cooperative, but competitive) relationships that influence their product offering, pricing strategies,
operating efficiency, market power, and their overall successes. There has been considerable research
analyzing the benefits for airlines from joining global alliances, including bilateral code-sharing part-
nerships. However, the joint effect of code-sharing and global alliances on airline performance has not
been fully investigated. In this paper, we study how the use of code-sharing strategies and their struc-
tural embeddedness into global alliances may impact airline performance. Using a unique dataset
compiled from Flight Global and Airline Business's Annual Airline Alliance Report, the paper empirically
investigates the joint benefits of code-sharing partnerships and global alliances on airline profitability.
The results based on a group of 81 airlines during the 2007e2012 period show that the profit margin of
an airline is positively associated with the number of code-sharing partners it has. Furthermore, the
profit margin gains from code-sharing are greater when an airline has a higher proportion of its code-
sharing partners in the same global alliance; i.e., allied code-sharing partners. Finally, we find no sig-
nificant evidence that the percent of comprehensive code sharing partnerships to total partnerships has
an impact on profit margin.
© 2016 Elsevier Ltd. All rights reserved.
1. Introduction
Code-sharing arrangements, the most common type of airline
alliance, rapidly developed in the US domestic airline industry after
industry deregulation in 1978 and on international routes by the
late 1980s (Dresner, 2010). Under a code-sharing arrangement, one
airline can use its designation code on a flight operated by a second
carrier. The seats on that flight can be marketed and sold by the first
airline either to provide regional connections to complement its
own network (i.e., complementary alliance) or to reduce competi-
tion by having only one airline actually operate on the route (i.e.
parallel alliance). There are several benefits for airlines from
developing code-sharing partnerships. For example, through code-
sharing arrangements, a major hub-and-spoke airline can use the
flights operated by its regional affiliates or partners to feed traffic
from spoke cities to its hub cities, enabling the efficient and suc-
cessful operation of hub-and-spoke networks. Code-sharing ar-
rangements also allow an airline to expand its service network
without committing its own resources; for example, by extending
its route coverage to more international destinations that other-
wise cannot be served under the restrictive regulatory framework
for international air transport.
The distinct advantages associated with code-sharing arrange-
ment prompt many global airlines to enter into such partnerships,
first at a bilateral level and later evolving into multilateral, more
formalized group alliances. In 1989, Wings, the first global alliance,
was established, mainly based on cooperation between KLM and
Northwest. In 1997, Star Alliance, the largest and most mature
alliance, was formed by five core members, including United, Luf-
thansa, SAS, Air Canada and Thai Airways Intl. One year after the
formation of Star Alliance, American Airlines, British Airways,
Qantas, Canadian Airlines, and Cathay Pacific teamed together and
formed their own alliance e Oneworld. In 2000, Skyteam Alliance
was founded by Air France, Delta, Korean Air, CSA, and Aeromexico.
Following the merger between Air France and KLM, all the major
member airlines of Wings joined Skyteam. With the extinction of
* Corresponding author. College of Business, Embry-Riddle Aeronautical Univer-
sity 600 S. Clyde Morris Blvd., Daytona Beach, FL 32114, USA.
E-mail address: [e-mail] (L. Zou).
1 Ms. Xueqian Chen is an undergraduate student in the accelerated MBA program
at the College of Business of Embry-Riddle Aeronautical University, and she helped
collect data for this project under the supervision of Dr. Li Zou during the spring of
2015.
Contents lists available at ScienceDirect
Journal of Air Transport Management
j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / j a i r t r a m a n
http://dx.doi.org/10.1016/j.jairtraman.2016.09.006
0969-6997/© 2016 Elsevier Ltd. All rights reserved.
Journal of Air Transport Management 58 (2017) 50e57

Wings, the remaining three global alliances e Star, Oneworld, and
Skyteam, continue their growth and expansion, increasing airline
membership by 58% from 34 in 2004 to 54 in 2012.
With the increasing prevalence of code-sharing partnerships
and global alliances, a growing number of airlines, therefore, have
recently been embedded in networks of multilateral “coopeti-
tivity”, meaning the coexistence of cooperation and competition
among allied partners that influence product offerings, pricing
strategies, operating efficiency, market power, and overall perfor-
mance. On one hand, more and more airlines have formed closer
and deeper partnerships with allied airlines in the same global
alliance to leverage their joint branding, joint marketing, resource
sharing, etc., for potential revenue gains, cost savings, or both. On
the other hand, airlines also have developed and maintained their
bilateral alliance relationships with non-aligned airlines or even
with airlines from rival group alliances. For many airlines, including
both aligned and non-aligned carriers, the bilateral code-sharing
strategy remains a driver of revenue growth and cost savings.
Though there has been much research analyzing the benefits for
airlines either from joining global alliances or from building bilat-
eral code-sharing partnerships, an examination of the joint effects
of code-sharing and global alliances on airline performance is still
unexplored. In this paper, we focus on the question: To what extent
are the impacts from code-sharing strategies on an airline's per-
formance moderated by its structural embeddedness (or the lack
thereof) into global alliances? Using data collected from Flight
Global and the Annual Airline Alliance Summary Report results
published by Airline Business, we empirically investigate the com-
bined effects of code-sharing partnerships and global alliances on
airline performance. The results based on a group of 81 airlines
during the 2007e2012 period show that the profit margin of an
airline is positively associated with the number of code-sharing
partners it has. Furthermore, the profit margin gains from code-
sharing partnerships are greater when an airline has a higher
proportion of its code-sharing partners in the same global alliance,
i.e., allied code-sharing partners. Perhaps, due to methodological
limitations, we do not find significant evidence that the level of
cooperation moderates the profitability benefits for code-sharing
partners from a code-sharing strategy. Nevertheless, our finding
that there are joint benefits from code-sharing partnerships and
global alliances provides valuable implications for airline man-
agement seeking to develop the most rewarding code-sharing
partnerships in the context of global alliances.
This paper contributes to the existing literature and to airline
alliance management in three ways: First, we develop a new
construct, namely, allied code-sharing partner, to represent the
code-sharing partnership formed between airlines in the same
global alliance. This construct is then used to measure the extent of
an airline's allied code-sharing partnerships compared to its total
number of code-sharing alliances. Through our empirical analysis,
we find evidence suggesting that an airline can gain a greater
profitability benefit when it increases its code-sharing partnerships
with allied airlines. For airlines that are already in the three global
alliances (i.e., Star, Oneworld, and Skyteam Alliance), this finding
can help them decide whether to develop code-sharing partner-
ships with allied or non-allied airlines. For those non-aligned air-
lines that have existing code-sharing arrangements, our findings
may be valuable in helping them to choose the most beneficial
global alliance to join. Second, although there is empirical research
estimating the impact of code-sharing alliances on airline perfor-
mance, the moderating effect of the depth of code-sharing alliances
(measured by the extent of route integration through code-sharing
arrangements) is unexplored. In this paper, we develop a conve-
nient instrument to measure the depth of code-sharing arrange-
ments in order to estimate their potentially moderating effects.
Finally, we contribute to the existent literature on airline alliances
by using a panel dataset that includes a broad sample of airlines
varying in operating scale, geographic region, and alliance
engagement.
In the following section, a literature review is provided. Section
3 introduces our hypotheses. Data descriptions and the empirical
models are presented in Section 4. The results are summarized in
Section 5. The last section concludes the paper and discusses po-
tential for future research.
2. Literature review
Dresner and Windle (1996) examine the early development of
airline alliances and code-sharing arrangements and suggest
several rationales for the adoption of such strategies by a growing
number of international airlines in the 1990s. For most airlines, the
primary consideration of forming alliances is to expand global route
coverage and serve on international routes that would otherwise be
impossible to offer due to legal and regulatory restrictions. Through
code-sharing arrangements, the most common type of airline alli-
ance, each of the two partner airlines can market and sell seats
under its code on the flights operated by the partner carrier. Such
an arrangement may generate revenue to partner airlines through
market expansion, traffic feeds, improved connectivity, multiple
listings on Computer Reservation System (CRS) screens, etc.
Moreover, code-sharing arrangements and other alliance activities
may help the partner airlines reduce the cost per passenger because
of increased traffic, joint advertising, equipment sharing, etc.
Therefore, it is expected that airlines may gain competitive ad-
vantages by code-sharing, and that carriers that do not enter into
these partnerships are at a disadvantage (Dresner and Windle,
1996).
There are various types of code-sharing partnerships. In the US
domestic airline industry, the first code-sharing arrangement were
formed between major US airlines and their smaller regional
partners that provided service on lower density routes, and fed
traffic onto mainline routes operated by the major airline. This type
of code-sharing arrangement, known as “complementary code-
sharing,” has become an essential component of the hub-and-
spoke systems in the US domestic airline industry (Ito and Lee,
2007). On international routes, a similar type of code-sharing
arrangement has been adopted by international airlines to con-
nect their route networks and provide seamless connections for
passengers traveling from one country to another and flying
beyond gateway hubs to inland destinations in the foreign country.
In contrast, so-called “parallel code-sharing” arrangements are
developed between two airlines that competed on routes prior to
forming partnerships (Park, 1997). The study of airfare effects of
parallel versus complementary alliances has been a research topic
over the last two decades (Yousseff and Hansen, 1994; Oum et al.,
1996; Park, 1997; Park and Zhang, 2000; Brueckner, 2001, 2003;
Brueckner and Zhang, 2001; Ito and Lee, 2007; Wan et al., 2009;
Zou et al., 2011; Gayle and Brown, 2014). The extent of coopera-
tion associated with code-sharing arrangements on international
routes also varies depending on whether antitrust immunity is
granted or not. With antitrust immunity, the partner airlines are
allowed to jointly set airfares and capacity, enabling them to have
greater cooperation in terms of airfares, flight scheduling, mar-
keting and capacity adjustments (Dresner and Windle, 1996;
Brueckner, 2003).
Given the prevalence of code-sharing partnerships and the po-
tential anticompetitive concerns over antitrust immunity for the
alliances, Brueckner (2003) develops an in-depth study to investi-
gate the joint airfare effects of code-sharing alliances and antitrust
immunity. As an extension of his earlier results (Brueckner and
L. Zou, X. Chen / Journal of Air Transport Management 58 (2017) 50e57 51

Whalen, 2000), Brueckner (2003) finds strong evidence that airline
cooperation through either code-sharing or antitrust immunity
leads to airfare reductions for interline passengers on international
routes. However, the combined airfare reduction effects from code
sharing and antitrust immunity were found to be smaller than the
separate, individual effects. Such airfare reductions generate
further benefits for interline passengers above and beyond the
improved convenience and tighter connections associated with
code-shared flights.
Gayle and Brown (2014) compare the average airfare, traffic and
market share on routes connecting the 50 largest cities in the US
before and after the implementation of alliances among Delta,
Continental, and Northwest Airlines in 2003 and find no statistical
evidence for collusive pricing on code-shared routes. Instead, a
traffic increase is found on routes where these three airlines have
code-sharing arrangements. The demand increase only existed on
routes where the joint market share between two allied airlines
was greater than 0.49 prior to their code-sharing alliance. Accord-
ing to the authors, the traffic stimulating effects can be attributed to
the enhanced opportunity for passengers to accumulate and
redeem frequent flier points with code-sharing partner airlines. In
other words, the formation of code-sharing partnerships seems to
bring additional benefits to airlines that already have a base of
customers that are loyal to either one of the partners prior to the
alliance. Through code-sharing alliances, loyalty may induce loy-
alty; thus, the total traffic of the code-sharing partners is greater
than the sum of the traffic of the individual airlines.
While there has been a general consensus about how code-
sharing alliances affect airfares in both the domestic and interna-
tional context, its overall impacts on airline performance are less
certain, with mixed findings in the existent literature. For example,
in their study of the three alliances formed between US airlines and
their European counterparts in the 1990s, including Continental
Airlines/SAS, Delta/Swissair, and Northwest/KLM, Dresner et al.
(1995) find that not all three alliances generate greater than
average increase in traffic and load factor in their markets. There-
fore, they conclude that the expected benefits from alliances are not
guaranteed, even after the partner airlines realign their route net-
works for improved connectivity. By contrast, in studying the code-
sharing alliances between US Air and British Airways and between
Northwest and KLM, Gellman Research Associates (1994), using a
different methodology, find evidence in support of the positive
traffic and revenue effects of these alliances. Their methodology is
based on passenger selection outcomes among alternative traveling
options, which are then employed to derive values placed by pas-
sengers on fares, flight time, connections, codesharing arrange-
ments, etc. Based in part on interview data and airline internal data,
the US General Accounting Office (1995) reports large traffic gains
and revenue increases for three strategic code-sharing alliances,
including Northwest/KLM (formed in 1992), USAir/British Airways
(1993), and United/Lufthansa (1994). As for the four regional code-
sharing alliances examined, two are found to result in modest in-
creases in traffic and revenue, including United/Ansett Australia
and United/British Midland, while the other two e Northwest/
Ansett Australia and TWA/Gulf Air fall, are not. According to the US
General Accounting Office (GAO, 1995), the majority of the 61 code-
sharing partnerships have a low degree of route integration at that
time and therefore, they are not profitable or long lasting.
Morrish and Hamilton (2002) provide a comprehensive review
of airline alliances and their impacts on airline performance in both
economic and non-economic terms. As Morrish and Hamilton
(2002) note, ‘there is no conclusive evidence to date that major
airlines have been able to use global alliances to restrict competi-
tion and boost their own profitability.’ They further suggest that
although alliance partners might experience some increase in
traffic, load factor, and productivity from alliances, these benefits
may be partially or even totally offset by greater frequencies and
lower airfares, thereby resulting in modest or little profit gains.
Pitfield (2007) echoes the view saying that an analysis using data
from the US Bureau Transportation Statistics ‘does not yield un-
ambiguous conclusions in accordance with theory or expectation’
about the positive impacts of code-sharing alliances on traffic and
market share of partner airlines. These inconclusive findings at the
route level may be due to the complexity of supply and demand
interactions, unidentifiable route characteristics, and/or diverse
regulatory and competitive environments (Pitfield, 2007).
The integration between airlines in code-sharing alliances may
be extensive, and distinct for different arrangements. Depending on
the specifics of each alliance, the market coverage ranges from
limited to comprehensive, and from point-specific to regional and
strategic. The scope of cooperation may include a variety of areas,
such as scheduling, route networks, operations, advertising,
frequent flyer programs, etc. As a result, it is necessary to take into
account the level and characteristics of code-sharing arrangements
when estimating the benefits to the partner airlines. For example,
in the study by Oum et al. (2004), the authors categorize alliances
into high-level and low-level by the degree of cooperation involved.
A high-level alliance involves network-level collaboration, through
which the allied airlines link their route networks. By contrast, the
collaboration in a low-level alliances only occurs at the route level
without combining the entire networks. The authors estimate the
impacts of alliances on airline productivity and profitability
focusing on the 108 alliances formed among the 22 leading inter-
national airlines during the 1986e1995 period. Their results sug-
gest that although alliances in general only lead to the
improvement of productivity (not profitability), strategic alliances
characterized by high-level cooperation contribute to both higher
productivity and greater profitability.
Yousseff and Hansen (1994) consider technical efficiency and
market power as two primary factors leading to increased profit-
ability for airlines from participation in code-sharing alliances.
More specifically, improvement in technical efficiency will
contribute to unit cost reduction and can be accomplished through
traffic increase, route network consolidation, resource sharing,
flight scheduling optimization, and greater outputs in terms of the
quality and quantity of connecting services, etc. In addition to the
cost saving benefit, the formation of alliances, in general, is viewed
as a means for airlines to restrain competition, preclude rivalry, and
seek virtual monopoly status. Alliances allow carriers to retain
market power which otherwise might be threatened as the long-
standing regulatory regimes for air transport are replaced with
liberalization over time (Yousseff and Hansen, 1994). On the other
hand, the new entrants may also resort to code-sharing alliances as
a strategy to help strengthen their market power against the
dominant market leader. Using data for 56 airlines during the
1986e1993 period, Park and Cho (1997) find evidence showing that
the combined market share of partner airlines is more likely to
increase after the formation of code-sharing alliance and such
market share gains are higher when the alliance is formed between
two relatively new entrants on a route, and when the market has
fewer competitors and it is growing quickly.
There may be inconsistencies between theoretical predictions
and empirical results regarding the cost effects from code-sharing
alliances. In a survey conducted by Iatrou and Alamdari (2005)
among managers of alliance departments at 28 airlines belonging
to the four global alliances in 2002, the respondents, on average,
perceive cost to be least affected by alliances, compared to other
factors, such as fares, revenue, load factor, and traffic. Moreover, as
compared to outcomes such as traffic growth, load factor increases,
and revenue growth, cost reduction is cited much less as an
L. Zou, X. Chen / Journal of Air Transport Management 58 (2017) 50e5752