Proration is the basis for how interlining of both passengers and cargo takes place. Put simply, proration is the division of passenger/cargo revenue between two or more carriers which paricipate in the routing. When a carrier sells a ticket to a passenger for an interline itinerary, they are collecting the entire fare. When the interlining carrier picks up the passenger, and transports them, they have not recieved any money from that passenger. This airline will need to "bill"
the carrier which issued the ticket, and collected the fare. Prorate agreements are what settles the billing issue between the two (or more) carriers, so that the non-issuing carrier will recogonize revenue for transporting the interline passenger.
In terms of passenger interlining, most international carriers agree to abide by the terms of the Multilateral Proration Agreement (MPA). The MPA was devised by a meeting of carriers at an IATA sanctioned meeting called the General Prorate Meeting. The cornerstone of proration under the MPA are prorate factor miles. Each sector a carrier operates are assigned a weighted mileage, which is loosely equivalent to the actual mileage. When a passenger flies an interline routing, each airline carries the passenger a certain percentage of the weighted miles on the routing. Under the MPA, each carrier is entitled a percentage of the collected fare which is proportional to the percentage of the routing they carried the passenger. This method for dividing up revenue by percentage of weighted mileage is called Straight Rate Proration, or SRP.
Two or more carriers may enter into a Special Prorate Agreement (SPA), when they believe there is a commercial benefit to having such an arrangement. The SPA, when in place, supercedes the Multilateral agreement for tickets and routings covered in the SPA. Most SPA's are unilateral or bilateral, meaning they apply to tickets issued by one or two carriers. In some rare cases, the SPA may apply to tickets issued by more than two carriers.
There are many different methodologies for deriving special prorates. The most common is the fixed rate, which is simply a fixed dollar amount that one carrier pays to another when they carry another airline's passenger. Other types of special prorates are; a percentage of the full local fare, or a discount off of the SRP. Most imporantly, a carrier will need to establish a SPA which will provide a commercial advantage over the MPA. Specifically, a carrier will want to negotiate a lower prorate for tickets they issue, and a higher prorate for tickets they accept from other carriers.
Special prorate agreements have a variety of advantages. One, they increase the market presence that a carrier has. For example, they can offer more destinations, through interlining, than they would be able to offer on their own. Secondly, prorate agreements provide a great deal of incremental revenue to a carrier's own services. Without the prorate agreement, a carrier is only taking passengers that they were able to sell a ticket to. With the prorate agreeement, the airline is able to take passengers from other carriers, in order to supplement their own customers. This type of traffic is very valuable in low load markets, where the operating carrier needs to get their hands on every passenger they (or another carrier) can find.
SPA's exist both inside and outside of the alliance structure. Just because you have an SPA with a carrier does not necessarily mean you have an alliance. Many carriers who recognize a commerical benefit to a SPA will enter in to one with an airline who many generally be considered a competitor.
In the context of airline alliances, however, the SPA is one of the primary building blocks of the partership, and is usually one of the first steps to be completed in an alliance.
I hope this lengthy posting is of some use to those of you who want to understand who passenger interlining and proration takes place.