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DWC
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Joined: Mon Nov 06, 2017 7:49 pm

Alliance Economics

Tue Feb 13, 2018 11:14 pm

This is a very wide topic, but to be meaningful, aimed at members well trained in Economics & not just in Finance 101. I have been focusing lately on the hidden economics of commercial aviation & questions have arisen, that I am willing to discuss at some length. Here are 4 topics to begin with, feel free to add others that you see :

1. ALLIANCE MARKET DISTORSIONS. Depending on how one looks at them, while Alliances do benefit top tier members handsomely, they also seem to produce a number of uncompetitive practices & market distorsions - food for thought :
a - Alliances & FF programmes orient FF consumers decisions : FF & codeshares specifically discourage them from looking into other options. A case in point is QF : 40% of Oz are said to have a QF card, QF also owns JetStar & has an extensive long-haul agreement with EK.
b - Alliances foster cooperation between member airlines : connecting flights & departure times, thereby actually reducing normal offers & thus competition.
c - This is epitomized by Joint Ventures, which are a form of "legalized oligopolies", "immunized" says it all : it is against Economics basics.
d - Alliance logic is now even channelled to Terminals where alliance airlines are concentrated, thus reducing interlining or codeshare connectivity with airlines departing from another terminal
e. The overall livery branding on all alliance aircrafts aimed at fostering brand/alliance awareness also aims at luring new customers, thus discouraging them from taking whatever remaining non-aligned airlines serving particular markets.
f. Alliance FF lounges lure members to the detriment of competing retaurants & services within airports
g. While much EY's pioneering "Equity Alliance" has now gone up in smoke, EK-FZ are becoming akin to a sizable alliance of their own by pax & destinations, with room to grow both with new WB yet to enter fleet & smart airport management. Add to that occasional extensive agreements with QF and codeshares. How disruptive can EK still be ? DWC was planned with that in mind in the long term.

2. BOTTOM FARES & EQUILIBRIUM. Another point that baffles me is the discrepancy between actual trip costs to the airline & fares, leading to the emergence of LCCs & fares unbundling. Recently, transpac competition from FSC like the CN3/4/5 ( the number of chinese airlines to the US is increasing ) has dropped fares in Y to $600 roundtrip or less. The begging question is what is the optimal equilibrium FSC fares for LH or ULH flights ? That of course depends on seasons, loadfactors, cargo, premium pax %, oil price, etc. In the same line of thought, I see US-Oz roundtrips in J for $1800 or less ( no mistake fares ), same for US-ME depending on positionning : how do these airlines make a profit at all ?

3. CODESHARING ECONOMICS. I was just booking a return flight half round the world between two odd places ( and so with a stop-over ) on a premium airline for little more than $1500 in Y ( so a very good fare to start with ), when I noticed an odd codeshared routing with 2 stops instead of 1 that not only doubled the total mileage flown ( good for Elite miles ), but where cabin ( 3-3-3 77W instead of 3-4-3 ), service ( one of the world's best ) & even airports are even more premium. How is that possible ? Do airlines trade empty seats or what ?

4. GAME THEORY. In november on two other threads, I predicted the recent A380 EK order on strategic considerations alone, so that Game Theory appears remarkably suited to aviation economics ( I did not say finance, which is to Economics what pharmacy is to medicine ). But there are other areas in commercial aviation where it could be applied, but that requires at least another trained member in GT to have a learned discussion ;)
 
MIflyer12
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Re: Alliance Economics

Wed Feb 14, 2018 1:03 am

Have you studied the U.S DoJ horizontal market criteria applied to airline mergers and JVs?
 
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DWC
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Re: Alliance Economics

Wed Feb 14, 2018 1:20 am

MIflyer12 wrote:
Have you studied the U.S DoJ horizontal market criteria applied to airline mergers and JVs?

No, any particular article you have in mind ?
My concern is not legal but adecuacy with Economics fundamentals.
Law & official market criteria are easily "accommodated" to ideology ("deregulation"), group interests, lobbying or any constructed indicator.
 
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lightsaber
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Re: Alliance Economics

Wed Feb 14, 2018 1:27 am

Alliances open opportunities for new entrants. :). In particular LCCs. With the A321LR, I'm not worried about mid-haul economics.

The connections are a good thing.

Oh, EK&FZ are both owned by the ruling family of Dubai.

If the paltry awards get someone to select, the FF club has done it's job. My work requires buying on price (with bag). There are ways to game the system, but a good travel agent software prevents the FF plans from costing the company more.

For example, alliance flights to AMS are above a threshold in J. We fly to Germany, rent a car, and drive back. Cest la vie. And the company values our time highly!

Lightsaber
You only have the first amendment with the 2nd. If you're not going to offend someone with what you say, you don't have the 1st.
 
MIflyer12
Posts: 4001
Joined: Mon Feb 18, 2013 11:58 pm

Re: Alliance Economics

Wed Feb 14, 2018 3:48 am

DWC wrote:
MIflyer12 wrote:
Have you studied the U.S DoJ horizontal market criteria applied to airline mergers and JVs?

No, any particular article you have in mind ?
My concern is not legal but adecuacy with Economics fundamentals.
Law & official market criteria are easily "accommodated" to ideology ("deregulation"), group interests, lobbying or any constructed indicator.


The DOJ is responsible for implementing law, after Congress took airline merger review away from the DOT.

The review criteria speak to underlying economic principles. The DOJ needs to cite public benefit, for example, for a priori reduction in number of carriers.

These aren't amateurs. Their decisions are part of the public record and can be tested in court. The criteria have been in place for more than 15 years, from the rejected UA/US merger thru today.

Extensive review is a necessary start for a serious answer to the query you outlined. LAXintl sounds like he is familiar.
 
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DWC
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Re: Alliance Economics

Wed Feb 14, 2018 12:25 pm

MIflyer12 wrote:
The DOJ is responsible for implementing law, after Congress took airline merger review away from the DOT.
The review criteria speak to underlying economic principles. The DOJ needs to cite public benefit, for example, for a priori reduction in number of carriers.
These aren't amateurs. Their decisions are part of the public record and can be tested in court. The criteria have been in place for more than 15 years, from the rejected UA/US merger thru today.

No government policy is amateurish.
But there often are discrepancies between Economic equilibria & Law, also all depends on what variables one chooses to maximize.
Most people qualify the US aviation market as mature, however US3 service is abysmal compared to other parts of the world so that "mature" is not accepted as an economic or good service argument.
Anyway, the discussion is about Economic maxima & minima, not about their legal interpretation ;)
Last edited by DWC on Wed Feb 14, 2018 12:27 pm, edited 2 times in total.

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