DECISION MODELS FOR AIRLINE
PASSENGER AND CARGO
NETWORK ALLIANCES
LANG CHUNMEI
DOCTOR OF PHILOSOPHY
CITY UNIVERSITY OF HONG KONG
FEBRUARY 2006
CITY UNIVERSITY OF HONG KONG
香港城市大學
Decision Models for Airline Passenger
and Cargo Network Alliances
航空客貨運網路聯盟的決策模型
Submitted to
Department of Management Sciences
管理科學學系
in Partial Fulfillment of the Requirements
for the Degree of Doctor of Philosophy
哲學博士學位
by
Lang Chunmei
郎春梅
February 2006
二零零六年二月
Abstract
Strategic alliances are widely practiced in the automotive, electronics,
computer telecommunications, airlines and hi-technology network-oriented
industries. The airline industry has become one of the most competitive industries
in recent years. The only practical way to secure and increase market share in
international air transport is to align with existing airlines based in foreign
territories. Nowadays, airlines have actively formed strategic alliances with
foreign carriers as a means of forming global networks to increase passenger and
freight market share. Extensive works have been devoted to studying airline
alliances. However, existing studies only focus on the air passenger alliance and
ignore the airline service network structure.
This thesis develops, for the first time, several economic models to study the
strategic alliance of both passenger and cargo services from a network integration
approach. The alliance synergies and network complementary are addressed.
The thesis is developed in three distinct stages and the results are then
collated and summarized.
The first study addresses the alliance of international service networks of two
regional airlines and develops an alliance model. By examining the alliance effect
on market outcome, profit and social welfare, the decision analysis tools for both
government and airlines are developed.
The second study presents an economic model to examine the effects of the
alliances between the combined passenger and cargo networks and the dedicated
cargo networks. These two service networks have different route structures where
the passenger-cargo network is designed to meet passengers’ demands, while the
dedicated cargo network is cargo oriented. Three parameters are introduced:
network coverage, flight capacity and shipment handling quality, to characterize
different networks, and alliance synergies are evaluated by time, service equality
ii
and cost saving. The model predicts that cargo alliance between these two
networks will likely increase cargo service quantities for each network whilst the
rival carrier, who owns both two networks, would lose some cargo services.
Furthermore, this carrier also loses some profits to the cargo alliance partners.
Results also show that cargo network alliances would decrease ‘full’ prices and
increase social welfare. Sensitivity analysis is performed using simulations to
investigate the relationship between network design and alliance synergies.
The third study introduces a strategic alliance model to evaluate the
competitiveness of forwarders and integrators in the air cargo market. The rivalry
between an integrator and a forwarder-airline alliance is examined by considering
the intermodal integration. It is found that under economies of traffic density, an
improvement in intermodal operations for a forwarder-airline alliance would
increase the alliance’s outputs and profits whilst harming the market rivals. For
the forwarders, the forwarder-airline alliance model is more profitable than the
outsourced, no-alliance model.
This research studies the economic models for the development of airline
strategic alliances. The unique characteristics of passenger and cargo networks in
different service markets are explored. Strategic alliances for both passenger and
cargo services are analyzed through the passenger network alliance synergies,
cargo
network
alliance
synergies,
and
the
passenger-cargo
network
complementary. The research provides a methodology for the airline industry to
analyze the formation of strategic alliances and the selection of strategic partners
in both the passenger and freight markets and in a combination of both.
iii
Table of Contents
Title Page
ⅰ
Abstract
ⅱ
Acknowledgments
ⅳ
Table of Contents
ⅴ
List of Figures
Ⅶ
List of Tables
ⅷ
Chapter 1 Introduction
1
1.1 A Brief Review of Airline Alliances
3
1.2 Background to Air Cargo Alliances
7
1.3 Motivations and Thesis Organizations
Chapter 2 Literature Review
10
12
2.1 Managerial Studies on Strategic Alliances
12
2.2 Empirical Studies on the Airline Alliance Effects
15
2.3 Theoretical Models for Airline Alliances
18
2.4 Literatures on Air Cargo Alliances
20
Chapter 3 Decision Analysis for International Air Network
Alliances
23
3.1 The model
24
3.1.1
Basic Assumptions
24
3.1.2
The Pre-Alliance Model
27
3.1.3
The Post-Alliance Model
30
3.2 Impact on Airlines’ Output and Profit
v
34
3.3 Impact on Economic Welfare
38
3.4 Decision Analysis
40
3.5 Summary
44
Chapter 4 Airline Alliances for Passenger and Cargo Networks
4.1 Introduction
44
4.2 The Model
49
4.3 Effects of the Alliance
57
4.4 Network Design and Alliance Synergies
61
4.4.1
Effects of Network Structure Change
63
4.4.2
Effects of Network Setup Cost Change
67
4.5 Summary
69
Chapter 5 Competition Models in Intermodal Transport
Logistics
70
5.1 Introduction
70
5.2 Basic Model
73
5.3 Effects of Alliance and Intermodal Integration
76
5.4 Effects of Alliance and Competition
81
5.4.1
Simulation Study on Market Share and Profit
85
5.4.2
Simulation Study on Deciding the Discount Rate
88
5.5 Summary
90
Chapter 6 Conclusions
92
References
96
Appendices
104
Appendix A
109
Appendix B
111
vi
List of Figures
3.1 Airline service network
25
3.2 Partners’ profit change as a function of fixed cost F and traffic density θ
37
3.3 Social welfare change as a function of fixed cost F and traffic density θ
39
3.4 Profit and welfare changes as a function of fixed cost F and traffic
density θ
40
4.1 An example of P/C network route structure
51
4.2 An example of C network route structure
51
4.3 A simple airline service network
52
4.4 Cargo output of firm A, relating to network parameter μ
64
4.5 Cargo output of partners B+D, relating to network parameter ｖ
65
4.6 Cargo output of firm A, relating to marginal cost
66
4.7 Cargo output of partners B+D, relating to marginal cost
66
4.8 Firm A’s profit change, relating to network parameter μ
67
4.9 Partner B+D’s profit change, relating to network parameter ｖ
68
5.1 A simple cargo transport network
73
5.2 Participation Constraint Function for transportation firms G and N,
relating to discount rate
89
5.3 Forwarder F’s profit change relating to discount rate
vii
89
List of Tables
5.1 Comparison of cargo quantities between the forwarder and the integrator
viii
87