Codeshare Agreement – A way to gain market power and raise airfares? : An investigation of the effect of codeshare agreement on the European airline market

Abstract: Over the last decades the airline industry has changed to a more competitive market as an effect of the deregulation in the European Union and United States. To keep and attract new customers partnerships between airlines have become a common scenario. Alliances have emerged and grown and created deeper incitement for a cooperative behavior between airlines. Codeshare agreement, which originated as a way to get more exposure, has now established as a strategic approach to gain larger market shares. Codeshare is a bilateral agreement between airlines that makes it possible for a passenger to travel on two different airlines on the same booking code. This study aims to investigate whether cooperative behavior like codeshare would eliminate or reduce competition on nonstop flights within Europe. Both economic theories and prior work is covered which gives an insight of the complexity behind antitrust behavior. Data was collected and regression analysis was made to detect certain patterns that could explain if codeshare agreements could lead to higher fares on nonstop traffic on intra-Europe flights. The empirical result showed that certain agreements, like parallel- and unilateral codeshare, are resulting in higher fares on nonstop flights. This could be explained by underlying factors that prevent competition, like airport congestion and the fact that being a member of an alliance in some cases will prevent new airlines to enter a specific market. This is also analyzed in the regression models. The result was in line with expectations. Much of the problem is the lack of competition, which in turn could be explained by limited takeoff- and landing permissions at the congested airports of Europe, along with other entry barriers like cost advantages for the incumbent. Codeshare agreements are likely to reinforce entry barriers that exist today in the airline industry in Europe.