CODE SHARE PARTNERSHIP
Updated: Aug 26, 2019
This piece is authored by Ish Chopra, a first year student of B.A.LL.B (Hons.) at the Rajiv Gandhi National University of Law, Patiala.
Ailing Aviation Sector
The aviation industry is one of the fastest growing industries, as it has year after year recorded a growing number of passengers across the world. This should generally correspond to growing profits for the airline carriers, but that certainly is not the truth. In fact, majority of the airlines face innumerable hardships and find it a real challenge to break- even the figures. The high cost of jet fuel and the stringent rules and regulations governing the sector overshadow the growth rates. In such a market the airlines have to take every measure to operate efficiently. One such measure which has found increasing popularity now-a-days is code-share partnership between two or more airlines.
Unlike any other sector aviation industry has seen an increasing cooperation amongst the airlines because they have realised that survival will require a framework which is based on cooperation and connection between various airlines. There are various hurdles before the companies which try to expand their market internationally. Such barriers include rigid regulations which make mergers and acquisitions amongst airlines very difficult. In practice, mergers and takeovers have been limited to airlines of the same nationalities.[i] Secondly, mergers have led to the undoing of various airlines, especially in the Indian market. For example, Air India’s merger with Indian Airways and Kingfisher’s merger with Air Deccan led to the downfall of both the airlines. These mergers were not strategically planned which caused discontent amongst both the staff and the consumers. Mergers come with a string of challenges and if these are ignored then they could turn sore and lead to the downfall of the airlines. In a market like India where survival for an airline is in itself a challenge, mergers have to be planned and executed very efficiently. Problems like friction between the staff of the two airlines and overstaffing because of the merger can lead to long term problems for the airlines like in the case of Air India.[ii] Kingfisher also failed to integrate a premium carrier with a low cost domestic carrier and thus caused confusion in the minds of its customers who were used to the premium service of Kingfisher. Majority of these problems could be bypassed by a codeshare partnership.
Rise of Codeshare Partnerships
In such an extensively regulated market where traditional alliances are seldom successful, code-share partnerships have developed at a very fast rate. Code-share agreements are quasi-alliances between airlines under which, one airline books certain number of seats on a flight operated by an administrating carrier. These seats are sold by the ticketing carrier as if they are operating the flight on their own aircraft, managed by their own crew and staff.[iii] But the whole flight is operated by the administrating carrier and its staff. Now the question that arises is: How does this partnership work to the advantage of the partner airlines?
Firstly, it helps in the expansion of routes for both the carriers. Direct expansion through buying more aircrafts and acquiring permission for new air slots is not always feasible as it requires a lot of capital. Further, the regulatory barriers set by the countries to promote their national carriers don’t allow a particular carrier to expand its international operations substantially.[iv] Therefore, these agreements help the partner airlines to effectively utilise each other’s routes and fleet. For example, if Spicejet wants to expand its operations to provide connectivity to China, that would require inducting longer range aircraft and going through the lengthy process of slot allotment. On the other hand, it could get into a code-share agreement with Hong Kong based airlines like Cathay Pacific, as Spicejet operates flights from various Indian cities to Hong Kong while Cathay Pacific provides services from Hong Kong to various cities in China.
Secondly, in a market like India where passenger traffic flying to and from international destinations grew from approximately 17 million in the year 2004-2005 to approximately 60 million in the year 2017-2018,[v] airline carriers did not expand at the same rate to provide direct connectivity across the globe, causing inconvenience to the passengers. At present only Air India provides long-haul flight options in India and a fleet of mere 49 wide body jets[vi] can cater to only a fraction of international passenger traffic. This situation can very effectively use codeshare partnerships as the inconvenience of changing carriers and thereby manually transferring the luggage could be bypassed. This is because under a code-share agreement the partner carriers decide upon some routes and then plan their respective flights accordingly to provide efficient solutions for the passengers. This partnership also helps the airlines to make profits because they are able to fill up the seats on a particular route which were not utilised before due to lesser traffic on that route. After the partnership, vacant seats would be filled because of further connectivity from those destinations. The alliance partners further use many techniques like gate proximity, synchronised frequent flyer programs, and common lounge access amongst others to provide a more efficient solution.
We can take up the example of many new code-share alliances in the Indian market. Indigo airline is starting a new partnership with Turkish airlines to increase connectivity from India to various European destinations so as to provide a seamless experience to the travellers.[vii] Here, the Turkish airlines will become the administrating operator and Indigo will be able to reserve some seats on the aircraft as if they are themselves operating the flight. After the fall of Jet Airways the Indian market took a major hit as flights to major European destinations ceased. The partnership between Indigo and Turkish airlines will give the Indian passengers faster and relatively cheaper options when compared to flights from more expensive international carriers like Emirates.
Regulation of Code-Share Agreements
Along with all the benefits that code-share agreements bring for both the passengers and the airline carriers, they also pose a challenge for the regulatory bodies of the countries. They have to eliminate any attempt at collusive pricing which means that the code-share agreement should not hike the airfare. This might occur when the flights of the partner carriers are overlapping each other instead of complementing each other. This can be explained with the help of an example; suppose, Indigo enters into a code-share partnership with Emirates. Here, both the carriers operate flights from Delhi to Dubai but only Emirates provide flights from Dubai to London and only Indigo provides flights from Jaipur to Dubai. The flights of the partnership will be complementing each other when there is code-share agreement for flight from Jaipur to Dubai and vice-versa. The Delhi to Dubai route would be considered to be an overlapping route and hence there could be possibility of price collusion between the airlines. This possibility has to be eliminated by the regulatory body otherwise there will not be fair competition in the market for the passengers. Hence, before entering into the agreement, the partner airlines should submit their pre-determined code-share flight plan for scrutiny by the regulatory body. The regulatory body should set a maximum limit to which the price of a certain route operated by the partner airlines can increase after the agreement.[viii]
Thus with adequate surveillance from appropriate authorities, code-share agreements will turn out to be the go to option amongst the airlines for quick expansion. These agreements also help in increasing connectivity to destinations that were previously not catered to by the airlines. The Indian market can very effectively use this model, as it will support the growth rates which will not be matched using traditional expansion methods. It might also help the airlines to resolve their financial issues as multiple-management system of the partner airlines will provide a much better financial solutions because they can use their experience in their respective areas of operation to lower the price of the tickets in a price sensitive market like India.
[i] Peter P.C. Haanappel, Airline Challenges: Mergers, Take-Overs, Alliances and Franchises, Annals of Air and Space Law XX, Issue I (1995).
[ii] Mihir Mishra, Indian Airlines merger has caused Air India’s downfall: Ashwani Lohani, The Economic Times (2016), https://economictimes.indiatimes.com/opinion/interviews/indian-airlines-merger-has-caused-air-indias-downfall-ashwani-lohani/articleshow/52998986.cms?from=mdr.
[iii] Philip G Gayle, On the Efficiency of Codeshare Contracts between Airlines: Is Double Marginalization Eliminated?, American Economic Journal: Microeconomics 244, 273 (2013).
[iv] Jan K. Brueckner, International Airfares in the Age of Alliances: The Effect of Codesharing and Antitrust Immunity, 85 SSRN Electronic Journal 105, 118 (2003).
[v] Domestic Traffic Reports, Directorate General of Civil Aviation (Jun 19, 2019), http://dgca.nic.in/reports/Traffic-ind.htm
[vi] Fleet Details, Air India (Jun 19, 2019), http://www.airindia.in/fleet-details.htm.
[vii] Indigo Enters into a Codeshare Agreement with Turkish Airlines, Indigo (Jun 20, 2019), https://www.goindigo.in/codeshare.html.
[viii] Philip G. Gayle, Airline Code-Share Alliances and Their Competitive Effects, 50 J.L. & ECON. 781, 820 (2007).