Abstract: This paper looks at the endogenous formation of airline alliances by means of a two-stage game where first airlines decide whether to form an alliance and then fares are determined. We analyze the profitability and the strategic effects of airline alliances when two complementary alliances, following different paths, may be formed to serve a certain city-pair market. The formation of a complementary alliance is shown to hurt outsiders and that fares decrease in the interline market. Contrary to what might be expected, we find that complementary alliances are not always profitable, even in the presence of economies of traffic density. The interplay between market size, the degree of product differentiation and the intensity of economies of traffic density determines whether the market equilibrium entails no alliances, a single alliance or a double alliance.

Keywords: complementary airline alliances; economies of traffic density; product differentiation

JEL classification: L13; L2; L93