Airlines Alliances: Fractures in Seamless Service(CEIBS Working Paper, No. 038/2020/MKT, 2020)

Airline alliances benefit global travelers and airlines. Although they enable seamless travel across countries and airlines, many customers complain about less-than-satisfactory services received from ‘partner’ airlines in an alliance. This is puzzling because quality of service impacts success and service provided by any member of an alliance impacts the evaluation of the entire alliance. We develop an analytical framework to analyze the problem of variation in service quality experienced by loyal customers during their journey across allied airlines. Our game theoretic framework shows that variation in customer service is inherent in an alliance structure. Therefore, managing customer expectations about service quality could alleviate dissatisfaction due to service quality variation. Both customer service and profitability of an alliance can be improved if its governing board takes more control of the alliance members’ service efforts and pushes them to invest in enhancing service infrastructure. Finally, alliance-wide customer service improves when allied airlines provide higher benefits to their loyalty program members by leveraging spare capacity—a new benefit of loyalty programs in the context of airline alliances.