The Economics of Code Sharing Agreements

The airline industry is one of the most competitive industry in the entire world. A large number of incumbents in this industry are making losses. This is primarily because of their lack of efficiency. Since success in the airline industry is solely based on efficiency, many companies have explored unconventional options in order to increase their profitability. One such option is a code-sharing agreement between airlines.

In this article, we will understand what code-sharing agreements really are and how they provide benefits to both the consumer and to the airlines involved.

What are Code Sharing Agreements?

Code sharing agreements are used extensively in the airline industry. In the aviation industry, the term code refers to the two-digit XX which is used as a prefix in flight numbers. For instance, flight no UA123 is a United Airlines flight. The code UA helps identify the airline involved. These codes are given by IATA which is an international travel and tourism body.

A code-sharing arrangement therefore refers to a situation when an airline is sharing its code with another. In simpler words, this means that if United Airlines shares its code UA with Emirates, then such an arrangement will be called code sharing. The flight will actually be operated by Emirates. However, for marketing and sales purposes, the flight will be addressed with the prefix UA.

In such an arrangement, the responsibility of marketing the flights lies with one of the airlines called the marketing partner. At the same time, the other airline is 100% responsible for operating the flight and hence they are called the operating partner.

Types of Code Sharing Arrangements

There are many types of code-sharing arrangements which are common in the airline industry. Some of these arrangements have been listed below.

Parallel Operation: A parallel code-sharing arrangement is an operation between two airlines that fly the same route. For instance, if both United Airlines and Delta Airlines fly from New York to Miami, a code-sharing arrangement between them may be called a parallel operation. This is because this code sharing runs in parallel to their own operations. Simply put in such a situation, the airlines will use each other’s codes as well as their own.

Connecting Operation: A connecting operation is an arrangement under which an airline has a code-sharing arrangement with another airline which does not operate on the same sector but provides connections to other flights. For instance, British Airways sells tickets for London to Chicago. However, the entire flight is not operated by them. In most cases, British Airways carries passengers from London to New York. From New York, a connecting partner takes passengers to Chicago.

The difference between a codeshare agreement and a traditional connecting flight is the way it is marketed. A traditional connecting flight will show two carriers when the passenger is booking the ticket. On the other hand, code sharing specifies one carrier and mentions the other in the fine print. Many times customers don’t even realize that they have purchased code sharing tickets.

Unilateral Operation: A unilateral operation is where one airline is not involved in the operations in any way. This means that the airline is not flying that particular route either directly or via a connection. Here, one airline tries to leverage the brand of another in order to get passengers to fly with them.

Advantages of Code Sharing

• Frequent Flyer Programs: Code sharing arrangements allow users to fly on a bigger network even though they are using the same airline. This helps them redeem their frequent flyer miles. For instance, if American Airlines only goes to 100 destinations, you will be limited in the number of places where the frequent flyer miles can be used. However, if American Airlines has a code-sharing arrangement with Delta, they can add a lot more places to your network. In this situation you will have a ticket from American Airlines but will be flying with Delta Airlines. This gives customers more options to choose from making code sharing agreements preferable from the customer’s point of view.
• Seasonal Expansion: Some airlines have the additional infrastructure which they cannot utilize. On the other hand, many airlines do not have the required number of planes or crew. This situation gets aggravated during the peak seasons. This is where code sharing arrangements come in handy. Some airlines can leverage their brands to earn more money. On the other hand, some airlines can rent out their infrastructure to other more established airlines. This allows both airlines to flourish amidst this cut-throat competition.

Disadvantages of Code Sharing

• Checking In: Passengers often complain of confusion. Sometimes they are not even aware that the flight that they are boarding is a code-sharing flight. As a result, they often end up reaching the wrong terminal or even the wrong airport. Also, there is a lot of confusion regarding the counter where the baggage is supposed to be checked in. Is it the counter of the marketing airline? Or the one with the operating airline? Such confusions may lead to missed flights.
• Safety and Baggage: Many times customers may have booked one flight considering the safety provisions of the airline. In such cases, they may get upset when they have to board a different flight. Also, customers are not really sure whom to contact in case their baggage is lost in transit.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.