Deregulation in the Airline Industry: The Impact of Parallel Alliances on Social Surplus when Airlines face Different Cost Functions

By Livia Lablans

On behalf of my master thesis at VU University Amsterdam, I did research on the effects to social welfare when different cost functions are used and government intervention is incorporated within the airlines optimization problem. The analysis is carried out by means of a model in which two out of three competing airlines decide to cooperate. Both the incorporation of government intervention and the model set-up are inspired by the KLM-AF merger, which is subject to a restriction on the distribution of traffic between Schiphol and Charles De Gaulle airports until 2010. The results of the analysis show that the government restriction on the allocation of traffic via certain hub airports gives sub-optimal outcomes. Furthermore, I argue more research should be carried out on a more precise specification of the cost function within the airlines’ optimization problem since this appears to be crucial for the results of similar research.