Frequent Flier Program Partnerships, Substitutability, and Airlines' Profit

Abstract

This paper offers a first model of parallel frequent flier programs partnerships, rather typical for the US domestic market. We model these partnerships as arrangements which make carriers' services more substitutable, in a setup where consumers value frequency and exhibit varying degrees of brand loyalty. We show that joining frequent flier programs can increase profits of partner airlines, even where no explicit coordination between them is allowed.

Keywords: Frequent Flier Programs, Airline Consolidation, Substitutability

JEL Classification: D43, D49, L13, L29, L40, L93