Home Agreements Understanding codeshare agreement in aviation

Understanding codeshare agreement in aviation

December 12, 2021

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This article is written by Pratha Kotecha, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).

Introduction

Imagine you bought an airline ticket to travel to your favourite vacation destination, but when you reached the airport, you were directed to another terminal or gate or a section of that airport or even to another airline! That is when you realize and /or are informed that the flight which you are about to board is a ‘codeshare’ flight.

Codeshare is a way for airlines to offer additional routes, increase the sale of their tickets, and even maintain the expenses in check for the passengers. A ‘codeshare agreement’ is a kind of cooperative agreement between two or more airlines under which airline companies sell each other’s seat tickets on a single route and offer more destination choices to the travellers. In the present article, we will understand what a code-sharing agreement is, its working, importance and essential provisions in the same.

Codesharing is a marketing arrangement where an airline places its designator code on a flight operated by another airline, and then sells tickets for that flight. Airlines all through the world continue to form such code-share arrangements to strengthen or enlarge their market presence and competitive ability.

In simple words, code sharing lets the airlines sell tickets to destinations to which they do not fly. Codesharing agreements allow airlines to offer frequent and abundant flights without any additional equipment, resources, and costs. Codesharing also provides passengers with a wide choice of flights, eases booking, checking in, and luggage handling. It also makes travelling more convenient and easy. In addition to this, the coordinated schedules of flights ensure that passengers have enough time for all connections.

What is a codeshare agreement?

It is an agreement between two or more airlines that use the same flight number in a mutually beneficial arrangement. In simple terms, it means that we- the passengers, can purchase a flight ticket from one airline using their flight number for a flight ticket on another different airline. For example, you can purchase a seat on a plane under one airline, but it will be a seat on the plane of a different airline, which shares the same flight number or code. Such types of codeshare agreements often occur within alliances, for example, OneWorld or SkyTeam, but not always.

A codeshare agreement is also simply referred to as “codeshare”, which is a very common business arrangement in the aviation industry. Under this agreement, two or more airlines circulate and market the same flight under their airline designator and flight number (also called the “airline flight code”) as part of their issued timetable or schedule. Normally, a flight is operated by one airline (technically referred to as an “administrating carrier”) while seats in the flights are sold by all cooperating airlines using their designator and the flight number.

The term “code” in the codeshare denotes the identifier used in a flight schedule. It is usually a two-character International Air Transport Association (IATA) airline designator code and flight number. For example, BB556 (flight number 556 operated by the airline BB), might also be sold by airline DD as DD234 and by FF as FF9642. Airlines DD and EE are in such a scenario referred to as the “marketing airlines” or “marketing carrier”.

History of code sharing

Codesharing can be traced back to the 1960s. In the year 1967, Allegheny Airlines (which now we know as USAir) agreed on the earliest codeshare with a commuter airline in the United States (US). Subsequently, with the deregulation act of the US domestic market in the 1970s, the practice of code sharing became even more popular. However, the term codeshare agreement was coined with Qantas and American Airlines in the year 1989. The services offered by them were a hub-and-spoke style. In Europe, code-sharing agreements became popular in 1993, following the deregulation of the EU. The European Commission, in the year 2007, issued a final report on the competitive impact of airline codeshare agreements, which showed that 100 out of 100 airlines which were surveyed had already signed a codeshare agreement with one or more airlines across the world.

This happened many years ago, and since then the practice has enhanced even more. The following are a few examples of codeshare agreements.

American Airlines and Qatar Airways,
Icelandic and airBaltic,
KLM and Delta,
LATAM Brazil and Azul,
TAP Portugal and Avianca,
United and ANA,
LATAM and Malaysia Airlines.

How does code sharing work?

The working of code sharing can be explained by using United and Delta as examples:

Let’s assume that United Airlines provides a flight with its own and specific flight number and sells seat tickets for the same. However, the trip is actually operated by Delta Air Lines and not United Airlines. A commercial agreement is a necessity between the two airlines to do this. Delta Air Lines, in this case, is guaranteed revenue without the necessity to spend a single penny on marketing to its customers. And, on the other hand, United Airlines sells its seat tickets to its customers, passengers, corporations, and travel agencies without providing any flight logistics. In such a case, both parties usually share the profits of this flight.

In the above example of a code-sharing agreement between United and Delta Air Lines, the United Airlines is the “marketing” airline, whereas Delta is the “operating” airline, which actually flies the plane, carries the passengers, and supplies the pilots, as well as the flight attendants. The passengers and customers will be commuting on a United Airlines flight operated by Delta Air Lines. Although the tickets bought by them were through United and payment made directly to them, yet they will check in with Delta, and every step of their journey, including the flight commute, will be managed by Delta airlines.

Another way in which code sharing works is via connecting flights. In this a passenger boards and flies a part of the journey on one airline, and during a halt, he or she shifts to a second airline for the other part of the journey. Nonetheless, both parts of the journey will be ticketed as one single flight ticket, issued by one airline, and a codeshare partner with the second airline.

Importance of codeshare flights

The majority of the airlines which operate today, have and practice code-sharing partnerships with other airlines. Codeshares have become a key feature in major airline alliances. Codeshares are beneficial to the airlines as it allows their passengers to reach new destinations that are not served by their own aircraft, which means that they can now offer a larger variety of destinations, without actually having to fly there. Codeshares also help airlines on focussing their services on the destinations they already offer, thereby providing more frequent services.

Advantages of codeshares

For airlines

The airlines enter into code-share agreements in order to broaden the offer that airlines can make to passengers in relation to the extent of destinations and, in certain cases, the flight timings that they can offer potential passengers, without them having to buy more planes, or hire more flight attendants, or pay more in airport fees basically without the expenditures and complications involved in supplementary investment in equipment or mergers with other airlines. Therefore, airlines join in partnerships to assist such agreements.

Code-share agreements also develop the “existence” of an airline in a marketplace where it would otherwise have no profile, and hence aid the marketing of its services, consenting its seats and tickets to be sold via a marketing carrier that may be much better known in that market. The airlines in such a way portray that they have more flights than they actually do, which in turn helps in their marketing and public relations.

The presence of a code-share agreement with a partner airline can also boost the confidence of both the passengers and distribution channels that journeys including the partner can be traded with the prospect of a good overall level of service, in terms of appropriateness of the product and seamlessness of ticketing and aircraft connection arrangements. It is believed that by enhancing the customer reach, widening the offer to the airlines’ passengers, and by giving them the required confidence about products offered in combination with other carriers – the airlines generate additional traffic, which increases their revenue, at a relatively low cost.

For passengers/travellers/customers

Codesharing increases connectivity as it allows travellers to book connections that wouldn’t otherwise exist, as a single carrier wouldn’t operate the full journey. The passengers can book connections at a single spot and have their voyage completely taken care of by one airline. Travellers are also able to fly on several airlines with a single ticket and are ensured of safety, security in case of any delays which may arise.

Travellers also have an advantage of earning Air Miles with such codeshares and with the airline they have booked, even if they are not regular flyers with the operating airline. This is provided by both the airlines that have the codeshare or are in such partnership.

Basic provisions of codeshare agreements

Code-share agreements, when viewed from a legal perspective, are commercial agreements between the marketing and operating carriers. Alliance members of airlines often codeshare with each other, but they do not state the particulars of such agreements, which remain mutual between the parties. The alliance membership specifies numerous common and mutual obligations that go well beyond those obligatory by code-sharing, but it is not always easy to differentiate the magnitude to which features of code-share agreements, or parallel agreements, relate to alliance membership rather than explicitly to code-sharing. This is predominantly the situation for airlines that only choose to code-share with related alliance members. The standard provisions of code-share agreements are as follows:

List of routes

Agreements must stipulate which routes are covered by the said agreement, either in universal and generic terms or through an explicit list within an annexe. The clause may also include that the said list can be modified by agreement between the parties in writing.

Marketing and product display

The agreement will contain several provisions permitting each carrier to market a flight under its own code, and necessitating the marketing carrier to pinpoint the flight to the customer, before the transaction is finalized, as being actually operated by the operating carrier.

Safety, security and maintenance

These provisions ensure that flights are functioned and operated safely with proper equipment, and usually cross-refer to standards set by the appropriate governmental authorities.

Technical and functional requirements

These provisions define and enumerate the operating carrier’s responsibility for the operational function of the flight, and rights to make operational changes as required for safety and other reasons.

Passenger handling and airport procedures (Codeshare service)

These provisions deal with the measures taken for handling passengers (resembling check-in, flight transfer, luggage retrieval, etc.) and is specific to how disturbances should be managed. Generally, wherever problems happen on the day of travel, the operating carrier has to manage the situation on its own. Conversely, where a flight is cancelled well in advance, the general practice is for the marketing carrier to rebook the code-share commuters onto other available flights.

Inventory control and procedures

These provisions may lay down how the dual airlines’ reservations booking classes are to be planned and recorded. It can also contain statements about probable “block space” arrangements between the parties, and, for both free sale and block space arrangements. The provision may also specify how access to inventory on the operating carrier’s flight will be delivered to the marketing carrier.

Pricing, revenue management, ticketing, commission payments, taxes, and financial settlement

These provisions are vital to the description of the flow of income and revenue occasioning from the agreement. As a normal rule, the share of a fare appropriate to a certain flight sector goes to the operating carrier. In some agreements, the applicable clause may merely state that the division of proceeds and reimbursement of commissions shall follow customary industry procedures, in other words, the industry rules concerning interlining and proration. The agreement may also contain provisions concerning the payment, collection, and settlement of applicable taxes and charges.

Liability, indemnification, and insurance

The above-mentioned clauses deal with liability if there is a problem. Generally, the operating carrier indemnifies the marketing carrier in case of any liability which it incurs relating to non-performance of its obligations to its customer due to certain actions or omissions of the operating carrier. However, the operating carrier is likewise requisite to hold proper insurance.

Exclusivity

Certain code-shares are exclusive between the parties, preventing them from entering into further code-share agreements with any third-party carriers in certain markets, in order to protect their interests.

Conclusion

Codeshare agreements have a lot more advantages for both the airlines and the passengers as compared to their shortcomings. The above-mentioned clauses are the essential and basic clauses that a codeshare agreement must include. A well-drafted code-sharing agreement will allow the airlines to function in a cooperative relationship with other partner airlines, which will make their product competitive and profitable at the same time. It is to be noted that airlines worldwide are increasingly adopting code sharing along with entering into a legally binding and water-tight agreement to ensure that no party is at a losing end due to ambiguities.

References

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