How 'relational' is a Relational Contract? Governance Issues in Strategic Airline Alliances

Abstract: The model initially developed by Baker-Gibbons-Murphy (2002; 2008) on relational contracts has recently been refined and empirically implemented and tested. This paper builds on these developments with a particular attention to non-contractibilities and the resulting temptation to renege. After a short reminder of the basic model (section 2), the paper explores specific factors that are non-contractible in a complex contract linking Air France-KLM, Delta, and Alitalia. This alliance, which is embedded within a broader alliance (the Sky Team Alliance), has been submitted to severe shocks coming from changes in the economic environment, reactions of other partners in the alliance, and substantial changes in the boundaries of the firms involved (section 3). These shocks fed powerful temptations to renege that challenged the sustainability of the arrangement, a challenge so far overcome thanks to the complex and efficient governance adopted by the partners (section 4). The paper shows that motivations for this arrangement go beyond a strategy to go around restrictive regulations and correspond to advantages coming out of the implementation of ‘hybrids within hybrids’ (section 5). Lessons are drawn regarding the complexity of hybrid arrangements in market economies and the institutional problems these arrangements raise, particularly with respect to competition authorities (section 6).