As the world economy speeding up its globalization, airline alliance emerged as a new trend in the air transport industry since 1980s, According to experts, in the future airline competition will enter a new stage and a few global airline alliances will monopolize the whole market. But so far the economic reasons for airline alliance formation is still a difficult question. To explain airline alliance, the present studies have focused on the production cost saving that is resulted from the economies of scale, increased traffic density, and economies of scope. The paper thinks that, since air transport industry is a network industry, study on airline alliance must consider its network economic characters. In other words, to supply an integrated air service, air transport industry can adopt market governance, hierarchy′s governance, or hybrid governance. Why does the air transport industry tend to go airline alliance? The neoclassical economy cannot explain the airline alliance adequately. The paper studies the economic reasons for airline alliance formation from the perspective of economics. This paper emphasizes that airline alliance is not only due to the production cost saving, but also due to the transaction cost saving. In addition, the paper also studies the policies and produces suggestions in order to develop China′s airline alliance. The paper focuses on and concludes as the following: 1 Analysis of the economies of network about airline alliance. The integrated air service product is space displacement from the original airport to the destination airport. It requests an efficient, integrated air service in the air passage traffic. Airline alliance intends to supply the integrated air service, and realize the economies of network. After airlines allied, the traffic routes network is enlarged, and the size increased. As the size increases, the traffic density increases too. So airline alliance can take advantage of the economies of traffic density, and economies of size, that is to say, take advantage of economies of scale, and economies of scope, to facilitate unit cost reduction. 2 Analysis transaction cost saving of airline alliance from the transaction cost economics. Connection of and dependence on one another are the majority characters of air transport networks, and the efficiency of the traffic route networks rely on the cooperation between entities. The contractual relations between airlines are relational contract, and multilateral contract. According to the comparative institutional analysis, the heuristic model that presented by Williamson can distribute transactions along different governance. Since the economic characters of network industry, the heuristic model cannot apply to air transport industry directly. This paper puts forward a revised heuristic model. It reveals that the efficient governance can minimize the sum of production cost, organizational cost, and transaction cost. The revised heuristic model is an important supplement to the general economic theory. The paper uses the revised heuristic model to compare and analyze governance which provides integrated air service in the international air transport market. Under present international air transport management system, hierarchy′s governance is not rational. So this paper mainly compares the market governance and hybrid governance. Due to the economies of network, the production cost of hybrid governance is smaller than that of market governance. In the international air transport industry, in order to supply integrated air service efficiently, airlines often must invest in specific assets. According to the model of Williamson′s, the governance cost of hybrid is small when specific assets are high. So according to the revised heuristic model, hybrid governance adapts to the international air transport industry. 3 According to network economies of air transportation and the revised Williamson heuristic model, the paper produces in conclusion three proposals about airline strategic alliance and its future development trend. (1 As the world economy speeding up its globalization, airline alliance emerged as a new trend in the air transport industry since 1980s, According to experts, in the future airline competition will enter a new stage and a few global airline alliances will monopolize the whole market. To so far the economic reasons for airline alliance formation is still a difficult question. To explain airline alliance, the present studies have focused on the production cost saving that is resulted from the economies of scale, increased traffic density, and economies of scope. paper thinks that, since air transport industry is a network industry, study on airline alliance must consider its network economic characters. In other words, to supply an integrated air service, air transport industry can can market governance, hierarchy’s governance, or hybrid governance. Why does the air transport industry tend to go airline alliance? The neoclassical economy can not explain the airline alliance adequat ely. The paper studies the economic reasons for airline alliance formation from the perspective of economics. This paper emphasizes that airline alliance is not only due to the production cost saving, but also due to the transaction cost saving. In addition, the paper also studies the policies and produces suggestions in order to develop China’s airline alliance. The paper focuses on and concludes as the following: 1 Analysis of the economies of network about airline alliance. The integrated air service product is space displacement from the original airport to the It is an international air service, and realize the economies of network. It airlines alliance intends to supply the integrated air service, and realize the economies of network. After airlines allied, the traffic routes network is enlarged, and the size increased. As the size increases, the traffic density increases too. So airline alliance can take advantage of the economies of traffic density, an d economies of size, that is to say, take advantage of economies of scale, and economies of scope, to facilitate unit cost reduction. 2 Analysis transaction cost saving of airline alliance from the transaction cost economics. Connection of and dependence on one another are the Major characters of air transport networks, and the efficiency of the traffic route networks rely on the cooperation between entities. The contractual relations between airlines are relational contracts, and multilateral contract. According to the comparative institutional analysis, the heuristic model that presented by Williamson can distribute the transactions along different governance. Since the economic characters of network industry, the heuristic model can not apply to air transport industry directly. This reveals that the efficient governance can minimize the sum of production costs, organizational costs , and transaction cost. The revised heuristic model is an imp ortant supplement to the general economic theory. The paper uses the revised heuristic model to compare and analyze governance which provides integrated air service in the international air transport market. Under this international air transport management system, hierarchy’s governance is not rational. Due to the economies of the network, the production cost of hybrid governance is smaller than that of market governance. In the international air transport industry, in order to supply integrated air service efficiently, airlines often must According to the model of Williamson’s, the governance cost of hybrid is small when specific assets are high. So according to the revised heuristic model, hybrid governance adapts to the international air transport industry. 3 According to network economies of air transportation and the revised Williamson heuristic model, the paper produces in conclusion three proposals about airline strategic alliance and its future development trend. (1