If a passenger uses multiple airlines without an interline agreement, then the passenger may have to collect his bags at the transit airport and get in line at the second airline to check in for the connecting flight.
For airlines, interline agreements present an opportunity to partner and expand their capacities. For example, American Airlines can sell tickets from Los Angeles to Bangkok even though it doesn't actually fly into Bangkok. American flies passengers to Tokyo and then partners with Japan Air Lines which flies customers into Bangkok. Because of this arrangement, American customers can purchase one ticket through American, which retains the brand loyalty.
At the same time, American might not carry enough traffic to Bangkok to make the route profitable. Therefore, passing the business to another airline, like JAL, more able to keep the seats full actually allows American to save costs while being able to provide more destinations to its customer base.
Today, it's becoming increasingly common to see codeshare flights where one flight has two or more airlines names and flights numbers. For example, because of Star Alliance -- a group of airlines that share mileage and partner via a multilateral interline agreement -- a United Airlines flight might also be labeled with flight numbers from US Airways and Lufthansa.
In order to have codesharing, an interline agreement between airlines is necessary. However, an interline agreement doesn't necessarily mean the participating airlines codeshare.
Over the past two decades, many airlines have entered multilateral interline agreements. Some of these are marketed as Star Alliance, One World, and Sky Team. These partnerships are designed to allow the participating airlines to work together to offer more destinations to their respective customers and markets, while allowing each to focus on their core businesses.
So, for example, Star Alliance includes United Airlines, Lufthansa and Singapore Airlines among others. A United frequent flier might book a multi-destination trip through United from New York Paris, from Paris to Istanbul, from Istanbul to Singapore and from Singapore back to New York. The customer can purchase one ticketed itinerary in which all three airlines are used to complete the trip. Yet, the customer accrues all the mileage to his or her United Mileage Plus account, and for any transit stops, baggage is transferred between airlines.
However, multilateral interline agreements are not restricted to partnership/alliance arrangements. Airlines may have sharing arrangements without marketing them under a partnership name.
In many cases, competing airlines have interline agreements. For example, while American Airlines and United Airlines compete against one another in the same markets on the majority of their routes, they also have interline agreements. This allows them to transfer passengers in a pinch if one airline has a cancelled flight or delay. It also allows them to send baggage through the other carrier should a passenger get ahead of his luggage.
In cases of emergencies, catastrophes, or sometimes just helping a passenger make use of few remaining seats, competitors find their interline agreements very useful.
