CO is 100% in the right on this one. Since CO did not issue the ticket to IST (and, I'm assuming that this was not a conjunction ticket of some kind), the airline is not liable for the failure of another carrier to deliver you to MUC in time to complete your trip.

Unfortunately, this is one of the risks you have to accept when booking multiple tickets for a single trip. To be completely honest, CO is doing you a favor by still allowing you to use the ticket to continue on, albeit with a change fee -- some airlines would have deemed the ticket worthless and forced you to buy a new ticket altogether.

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Has YOUR airline won an award lately?