The Structure of Airline Equilibrium Networks

Abstract

In this paper, we explore why airline firms restructure their route network as a hub-and-spoke instead of a fully connected network. The difference between the two networks is that under a fully connected network all passengers are serviced by direct flights between origins-destinations city pairs, whereas under a hub-and-spoke network all city pairs are linked via a hub. We show that when a monopoly airline firm finds it profitable to operate a hub-and-spoke, it will increase frequency of service, compared to the case of a fully-connected type network. Our analysis differs from existing studies in two major respects: (i) We employ ‘frequency of flights’ as the measure of airline’s output instead of the commonly used measures like number of passengers or available-seat-km. (ii) Whereas previous studies have shown similar results based on airline’s cost function analysis in this paper we focus on demand conditions which cause the airline firm to restructure its network as a hub-and-spoke.