Airline Hubs: a Study of Determining Factors and Effects
Total Page：16
File Type：pdf, Size：1020Kb
http://clevelandfed.org/research/review/ 1987 QUARTER 4 Best available copy Airline Hubs: A Study of Determining Factors and Effects by Paul W. Bauer Paul W. Bauer is an economist at the Federal Rese~eBank of Cleve- land. The author would like to thank James Keeler, Randall W. Eberts, and Thomas J. Zlatoper and others who provided useful comments on earlier drafts of this paper. Paula Loboda provided valuable research assistance. Introduction Syracuse to name just a few. Hub cities tend to The Airline Deregulation Act (ADA) of 1978 have much more traffic than spoke cities. Much caused many changes in the industry. For the first of the hub-city traffic centers on making connec- time in 40 years, new airlines were permitted to tions. For example, over 60 percent of the pas- enter the industry, and all airlines could choose sengers who use the Pittsburgh airport hub are the routes they would serve and the fares they making connections, vs. 25 percent at the Cleve- would charge. Airlines were also free to exit the land spoke airport. industry (go bankrupt), if they made poor choices The advantages of hub-and-spoke in these matters. Naturally, this has led to many networks have been analyzed by several sets of changes in the way airlines operate. researchers. Bailey, Graham, and Kaplan (1985) Many aspects of airline behavior, discussed the effects of hubbing on airline costs particularly fares, service quality, and safety, have and profitability. Basically, hubbing allows the air- been subjected to intense study and debate. The lines to fly routes more frequently with larger air- development of hub-and-spoke networks is one craft at higher load factors, thus reducing costs. of the most important innovations in the industry Morrison and Winston (1986) looked at the since deregulation, and it has affected all of these effects of hubbing on passenger welfare, finding aspects. Yet comparatively little research has been that, on average, passengers benefited from the done on this phenomena. switch to hub-and-spoke networks by receiving A hub-and-spoke network, as the more frequent flights with lower fares and slightly analogy to a wheel implies, is a route system in shorter travel times. which flights from many "spoke" cities fly into a It is important to note, however, central "hub" city. A key element of this system is that while passengers benefit on average from that the flights from the spokes all arrive at the hub-and-spoke networks, there are some detrimen- hub at about the same time so that passengers tal effectssuch as the increased probability of miss- can make timely connections to their final desti- ing connections or losing baggage and having di- nations. An airline must have access to enough rect service converted into connecting service gates and takeoff and landing slots at its hub air- through a hub (although this is partially offset in ports in order to handle the peak level of activity. many cases by more frequent service). Current An example of a hub-and-spoke public perceptions about the state of airline ser- network can be seen in figure 1, which shows the vice have been strongly influenced by the transi- location of the hub and spoke cities used in this tory problems many of the carriers have had inte- study. From Pittsburgh, USAir offers service to grating acquired airlines into their service network. such cities as Albany, Buffalo, Cleveland, Dallas- Fort Worth, London, New York, Philadelphia, and ECONOMIC REVIEW http://clevelandfed.org/research/review/ Best available copy Hub and Spoke Network Source: Author FIGURE 1 McShan (1986) and Butler and In an attempt to more fully under- Huston (1987) have shown another aspect of the stand the hubbing phenomena, this paper looks switch to hub-and-spoke networks. McShan argues for the main factors that airlines consider in eval- that airlines with access to the limited gate space uating existing and potential hubs, and investi- and takeoff and landing slots at the most desira- gates the impact of the hubbing decision on air- ble hub locations before deregulation have bene- port trafic. fited the most from deregulation. Butler and Hus- The paper is organized as follows. ton have shown that the airlines are very adept at Section I discusses the cost and demand charac- employing their hub market power, charging teristics of the airline industry that lead to hub lower fares to passengers flying through the hub and spoke networks. From these stylized facts (who typically have more than one choice as to about the airline industry, a two-equation empiri- which hub they pass through) than to passengers cal model is constructed in section 11. The first flying to the hub (who have fewer options). equation predicts whether a city is likely to have Some of these authors have specu- a hub airline and the second equation estimates lated as to why hubs exist in some locations but the total revenue passenger enplanements the not in others. Bailey, Graham, and Kaplan (1985) city is likely to generate as a result of the hub and McShan (1986) have suggested that an ideal activity. Empirical estimates are obtained for this hub network would have substantial local trafic model, using data from a sample of the 115- at the hub and would be centrally located to largest airports in the US., and are discussed in allow noncircuitous travel between the airline's section 111. The implications of these results on hub and spoke cities. However, no empirical the present and future structure of the U.S. airline exploration of this issue has yet been attempted. industry are discussed in section IV. http://clevelandfed.org/research/review/ 1987 QUARTER 4 Best available copy I. Characteristics of Airline Demands and Costs tude is relatively inexpensive. Thus, with each To understand the factors that influence the loca- mile flown the high fmed costs per flight are dis- tion of hubs, it is first necessary to look at the tributed over more and more miles, which lowers demand determinants and costs for providing air the average cost per revenue passenger mile. service. Basically, people travel for business or Second, average cost per revenue passenger mile pleasure. Travelers usually can pick from several declines as the average load factor is increased, transportation modes. The primary modes of because it is cheaper to fly one airplane com- intercity travel in the US., are automobiles, air- pletely full than it is to fly two planes half full. lines, passenger trains, and buses. A traveler's Studies have shown that the cost of choice of transport is influenced by the distance airline operations do not exhibit increasing re- to be traveled, the relative costs of alternative turns to scale.' In other words, large airlines do transportation, and the traveler's income and not enjoy cost advantages over small airlines if opportunity cost of time spent traveling. load factors and stage lengths are taken into Aggregating up from individual account. This does not mean that large airlines travelers to the city level, the flow of airline pas- may not have other advantages over their smaller sengers between any two cities is largely rivals. One advantage that they may have is that explained by the following factors: they have more flights to more destinations with 1) the air fare between the two cities and the more connections, so that they may be able to cost of alternative transportation modes, achieve higher load factors, which reduces cost. 2) the median income of both cities, Frequent-flyer programs also tend to favor larger 3) the population of both cities, airlines, since passengers will always try to use 4) the quality of air service (primarily the one airline to build up their mileage credits faster. number of intermediate stops and the The larger airlines, having more flights and more frequency of the flights), destinations, are more likely to be able to satisfjr 5) the distance between the two cities, and this preference. lastly, Under these cost and demand con- 6) whether either of the cities is a business ditions, the chief advantage to establishing a suc- or tourist center. cessful hub is the increase in the average load It is important to distinguish factor, which lowers average cost. Hubbing en- between business and tourist travelers. While ables an airline to offer more frequent nonstop both generate traffic, business travelers are more flights to more cities from the hub because of the time-sensitive and less price-sensitive than tourist traffic increase from spoke cities. Passengers orig- travelers. Business travelers would prefer to pay inating from the hub city thus enjoy a higher level more for a convenient flight, whereas tourists of service quality than would have been possible would prefer to pay less, even if it means spending if spoke travelers were not making connections more time en route. These factors influence the there. Passengers from the spoke cities may also demand for air service. The cost of providing that enjoy better service, because they can now make service can now be discussed. one-stop flights to many cities that they may have As with any firm, airline costs are only previously reached by multistop flights. determined by how much output is produced Hubbing has a significant effect on and by the price of the inputs required to pro- the demand for air travel through its effects on duce that output. Output in the airline industry is both air fares and the quality of air service. Pas- usually measured in revenue passenger miles sengers prefer nonstop flights to flights with (rpm), which is defined as one paying passenger intermediate stops, and if there are intermediate flown one mile.