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Competition for Hub Dominance: Some Implications to Airline Profitability and Enplanement Share

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Competition for Hub Dominance: Some Implications to Airline Profitability and Enplanement Share Journal of Aviation/Aerospace Education & Research Volume 2 Number 1 JAAER Fall 1991 Article 5 Fall 1991 Competition for Hub Dominance: Some Implications to Airline Profitability and Enplanement Share Atef Ghobrial Follow this and additional works at: https://commons.erau.edu/jaaer Scholarly Commons Citation Ghobrial, A. (1991). Competition for Hub Dominance: Some Implications to Airline Profitability and Enplanement Share. Journal of Aviation/Aerospace Education & Research, 2(1). https://doi.org/10.15394/ jaaer.1991.1053 This Article is brought to you for free and open access by the Journals at Scholarly Commons. It has been accepted for inclusion in Journal of Aviation/Aerospace Education & Research by an authorized administrator of Scholarly Commons. For more information, please contact [email protected]. Ghobrial: Competition for Hub Dominance: Some Implications to Airline Profi COMPETITION FOR HUB DOMINANCE: SOME IMPLICATIONS TO AIRLINE PROFITABILITY AND ENPLANEMENT SHARE Atef Ghobrial ABSTRACT The phenomenon ofairline competition for hub dominance in terms offrequency concentration has been on the rise since deregulation. Using cross-sectional time-series data, this study explores the impact of hub dominance on airline profitability and enplanement share at the hub airport. The regression analysis finds a significantpositive relationship between airline profitability and hub dominance. The relationship between an airline's share ofpassenger enplanements and its hub dominance seems to follow an S-curve indicating that high frequency shares are associated with even higher enplanement shares, and conversely. INTRODUCTION exists a positive and strong and hub dominance using Deregulation has led to relationship between airline regression analysis. The second radical changes in airline hubbing and profitability. They phase of this paper assesses the network planning. A main focal developed two indices for airline impact of hub dominance on point for these changes has hubbing and profitability for 17 airline share of passenger been the greatly increased airlines in 1982. The regression enplanements at the hub air­ emphasis on Ihubbing.I All of the hub index on the profit­ port. The paper concludes with carriers have sought to build up ability index showed a very poor some implications to airline their previous hubs, and in many fit and the independent variable network planning, congestion at cases have created new ones. (hub index) seemed to be statis­ major hubs, and the public The hubbing phenomenon tically insignificant. Toh and policy towards airline mergers. has been the subject of many Higgins (1985) also commented TRENDS IN AIRLINE studies. Kanafani and Ghobrial that profitability is not NETWORK CENTRALITY (1982) studied the relationship guaranteed by hub netwrok AND HUB DOMINANCE between the economies of centrality, which is contrary to A comparison of airline aircraft size and airline hubbing. popular belief. networks of today with those of In 1985, they expanded their This paper is an attempt to the mid 1970s amply analysis to assess the impact of extend the work of Toh and demonstrates that hubbing has airline hubbing on airport Higgins to explore further the increased. The now familiar congestion and its implications impact of hub dominance on pattern of multiple links to airport economics. Kanafani airline profitability and its emanating from a handful of hub and Hansen (1985) showed that, passenger enplanement share. airports has replaced the when all other variables (such as The findings of Toh and Higgins seeming hodge-podge that stage length, aircraft capacity, together with the results of this characterized many route network size, etc.) are controlled study will help shed some light systems under regulation. airlines with strong hubbed route on the commonly held belief that One indication of a hubbed systems incur roughly the same hubbing leads to more network is the concentration of cost to provide a given amount successful and profitable operations at a few airports of transportation as those with operations (see Aviation Week which serve as transfer points for less hubbed systems. Ghobrial and Space Technology, connecting traffic. Measures of and Sousa (1987) investigated November 1981). The paper concentration of an airline's some airline strategies to begins by discussing the operations can therefore serve dominate their main connecting phenomenon of airline hubbing as measures of the degree of hubs. and hub dominance. This is hubbing of that airline's route Toh and Higgins (1985) followed by exploring the network. One such a measure is attempted to test whether there relationship between profitability the one-airport concentration Published by Scholarly20 Commons, 1991 JAAER, Fall 1991 1 Journal of Aviation/Aerospace Education & Research, Vol. 2, No. 1 [1991], Art. 5 Hub Dominance Table 1 Operational Statistics for Selected Airlines In 1980 Airline Main Hubbing hub airline profit hub index * dominance ranking at index ** index * main hub % AA ORO 0.146 26.80 2 -3.50 AL PIT 0.189 63.04 1 9.47 BN DFW 0.321 37.82 1 -5.70 CO DEN 0.252 26.30 3 -5.28 DL ATL 0.224 46.40 1 5.42 EA ATL 0.208 41.19 2 0.47 FL DEN 0.225 34.14 1 7.49 NW MSP 0.156 41.09 1 2.12 OZ STL 0.205 32.36 2 -0.34 PA MIA 0.141 21.99 2 -8.97 PI ROA 0.081 99.50 1 6.62 RC ORO 0.066 15.39 3 1.53 TW STL 0.140 41.94 1 -1.85 UA ORO 0.164 43.61 1 -1.55 WA LAX 0.170 25.07 2 -3.62 * Estimated using data from IAirport Activity Statistics of Certificated Route Air Carrier-, U.S. Department of Transportation, The Federal Aviation Administration, 1980. ** Estimated using data from lAir Carriers Financial Statisticsl, Civil Aeronautics Board and the U.S. Department of Transportation, 11980 ratio which is defined as the ratio years 1976, 1978, 1980, 1982, be estimated as the share of that of the airline's departures from 1984 and 1986 was estimated. airline's departures of the total its main hub to the total aircraft For the purpose of illustration, aircraft departures by all airlines departures from all airports Table 1 depicts this trend for the from that hub. This index can within the airline's domestic selected airlines in 1980. Overall, also serve as a proxy for hub system. This ratio will be referred the time-series data suggest an monopoly. The hub dominance to as the hubbing index. For a upward trend in the hubbing index was calculated for all air­ complete hub-and-spoke index. The few instances of lines under investigation at their network structure (i.e.; all spoke downward movement are likely main connecting hub over the cities are connected only to the due to large scale network period 1976-1984. Only domestic hub airport) the number of expansions, which naturally tend operations were considered for aircraft operations (i.e.; take-offs to reduce concentration. airlines offering both domestic and landings) at the hub airport A parallel phenomenon to and international services such is equal to the number of aircraft airline hubbing is hub as Pan Am, TWA, Northwest, etc. operations at all other airports. dominance. While hubbing Table 1 reports the hub The hubbing index is, therefore, measures network centrality dominance index (in percent­ equal to 0.5 for a complete within the airline's system, hub ages) for the airlines under in hub-and-spoke network dominance measures airline 1980. Also depicted in Table 1 is structure. The trend of the concentration relative to other the airline's ranking at its main hubbing index for some selected airlines operating at the same connecting hub in terms of the airlines' distributions of hub. An airline's dominance number of aircraft departures. scheduled departures for the index at a particular hub could An analysis of the time-series https://commons.erau.edu/jaaer/vol2/iss1/5 DOI: https://doi.org/10.15394/jaaer.1991.1053JAAER, Fall 1991 21 2 Ghobrial: Competition for Hub Dominance: Some Implications to Airline Profi Hub Dominance data of airline ranking at major served by that hub. Since the positive and strong relationship hubs over 1976-1984 indicates monopolist can alter the supply between airline profitability and that airlines have exploited the of flights and set the price (i.e.; hub dominance. The profitability opportunities of free entry and airfare), monopoly profits in this index is estimated by dividing exit of deregulation and case are usually larger than operating income (i.e., operating attempted to dominate the hubs those attained· under highly revenue-operating expense) by which they use as funnel and competitive conditions. the operating revenue and transfer points for their HUB DOMINANCE AND multiplying it by 100 to be passengers. AIRLINE PROFITABILITY expressed in percentage terms. Hub dominance appears to be The analysis of airline A profitability index is calculated highly instrumental in profitability is a complex one that for all the airlines under consid­ establishing a strong regional involves a. number of factors eration. Table 1 shows the identification among passengers including network structure, hub estimated profitability index for which is important for marketing dominance, fleet type and these airlines in 1980. the airline. Examples are Delta at average aircraft size, stage The Model Atlanta, American at Dallas/Fort length, average yield, route The relationship between airline Worth, TWA at St. Louis, and monopoly, load factor, degree of profitability and hub dominance Continental at Houston. In unionization, and management is expressed as a linear addition, a dominant airline at a skills. For the purpose of this regression model which takes particular hub can reap the study, we will attempt to test the the following form: monopoly profits in the markets hypothesis that there exists a Equation 1 PROFF u+PDOMr+tFIRMI+8(Y7~+ ~(Y8~+4>( Y8~ +3(Y84) + a(Y86)+e (1) Where PROFi is the profitability model is intended to capture the order serial correlation cannot be index in percentage terms of effects of other variables rejected.
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