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An Empirical Analysis of Airline Network Structure: The Effect of Hub Concentration on Airline Operating Costs
Abstract
The Airline Deregulation Act of 1978 provided the impetus for domestic U.S. airlines
to establish hub-and-spoke networks to improve profitability and stem financial losses.
This study seeks to determine if a significant relationship exists between an airline’s
Hub Concentration and its total costs. Previous studies in the airline industry have
focused on mergers, competition, profitability, and route network structure, but no
study to date has focused solely on costs and Hub Concentration. Using the microeconomic
principle of cost minimization, a cost function for airlines was developed. Furthermore,
panel data for sixteen domestic U.S. airlines were collected from seven reputable
sources on a quarterly basis from 1995 through 2011. Then, panel data regressions
using random and fixed effects were used to analyze the data. This study finds that
an increase in an airline’s Hub Concentration leads to a higher cost per available
seat mile, a lower cost per passenger seat mile, and lower operating expenses. Even
though many airlines that currently operate a hub-and-spoke network, such as American,
United, Delta, and Frontier, have filed for bankruptcy in the last decade, this study
shows that a more concentrated hub-and-spoke network is an effective way of reducing
costs.
Type
Honors thesisDepartment
EconomicsPermalink
https://hdl.handle.net/10161/7093Citation
Short, David (2013). An Empirical Analysis of Airline Network Structure: The Effect of Hub Concentration
on Airline Operating Costs. Honors thesis, Duke University. Retrieved from https://hdl.handle.net/10161/7093.Collections
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