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.