Air Regulation

A recent paper by two economists (Aguirregabiria and Ho) caught my eye.

Typically, in America, airlines operate 'hub and spoke' networks. That is, an airline will have a main airport (the hub) and all the other cities in the network (the spokes) only fly to the hub. Why do airlines tend to do this?

There are three main possibilities that the paper explores:

1. Passengers prefer large airports which tend to be more efficient, so are prepared to fly via the hub airport.
2. Airlines benefit from lower running costs (economies of scale) at a hub airport.
3. Airlines find it easier to deter competition by operating out of a hub airport.

Aguirregabiria and Ho find that airlines do benefit from costs savings of a hub airport. But they also find that airlines running a hub and spoke network tend to run more loss making services. They interpret this as a way of large airlines stopping smaller competitors from starting to run those 'spokes'. They also find that by having a hub airport an airline can drive up the cost of other airlines running services to that particular airport.

Thus hub and spoke networks could be a way airlines deter competition. 

If proven, air industry regulators should look into how airlines manage their networks and whether they illegally deterring competition that would benefit passengers.