Airline consolidation and the distribution of traffic between primary and secondary hubs

Abstract

Several airline consolidation events have recently been completed both in Europe and in the United States. The model we develop considers two airlines operating hub-and-spoke networks, using di¤erent hubs to connect the same spoke airports.We assume the airlines to be vertically di¤erentiated, which allows us to distinguish between primary and secondary hubs. We conclude that this di¤erentiation in air services becomes more accentuated after consolidation, with an increased number of ‡ights being channeled through the primary hub. However, congestion can act as a brake on the concentration of ‡ight frequency in the primary hub following consolidation. Our empirical application involves an analysis of Delta's network following its merger with Northwest. We …nd evidence consistent with an increase in the importance of Delta's primary hubs at the expense of its secondary airports. We also …nd some evidence suggesting that the carrier chooses to divert tra¢ c away from those hub airports that were more prone to delays prior to the merger, in particular New York's JFK airport.

What hurts the dominant airlines at hub airports?

“…The expected sign of the coefficient associated with these variables is not a priori clear A typical strategy of an incumbent airline against the entry of rivals in a route is to cut fares and add flights to boost demand. Hence, we could expect a negative relationship between frequencies and route concentration as it has been found in Bilotkach et al (2010Bilotkach et al ( , 2013) and a positive effect of entry of a low-cost airline in a route as it has been found in Bettini and Oliveira (2008). Indeed, incumbents may compensate a loss in demand with proper pricing tactics.…”

“…To this point, note that we also provide evidence of the impact of mergers on the hubs of the smaller airline in Europe. In this regard, Bilotkach et al (2013) show that the merger of Delta 7…”

“…Previous studies examining the determinants of airline frequencies have focused primarily on route competition (Schipper et al, 2002;Richard, 2003;Pai, 2010;Bilotkach et al, 2010Bilotkach et al, , 2013Brueckner and Luo, 2013). Indeed, these studies use as indicators of competition the route concentration index, the presence of lowcost airlines on the route and whether the airport is a hub or not.…”

How do airlines react to airport congestion? The role of networks

“…3 While several works analyze the determinants of delays, less attention has been devoted to the impact of delays on airline frequencies. 4 The exceptions are the studies published by Pai (2010) and Zou and Hansen (2014), which yield contradictory results. Using data for a sample of US routes, Pai (2010) …nds a negative relationship between frequencies and delays.…”

“…Our …ndings are also in line with the empirical results in Brueckner (2002), which show that delays are higher in hub airports after controlling for airport size and other airport attributes. Finally, our paper goes some way to accounting for the non-existent reaction to congestion by the merged Delta-Northwest airline reported in Bilotkach et al (2013).…”