Fare Determination in Airline Hub-and-Spoke Networks

TLDR

Fares are lowered by economies of density on the spokes of a hub‑and‑spoke network. The study tests whether higher traffic volumes on hub‑spoke spokes lower fares, predicting that large networks and connections between large cities yield lower fares. Empirical analysis confirms that network characteristics, such as traffic density and city size, are key determinants of fares, and recent mergers are predicted to have lowered fares in 4‑segment markets served by hubs at St.

Abstract

This paper tests the hypothesis that any force that increases traffic volume on the spokes of an airline hub-and-spoke network will reduce fares in the markets it serves. This effect arises because of economies of density on the spokes. It is predicted that fares in the individual markets served by a large network should be low since a large network is expected to have low costs per passenger as a result of high traffic densities. Similarly, holding size fixed, a network that connects large cities should have higher traffic densities on its spokes and thus lower fares in individual markets than one serving small cities. The empirical analysis supports these predictions. Network characteristics are found to be important determinants of fare in 4-segment city-pair markets requiring a connection at the hub. In the 4-segment markets served by the hubs at St. Louis and Minneapolis, the empirical model predicts that recent airline mergers should have reduced fares.