STRUCTURAL CHANGE IN THE AIRLINE INDUSTRY: CARRIER CONCENTRATION AT LARGE HUB AIRPORTS AND ITS IMPLICATIONS FOR COMPETITIVE BEHAVIOR

Abstract

The Airline Deregulation Act of 1978 (Public Law 95-504) brought far-reaching changes in airline operations, the most im portant of which was the freedom of airline managers to determine which markets to enter and which to exit. The most signifi cant development in airline operations has been the establishment of hub-and-spoke route networks. Aptly named because of their similarity to the hub-and-spoke com position of a wheel, such networks are de signed to consolidate flight operations at specific points (hubs) in such a way as to provide optimum traffic flow to and from low-density, city-pair markets. To some degree, similar networks existed prior to deregulation, as one or more local-service airlines interlined traffic with one or more trunk airlines operating at a particular hub airport. In the postderegulation era, how ever, airlines have adopted competitive strategies that have fostered the growth of hub-and-spoke route systems. This paper evaluates only one facet, al beit an extremely important one, of the growth in hub-and-spoke route networks: high concentration levels at large hub air ports, which could have important competi tive implications. Airline deregulation is premised on the belief that city-pair mar kets are contestable; that is, a potential en trant could, almost effortlessly, replicate along all relevant dimensions (cost, service, product variety, etc.) the operations and performance of established firms.1 Further, the theory of contestable markets rests on the assumption that a firm which enters a market can, if market conditions change, exit that market at a relatively low cost.2 If high levels of concentration at large hub airports make it more costly for potential competitors to establish operations and de velop economically viable route networks, either because of a potential entrant's ina bility to secure sufficient traffic or because of strategic actions taken by incumbent firms to disadvantage potential rivals, then competition among air carriers will be less vigorous than it would be otherwise. The next section provides an overview of how forty years of economic regulation af fected the structure of the airline industry, as well as the economic factors that have compelled airline managers to adopt hub and-spoke route networks. A discussion of airspace and airport capacity constraints is presented next, along with data on four firm, two-firm, and single-carrier concen tration at twenty-seven large hub airports.3 The effects of high levels of concentration on competition at large hub airports are then discussed and conclusions drawn. Mr. Phillips is Chief, Economies and Finance Division, Office of Economies, U.S. Department of Transportation, Washington, D.C. 20590. The views expressed in this paper are solely those of the author and do not necessarily reflect the official position of the U.S. Department of Transportation. Special thanks to Steve Colevas, Paul Bowser, Jack Schmidt, and Peter Belenky for their helpful comments on an earlier draft of this paper. 18