Airline Deregulation and Hub-and-Spoke Networks

Hubs existed before deregulation, but the removal of restrictions on market entry and exit, along with policies permitting airline mergers, freed surviving carriers to consolidate hub-and-spoke networks feeding traffic to and from strategically located hubs. Prior to deregulation movements (end of 1970s-early 1980s), many airline services were taking place on a point-to-point basis. On the above figure, two airline companies are servicing a network of major cities. A fair amount of direct connections exists, but mainly at the expense of the frequency of services and high costs (if not subsidized). Also, many cities are serviced, although differently, by the two airlines and connections are likely to be inconvenient.

With deregulation, a system of hub-and-spoke networks emerges as airlines rationalize the efficiency of their services. A common consequence is that each airline assumes dominance over a hub and services are modified so the two hubs are connected to several spokes. Both airlines tend to compete for flights between their hubs and may do so for specific spokes, if demand warrants it. However, as this network matures, it becomes increasingly difficult to compete at hubs as well as at spokes, mainly because of economies of agglomeration. As an airline assumes dominance of a hub, it reaches oligopolistic (if not monopolistic) control and may increase airfares for specific segments. The advantage of such a system for airlines is the achievement of a regional market dominance and higher plane loads, while passengers benefit from better connectivity (although delays for connections and changing planes more frequently) and lower costs.