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.
There are however physical and commercial limits to hubbing. Hub
airports may run into capacity limitations, both in terms of the
number of gates and the availability of landing and takeoff
windows, which makes them vulnerable to disruptions. Further, as
the demand for air transport grows, direct (point-to-point)
services become increasingly feasible.