Competition for Hub Dominance: Some Implications to Airline Profitability and Enplanement Share

The phenomenon ofairline competition for hub dominance in terms of frequency concentration has been on the rise since deregulation. Using cross-sectional time-series data, this study explores the impact of hub dominance on airline profitability and enplanement share at the hub airport. The regression analysis finds a significant positive relationship between airline profitability and hub dominance. The relationship between an airline's share ofpassenger enplanements and its hub dominance seems to follow an S-curve indicating that high frequency shares are associated with even higher enplanement shares, and conversely. INTRODUCTION Deregulation has led to radical changes in airline network planning. A main focal point for these changes has been the greatly increased emphasis on Ihubbing.I All carriers have sought to build up their previous hubs, and in many cases have created new ones. The hubbing phenomenon has been the subject of many studies. Kanafani and Ghobrial (1982) studied the relationship between the economies of aircraft size and airline hubbing. In 1985, they expanded their analysis to assess the impact of airline hubbing on airport congestion and its implications to airport economics. Kanafani and Hansen (1985) showed that, when all other variables (such as stage length, aircraft capacity, network size, etc.) are controlled airlines with strong hubbed route systems incur roughly the same cost to provide a given amount of transportation as those with less hubbed systems. Ghobrial and Sousa (1987) investigated some airline strategies to dominate their main connecting hubs. Toh and Higgins (1985) attempted to test whether there 20 exists a positive and strong relationship between airline hubbing and profitability. They developed two indices for airline hubbing and profitability for 17 airlines in 1982. The regression of the hub index on the profitability index showed a very poor fit and the independent variable (hub index) seemed to be statistically insignificant. Toh and Higgins (1985) also commented that profitability is not guaranteed by hub netwrok centrality, which is contrary to popular belief. This paper is an attempt to extend the work of Toh and Higgins to explore further the impact of hub dominance on airline profitability and its passenger enplanement share. The findings of Toh and Higgins together with the results of this study will help shed some light on the commonly held belief that hubbing leads to more successful and profitable operations (see Aviation Week and Space Technology, November 1981). The paper begins by discussing the phenomenon of airline hubbing and hub dominance. This is followed by exploring the relationship between profitability and hub dominance using regression analysis. The second phase of this paper assesses the impact of hub dominance on airline share of passenger enplanements at the hub airport. The paper concludes with some implications to airline network planning, congestion at major hubs, and the public policy towards airline mergers. TRENDS IN AIRLINE NETWORK CENTRALITY AND HUB DOMINANCE A comparison of airline networks of today with those of the mid 1970s amply demonstrates that hubbing has increased. The now familiar pattern of multiple links emanating from a handful of hub airports has replaced the seeming hodge-podge that characterized many route systems under regulation. One indication of a hubbed network is the concentration of operations at a few airports which serve as transfer points for connecting traffic. Measures of concentration of an airline's operations can therefore serve as measures of the degree of hubbing of that airline's route network. One such a measure is the one-airport concentration JAAER, Fall 1991 1 Ghobrial: Competition for Hub Dominance: Some Implications to Airline Profi Published by ERAU Scholarly Commons, 1991