AIRLINES

HUBS AND DIRECT CARRIERS :AN OLIGOPOLY MODEL OF THE AIRLINE MARKET

Coordinatore	INTERDISCIPLINARY CENTER (IDC) HERZLIYA    more  Organization address address: Kanfei Nesharim city: HERZLIYA postcode: 46150 contact info Titolo: Dr. Nome: Eric Cognome: Zimmerman Email: send email Telefono: 97299527676 Fax: 97299527268
Nazionalità Coordinatore	Israel [IL]
Totale costo	100˙000 €
EC contributo	100˙000 €
Programma	FP7-PEOPLE Specific programme "People" implementing the Seventh Framework Programme of the European Community for research, technological development and demonstration activities (2007 to 2013)
Code Call	FP7-PEOPLE-IRG-2008
Funding Scheme	MC-IRG
Anno di inizio	2009
Periodo (anno-mese-giorno)	2009-05-01   -   2013-04-30

 Partecipanti

#	participant	country	role	EC contrib. [€]
1	INTERDISCIPLINARY CENTER (IDC) HERZLIYA  Organization address address: Kanfei Nesharim city: HERZLIYA postcode: 46150 contact info Titolo: Dr. Nome: Eric Cognome: Zimmerman Email: send email Telefono: 97299527676 Fax: 97299527268	IL (HERZLIYA)	coordinator	100˙000.00

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 Obiettivo del progetto (Objective)

'The structure of the US airline industry has undergone important changes since the deregulation in 1978, which removed entry and exit restrictions and allowed carriers to set airfares. One of the most dramatic aspects of the airline deregulation has been the shift of carriers from a point-to-point business model to hub-and-spoke (HS) networks, where a carrier designates one or more strategically located cities as hubs. Passengers are first channeled to the hub, and only then are taken to their respective destinations. Initially, the termination of unprofitable lines, increased productivity, and other general cost-reduction policies amplified profitability in the market. Changes in the market, however, and in particular the entry of direct carriers have increased the competitiveness of the market and during the last decade the airline industry has been facing a financial crisis. We propose an economic model that analyzes the equilibrium market structure in the competition between a direct carrier and a hub and spoke carrier. The model departs from traditional economic models of the airline industry by separating the hub carrier's decision to service a city and the carrier's pricing decisions for city-pair routes. The model is tractable and has several key properties: The inter-dependence between routes is derived from either capacity constraints or demand uncertainty, both of which are modeled explicitly. The hub carrier's inherent cost disadvantage, due to the longer routes implied by a hub and spoke system, is mitigated by consumers’ benefits from the hub's network, the HS better load factor as well as its better risk pooling. Based on these tradeoffs, the model can quantify the advantage HS carriers should achieve in any of the dimensions above in order to compete effectively with a direct carrier.'