Airline Networks, Traffic Densities, and Value of Links

Abstract

Abstract In airline networks, a link creates profits for its carrier in conjunction with the carrier's other links. In other words, a link has “network” value. One prominent mechanism behind this network value is a hubbing effect: adding one single link to a hub creates many connecting routes. This paper studies a different and less explored mechanism of network value. It relies on the observation that passengers generally prefer a higher flight frequency (mainly because it provides more flexible options for travel times). Specifically, when a carrier adds a link, the created connecting routes will increase the traffic densities on adjacent links. As the carrier raises flight frequencies to meet the higher densities, there creates a positive effect on demand. By structurally estimating a model that incorporates this mechanism, I am able to quantify the density effect. It is found to be about 3.8 times as large as the hubbing effect. Furthermore, the model shows that the competitive impact of an airline entry (i.e., adding a new link) goes greatly beyond the local city-pair market where the entry happens.

Keywords: Networks, Airline industry, Air-travel demand, Network effects, Flight frequency, Structural estimation.

JEL Classification: L13, L93, D62, C31