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Hub-and-spoke network alliances and mergers: Price-location competition in the airline industry

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  • Adler, Nicole
  • Smilowitz, Karen
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    Abstract

    This paper presents a framework to analyze global alliances and mergers in the airline industry under competition. The framework can help airlines identify partners and network structures, and help governments predict changes in social welfare before accepting or rejecting proposed mergers or alliances. The research combines profit-maximizing objectives to cost-based network design formulations within a game theoretic framework. The resulting analysis enables merging airlines to choose appropriate international hubs for their integrated network based on their own and their competitors' costs and revenues in the form of best response functions. The results of an illustrative example suggest that some mergers may be more successful than others and optimal international gateway choices change according to the number of competitors remaining in the market. Furthermore, although the pressure on airlines would suggest a strong preference for mergers or alliances, perhaps surprisingly, the solution outcomes whereby all airlines merge or ally are not equilibria in the overall game.

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    Bibliographic Info

    Article provided by Elsevier in its journal Transportation Research Part B: Methodological.

    Volume (Year): 41 (2007)
    Issue (Month): 4 (May)
    Pages: 394-409

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    Handle: RePEc:eee:transb:v:41:y:2007:i:4:p:394-409

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    References

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    1. Barla, Philippe & Constantatos, Christos, 2000. "Airline network structure under demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 36(3), pages 173-180, September.
    2. Skorin-Kapov, Darko & Skorin-Kapov, Jadranka, 1994. "On tabu search for the location of interacting hub facilities," European Journal of Operational Research, Elsevier, vol. 73(3), pages 502-509, March.
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    5. Brueckner, Jan K & Spiller, Pablo T, 1994. "Economies of Traffic Density in the Deregulated Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 379-415, October.
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    7. Adler, Nicole, 2001. "Competition in a deregulated air transportation market," European Journal of Operational Research, Elsevier, vol. 129(2), pages 337-345, March.
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    9. Jan K. Brueckner & Yimin Zhang, 2001. "A Model of Scheduling in Airline Networks: How a Hub-and-Spoke System Affects Flight Frequency, Fares and Welfare," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 35(2), pages 195-222, May.
    10. Ebery, Jamie, 2001. "Solving large single allocation p-hub problems with two or three hubs," European Journal of Operational Research, Elsevier, vol. 128(2), pages 447-458, January.
    11. Swan, William M. & Adler, Nicole, 2006. "Aircraft trip cost parameters: A function of stage length and seat capacity," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 42(2), pages 105-115, March.
    12. Hong, Sungwook & Harker, Patrick T., 1992. "Air traffic network equilibrium: Toward frequency, price and slot priority analysis," Transportation Research Part B: Methodological, Elsevier, vol. 26(4), pages 307-323, August.
    13. Nero, Giovanni, 1999. "A note on the competitive advantage of large hub-and-spoke networks," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 35(4), pages 225-239, December.
    14. Button, Kenneth, 2002. "Debunking some common myths about airport hubs," Journal of Air Transport Management, Elsevier, vol. 8(3), pages 177-188.
    15. Fan, Terence & Vigeant-Langlois, Laurence & Geissler, Christine & Bosler, Björn & Wilmking, Jan, 2001. "Evolution of global airline strategic alliance and consolidation in the twenty-first century," Journal of Air Transport Management, Elsevier, vol. 7(6), pages 349-360.
    16. Pels, Eric & Nijkamp, Peter & Rietveld, Piet, 2000. "A note on the optimality of airline networks," Economics Letters, Elsevier, vol. 69(3), pages 429-434, December.
    17. Bhaumik, P. K., 2002. "Regulating the domestic air travel in India: an umpire's game," Omega, Elsevier, vol. 30(1), pages 33-44, February.
    18. Park, Jong-Hun & Zhang, Anming & Zhang, Yimin, 2001. "Analytical models of international alliances in the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 35(9), pages 865-886, November.
    19. Adler, Nicole & Berechman, Joseph, 2001. "Evaluating optimal multi-hub networks in a deregulated aviation market with an application to Western Europe," Transportation Research Part A: Policy and Practice, Elsevier, vol. 35(5), pages 373-390, June.
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    Cited by:
    1. Adler, Nicole & Pels, Eric & Nash, Chris, 2010. "High-speed rail and air transport competition: Game engineering as tool for cost-benefit analysis," Transportation Research Part B: Methodological, Elsevier, vol. 44(7), pages 812-833, August.
    2. ALVAREZ-SANJAIME, Oscar & CANTOS-SANCHEZ, Pedro & MONER-COLONQUES, Rafael & SEMPERE-MONERRIS, José J., . "Competition and horizontal integration in maritime freight transport," CORE Discussion Papers RP -2504, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Li, Zhi-Chun & Lam, William H.K. & Wong, S.C. & Fu, Xiaowen, 2010. "Optimal route allocation in a liberalizing airline market," Transportation Research Part B: Methodological, Elsevier, vol. 44(7), pages 886-902, August.
    4. Nicole Adler & Chris Nash & Eric Pels, 2008. "High-Speed Rail & Air Transport Competition," Tinbergen Institute Discussion Papers 08-103/3, Tinbergen Institute.
    5. Adler, Nicole & Gellman, Aaron, 2012. "Strategies for managing risk in a changing aviation environment," Journal of Air Transport Management, Elsevier, vol. 21(C), pages 24-35.

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