Airline network competition in inter-continental market

Abstract

As the number of countries liberalizing their skies increases, some airlines, notably carriers in the Middle East, have extended their hub-and-spoke networks beyond domestic borders. This allows them to serve international destinations without the need to go through traditional gateway hubs, so that they can compete with airline alliances relying on the traditional dual-gateway, or the so-called “dog-bone” networks. This paper proposes a stochastic optimization model to address the location choice issue of additional gateway airports, with a consideration of the competition between airlines running traditional dog-bone networks and hub-and-spoke networks in a liberalizing inter-continental market. A two-stage approach is adopted to model the effects of demand uncertainty. In the first stage, the future passenger demand is not observable and thus airlines or airline alliances aim to maximize their own expected profit by choosing additional gateway airports from the set of candidate gateway airports pre-specified by the regulator. In the second stage, with the passenger demand observed and the gateway scheme fixed, airlines determine their aircraft sizes and service frequencies to maximize their own profit, and air passengers choose routes that minimize their own travel disutility. Based on a calibration of the demand dispersion parameters in elastic demand function, the proposed model is applied to the China-Europe aviation market, which includes the inter-continental international market and the associated Chinese and European domestic markets, so that to ascertain the comparative advantages of different network configurations. The social welfares of the system under different demand scenarios and different gateway schemes are compared, and the sensitivity analyses of some parameters are also implemented.