THE IMPACT OF HUB AND SPOKE NETWORK CENTRALIZATION AND ROUTE MONOPOLY ON DOMESTIC AIRLINE PROFITABILITY

Since airline deregulation in the United States began in 1978, domestic airlines have suffered declines in operating incomes, or, in some cases, increases in operating loss es.1 However, if the aggregate financial statistics are analyzed, it becomes obvious that the major carriers (airlines with annual revenues in excess of $1 billion) have gen erally been unprofitable, while the reverse has generally been true for the nationals (airlines with annual revenues greater than $75 million but less than $1 billion).2 Following are listed the larger airlines that showed a profit in 1982, a year in which the domestic airline industry recorded an overall loss of close to three-quarter billion dollars: US Air ($79 million), Southwest ($39 million), Republic ($37 million), Pied mont ($22 million), Alaska ($21 million), Ozark ($18 million), Frontier ($7 million), and Aloha ($3 million).3 Of this profitable group, only US Air and Republic are majors. Moreover, both US Air (formerly Allegheny) and Republic (formerly North Central) were previously nationals and are similarly structured. The very divergent fortunes of the majors and nationals can be chronicled further by observing that in 1977, the year before de regulation, the majors (then called trunks) had 87.6 percent of the domestic airline passenger market, while the nationals (then called locals) had only 8.4 percent. By 1981, after four years of deregulation, the majors' market share had dropped to 79.6 percent while that of the nationals had risen to 11.9 percent.4 From the perspective of both profitability and market share, the nationals obviously have been outperforming the majors. Among the factors often cited for the suc cess of the nationals is the efficiency of hub and spoke operations which are believed to characterize their network patterns. Avia tion Week commented: The hubs were considered the non-major air lines' main advantage since deregulation and the reason they have continued to be more success ful than the major airlines with their more linear route systems.5