Transcript Why Hubs Work - Sauder School of Business

Why Hubs Work
Revenue Benefits for Hubbing
Spring 2005 Research
Working Paper
Hubs Work
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Fare Rise Linearly with Distance
Fares decline Linearly with Market Size
Hubs serve Smaller Connecting Markets
Hubs get premium revenues for connects
Hubs have exited large local markets
Low Cost Carriers price Connections High
– Tend to charge sum of local fares
– Prices match Hub Carriers’ prices
Hub Cost Carriers’ (HCCs) Fare
Trend is Linear with Distance
O-D Markets Without Low-Cost (LCC) Competition
$260
$240
Average Fare
$220
$200
$180
$160
HCCs Alone
$140
Linear (HCCs Alone)
$120
$100
0
US Domestic 2q04 Data
500
1000
1500
2000
City-Pair Distance (Mi.)
2500
HCC Fares Linear With Distance
• Origin-Destination (OD) Data
– Average fair for Airport Pair
– Markets with 95% of revenue HCC carriers’
• HCCs = AA, DL, CO, UA, NW, CO, US, AS, YX
• US domestic Markets
– Without Hawaii
– All valid data markets
– Trend $153 + $0.034/mi (no taxes)
Low-Cost Carriers’ (LCCs) Fares
are Linear With Distance
Average Fare
$200
$190
LCC Fares
$180
Linear (LCC Fares)
$170
$160
$150
$140
$130
$120
$110
$100
0
US Domestic 2q04 Data
500
1000
1500
2000
City-Pair Distance (Mi.)
2500
LCC Fares are Linear With Distance
$50 Lower than HCCs
• Origin-Destination (OD) Data
– Average fair for Airport Pair
– Markets with 35% of revenue LCC carriers’
• LCCs mainly Southwest, America West, Jet Blue, Air Tran,
Frontier, Spirit
• US domestic Markets, Without Hawaii
– All valid data markets
– Trend $101 + $0.035/mi (no taxes)
• Same slope as HCC trend
• Intercept roughly $50 lower
• Represents savings in trip-originating costs
Hub Cost Carriers’ (HCCs) Fares
Match Low-Cost (LCC) Competition
HCCs Alone
HCCs with LCCs
LCC Fares
Linear (HCCs Alone)
Linear (HCCs with LCCs)
Linear (LCC Fares)
$260
$240
Average Fare
$220
$200
$180
$160
$140
$120
$100
0
US Domestic 2q04 Data
500
1000
1500
2000
City-Pair Distance (Mi.)
2500
HCC Match LCC fares
In Markets with Competition
• Origin-Destination (OD) Data
– Average fair for Airport Pair
– Markets with >15% of revenue LCC carriers’
– Markets with >35% of revenue HCC carriers’
Hub Cost Carriers’ (HCCs) Fares
Without Low-Cost (LCC) Competition
HCCs Alone
HCCs with LCCs
LCC Fares
Linear (HCCs Alone)
Linear (HCCs with LCCs)
Linear (LCC Fares)
$260
$240
Average Fare
$220
$200
$180
$160
$140
$120
$100
0
US Domestic 2q04 Data
500
1000
1500
2000
City-Pair Distance (Mi.)
2500
HCC Fares Decline with Market Size
Average Fare 2q04 (adjusted to 1100mi)
$220
Connecting
$200
$180
HCCs without LCCs
$160
$140
$120
HCC fare Trend= $196 - 2.26 * Ln(Pax)
$100
1
3
5
7
9
13
20
30
41
61
Market Size, Log Scale
86
122 172 281 479
LCC Fares Decline with Market Size
Average Fare 2q04 (adjusted to 1100mi)
$180
Connecting
$170
$160
LCC fares
$150
$140
$130
$120
$110
LCC Trend = $178 + 11 * Ln(Pax)
$100
1
3
5
7
9
13
20
30
41
61
Market Size, Log Scale
86
122 172 281 479
Fares Decline with Market Size
Average Fare 2q04 (adjusted to 1100mi)
$220
Connecting
$200
$180
$160
$140
HCCs without LCCs
HCCs with LCCs
LCC fares
$120
$100
1
3
5
7
9
13
20
30
41
61
Market Size, Log Scale
86
122 172 281 479
HCC Fares are Slightly Higher Than
LCC Fares, adjusted for Market Size
Average Fare 2q04 (adjusted to 1100mi)
$220
Connecting
$200
$180
$160
$140
HCCs without LCCs
HCCs with LCCs
LCC fares
$120
$100
1
3
5
7
9
13
20
30
41
61
Market Size, Log Scale
86
122 172 281 479
The Real Difference is
Hubs Serve Many more Small Markets
• US HCCs have “given up” local markets
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Nonstop markets to hub city
Used to gain premium revenues
Now required to match LCCs
Revenues no longer cover union labor costs
HCCs have given up most traffic to LCCs
• Hubs serve connecting markets
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Share of HCC revenues in small markets high
Share of LCC revenues in small markets low
Fares in small markets higher
More small market revenues mean higher HCC fares
18%
Connections
16%
14%
12%
HCCs
LCCs
10%
8%
6%
4%
2%
12
2
17
2
28
1
47
9
86
61
41
30
20
13
9
7
5
3
0%
1
Share of Carrier Total Revenues
Hubs Emphasize Smaller Markets
O-D City Pair Market Size (log scale)
LCCs Share of Small Markets is 5%
Share of Larger Nonstop Markets is 25%
30%
Connections
25%
20%
15%
10%
5%
86
12
2
17
2
28
1
47
9
14
54
61
41
30
20
13
9
7
5
3
0%
1
of All Markets in Size Group
Discount Carriers Revenue Share
35%
O-D City Pair Market Size (log scale)
HCCs Raise Average Fare
By Emphasizing Connecting Markets
• Average Fare for All Passengers: $146
• Average Fare for HCC Passengers: $166
• Average Fare for LCC Passengers: $102
No Complications from Travel Distances
Small Markets are not Longer, on Average
Connections
2000
1500
1000
500
12
2
17
2
28
1
47
9
14
54
86
61
41
30
20
13
9
7
5
3
0
1
Average Travel Distance (mi)
2500
O-D City Pair Market Size (log scale)
HCC Revenues are 1/3 Small Markets
LCC Revenues are 10% Small Markets
70%
Connections
50%
HCCs
LCCs
40%
30%
20%
10%
O-D City Pair Market Size (log scale)
9
47
1
28
2
17
2
12
86
61
41
30
20
13
9
7
5
3
0%
1
Cumulative Revenues
60%
Hubs Make Travel Possible
• Hubs exist to serve small markets
• For US domestic network
– 25% of revenues are from small markets
– Over 30% of HCC revenues
– Under 10% of LCC revenues
• International “small markets” add to this
• US has higher share nonstop than world
Economics of “Small Markets”
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Half of world-wide loads are connecting
Small cities have small markets
Small Markets pay more
Value is there
– Small cities have lower living costs
• Lower housing costs
• Higher air travel costs
– Air Travel connects small cities to trade
Fares are Linear With Distance
• Average Fare = $153 + $0.043 * Dist
– R-square = 0.13
– All US domestic markets with valid data
– Excluding Hawaii
– Mix of HCC and LCC markets
– 18,000 data points (Airport Pair O-Ds)
Fares are Higher for Small Markets
(Includes both Small and LCC Presence Effects)
For Pax < 10/day
Fare = $117 + 0.046 * Distance
257 data points;
R-square = 0.42
For 10/day < Pax < 100/day
Fare = $106 + 0.037 * Distance
758 data points;
R-square = 0.37
For Pax > 100/day
Fare = $98 + 0.035 * Distance
671 data points;
R-square = 0.34
HCC Fares are Higher for Small Markets
For Pax < 10/day
Fare = $127 + 0.042 * Distance
R-square = 0.24
For 10/day < Pax < 100/day
Fare = $110 + 0.036 * Distance
R-square = 0.30
For Pax > 100/day
Fare = $115 + 0.031 * Distance
R-square = 0.22
LCC Fares are Higher for Small Markets
For Pax < 10/day
Fare = $111 + 0.0442 * Distance
R-square = 0.33
For 10/day < Pax < 100/day
Fare = $100 + 0.034 * Distance
R-square = 0.31
For Pax > 100/day
Fare = $83+ 0.032 * Distance
R-square = 0.38
LCCs Price Close to HCCs
in Very Small Markets
Pax < 10/day
HCC fare = $127 + 0.042 * Distance
LCC fare = $111 + 0.044 * Distance
LCCs Price Connections Close to HCCs
10/day < Pax < 100/day
HCC fare = $100 + 0.036 * Distance
LCC fare = $100 + 0.034 * Distance
LCCs Fares In Nonstop Markets are Low
HCC fares are a mix of all-HCC and with-LCC Markets
Pax > 100/day
HCC fare = $115 + 0.031 * Distance
LCC fare = $83 + 0.032 * Distance
Full Model Includes 3-4 Variables
Fare = $102 + 0.040* Distance
(R2 = 0.36)
Fare = $131 + 0.038* Distance – 6.4 * Ln(Pax)
(R2 = 0.36)
Fare = $153 + 0.037* Distance – 6.9 * Ln(Pax)
- $23 if LCC presence
(R2 = 0.48)
Fare = $151 + 0.037* Distance – 7.0 * Ln(Pax)
- $20 if LCC presence + $26 if HCC only
(R2 = 0.48)