Ever since deregulation in the airline industry, airlines have had the freedom, to select their choice of routes and have been given the freedom to determine fares. The paper gives a discussion of three basic route architecture networks that are in adoption, in the airline industry. These route networks include hub and spoke, point to point and multi-hub networks. Hub and spoke network is the most widely used route network architecture owing to its high cost and revenue advantages.
Keywords, Route, network, hub and spoke, point to point network
Aviation management forms a significant and one of the most crucial parts in the aviation industry. Over the years, the volume of operations and traffic involving airlines has increased tremendously. This has resulted to traffic problems that have had a negative impact on the economy of the airline industry (Khurana, 2009). Airlines just like many business enterprises focus on maximizing revenue to produce maximum profits. To attain such profits, these airlines have to put much focus on issues such as route structure, schedule design, aircraft selection, and pricing strategies among other vital issues. Most of the operating costs for airlines are generated from the flying routes of the airline company.
The design of route structure emanated from the deregulation in the airline industry, which resulted in airlines being given the freedom to set fares and it removed restrictions on entry and exit. This, according to Song (2006), has allowed major carriers in the airline industry to expand and rationalize their different route structures. According to the Transport Research Board (2010), the designed route structures for an airline have a significant influence on the facilities, character, and requirements of a terminal.
Different airlines use different route networks. According to Kleymann and Seristo (2004), route networks form an important element in differentiating airlines. For instance, large carrier airlines use the hub and spoke system, whereas the low cost carriers use the point to point network. This airline routes serve as the production element, marketing element and distribution element for the airline (Kleymann and Seristo, 2004). Thus, airlines that have multiple route networks have more services or products to offer than an airline with minimal route networks. This larger size of an airlines networks provides it with a higher competitive advantage among its rival airline firms.
A route is a link between two airports and it is used to enable the transportation of people and cargo via the airline. Generic route systems include the hub and spoke system, point to point system and the multi-hub system. Deregulation in 1978 contributed heavily to the wide scale adoption of the hub and spoke systems. An airline may choose to use one route system structure over another based on the cost implications. For instance, the airlines that decide to use hub and spoke system may experience reduced operation costs. However, this system may have additional costs when compared to the point to point system. This becomes the case during peak hours where airlines having the hub and spoke system experience congestion. The situation becomes such that there will be additional strain on slots, more pressure for ground crew and handling equipment. Certain airlines, for example, Southwest Airlines use the point to point system and are still successful in terms of profit (Lauer, 2010).
Factors that limit airlines in the adoption of the different route structure systems include the airline targets, local demand structure, presence of slots, operating economics and traffic rights (Wald, Fay and Gleich, 2010). Therefore, the route network structure an airline adopts determines its costs and traffic flows, which influence airline revenues. The application of one route system structure may be applied differently among the airline companies, and this generates different outcomes in terms of revenue and profit for the airlines. Points to point systems are common for local carrier airlines, whereas the hub and spoke system is more suited to airlines that have larger carriers and many operations. Multi-hub system is more oriented to cargo operations. The different route structures and their cost implications will be discussed in the following sections.
Hub and Spoke System
The deregulation in the airline industry in 1978 contributed tremendously towards the wide scale adoption of the hub and spoke system. According to Janic (2007), the hub and spoke system is based on the concept of consolidation of airline traffic flows from different origin airports (spoke) at the hub airport. These are then directed to a wide range of different destination airports (spoke). Most airlines have adopted the hub and spoke system in order to achieve more profits, increase the efficiency, and usefulness of their services to their clients. The hub airport is responsible for collecting and distributing passengers at an airport. Furthermore, the hub airport is also responsible for facilitating ground activities operations at the airline.
The hub and spoke network are used by distribution systems such as airline passengers carriers and express package delivery networks. Most domestic airlines in America utilize hub and spoke networks in most of the major US cities. The hub and network system can be seen, for example, where a passenger flies from Omaha to Boston on a United Airlines, first boards a plane from Omaha to Chicago, then at Chicago boards a plane to Boston (Besanko, 2010).
Certain factors are considered when determining the application of a hub and system network for an airport. For instance, size and utilization of the airline fleet will highly have an impact on the design of an airport. This is important since the hub airports are prone to clustering. The hub and spoke networks are normally prone to disruptions. These disruptions can be costly. These disruptions include bad weather, failures in aviation systems, equipment, and facilities and industrial action by aviation staff. Additionally, the environmental impacts that may arise from the implementation of a hub and spoke network need to be considered.
Operations in a Hub and Spoke Network
Common operations in the hub and spoke network include the continuous hub and rolling hub operations (Belobaba, Odoni and Barnhart, 2009). The continuous hub operation reduces the use of fixed connecting banks. Banks are used to accommodate connecting traffic. De-banking results in a systematic distribution of flight arrivals and departures. This ensures that there is full utilization of the infrastructure, aircrews, ground resources, and aircraft. The flights will arrive at the hub and depart the moment they are turned around. The challenge with this operation is the unreliability in the timing of the passenger and cargo connections (Belobaba, Odoni and Barnhart, 2009).
Advantages of the Hub and Spoke Network
The hub and spoke networks have several advantages that make it very common in the airline industry. Firstly, the hub and spoke networks system has a higher frequency of transport services. They also have fewer flights to connect different hubs. The hub and spoke network ensures there is better utilization of existing capacity. This is based on the concept of density and scope, which reduce the average cost of operation. This can be shown in the case where passengers from different origins connect different airlines at the hub. These connecting passengers will easily be added to other airlines headed for the different destinations. There is integration several markets into one flight cabin.
The hub and spoke system also reduces the average fixed cost of developing a new route. This is because the cost of adding a new spoke is distributed over many other spokes. Additionally, the hub and spoke network allows for a concentration of certain vital activities, which include advertising, management, and coordination within a certain region and this reduce the fixed, average costs. This is the case where there is running of a maintenance base in a single hub location. The result is a reduction in cost implications. Furthermore, maintenance team can easily carry out maintenance activities during the night shift aircraft overlays.
Economies of scale for any enterprise occur when the enterprise produces many products. This results in a reduction in the average enterprise cost compared to an enterprise that has or produces fewer products. Economies of scale for an airline will thus occur when the airline is serving many origin-destination pairs. According to Button and Stough (2000), the economies of density, for instance 1% increase in the number of passengers may result in a 0.8% reduction, in total costs. Further studies have indicated that the cost savings could increase for an 1% increase in passengers.
A study conducted at the University of Illinois in 1985 on three careers provides data that show the economies of scale for a hub and spoke system. One carrier, the Delta transported 36,000 passengers per quarter on an average spoke route; US Air transported 24,000 passengers, whereas Ozark transported 12,000 passengers. Marginal costs for the three airlines were $107, $113, $134 respectively for every additional passenger that was flown (Buttonn and Stough, 2000).
Major carriers in the United States have adopted the use of hub and spoke networks because of the cost and revenue benefit reasons. United Airlines is a major carrier that utilizes the hub and spoke route system. This has enabled it to connect western U.S. routes and eastern U.S. routes through a major connecting hub. Other carriers include the American Airline and Northwest Airline. These adopted the hub and spoke network to have a competitive advantage over other airlines because of the cost and demand benefits, restrict entry and to have more control over a hub airport.
Thus, the hub and spoke route system structure predominates over other route structures because of the economies of scale, density, and scope it provides. Economies of scale emanate from the ability of the airlines to feed large volumes of traffic at a hub and complex flights from different origins (Button and Stough, 2000). Economies of scope, on the other hand, is based on the capacity of the airline to spread its costs among its wide range of products and services, whereas the economies of density come from the ability of the airline to utilize fully equipment, facilities and infrastructure (Button and Stough, 2000). These network economies have allowed the airlines using the hub and spoke network to provide services, in more city pairs than would be the case when using point to point networks.
Challenges that are experienced in a hub and spoke network may include weather delays. This has a significant effect on the operations of the airline. Extreme weather conditions such as hurricanes causes an airline to terminate all of its flights. Additionally, the number of departures and arrivals in a hub and spoke network system may be more than the airport’s runway capacity.
Point to Point Route Networks
A point-to-point network is a route network architecture whereby there is no regular pattern in the linkage between airports (Gillen, 2006). This type of network is adopted by low cost carriers. That is this kind of network system is mainly utilized by small airlines or private aircrafts that are used for hiring purposes. This mode of operation of airlines does not follow a strict schedule. This means that the arrival and departure times of aircraft are not predetermined. Sometimes, passengers can only book private flights depending on the flight vehicles available. It is very similar to an express bus or public vehicle that ferries people or luggage from one point to another depending on the demand. Airlines operating on the point to point network adopt a process design, which allows them to trade-off certain features for a lower fare. These features include no meals, no alcoholic drinks, electronic tickets. Subsequently there is no connecting of network in the point to point networks (Gillen, 2006).
Mode of Operation
This aviation system is mostly used to commute between cities through direct flights. These kinds of flights have no dependence on connecting flights to fill the plane. This means they are only applicable where there is direct and available demand for these services. The airlines using this mode of operation operate in well developed cities and especially where there are citizens who can afford this mode of transportation. Initially, regulation regarding to aviation in most countries was regulated and hence did not allow for point-to-point systems, which hindered their growth. However, in the recent past there has been a lot of deregulation hence facilitating for growth of this type of airlines.
Advantages and Disadvantages of Point-to-Point System
This system is very convenient to the clients since it saves on time spent waiting for a scheduled plane as in the hub and spoke system. The system is also comparatively cheaper in terms of the initial capital required. These airlines take shorter to travel from one point to a new one since they are direct. They also have a higher load factor since even the capacity is fairly smaller than for hub and spoke systems. Load factor is the rate of occupancy of the aircraft at any one time. These airlines are also more flexible and can hence shift to more demand-prone areas to maximize profits. For point to point network, there can be marketing and cost advantages. The emphasis on short haul distances provides or ensures lower costs and provides revenue advantages. The revenue management system for point to point system becomes simplified. This is because of the use of one-way pricing, no refunds without a penalty and limited fare classes. Thus, the short haul markets using the point to point network will receive more revenue compared to long haul markets (Kanafani and Kuroda, 2005). The revenue advantages in this case are because of the client's willingness to pay more for a direct service, and the revenue is not diluted because of connecting flights. However, maintenance and fuel costs are proportionately high. At times, there may be a lot of time wastage in the point-to point system where the plane stops at various point to drop passengers. Point-to-point airlines are also more expensive than the hub and spoke airline systems. This is because they do not enjoy the benefit of economies of scale.
Point to point carriers
Most common point to point carriers includes JetBlue and Southwest airlines. These airlines adopted the point to point network especially for the domestic market. These airlines posed a threat to the larger airlines in the domestic market owing to their convenience and lower fares. According to Ireland, Hoskisson and Hitt (2005), by the year 2001, Southwest Airlines was the only money-making airline, in the United States. This point to point system for Southwest airline involved short distances and high frequency of flights that provided them with reductions in costs. Shorter waiting time at airports has provided Southwest airline with the ability to avoid delays for their clients.
The world has become business minded and many people are tough entrepreneurs. Point-to-point airlines have a high turnover to the owners. Therefore, it is expected that they will increase in number and even compete effectively with airlines using the hub and spike system. Similarly, the world has become a global village where convenience, time saving and speed are very crucial to people. Therefore, these airlines are likely to survive through changes in time and even rise to become predominant.
Multi-hub networks develop where airlines form strategic alliances for expansion. There is linking of two large hubs where the airlines aim to reach a larger market or are engaged in cargo transportation. Multi-hub networks share the same cost and revenue advantages as with the normal hub and spoke network system. In the United States, major carriers have developed multi-hub systems, which include primary and secondary hubs. In this network, spoke cities such as Oregon and Portland are connected to more than one hub such as Chicago and Denver. This network system offers higher frequencies of traffic compared to a single hub and spoke system (Holloway, 2008). Examples of airlines that have adopted the multi-hub system for market penetration are the Northwest, which has hubs at Detroit and Minneapolis and American Airlines, which has hubs at Chicago and Dallas (Button and Stough, 2000).
The hub and spoke network still remains the most widely route network structure used. This is because its economic advantages of its network operations far outweigh its operational disadvantages. This has been the case in both good and harsh economic times. Additionally, the hub and spoke network makes it easier to validate the development of a new route to a smaller spoke city within an established hub network. Airlines in Europe have also adopted the hub and spoke system due to its wide adoption the airline industry in the United States. The concept of load consolidation in the hub and spoke network provides economic benefits to airline during periods of low demand and low profits. Regional carriers that deal with short haul distances are more suited using a point to point network. This type of network is not easy to expand since it has to have a substantial demand between two cities where it will operate. Airlines will adopt networks that have higher or more economics of scale during both peak and bad economic times.
Belobaba, P., Odoni, A. R., & Barnhart, C. (2009). The global airline industry. Chichester, U.K.:
Besanko, D. (2010). Economics of strategy (5th ed.). Hoboken, NJ: John Wiley & Sons.
Button, K. J., & Stough, R. R. (2000). Air Transport Networks: Theory and Policy Implications.
Massachusetts: Edward Elgar Publishing.
Gillen, D. (2006). Airline Business Models and Networks: Regulation, Competition and
Evolution in Aviation Markets .Review of Network Economics, 5(4), 366-385.
Holloway, S. (2008). Straight and level practical airline economics (3rd ed.). Aldershot,
England: Ashgate Pub.
Ireland, R. D., Hoskisson, R. E., & Hitt, M. A. (2006). Understanding business strategy:
concepts and cases. Mason, OH.: Thomson Higher Education.
Janić, M. (2007). The sustainability of air transportation: a quantitative analysis and
assessment. Aldershot, Hants, England: Ashgate.
Kanafani, A. K., & Kuroda, K. (2005).Global competition in transportation markets analysis
and policy making. Amsterdam: Elsevier JAI.
Khurana, K. C. (2009). Aviation management: global perspectives. New Delhi: Global India
Lauer, C. (2010). Southwest Airlines. Santa Barbara, Calif.: Greenwood.
Transport Research Board, (2010). Airport passenger terminal planning and design.
Washington, D.C.: Transportation Research Board.
Wald, A., Fay, C., & Gleich, R. (2010). Introduction to aviation management. Berlin: Lit.