Expansion of point-to-point routes by low-cost carriers in hub networks : traffic and revenue impacts

Abstract

Legacy carriers developed hub networks to achieve a high concentration of operations, increase frequency, and serve multiple Origin-Destination markets with maximum efficiency. By contrast, the rapid emergence of low-cost carriers (LCCs) is mainly based on a low-fare entry strategy in point-to-point markets competing with the traditional connecting paths offered by the legacy carriers via their hubs. This thesis examines the traffic and revenue impacts of an LCC developing a point-to-point network in a legacy hub network environment. To this purpose, we use the Passenger Origin-Destination Simulator (PODS) to perform all quantitative evaluations. Modeling the choice of travelers with regard to flight schedules and fares, as well as the airlines' revenue management systems, PODS allows one to investigate the changes in aggregate and disaggregate airline statistics following the introduction of low-fare service on point-to-point routes. The first goal of the thesis is to review and update models of passenger choice between connecting legacy and non-stop low-cost paths. The review of the literature on air traveler choice provides parameters and benchmarks critical to the calibration of PODS.

(cont.) We then simulate a LCC entry case, and calibrate the Passenger Decision Model (PDM) embedded in PODS through sensitivity analysis. In the second part of the thesis, we analyze the introduction of LCC operations in two legacy hub networks, a theoretical symmetric and a more realistic asymmetric network. Two different LCC strategies were considered. In the first case, LCC routes are added to the legacy network with one daily frequency, while the second strategy is characterized by two daily flights in each market entered by the low-fare airline. For both networks and strategies, the analysis reveals that legacy revenues are greatly reduced whereas the decrease in legacy traffic is limited even with extended and aggressive low-cost competition, allowing the legacy carriers to maintain their network load factors at high levels. The lower fares implemented by the LCC and matched by the legacy airlines lead to the reduced legacy revenues. However, legacy carriers can rely on demand stimulation, as well as great demand in local hub markets and connecting markets not served by the LCC, to replace traffic captured by the new entrant.