12.07.2015 Views

research - Associated Student Government, Northwestern University

research - Associated Student Government, Northwestern University

research - Associated Student Government, Northwestern University

SHOW MORE
SHOW LESS

Create successful ePaper yourself

Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.

RESEARCHSOUTHWESTTO THE RESCUE?An Investigation of Hub Premiums and Southwest AirlinesUsing a regression study of data comparing 2000 and 2010, this studyinvestigates the effect of Southwest Airlines on the pricing strategy ofthe legacy air carriers (American, Continental, Delta, Northwest, USAirways, and United). Namely, it looks into if Southwest has curbedthe ability of the legacy carriers to command a “hub premium” bycharging higher prices for flights originating or terminating at theirrespective hub airports. Test results show that the hub premiums ofthe legacy carriers were large and significant in 2000 but had declinedby 2010. However, the declines cannot be clearly attributed to thepresence of Southwest Airlines at the legacy carriers’ respective hubairports. In fact, a Southwest presence seems to matter less in 2010than in 2000. The <strong>research</strong> also examines whether Southwest Airlinesextracts hub premiums of its own. Empirical evidence suggests thatSouthwest charges higher prices not only for its flights with an origin ordestination at airports where it has its largest operations but also for itsflights originating or ending at one of the legacy carrier hub airports.Suzanne ChangDEPARTMENT OF ECONOMICSRobert GordonFACULTY ADVISORDEPARTMENT OF ECONOMICSSteffen HabermalzSECONDARY ADVISORDEPARTMENT OF ECONOMICSI. IntroductionSince the US Airline Deregulation Act of 1978, six legacy carriers, American, Continental, Delta, Northwest,US Airways, and United, and several strong low-cost carriers, notably Southwest, eventually emerged after a longsuccession of mergers and bankruptcies. The legacy airlines began in 1978 with a mix of hub operations and pointto-pointlinear routes between cities other than their hubs; gradually over time the linear routes were dropped andairlines centralized operations at a few hub airports serving a wide variety of destination or “spoke” airports. As a result,the notion of a “hub premium” has been popularized in airline pricing studies to capture a difference in air faresbetween flights originating or terminating at a hub airport and those that do not take off or land at a hub.Research on hub premiums has focused on either identifying the existence of hub premiums or attributing possiblecauses to the presumably existing premiums. Borenstein (1989) concludes that an airline’s dominance at hubairports leads to higher fares for passengers traveling to or from these airports. Lederman (2008) finds that both ahub premium and frequent flier program partnerships allow airlines to charge higher fares for flights that originatedfrom places where their FFP partner was dominant.Berry, Carnall, and Siller (1996) attribute most of the hub premium to business travelers, who are more priceinelasticthan non-business travelers, an assertion further supported by Lee and Luengo-Prado (2005). In contrast, a2001 U.S. Department of Transportation study is highly critical of the position that the higher fares can be ascribedto passenger mix, despite its finding of a premium on prices at hub airports. It instead attributes the premium to airlinesnot meeting passenger demand for lower-fare seats in their hub markets. In short, while past studies agree onthe existence of a hub premium, they do not necessarily agree on the driving forces behind the premium.Adding to the disagreement in <strong>research</strong> findings, Gordon and Jenkins (1999) actually document a hub discountwith passengers on flights with an origin or destination at one of Northwest’s three hubs, Detroit, Memphis, andMinneapolis, paying fares about four percent less than passengers with an origin or destination elsewhere in Northwest’snetwork.Although Southwest’s operations first focused on smaller markets and at airports not dominated by the legacyVOLUME 7, 2011-2012NORTHWESTERN UNDERGRADUATE RESEARCH JOURNAL33

Hooray! Your file is uploaded and ready to be published.

Saved successfully!

Ooh no, something went wrong!