|
Robert J. Gordon
Northwestern University
Darryl Jenkins
George Washington University Executive Summary of This Study
1. This paper investigates the "hub premium" hypothesis that major carriers with the major share of traffic in and out of a hub exploit so-called "monopoly power." The hypothesis states that these carriers charge hub-city residents higher fares for travel originating or terminating at the hub than they charge other passengers traveling on the rest of their systems. Some have even gone so far as to claim that consumers living in hub cities live in "pockets of pain."
2. By contrast, virtually everyone agrees that consumers who choose to take one stop flights enjoy the full benefits of competition. If a passenger is traveling, say, from Newark to Los Angeles or Seattle and is willing to include a stop in the itinerary, that person has a choice of flying perhaps seven or eight different airlines – including all of the major carriers. Those flying shorter distances, even from Washington to Chicago, have the choice of connecting through cities like Cleveland, Pittsburgh, Detroit, and Cincinnati, rather than going nonstop. This rich array of choices for connecting traffic guarantees a competitive fare to the passenger willing to make a connection.
3. The surprising result of this study is that the passenger originating or terminating his or her trip in the three major Northwest Airlines hub cities actually enjoys the same competitive fare as the connecting passenger, holding constant the effect of mileage on fares. And yet this study makes no adjustment whatsoever to the benefit to the hub-originating passenger of his or her freedom from the inconvenience or time penalty of connecting or stopping enroute.
4. Because hub-originating passengers on the Northwest Airlines system pay no more than the fares paid by connecting passengers through those hubs, they enjoy a very substantial benefit of the time and convenience saving of being able to fly nonstop to many destinations from the hub rather than being forced to connect to obtain lower fares.
5. Those passengers originating or terminating their travel in a Northwest hub receive a travel bargain compared to other passengers on Northwest airlines. Hub-originating passengers receive a higher quality product, since they have the option of flying directly to many destinations without stopping or connecting, yet our study shows that they do not pay a higher fare for this privilege. In fact, they pay slightly less on nonstop hub-originating flights than passengers pay to connect on a route of given mileage and with given advance purchase and minimum-stay restrictions.
6. Average fares paid at any airport are misleading. Only a few passengers pay high walk-up fares. At Minneapolis in 1998 fully 77 percent of Northwest passengers originating their travel at that hub paid less than the average fare.
7. There is a higher percentage of passengers paying unrestricted fares at the Northwest hubs, but this is not because discount fares at the hubs are unavailable. In September, 1999, 86 percent of discount fares in the top 30 Northwest hub-originating markets from Minneapolis were available 30 days in advance.
8. This study is the first to be based on proprietary airline data. Because of its rich data source, it is also the first to base its study of the relationship between fares and mileage for hub- originating and connecting traffic on detailed data by fare category.
9. This study, because of its unique data source, is able to correct for many of the flaws in previous studies based on data collected at a high level of aggregation. For instance, in addition to its careful controls for elapsed mileage on every route and for the travel conditions and restrictions of each type of ticket, this study is able to strip out the effect of connections between regional airlines and the hub airline and is also able to incorporate the value of frequent flyer awards.
|