The Role of Demand Uncertainty in Airline Network Structure

Abstract

In this paper, we provide another reason that may explain the adoption of the hub-and-spoke network structure in the airline industry. We show that when an airline has to decide on its capacity before the demand conditions are perfectly known, a hub-and-spoke network structure by pooling passengers from several markets into the same plane helps the firm to lower its cost of excess capacities in the case of low demand and to reduce its opportunity cost of rationing in the case of high demand.Airlines, Network, Demand uncertainty, Hub