An Analysis of Fortress Hubs in Airline Networks

This paper explores the possibility that the fortress hubs phenomenon is a consequence of the nature of airline hub-spoke network rivalry with the cost complementarities and economies of traffic density inherent to such networks. A negative network effect of local competition is identified: entry into a competitor's local markets may reduce the entry carrier's profit in its own hub-spoke network. As a result, even if a carrier could derive a positive profit from the invaded markets, it would not enter those markets if the negative network effect is sufficiently strong. In effect, it is shown that fortress hubbing can be each carrier's dominant strategy. The impacts of local competition on consumer surplus and total social surplus are also examined