Most large airlines operate networks, or hub-and-spoke systems, which connect many spoke cities (or nodes) with flights to and from a hub airport.
a. A network carrier serves 39 spoke cities from a single hub. How many city-pairs does it serve? (A city-pair is City A to City B. City A to City B and City B to City A are consider just one city-pair)
b. This same airline adds a 40th spoke city to its network using a 100 seat capacity aircraft. On a flight from this 40th spoke to the hub, how many passengers, on average, does it need to attract to each destination to achieve an 80% load factor?
c. How can a network airline profitably serve smaller cities than a low-cost-airline? (Hint: Consider 2b above).
d. A network carrier serves some small cities close to its hub with regional jets which have much higher seat-mile-costs (CASM) than larger mainline jets. The average fare from these cities to the hub does not cover fully allocated costs. Is this rationale?
e. Networks are subject to negative externalities. How might such externalities affect a network carrier’s decision to add another spoke city to its network? Explain. (You may wish to use marginal benefit/cost analysis).