Hub-and-Spoke vs Point-to-Point Transport Networks
With airlines, there are two very different ideas for planning flight routes – the hub-and-spoke model (H&S) and the point-to-point model (P2P). After deregulation in the 1970s, the industry slowly transited to a hub-and-spoke model to save costs and increase flight frequencies .
Transiting from P2P to H&S. Source: http://people.hofstra.edu/geotrans/eng/ch3en/conc3en/hubspokederegulation.html
A brief visit to Wikipedia at http://en.wikipedia.org/wiki/Spoke-hub_distribution_paradigm and http://en.wikipedia.org/wiki/Point-to-point_transit gives a good overview of the advantages each system has over the other:
Hub-and-Spoke:
- Significantly less routes are needed to serve the network. This is because the number of pairings in a P2P network increases at a greater rate than the increase in nodes. (For those familiar with Big-O notation, it’s O(n^2) ).
- Since there are less routes, assuming the number of planes are the same, airlines can schedule more frequent flights along each route and make full use of the capacity of each plane.
- Centralizing operations at the hub leads to economies of scale.
Point-to-Point:
- Minimizes connections and travel time. Also, since there are less baggage transfers, there will be less incidences of missing luggage.
- No interdependency of flights and hubs – a delayed flight or a closed airport will not significantly affect other flight schedules. There is no single point of failure, and delays are unlikely to cascade through the system.
Each model has its own proponents, even in the academic world. At http://gemini.econ.umd.edu/jrust/crest_lectures/ah.pdf, the author argues that H&S networks offer a very significant cost saving for the airlines, forming an effective barrier to entry since new airlines will not enjoy these economies of scale. The paper at http://mywebspace.quinnipiac.edu/cball/Research/Ball%20Rethinking%20Hubs%20&%20P2P%2008_2005.pdf, on the other hand, holds up Southwest Airlines as a champion of the P2P model and counters that its success in markets it enters is a validation of the P2P model.
Even airplane-making companies have differing opinions on the future of air travel – Airbus predicts that the H&S strategy will be dominant and created the A380 mega-plane, whilst Boeing foresees the P2P model taking precedence and crafted the sleek and fuel-efficient 787 to appeal to the market. Take a look at http://www.forbes.com/2006/05/23/unsolicited-advice-advertising-cx_meb_0524boeing.html to read more.
From a bigger perspective, airlines themselves are a hub in the world’s transport network. A true P2P system would take you from your real origin (your home in California, for example) to your actual destination (like a classroom in Cornell) in a single journey. The earliest days of transportation used to be a P2P – walking (and maybe horse riding?). As ships and public transportation came into the picture, people learned to travel to a hub (like a port, or train station) and take another mode of transport before alighting at another hub. All airports, then, are hubs in themselves. Since passengers have already journeyed to a hub, they will be more receptive to the idea of adding an additional leg of the trip to another hub.
Is is true for my personal experience as well. My first concern would be cost – I would be willing to go through an additional flight if the overall ticket price is significantly cheaper. However, if the price ends up differing by only about $50, then I would rather sit on a direct flight to my destination. The question, then, is if the cost savings from centralized operations in a H&S network are significant enough to offset the increase in customer welfare (and what they are willing to pay for it) by providing direct flights. Right now, because flying is still relatively expensive compared to other modes of transportation, cost savings are still significant, and businesses will be more attracted by that prospect than a less easily quantifiable notion of customer welfare. Furthermore, given the high capital costs in starting an airline and the fact that most airlines are on the H&S model, it seems that airlines have little incentive to switch to a P2P network.
However, my view is that as technology improves, the cost of spreading operations over more nodes in the airline network will go down, and eventually H&S will not seem as viable an alternative. My dream, of course, is when everyone has a flying car – then air travel will be truly point-to-point.