Network Disequilibrium in the Post Deregulation U.S. Airline Industry: an Argument for Re-regulation?
The US airline industry was deregulated in 1978 and three decades later it appears that expectations from deregulation have been fulfilled. Legacy carriers are incurring losses while `low cost carriers' (LCCs) are profitable and expected to displace legacy carriers. This paper takes a contrarian stance that while the deregulation of the US airline industry was warranted, its implementation overlooked several key aspects of the economics of airline networks. Based on Lederer and Nambimadom (1998), Hussain developed a model of airline network design to show that point-to-point/directed networks are optimal only over a small number of high demand routes. Put another way, point-to-point/directed networks cannot be optimal over the legacy carrier set of cities and demand patterns. He demonstrates that social welfare with legacy carriers operating HS networks and LCCs operating point-to-point/directed networks is lower than just legacy carriers operating HS networks, implying that social welfare would have been higher if entry by LCCs had been restricted. Without such restrictions, there is no equilibrium in network design which reduces social welfare in the long run.
Hussain, Sayed A., "Network Disequilibrium in the Post Deregulation U.S. Airline Industry: an Argument for Re-regulation?" (2007). Babson Faculty Research Fund Working Papers. 15.