Airlines on the North Atlantic run at a loss, and increased fares would not make them profitable unless capacity were sharply reduced. That might require innovations in the type of service provided, which must be settled between governments.
This paper explores the possibility that the fortress hub is a consequence of the nature of airline hub-spoke rivalry. Entry into a competitor’s local market may reduce the entrant’s profit in his own market. As a result, there is a deterrent to entry if the negative effects are strong enough. The paper also examines the impacts of local competition on consumer surplus and total social surplus.
The authors formulate and estimate a model of international air travel demand for Israel. Consumers’ wealth is found to be a significant determinant and failure to include it in the estimated equations yields price elasticities which are biased downward and income elasticities which are biased upward.
