The entry of a low cost carrier onto a route leads to lower prices and higher passenger counts, both on other routes at the same airport and on competing routes at neighbouring airports. These effects indicate that consumer gains from the entry of low cost carriers are higher than previously estimated. A case study and an econometric analysis are used to estimate these effects.

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.

Using a two-countries/two-airlines framework, three different competition scenarios are analysed. These reflect the new EU competition rules. The results suggest that the use of hub-and-spoke networks results in significant welfare gains. In addition, the model shows that cross-border mergers may increase net social welfare.