Is it Time to Discard the Hub and Spoke Airline Model?

In the news it was recently mentioned that Emirates accepted the delivery of their 117th A 380. While we hear quite often that jumbo aircraft and the hub and spoke model (H&S)  are obsolete and the future is in smaller Aircraft and point to point (P2P) operation Emirates boldly continue piling the fleet of jumbo Aircraft. It seems that Emirates knows something important that is inconspicuous to others. Let’s try to understand their secret knowledge. Is it true that the model, which proved itself on many occasions, is becoming obsolete and old fashioned?

Indeed such concerns were valid at the beginning of the pandemic, when people did not know about the dynamics of the virus spread. So, common sense advised that, to reduce exposure, it is better to avoid transitions in hubs and travel directly, point to point. It looked quite sensible 8-9 months ago.

Medical safety procedures and protocols established in the airline industry (airlines and airports) have proven that the airport and aircraft are the safest places in the world. IATA published stunning statistics - there were only 44 cases of infection reported over a 6-month span (which is around 1 case per 27 million passengers).

So, the major prejudice against the H&S model of travel is proven to be exaggerated.

What else should we think over and analyze?

The current (I would say jerk and jolt) mode of operation in the airline industry obscures the picture and does not enable a proper assessment of the advantages and disadvantages of the hub and spoke model. Nevertheless, we will try to make such an assessment.

Two powerful pillars are supporting the H&S model. Firstly, the airline with a single hub can efficiently consolidate and manage various key functions (like maintenance, spare parts inventory, etc.)  and significantly reduce costs. With the P2P model, one needs to establish multiple bases for operation; the latter forces airlines to stretch their resources and limits their ability to control and coordinate activities. Although current technologies enhance coordination, and resource allocation in various bases, their prompt transfer to where they are in demand remains a challenge.

The H&S model consolidates small streams of demand and directs them to the hubs and then again redistributes them to their final destinations. Through code-sharing agreements, H&S operators can achieve a larger advantage by increasing the frequency of serving particular destinations without an actual growth in cost. The profitability of such an operation can only be achieved with large aircraft. This clearly explains the distribution of jumbo A 380 in the hands of the major hub and spoke operators. The operation of large aircraft also allows softening the airport congestion problem. The matter of serving secondary destinations, where demand is significantly lower than aircraft capacity, remains. Some H&S operators address this challenge by diversifying their fleets; the others - through casting alliances with other carriers with smaller size fleets.

The other important factor, which should be considered, involves cargo transportation. Around half of the air cargo is transported by passenger airlines. Similar to the streams of passengers, cargo, mail, and courier shipments are consolidated in the hubs; the latter allows expedite delivery of these shipments (the P2P operators cannot compete with H&S airlines’ frequencies of operation). Therefore, the P2P airline loses in competition for the major advantage of air transportation – speed of delivery. The second consideration is that the H&S operators need serious cargo gateways for consolidating and dispatching streams of cargo in various directions. And such cargo gateways are built and available in the hubs. It is much easier to match the capacity of such gateways with the turnover of cargo (because the cargo moves fast). This is not the case for P2P operation; cargo and shipments have to wait (sometimes days) for the next flight to deliver the shipment to its destination. Perhaps it is not that obvious from the airline’s point of view, but it becomes a burden for airports and freight forwarders. They need to make heavy investments in storage and processing facilities in secondary airports. And the return of these investments shall be placed upon the shoulders of P2P operators and affect the cost of cargo transportation. In addition, P2P with thinner freight streams do not have the bargaining power to get preferential rates for warehousing, demurrage, security, temperature-controlled storage due to less volume of flights and cargo compared to volumes offered by the hub and spoke carriers.

The P2P operation model solves the issue of airport congestion and aligns traffic between multiple airports, however, it creates another problem – congestion of airways. This problem is not tangible in emerging markets, but it becomes a burden in countries with an advanced airline sector and on the international and intercontinental routes.

With the arrival of the new generation aircraft (like B787 and A 350) for long haul travel, new opportunities for the P2P model appeared. These new aircraft have excellent fuel efficiency and range, allowing them to reach practically every destination from the menu of H&S operators. These aircraft have a lower seat capacity and are better fit for P2P operation, where the airlines need to serve thinner routes. These aircraft, utilized in a P2P operation, are an ideal response to the current market condition, and it seems that the H&S model is about to surrender.

However, these advantages of the P2P model are temporary and their future is not fully certain yet.

Firstly, the advantage of fuel efficiency is slightly diminished by low fuel prices. This era started well before the pandemic and with the absence of speculative support for maintaining fuel prices high, we would not evidence skyrocketing fuel prices again.

Moving on - it is true that the H&S operation is limited to the large airports capable of handling jumbo aircraft. But these difficulties are well in the past; all the setup for handling jumbo aircraft was complete years and years ago. One may say that the new generation aircraft can reach the airports where an A380 cannot land. That is true. But would P2P airlines be able to get enough demand to fill seats in their aircraft in these airports?

The other notion which we see in various reports and research papers is that the H&S model can offer a higher frequency of operation in comparison to the P2P model. One of the reasons for this we mentioned earlier - consolidation of demand; bringing on the flight to the hub passengers traveling to various destinations. But there is another consideration that nobody dares to articulate. To match the frequency with the H&S operator, the P2P carrier has to put in operation a significantly larger number of aircraft. And this is not only because the fleets of the P2P carrier have a lower seat capacity. This is because the P2P model requires a much higher number of flights to move the same stream of passengers.

I believe the latter can be proven with modeling. Let’s assume that we are comparing the operation of two airlines on the same network. One operates a fleet of jumbo aircraft using the hub and spoke model. The other has a fleet of smaller modern aircraft and follows a point to point model. Both airlines have an equal simultaneous number of seats. To make this exercise more realistic, let’s assume that both airlines are operating primarily internationally and do not serve shorter routes within one country.  Do you have any guesses about how many frequencies the airlines would be able to perform? I guess that the P2P operator would be able to perform at least two times fewer frequencies. To perform the same number of frequencies as the H&S carrier, the P2P operator would need twice the seat capacity – in other words, two times more aircraft.

And here the most interesting part begins. How would P2P airlines be able to bring in the necessary number of aircraft, especially in view of the shamble with airlines’ liquidity? I discussed this in my other article (see ‘A Blurred Future - are OEMs’ forecasts realistic?’)  – that the airlines simply would not be able to acquire the necessary fleets to adequately serve the same network. Perhaps further research and modeling in this area would shed light on the fleet requirements for P2P operations and make a more precise forecast for the number of aircraft required for such operations.

And when this happens, we realize that the other seeming advantages of point to point operation will be seriously undermined or fully dissipated.

So, all in all, as soon as we see the revival of airlines’ operations, the hub and spoke airlines will gain momentum and prove their sensibility.

References:

Cook, G. N., & Goodwin, J. (2008). Airline Networks: A Comparison of Hub-and-Spoke and Point-to-Point Systems. Journal of Aviation/Aerospace Education & Research, 17(2). https://doi.org/10.15394/jaaer.2008.1443 

Eric Pels Optimality of the hub-spoke system: A Review of the literature and directions for further research. Transport Policy 2020

Morton E. O’Kelly Fuel Burn and Environmental implications of hub networks. Transportation Research Volume 17D, Issue 1, January 2012

Camilla Salvatori Competition in Airline Industry: Comparison Between Hub-And-Spoke and Point-to-Point Networks Thesis LUISS Department of Economics and Business 2018-2019

Acknowledgments:

I would like to thank Eric Pels and Prof. Morton O’Kelly for their interest and help which I received while working on this article.