Airlines-within-airlines strategies and existence of low-cost carriers

This paper investigates hub carriers’ airlines-within-airlines (AinA) strategies, intended to establish low-cost divisions offering nonstop flights on rim routes. An initial hub-spoke network is optimal if passenger differentiation between one-stop and nonstop services and via-hub time cost are small. If differentiation is substantial, a mixed one-stop and nonstop (point-to-point) network under AinA is optimal when via-hub time cost is small (large). Low-cost rivals on rim routes weaken AinA adoption and enhance welfare from a monopoly mixed network. In a perfect-substitute case, hub carriers may have excessive incentive to adopt AinA from a welfare viewpoint, especially, when low-cost rivals exist.

► I examine hub carriers’ airlines-within-airlines (AinA) strategies on rim routes.
► Passengers differentiate one-stop and nonstop services horizontally and vertically.
► A mixed network under AinA can be preferable to a hub-spoke or point-to-point one.
► Low-cost rivals on rim routes weaken AinA adoption and enhance welfare.
► Hub carriers may have excessive incentive to adopt AinA in a perfect-substitute case.