Network competition in the open aviation area

In 2008 the ‘joint open aviation area’ between the US and EU will become reality. It is expected that competition will increase. The reaction of the airlines depends on the possibility to make profits in ‘new’ markets (markets that can now be entered). This, in turn, depends on network characteristics. In this paper we find that full liberalization of international markets by means of a bilateral agreement results in higher welfare than the formation of an alliance. Carriers, however, will also in fully deregulated aviation markets most likely opt for an alliance. This is a result of a built-in competitive effect of hub–spoke networks. Only in markets where the reservation price is very high (e.g. to London Heathrow), hub–spoke airlines may enter a competitive game. Low-cost airlines, which do not operate extensive hub–spoke networks, may find it profitable to enter new markets.