Airport privatization in international inter-hub and spoke networks

- An international inter-hub network links two countries׳ hub and local airports.
- Each country׳s hub carrier interlines with the other country׳s regional carrier.
- Privatizing hub is a Nash equilibrium if inter-hub market is sufficiently large.
- Privatizing the hub and local airports could also be a Nash equilibrium.
- A Prisoners׳ Dilemma can emerge as both countries could be better off.

This paper investigates strategic interactions in airport privatization by two countries. Each country has a (gateway) hub and a local airport. In each country, a hub carrier operates hub-local and international hub-hub flights, whereas a regional carrier operates hub-local flights and forms an alliance with the foreign hub carrier. Previous studies considered a limited network with a (hub) airport per country and showed that privatizing the hub is generally the dominant strategy. By contrast, in our more general network, privatizing the hub (alone or along with the local airport) could be one of the equilibria only if the international hub-hub market is sufficiently large. If the hub-hub market is relatively large, governments have an incentive to privatize both their hub and local airports to a single operator on the condition that the operator is allowed to cross subsidize. We further find that governments may be trapped in a Prisoners׳ Dilemma.