Deregulation Airline Industry

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The Geography of Deregulation in the U.S. Airline Industry

Andrew R. Goetza; Christopher J. Suttonb
a
Depatment of Geography, University of Denver, b Department of Socail Sciences, Northwestern State
University, Louisiana
Online publication date: 15 March 2010
To cite this Article Goetz, Andrew R. and Sutton, Christopher J.(1997) 'The Geography of Deregulation in the U.S. Airline
Industry', Annals of the Association of American Geographers, 87: 2, 238 — 263
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The Geography of Deregulation in the

U.S. Airline Industry
Andrew R. Goetz* and Christopher J. Sutton**
*Department of Geography, University of Denver

**Department of Social Sciences, Northwestern State University of Louisiana
The U.S. domestic airline industry was deregulated in 1978 as part of a regulatory reform movement
that has transformed the banking, telecommunications, energy, and transportation industries. A
geography of deregulation has emerged conforming to a core-periphery structure in which industries
are increasingly controlled by fewer firms through their major headquarters and operations centers.
As a consequence of industry consolidation and the shift to “hub-and-spoke” network service
structures, strong domestic “hubs” (e.g., Dallas, Chicago, Atlanta) and international gateway cities
(e.g., Los Angeles, New York, San Francisco) have emerged as the core control centers of the
air-transport system, while “spoke” cities have become peripheralized in the process. The group of
core centers has benefited more than the periphery from increased air transportation employment,
frequency of service, passenger flow, and lower fares, except in cases where hubs were dominated
by one or two airlines, where fares rose. The latter is manifested in a pattern of higher fares in the
more concentrated hubs of the southeastern U.S. and their peripheral hinterlands. Key Words:
airlines, concentration, core-periphery, deregulation, hubs.
D
eregulation continues to be one of the service, and pricing. Particular attention is de-
most important forces shaping the future voted to core-periphery contrasts as well as re-
of industries such as transportation, g io n al p a tterns of change in m arket
banking, and telecommunications. This paper ex- concentration, employment, service frequencies,
plores the geography of deregulation by focusing passenger flows, and air fares. The association
on the case of the U.S. domestic airline industry, between industry concentration and higher air
which, in 1978, became one of the first to be fares in markets dominated by only one or two
significantly deregulated. It is thus a test case of airlines is of particular concern.
deregulation’s ability to improve economic effi-
ciency and consumer choice in industries with a
strong public-interest dimension. Although nu- Regulation, Deregulation, and the
merous benefits from deregulation have been U.S. Airline Industry
claimed, mounting evidence from the airline and
other industries reveals that impacts are ex- Formal regulation of air transportation was
tremely uneven across space. The purpose of this instituted by the U.S. Congress through promul-
paper is to show that the geographic effects of the gation of the Civil Aeronautics Act of 1938. This
deregulation of the airline industry are conspicu- Act created the Civil Aeronautics Authority
ous, are consistent with other deregulated indus- (later reorganized as the Civil Aeronautics Board
tries, and conform to a core-periphery pattern. [CAB]) and authorized it to control route entry
Following a review of the history and rationale and exit of air carriers, regulate fares, award sub-
of the movement for airline deregulation, and the sidies, and control mergers and inter-carrier
literature on the spatial effects of deregulation agreements (Bailey et al. 1985). Regulation of the
across industries, the paper deploys a core- airlines was deemed necessary to prevent “de-
periphery approach as an analytical framework structive competition” from damaging a fledgling
for understanding post-deregulation changes in industry vital to the future security and commerce
the spatial dynamics of the airline industry. De- of the nation (Sampson et al. 1990).
regulation’s geographic effects from 1978–1993 Following World War II, analysts began to
are examined with respect to industry structure, question the merits of continued economic
Annals of the Association of American Geographers, 87(2), 1997, pp. 238–263
©1997 by Association of American Geographers
Published by Blackwell Publishers, 350 Main Street, Malden, MA 02148, and 108 Cowley Road, Oxford, OX4 1JF, UK.
Deregulation in the Airline Industry 239
regulation in a maturing and more competitively intrastate, and charter airlines as well as several
balanced industry. By the 1960s–1970s, several new carriers (e.g., People Express, New York Air,
economic studies of regulatory inefficiencies Midway) challenged the dominance of the ten
(Caves 1962; Levine 1965; Jordan 1970; Keeler major trunk airlines (United, American, Delta,
1972; Douglas and Miller 1974) together with Eastern, TWA, Western, Pan Am, Continental,
Congressional hearings led by Senator Edward Braniff, and Northwest) (Meyer and Oster 1984).
Kennedy (with the assistance of Stephen Breyer) In the face of this competition, the ten majors
contributed directly to a reconsideration of regu- (former trunks) saw their market share of domes-
latory policy. An economic and political consen- tic revenue passenger miles slip from 87 percent
sus was emerging that regulation as practiced was to 75 percent between 1978 and 1983 (Bailey et
inefficient and restricted the growth of the indus- al. 1985).
try. As a result, Congress passed and President But in the next five years (1983–1988), the
Carter signed into law the Airline Deregulation airline industry experienced a massive wave of
Act of 1978. In essence, this Act stripped the bankruptcies, mergers, and acquisitions. More
CAB of its authority to control entry and exit, than 200 carriers folded or were absorbed, indus-
fares, subsidies, and mergers. Today, carriers that try-wide concentration increased, and the majors
are “fit, willing, and able” can serve any route and reestablished their dominance. By 1990, the com-
charge fares to any level that they deem appropri- bined market share of the nine largest airlines
ate (Morrison and Winston 1986). (American, United, Delta, Northwest, Conti-
Political support for deregulation has been bi- nental, USAir, TWA, Pan Am, and Eastern) was
partisan. While Carter, Kennedy, and other 92 percent of domestic revenue passenger miles
Democrats spearheaded the airline and other (Williams 1993). Concentration levels increased
early reforms, the Reagan Administration and further between 1990 and 1993 as Pan Am, East-
Congressional Republicans expanded deregula- ern, Braniff, and Midway1 ceased operations, and
tion within the railroad, bus, trucking, banking, as other carriers experienced severe financial in-
savings and loan, long-distance telephone, cable stability. Continental, TWA, and America West
television, and radio and television broadcasting entered Chapter 11 bankruptcy (the second time
industries in the early 1980s (Meiners and Yandle for Continental), while Northwest and USAir
1989; Dempsey and Goetz 1992). Deregulation threatened bankruptcy. By 1995, a number of
was warmly embraced by both political parties as new small airlines had started operations, but the
a strategy for reducing government involvement industry remained as concentrated as ever. Since
in economic affairs. Both sides of the political the onset of deregulation in 1978, the industry
aisle regarded regulators with increasing suspi- has been transformed from a regulated oligopoly
cion, seeing them either as captives of the indus- of ten trunk carriers controlling 87 percent of the
try they were supposedly regulating or as market to an unregulated oligopoly of eight major
unnecessary bureaucrats constraining the free carriers controlling 93 percent in 1995 (Bailey et
flow of business (Derthick and Quirk 1985; Braun al. 1985; “U.S. Industry Traffic . . .” 1995).
1987; Himmelberg 1994). Deregulation was largely premised on the the-
Industry and public constituency groups gen- ory that the market for an unregulated airline
erally supported the deregulation movement. Af- industry would approximate a perfectly competi-
ter initial reluctance, the major airlines (led by tive one with numerous carriers (because sunk
United) became staunch proponents of deregula- costs were minimal) and no significant economies
tion. Likewise, the general public favored less of scale or barriers to entry (Kahn 1977). The
regulation principally because the change was theory of contestable markets buttressed the pre-
being promoted as pro-consumer. Only organized vailing view by postulating that even the threat
labor mounted serious opposition to the move- of new entry would not allow large firms to exer-
ment, but labor’s political clout had diminished cise monopoly power (Baumol et al. 1982; Bailey
following the Reagan Administration’s firing of and Panzar 1981). By the late 1980s, however, it
striking air traffic controllers in 1981 (Kahn 1983; had become apparent that larger carriers held
Brown 1987). significant advantages, mainly in the form of
The removal of regulatory restraint has had economies of scope and network density, rein-
profound consequences for the structure of the forced by their control of computer reservation
U.S. airline industry. During the first several years systems and airport capacity via long-term gate
after deregulation began, smaller local service, leases as well as more attractive frequent-flyer
240 Goetz and Sutton
programs (Levine 1987; Small 1993). These ad- Association 1994). The situation was so bleak
vantages for large firms represented significant that shortly after taking office, the Clinton Ad-
barriers to entry for smaller ones. ministration organized a “blue-ribbon” commis-
Even though the airline industry has become sion to study the problems in the industry and to
more concentrated, several studies have shown make remedial recommendations (National
that average air fares (in constant dollars) have Commission to Ensure a Strong Competitive Air-
declined since 1978 and that competition re- line Industry 1993).
mains vigorous on many city-pair routes (U.S. These recent financial setbacks have multiple
Department of Transportation 1990; U.S. Gen- sources, including the Persian Gulf crisis, which
eral Accounting Office [GAO] 1990a, 1993; Na- boosted fuel costs and reduced air travel, and the
tional Research Council 1991). Moreover, a economic recession of the early 1990s. But the
variety of discount and other fare categories have losses also reflect the underlying unhealthy finan-
proliferated. Hence there are wide variations in cial status of an industry that had become bloated
fare levels depending upon factors such as class with debt during the restructuring frenzy of the
of service, geographic locations of travel, and time 1980s. Several major carriers amassed very high
of purchase. In the period of deregulation, airlines debt-to-capital ratios as a result of overly optimistic
also have engaged in deep discount pricing. To expansion plans and, in some cases, of leveraged
increase demand during slack periods, a major buy-outs (LBOs) (Curtis 1990). Financial losses so
airline may cut fares drastically; doing so precipi- afflicted the industry that the worth of all U.S.
tates a “fare war” as other airlines respond by airlines on Wall Street was less than that of Japan
offering similar fares. These “fare wars” may result Airlines alone on the Nikkei (Dempsey 1993).
in substantial savings to consumers, but they can After nineteen years of deregulation, the
be damaging to the airlines if pricing drops below “shake-out” process continues in this turbulent
cost levels. To compensate for the revenue short- industry (Morrison and Winston 1995; Ott and
fall, airlines charge higher fares for short-notice Neidl 1995; Peterson and Glab 1994; Petzinger
business travel and for travelers in monopoly 1995). The most powerful large-scale U.S. air-
markets. Tangible evidence of these strategies lines, American, United, and Delta, are ones that
comes from the previously-cited studies by the industry observers feel have the best chance to
U.S. Department of Transportation (1990) and survive in the long run. Northwest, Continental,
the U.S. GAO (1990a, 1993). They indicate that and USAir are financially weaker, though alli-
air fares have tended to be anywhere from 18–27 ances with international carriers (North-
percent higher for those cities where one airline w e s t / K L M, C o n t i n e n t a l / A i r Ca n a da ,
dominates traffic (e.g., Charlotte, where more USAir/British Air) have helped to stabilize their
than 90 percent of the market is controlled by positions. In late 1995, United turned down an
USAir). offer to acquire USAir, thus forestalling another
Partly because of the availability of these dis- potential round of megamergers. Southwest Air-
count fares, U.S. domestic air passenger levels lines has been surprisingly strong, being the only
have increased dramatically under deregulation. airline to report profits during the recent industry
From 1978–1993, the number of enplaned do- downturn. By 1995, it accounted for 4.4 percent
mestic air passengers grew from 256 million to of total industry revenue passenger miles, while
478 million, an 87 percent increase (U.S. Depart- maintaining its “niche” status by serving limited
ment of Transportation 1978, 1993). In parallel, markets. Newer carriers such as American Trans
the frequency of airline service has also expanded. Air, Valu-Jet, Kiwi, Vanguard, and Western Pa-
In 1978, there were slightly more than 5 million cific have recently started “Southwest-type” op-
flight departures; by 1993 that number had grown erations in some markets, but they account for
to 7.2 million (U.S. Federal Aviation Administra- very small fractions of total passengers, and their
tion [FAA] 1978, 1993). future success vis-à-vis the majors remains un-
Ordinarily, such growth in demand suggests clear. TWA and America West are still operating
that financial returns are quite positive. Yet in the after reemerging from bankruptcy.
airline industry, the fifteen-year period of deregu- Thus deregulation of the U.S airline industry
lation was much less profitable than the previous has produced mixed results. On the one hand,
fifteen years. Between 1990 and 1993, in particu- more people are flying than ever before, average
lar, airlines lost nearly $13 billion—the largest fares (adjusted for inflation) may be lower than
losses ever in the industry’s history (Air Transport before deregulation, and the number of fatalities
and major air accidents is lower today (though from mergers, while the locations of the acquired
this may be in spite of deregulation rather than companies tended to be disadvantaged. Similarly,
because of it; see Nader and Smith 1993). On the deregulated telecommunications firms increas-
other hand, the industry has lost more money ingly formed horizontal, spatially-strategic alli-
than ever, industry concentration has increased ances and joint ventures that minimized
as the number of major airlines has declined, and competitive threats (Cooke 1992). And in the
fares have increased at the most concentrated deregulated Canadian and Australian airline in-
airports, i.e., those where one or two carriers have dustries, markets have been dominated by just
dominant market shares. two carriers each after several years of deregula-
In sum, deregulation has had a major impact on tion (Australian Bureau of Transport and Com-
industrial structure, service, pricing, and the finan- munication Economics 1994; Small 1993). In
cial condition of the U.S. airlines. Yet one of deregu- Europe, liberalization of air transport, allowing
lation’s most important impacts has been greater access to more markets, has produced
geographic, namely the uneven changes in levels of very few new entrants and thus is expected to
industry concentration, service, and pricing in the benefit larger global carriers and their hub cities
U.S. space-economy. This geographic impact was at the expense of smaller national airlines and
not entirely unexpected, however, since previous their capital cities (Debbage 1994; Dennis 1994).
research on deregulated industries reveals that the Airline industry liberalization in the East Asian
locational effects of this policy are substantial. Newly Industrialized Countries (NICs) has been
guided by pragmatism more than laissez-faire ide-
ology, and thus the state has limited the extent to
The Spatial Effects of Deregulation which private carriers are allowed to control mar-
kets (Bowen and Leinbach 1995). Deregulation
Recent deregulation initiatives in transporta- also tends to increase infrastructural concentration
tion, banking, telecommunications, and other in- at certain nodes in response to market potentials
dustries have resulted in the upheavals of (Mitchelson and Wheeler 1994).
bankruptcies, mergers, acquisitions, and, in the Most studies have found that better service
end, industry consolidation (Ravenscraft 1987). and lower prices are associated with larger and
The literature is less decisive on whether the more competitive markets. Deregulation allowed
increased consolidation has actually curtailed banks to withdraw from poorer neighborhoods
competition (National Research Council 1991). and small communities in favor of more lucrative
Certain trends become clearer, however, when we markets (Christopherson 1993). Deregulation in
examine their spatial effects. The transition from telecommunications curtailed cross-subsidiza-
a relatively stable regulated environment to a tion of smaller rural areas by larger urban centers
more turbulent deregulated one has resulted in resulting in the reappearance of uneven service
wide geographic variations in individual market over space (Cooke 1992). Deregulation of legal
concentration, service, and pricing, with outcomes services in England and Wales resulted not only
that generally favor larger markets in major metro- in wide spatial variations in fee levels and lower
politan areas (Cooke 1992; Love et al. 1992; Deb- prices for legal services overall, but also in higher
bage 1993; Graham 1993). A clearer picture of fees in the more concentrated markets (Love et
deregulation’s spatial impacts is emerging, but dis- al. 1992). Additionally, smaller markets tended
crepancies within and among industries remain. to be more concentrated because entry into them
Several studies have shown that industrial con- was perceived to be more difficult. Liberalization
solidation in the wake of deregulation has led to the in the U.K. airline industry resulted in increased
spatial concentration of corporate power in head- competition on dense routes out of London
quarters and major operations centers and to the Heathrow, a sustained increase in traffic, much
geographic expansion of corporate control through better cabin service, vastly improved frequencies,
enlarged market hinterlands. The lifting of restric- and cheaper fares (Graham 1993). Competition
tions on U.S. interstate banking, for example, on other routes in the U.K., however, tended to
resulted in geographic expansion by large corpo- be uneven. Australian transport deregulation has
rations through increased merger and acquisition favored larger markets at the expense of smaller
activity (Lord 1992). The control-center loca- ones (Parolin and Harrington 1992).
tions of many of the acquiring banks (e.g., Los Previous research on the geographic effects of
Angeles, Charlotte, Boston, Atlanta) benefited airline deregulation in the U.S. has uncovered a
variety of findings. During the 1980s, a few large The choice of a theoretical framework for the
airlines dramatically expanded their geographical examination of these impacts includes those
reach and exercised greater control over more air based on neoclassical economics (e.g., spatial in-
market hinterlands (Fleming 1991; Sorenson teraction models and central-place formulations)
1991). Deregulation also led to an attenuation of as well as social theory and neo-Marxian political
competition through consolidation and bank- economy. One framework that seems particularly
ruptcy (Graham 1993) and the emergence of appropriate in accounting for the spatial eco-
dominant centers in the service networks of the nomic processes unleashed by deregulation is the
major U.S. airlines—as reflected in the high con- core-periphery model. It is well-suited for this
nectivity indices of a few key nodes (Shaw 1993). study because it has direct spatial applicability;
Network concentration, as measured by Gini in- incorporates inherent efficiencies and advan-
dices, also became more pronounced as a result tages associated with particular locations; and
of deregulation (Reynolds-Feighan 1992). That acknowledges the dimensions of dominance,
said, the evidence on nodal accessibility (defined power, and control (Green 1987; Lord 1992).
as the degree to which people in a city are able to Furthermore, a core-periphery approach does not
travel to other cities through airline services) for unduly limit our interpretations of the empirical
the 84 largest cities in the 1980–1989 period was evidence. The key issue is whether cores and
more evenly distributed than in the 1970–1980 peripheries both benefit from an industry domi-
period (Chou 1993). Also, interurban accessibil- nated by the core, or whether cores benefit at the
ity (defined by air travel times) over the same expense of the periphery.
period held steady for a group of seven Ohio cities The core-periphery model has been used ex-
and major U.S. air passenger destinations (Ma- tensively in geography, economics, and political
raffa and Finnerty 1993). These findings suggest science principally as a way to understand spatial
that post-deregulation passengers in many cities variations in levels of development over regions
have not experienced a decline in accessibility, at intranational and international scales. The
notwithstanding that they must travel increas- following section summarizes its major features
ingly via specific nodes and that fewer and larger and its relevance to the current study.
airlines exercise increased control over more hin-
terlands. These different patterns of service, pric-
ing, connectivity, and accessibility point to a need Core-Periphery Dynamics
to synthesize recent results within a more coordi-
nated and coherent spatial framework. In a general context, cores are distinguished
from peripheries by three principal features: (1)
the economic development and cultural attrib-
Deregulation and Spatial utes of each, (2) the nature and direction of
Frameworks exchanges between cores and peripheries, and (3)
the interaction patterns between cores and pe-
The deregulation of the airline industry has ripheries (Galtung 1971; Wellhofer 1988). Char-
meant that the airlines now control decision making acteristically, cores exhibit higher levels of
with regard to service entry and exit, pricing, bank- development, higher standards of living, more
ruptcies, and to a lesser extent mergers and acqui- highly skilled workers, and larger capital invest-
sitions (the Department of Justice was given ments per worker, and are the centers of political
authority in 1988 to deny proposed mergers and power, cultural domination, and military supe-
acquisitions on antitrust grounds). Changes in these riority (Wallerstein 1974). In exchange relations,
aspects of the airline industry will be manifested in cores export more high value-added commodities
spatial differentials in the levels of market concen- and services, while peripheries export primary
tration, employment, service frequencies, enplaned and semifinished products (Johnston 1982). Cores
passengers, and fares. The removal of regulatory tend to dominate interaction and to mediate direct
restraint in the airline and other industries should periphery-to-periphery connections; they are the
reveal, moreover, dramatic and exaggerated spatial hubs of transportation and communications net-
impacts owing to the suddenness of the shift in works (Galtung 1971; Wellhofer 1988).
decision making and control away from regulatory Green (1990) used the core-periphery frame-
agencies to individual firms, and to the greater work to understand the geographical effects of
likelihood of monopolistic behavior. industrial mergers and acquisitions. Mergers, he
observed, tend to consolidate power and control Table 1. Core Centers of the U.S. Domestic
in cores at the expense of peripheries. “Command Airline Industry
and control centers” within the core of national
urban systems (Green 1987; Borchert 1978; City Major Airline(s)
Wheeler 1988) benefit from increased merger Domestic Hubs
activity by expanding their control over more Atlanta Delta
extensive hinterland regions. In his analysis of Baltimore USAir
banking mergers, Green further subdivided the Charlotte USAir
traditional core-periphery dichotomy into four Chicago United, American
Cincinnati Delta
segments: the core, semi-core, semi-periphery, Cleveland Continental
and periphery. The core had the highest degree Dallas-Fort Worth American, Delta,
of internal and external connectivity, and thus Southwest
occupied a dominant position in the system. The Denver United
semi-core resembled the core in many respects Detroit Northwest
but lacked the same level of internal interconnec- Houston Continental,
Southwest
tion. The semi-periphery had stronger linkages to Las Vegas America West
the core than the periphery, but had virtually no Memphis Northwest
internal interconnections. The periphery had Minneapolis Northwest
very weak levels of integration into the system Nashville American
overall. Newark Continental
When applied to airline-industry deregulation, Philadelphia USAir
the core-periphery model suggests that one of the Phoenix America West
Pittsburgh USAir
key spatial effects of deregulation would be the Raleigh-Durham American
emergence and dominance of certain core control St. Louis TWA
centers as the most powerful airlines increased Salt Lake City Delta
consolidation of the industry and implemented Washington United, USAir
hub-and-spoke service networks. As these con-
trol centers, located at the hubs, become the International Gateways
Boston Delta, USAir,
pivotal nodes in the air transportation system for Northwest
articulating and mediating spatial interaction, Los Angeles United, Delta,
their advantages from this dominant position are American,
compounded. Northwest
The proliferation of hub-and-spoke network Miami American, Delta,
structures and the emergence of powerful hubs USAir
since 1978 underscore these core-periphery dy- New York American, Delta,
USAir, TWA
namics. The 29 cities designated in 1991 by the San Francisco United
major U.S. carriers as their principal operations Seattle United, Alaska,
centers or hubs (Ivy 1993) divide into two prin- Northwest
cipal types: (1) domestic hubs or (2) international Sources: FAA 1993; Ivy 1993; Debbage 1993; Goetz 1993;
gateways (Debbage 1993; Goetz 1993). Domestic Shaw 1993; Williams 1993.
hubs serve as major connecting complexes for the
airlines. Functioning as focal points of the hub-
and-spoke networks with high degrees of domes- or international gateways as constituting the
tic connectivity, these hubs are usually located in “core,” i.e., as hub cores and gateway cores, respec-
interior cities (e.g., Chicago, Atlanta, Dallas) (Ta- tively. Although these core sites function as con-
ble 1). International gateways serve, meanwhile, trol centers for the airlines, their passenger
as funnels for international service, and while profiles (i.e., local versus connecting, domestic
they have very good connections to other large versus international) differ, as do their levels of
markets, they do not function as true domestic market concentration, service, and fares.
hubs. These gateways are usually found, of course, The semi-core consists of other FAA-defined
in large coastal cities (e.g., New York, Miami, Los large and medium-sized air traffic cities (e.g.,
Angeles).2 Tampa, Portland, Kansas City) that do not serve
Viewed within a core-periphery framework, we as major hubs or gateways but have relatively high
may denote all cities functioning as domestic hubs levels of connectivity.3 These cities have strong
linkages to core centers, but tend to have fewer competitive balance in the airline industry
interconnections. through its power to authorize mergers, assign
All remaining points receiving air service are part lucrative routes to ailing carriers, and restrict fare
of the “periphery.” The semi-periphery consists of levels. While airlines had centers of operations,
moderately-sized cities that serve as “spokes” pos- the CAB prevented any single carrier from be-
sessing reasonably good connections to the core, coming too dominant in any particular market.
and what we will call the “far” periphery consists of Under deregulation, carriers have been able to
smaller communities further down the urban hier- locate their activities wherever they deem most
archy. For the purposes of this study, the semi- appropriate. One of the clearest geographic ef-
periphery is considered to be any of the fects of this change has been the domination of
FAA-defined small air-traffic cities (approximately one airline (or sometimes two) over passenger air
61 cities, e.g., Birmingham, Alabama; Dayton, transportation in domestic hub centers4 (Table
Ohio; Providence, Rhode Island) while the “far” or 3). Between 1978 and 1993, every domestic hub
“distant” periphery includes all FAA-defined non- core except Cleveland experienced an increase in
hubs (approximately 384 cities, e.g., Duluth, Min- single carrier concentration. In 12 of the 22 hub
nesota; Durango, Colorado; Starkville, Mississippi). cores as of 1993, one carrier accounted for more
Table 2 summarizes the functional attributes of each than 60 percent of their traffic, and 9 hubs re-
core-periphery category. ported more than 70 percent concentration.
Using this spatial classification, the study ex- These high levels of concentration at hub cores
amines the effects of deregulation on the core- reflect the increases in both hub-and-spoke op-
periphery structure of the U.S. airline industry. erations and industrial consolidation. Once entry
Given that industry consolidation increased the and exit regulations were removed and carriers
market power of fewer airlines, it is hypothesized adopted hub-based networks, carriers concen-
that air traffic is increasingly controlled by the core trated traffic, personnel, and infrastructure at key
centers and that these places benefit from increased points in their systems. The development of “for-
airline employment, higher levels of service, more tress hubs”—cities where no other carriers were
passenger flow, and lower fares; peripheral loca- able to establish beachheads o f o pera-
tions, by contrast, will be relatively (and perhaps tion—emerged as a key strategy for major airlines
absolutely) disadvantaged. It is expected moreover facing competitive threats from new entrants into
that there will be a decline in benefits across classes the industry.
from the core to the periphery. Hub dominance was reinforced through the
Computer Reservation Systems (CRSs) of the
larger carriers. Almost all airlines and travel
The Geographic Effects of Airline ag e n ts use o ne of the major carriers’
Deregulation CRSs—either American’s Sabre system, United’s
Apollo system (USAir is a part-owner), Conti-
Geographic Changes in Industry Structure nental’s System One, or the Worldspan system of
TWA, Northwest, and Delta—to sell flights to
Market Concentration. Before 1978, the consumers (Borenstein 1992). Smaller airlines do
Civil Aeronautics Board attempted to maintain a not own CRSs, and hence most rely on the larger
Table 2. Functional Attributes of Core-Periphery Classification, 1993

Percentage Average
of Total Percentage Percentage Yield
Percentage Transportation of Total of Total Average (cents per
No. of of Centers Employment Flight Enplaned One-Way passenger
Centers Concentrated (1992) Departures Passengers Fare mile)
Hub core 22 54.5 43.8 48.9 52.7 $163.81 17.85
Gateway core 6 0.0 23.7 16.8 20.0 $161.54 12.42
Semi-core 25 4.0 8.9 15.7 15.5 $137.59 13.90
Semi-periphery 61 21.3 7.9 11.2 7.8 $166.47 16.94
Far periphery 384 79.1 12.9 7.4 3.9 $182.39 21.28
Sources: U.S. Federal Aviation Administration, 1993; U.S. Bureau of the Census 1992; U.S. DOT RSPA Forms T-3 and 298-C
1993; Back Associates 1993; and authors’ calculations.
Table 3. Market Concentration at Domestic Hub Coresa

City 1978 1988 1993
Airline % Airline % Airline %
Atlanta Delta 49.7 Delta 58.4 Delta 83.5
Eastern 39.2 Eastern 34.6 American 2.3
Total 88.9 Total 93.0 Total 85.8
Baltimore Eastern 26.1 Piedmont 58.7 USAir 52.8

United 25.9 American 7.7 American 12.0
Charlotte Eastern 74.8 Piedmont 92.6 USAir 94.6

Delta 13.4 Delta 2.1 Delta 2.2
Chicago United 32.6 United 45.1 United 42.5

American 18.9 American 27.1 American 32.1
Cincinnati Delta 35.1 Delta 77.6 Delta 89.8

American 29.4 USAir 4.0 USAir 2.6
Cleveland United 63.4 USAir 25.2 Continental 42.1

American 12.3 Continental 24.3 USAir 11.7
Dallas/Ft. Worth Braniff 34.4 American 57.0 American 53.1

American 30.2 Delta 23.0 Delta 25.2
Denver United 32.0 United 44.5 United 51.8

Frontier 19.9 Continental 40.7 Continental 30.9
Detroit American 21.6 Northwest 59.9 Northwest 73.1

Delta 21.3 American 7.1 Southwest 4.7
Houston Texas Int’l 18.6 Continental 52.6 Continental 55.7

Continental 18.5 Southwest 24.4 Southwest 25.1
Las Vegas Hughes AW 23.6 America West 33.7 Southwest 26.5

Western 23.1 American 10.5 America West 23.1
Memphis Delta 42.2 Northwest 83.5 Northwest 76.3

Southern 24.0 Delta 8.1 Delta 11.8
Minneapolis Northwest 31.7 Northwest 77.4 Northwest 80.6

N. Central 21.4 United 5.2 United 4.0
Nashville American 28.5 American 62.7 American 69.8

Eastern 19.8 Delta 8.0 Delta 8.1
Table 3. Market Concentration at Domestic Hub Cores (continued)

City 1978 1988 1993
Airline % Airline % Airline %
Newark Eastern 30.2 Continental 43.9 Continental 53.0
American 11.1 United 11.3 United 11.0
Philadelphia Allegheny 22.4 USAir 36.8 USAir 60.0

Eastern 21.4 Eastern 17.0 American 10.8
Phoenix American 27.1 America West 44.2 America West 39.4

Hughes AW 20.4 Southwest 19.1 Southwest 30.7
Pittsburgh Allegheny 46.7 USAir 85.4 USAir 88.9

United 20.5 American 2.7 Delta 2.7
Raleigh-Durham Eastern 74.2 American 68.6 American 80.4

Piedmont 8.2 Piedmont 12.0 USAir 8.2
St. Louis TWA 39.4 TWA 82.2 TWA 60.4

Ozark 20.6 Southwest 3.5 Southwest 13.6
Salt Lake City Western 39.6 Delta 80.2 Delta 71.4

United 21.9 United 5.8 Morris 14.6
Washington Eastern 24.3 United 23.0 United 29.8

United 14.6 Eastern 14.4 USAir 19.0
Domestic hub 1st carrier 37.2 1st carrier 58.8 1st carrier 62.5
cores average 2nd carrier 20.7 2nd carrier 14.2 2nd carrier 13.9
aBoldface shows higher concentration.
Source: FAA 1978, 1988, 1993.
carriers’ CRSs to display their flights. This places zation of certain CRSs has become concentrated
smaller airlines at a tremendous disadvantage in hub cities as well (Williams 1993). For example,
because they must pay to have their flight infor- American Airlines’ Sabre CRS handled more
mation included on the CRSs5 and because they than 87 percent of travel-agency revenues in
are usually given a less favorable display. The Dallas (U.S. DOT 1990), while United’s Apollo
result is that a CRS-owning airline has a 13–18 CRS handled more than two-thirds of these in
percent greater chance of selling its flights when Denver in the late 1980s.
its CRS is used by a travel agent (U.S. GAO Industrial consolidation through mergers, ac-
1986). Additionally, large CRS-owning airlines quisitions, and bankruptcies further facilitated
provide financial incentives (commission over- single-carrier concentration in hub cores. The
rides) to travel agents who book more passengers acquisition of Republic by Northwest in 1986
on their flights. Larger airlines thus attempt to increased concentration levels in Minneapo-
control both the travel agencies and the markets lis/St. Paul and Detroit, while the TWA-Ozark
they serve by encouraging the use of their CRSs. merger in 1986 did the same for St. Louis (U.S.
It is no surprise, therefore, that travel-agent utili- GAO 1988). Similarly, Eastern’s bankruptcy and
subsequent dissolution increased Delta’s market were concentrated in 1993 (Figure 4). In the far
share in Atlanta from 58 percent to 83 percent. periphery, meanwhile, nearly 80 percent of cities
That said, airline market shares were not as were concentrated (Figure 5). Most of these mar-
concentrated in other core airports (Figure 1). All kets are very small and generally cannot sustain
of the international gateway cores and ten of the more than one or two airlines. Prior to 1978,
22 hub cores (several of which also function as airlines provided regulated small community
gateways) were not concentrated as of 1993. service as part of their common-carrier obliga-
Large local demand, multiple airports, resort tion. Under deregulation, airlines have been al-
functions (Las Vegas and Phoenix), and relatively lowed to exit smaller markets, leaving these
recent hub designation (Cleveland) explain why communities to rely upon commuter operators or
market concentration was not uniform across all to lose service altogether. The major carriers did
hub and gateway cities. Keen competition in the bring the larger peripheral centers into their do-
semi-core has also limited airline control; con- mains as a result of code-sharing6 and intercarrier
centration prevailed in only one (El Paso) of 22 agreements with commuter airlines (Oster and
semi-core cities (Figure 2). Pickrell 1986). Indeed, the majors owned, con-
Turning to the periphery, levels of concentra- trolled, and financed (in part or in full) virtually
tion tend to rise again as centers become smaller all the top 50 commuter carriers (Beyer 1987).
(Figure 3). Cities in the semi-periphery have rea- Small communities relying heavily upon com-
sonably good linkages to the core because they muter carriers for their service are often captives
are important spokes providing traffic for the of the majors themselves.
major hubs. Each of the nationwide carriers has
expanded their systems to include most of these Employment Impacts. As fewer airlines
cities. Nevertheless, 13 of 61 semi-peripheral cit- account for a larger share of the market, nodes
ies, mostly in the southeastern U.S. and Texas, of corporate control and decisionmaking have
CORE MARKET CONCENTRATION

Seattle
Minneapolis/St. Paul
Boston
Detroit
Newark New York
Chicago Cleveland
Salt Lake City
Pittsburgh Philadelphia
San Francisco Baltimore
Denver Washington
Cincinnati
St. Louis
Las Vegas
Raleigh/Durham
Nashville Charlotte
Los Angeles
Memphis
Phoenix Atlanta
Dallas/Ft. Worth
Houston
Hub Gateway
Concentrated Miami
Not Concentrated
Figure 1. Passenger-airline core market concentration for domestic hub and international gateway centers. A
concentrated market is one in which one airline enplaned at least 60 percent of passengers or two airlines enplaned
at least 85 percent (U.S. GAO 1990a). Source: U.S. FAA 1993.
SEMI-CORE MARKET CONCENTRATION
Portland
Buffalo Hartford
Milwaukee
Sacramento
Reno Columbus
Indianapolis
San Jose
Kansas City
Tulsa
Ontario/Riverside
Albuquerque Oklahoma City
San Diego
Tucson
El Paso
Jacksonville
Austin New Orleans Orlando

San Antonio
Concentrated Tampa/St. Petersburg
W. Palm Beach
Not Concentrated Fort Myers
Figure 2. Passenger-airline market concentration for semi-core cities. Source: U.S. FAA 1993.
Figure 3. Average levels of market concentration in places across core-periphery categories.

SEMI-PERIPHERY MARKET CONCENTRATION

Spokane
Eugene Billings Burlington Portland
Rochester Manchester
Boise Green Bay Albany
Grand Rapids Syracuse
Newburgh Providence
Sioux Falls Madison White Plains Islip/Long Island
Cedar Rapids Allentown
Moline Harrisburgh Atlantic City
Ft. Wayne
Omaha S. Bend
Des Moines
Dayton
Colorado Springs
Fresno Richmond
Louisville Lexington Norfolk
Wichita Springfield
Greensboro
Knoxville
Greenville/Spartanburg
Indio/Palm Springs Chattanooga
Amarillo Huntsville Columbia
Little Rock
Birmingham Charleston
Lubbock
Savannah
Jackson
Midland/Odessa Mobile
Tallahassee
Baton Rouge Pensacola Daytona Beach
Melbourne
Concentrated
Corpus Christi Sarasota
Not Concentrated
Mission/McAllen
Brownsville
Figure 4. Passenger-airline market concentration for semi-periphery cities. Source: U.S. FAA 1993.
FAR PERIPHERY MARKET CONCENTRATION
Concentrated
Not Concentrated
Figure 5. Passenger-airline market concentration for far periphery cities. Source: U.S. FAA 1993.
assumed more importance in places like Dallas roll in 1985 (U.S. Bureau of the Census 1985);
(American), Chicago (United), and Atlanta indirect employment is even greater. The sub-
(Delta). These places, linked as they are to the sequent decline of Eastern and related job losses
healthiest airlines, would be expected to benefit, after 1985 thus had a chilling effect on Atlanta’s
while places linked to declining or defunct air- economy, although Delta’s expanded hub opera-
lines would be expected to suffer. One way to tions mitigated these losses somewhat. As airlines
gauge these impacts is to monitor airline employ- go out of business or adopt alternative operating
ment across communities. Table 4, based on strategies in response to changing economic con-
County Business Patterns (U.S. Bureau of the Cen- ditions, the geographic effects on employment
sus 1978, 1992) listings of employment in SIC and economic bases are markedly uneven. Cases
category 45 (air transportation), summarizes the in point are the recent cutbacks in hub operations
changes in airline and airport employment for by the majors, e.g., USAir dropping its Dayton
each of our core-periphery categories. hub, American pulling out of San Jose, and Con-
Across all categories, employment in airline tinental’s decision early in 1994 to reorient much
services in both commercial air passenger and of its aircraft fleet and personnel away from its
freight (air cargo) transportation grew from hub operations in Denver (where it was losing out
365,468 in 1978 to 642,249 in 1992. More than to United). Continental’s downsizing in Denver
55 percent of this increase occurred in hub core resulted in the layoff of several thousand airline
cities, especially Dallas, Chicago, Minneapolis, employees in 1994 alone, but this decision also
Pittsburgh, and Phoenix (Figure 6). In hub cities, enabled United to increase its market share in
airline-based employment increased from 36.2 Denver from approximately 50 percent in 1993
percent of the national total in 1978 to 45.1 to more than 70 percent by 1995 with marginal
percent in 1992. Gateways experienced much increases in employment there (Lieb 1995;
slower growth, their share of total employment Dempsey, Goetz, and Szyliowicz 1997).
dropping from 39.2 percent to 24.4 percent. Mi-
ami, in particular, lost more than 12,000 air-trans-
portation jobs over this period, much of it Geographic Changes in Service: Departure
occurring between 1985 and 1990 with the de- Frequencies and
cline of Eastern and Pan Am Airlines. Atlanta Passenger Flows
also lost more than 10,000 employees in that same
period, and Kansas City fell from the ranks of Most communities regard increases in flight
domestic hubs. The semi-periphery and far pe- departures, quality of service, and passenger flow
riphery each increased their share of total em- as beneficial for economic vitality. Frequent and
ployment by several percentage points. reliable air service is often cited as a principal
The impact of a healthy or ailing airline on factor in the locational decisions of firms, includ-
metropolitan employment can be substantial. As ing many high-technology and Fortune 500 cor-
an example, airline services in Fulton County porations (Joyce 1985; Markusen et al. 1986).
(Atlanta) directly accounted for 6.4 percent of Several studies have identified direct linkages
total employment and 10.7 percent of total pay- between a city’s air passenger service and its
Table 4. Concentration in Air Transportation Employment across Core-Periphery Categories

Category Employees Share of Total (Percent)
1978 1992 1978 1992
Domestic hub core (22 cities) 132,414 289,511 36.2 45.1
International gateway core (6 citites) 143,407 156,407 39.2 24.4
Semi-core (25 cities) 34,408 59,029 9.4 9.2
Semi-periphery (61 cities) 15,625 51,990 4.3 8.1
Far periphery (all othersa) 39,614 85,312 10.8 13.3
National total 365,468 642,249
a
Includes all other U.S. counties excluding Alaska and Hawaii that registered employment in air passenger, air freight, or airport
activity.
Sources: U.S. Bureau of the Census 1978, 1992.
Figure 6. Air-transportation employment (Standard Industrial Classification category 45) for domestic hub and
international gateway core centers in 1978 and 1992. Sources: U.S. Bureau of the Census 1978, 1992.
population and employment growth (Irwin and departures and enplaned passenger traffic (Table
Kasarda 1991; Goetz 1992; O’Connor and Scott 5). Between 1978 and 1993, hub cities increased
1992; Ivy et al. 1995), provided of course that flight departures by 75.6 percent and more than
diseconomies of scale such as airport capacity doubled the number of enplaned passengers. In-
constraints (which increase congestion and de- ternational gateway, semi-core, and semi-periph-
lays) or environmental impacts (e.g., increased air ery centers also registered gains, though not to
and noise pollution) do not occur. the same degree as the domestic hubs. Far periph-
Before 1978, the Civil Aeronautics Board con- ery cities meanwhile experienced a 15.4 percent
trolled airline service through the issue of “certifi- decline in certificated airline flight departures
cates of public convenience and necessity” to and a relatively modest increase (11.8 percent) in
airlines for every route that they served. This enplaned passengers.
practice resulted in a predominantly linear route Concurrently, service frequencies and en-
structure whereby certain carriers became associ- planed passengers concentrated in the core. The
ated with particular markets and regions. Al- share of flight departures from hubs increased
though the growth and development of the airline from 41.8 percent to 48.9 percent of the national
industry resulted in a more complex service pat- total between 1978 and 1993; and passenger en-
tern in 1978 than in 1938, the carriers’ regional planements increased from 46.9 percent to 52.7
orientations persisted (Fleming 1991). percent. Absolute increases in departures and
With deregulation, airlines were allowed to enplaned passengers were highest in Dallas, Chi-
serve or withdraw from any domestic route. With cago, Los Angeles, San Francisco, Phoenix, and
this newly found freedom, most carriers adopted Houston. Core centers overall experienced sub-
hub-and-spoke route structures to accommodate stantial increases, save for New York’s Kennedy
larger volumes of traffic from an increased and La Guardia Airports where departures de-
number of city-pairs. Airlines developed hub fa- creased by nearly 19,000 flights. Doubtless the
cilities at strategic points in their air-service net- difficulties of Pan Am and Eastern had a negative
works, and hub cities rapidly expanded flight effect on New York’s central airports, but the New
Table 5. Increasing Hub Core Dominance in Flights and Enplaned

Passengers across Core-Periphery Categories
Percent Percent
Category Flights of Total Enplaned Passengers of Total
1978 1993 1978 1993 1978 1993 1978 1993
Hub cores (22 1,914,239 3,360,779 41.8 48.9 120,036,741 252,112,742 46.9 52.7
centers)
Gateway cores (6) 795,002 1,151,800 17.4 16.8 59,752,903 95,769,393 23.3 20.0
Semi-core (25) 678,854 1,078,256 14.8 15.7 34,923,473 74,271,442 13.6 15.5
Semi-periphery (61) 588,078 769,379 12.8 11.2 24,497,081 37,471,021 9.6 7.8
Periphery (384) 602,785 511,515 13.2 7.4 16,974,191 18,792,273 6.6 3.9
Total 4,579,158 6,871,729 256,184,389 478,416,871
Sources: U.S. FAA 1978, 1993; U.S. DOT 1978, 1993.
York metropolitan area was buoyed by the growth cisco, Phoenix, Seattle, Salt Lake City), Texas
of the Newark, Islip-Long Island, White Plains, (Dallas, Houston), the mid-South (Charlotte),
and Newburgh airports. the Midwest (Chicago, St. Louis, Minneapolis,
Peripheral centers did not fare as well. Many Detroit), and the Eastern Seaboard (Newark,
jet-service carriers withdrew from these markets Boston). New York, Buffalo, New Orleans, and
and were replaced by smaller turbo-prop carriers. Kansas City experienced absolute decreases in de-
Although flight frequencies have increased at partures, as did more peripheral cities in the Mid-
some of the largest of these communities, seating west (Sioux Falls, South Dakota; Omaha,
capacities and service quality have declined as a Nebraska; Wichita, Kansas; Des Moines, Iowa) and
result of these changes (Ahmed 1984; Molloy the South (Chattanooga, Tennessee; Jackson, Mis-
1985; Brenner 1988). Furthermore, small com- sissippi; Birmingham, Alabama; Mobile, Alabama).
munities overall have experienced frequent inter- These changes are attributable in part to gen-
ruptions in service and many have been dropped eral population and economic trends, but they
from the air-service network altogether (Kihl also reflect the importance of airline hubs and
1988). Of the 514 nonhub communities receiving international gateways as well as the accompany-
air service in 1978, 167 were terminated by 1995, ing “peripheralization” of other cities. For exam-
while only 26 gained a new service (Dempsey and ple, Kansas City has experienced erratic levels of
Goetz 1992; Official Airline Guide 1995). Termi- service in the era of deregulation. Initially a hub
nations were most numerous in the Far West, for TWA, Kansas City lost these hub operations
especially Oregon, Nevada, and California, but to St. Louis; later, it served as a hub for Eastern
were also widespread throughout the East (Figure which subsequently went out of business (de
7). These trends underline one of the concerns Neufville and Barber 1991). Instability in service
expressed during the deregulation debate—the has become a fact of life under deregulation.
issue of small community service (Havens and
Heymsfeld 1981; Meyer et al. 1981). Fearing that
carriers would exit smaller markets once they Geographic Changes in Pricing
were relieved of their common-carrier obligation
to provide service, the Airline Deregulation Act While regulated, air-passenger fare pricing was
included provisions for Essential Air Service tied directly to costs (especially those related to
(EAS) subsidies to encourage carriers to continue distance) and to earnings levels that ensured
serving small communities. In 1995, 77 commu- carrier solvency. After deregulation, carriers were
nities received subsidized service (“Subsidized Es- free to set fares at whatever level the market
sential Air . . .” 1995). would bear. According to the U.S. Department of
The geographic pattern of service changes Transportation (1990), the U.S. GAO (1990a,
since deregulation (to 1993) is evident in the top 1990b, 1993), and the National Research Coun-
114 air passenger cities (Figure 8). Core cities cil (1991), average fares have decreased since
enjoyed the largest absolute increases in flight deregulation; these studies failed to emphasize,
departures in the West (Los Angeles, San Fran- however, the striking spatial variations in fares.
AIR SERVICE TERMINATIONS

1978-1995
Period when service ended

1978 - 1984
1984 - 1987
1987 - 1995
Figure 7. Passenger-airline service terminations from 1978–1995. Sources: U.S. CAB 1984; Official Airline Guide
1987, 1995.
ABSOLUTE CHANGE IN FLIGHT DEPARTURES

1978-1993
Number of Flight Departures

> 225,000
100,000 - 224,999
50,000 - 99,999
30,000 - 49,999
10,000 - 29,999
5,000 - 9,999
0 - 4,999
Increase Decrease
Figure 8. Absolute changes in flight departures from 1978–1993 for the 114 largest air-passenger cities. Sources:
U.S. FAA 1978, 1993.
The uneven spatial pattern of airline pricing is carriers Southwest Airlines and America West
revealed by calculating average fares in 1979 and which vigorously competed against the majors.
1993 for the top 114 air passenger cities in the Increased fares in the southeast were explained
U.S. and mapping them as fare contours using a by the agglomeration of hub airports in the mid-
kriging algorithm7 (Figures 9 and 10). In 1979, South (e.g., Atlanta, Charlotte, Memphis, Nash-
average fares were much higher in the southwest- ville, and Raleigh-Durham) and the increased
ern U.S. (especially for Colorado Springs, Colo- reliance of smaller hinterland cities upon these
rado; El Paso, Texas; Albuquerque, New Mexico; concentrated hubs (Goetz 1993). Equally note-
and Tucson, Arizona) and tapered off toward the worthy is Delta Airlines’ strong presence in many
east and intermontane west (especially Nevada). of the high-fare southeastern markets. Corporate
By 1993, the situation was completely reversed. dominance as manifested in geographic location
The lowest fares were in the southwest, while the is partly responsible for these regional changes in
highest fares were centered in the southeastern air fares.
U.S., particularly in Huntsville and Mobile, Ala- Recent research has documented an associa-
bama; Jackson, Mississippi; Greenville and Co- tion between high fares or yields8 (fares per pas-
l u m b i a , S ou th Ca roli n a; M em ph is a nd senger-mile) and hub dominance by one or two
Chattanooga, Tennessee; and Raleigh-Durham firms, i.e., one carrier accounting for 60 percent
and Charlotte, North Carolina. More important, or more of the market or two carriers controlling
the fact that these cities experienced absolute more than 85 percent (U.S. GAO 1990a, 1993).
increases in real fares (measured in 1993 dollars) It has also been reported that an increase in a hub’s
confirms that deregulation has not reduced fares airline-enplanement share of 10 percent results in
across all locations. a 4.3 percent increase in average fares at that hub
This regional inversion in fares can be ex- (Borenstein 1989). Table 6 reports changes in av-
plained by varying levels of competition and con- erage air fares and yields between 1979 and 1993
centration at airports throughout the country. for both concentrated and unconcentrated hub
The GAO (1990b) attributed decreased fares in cores, as well as for the other core-periphery
the southwestern U.S. to the presence of low-cost categories. Passengers in the unconcentrated hub
Figure 9. Contour map of average one-way fares in 1979 for the 114 largest air-passenger cities. Source: U.S. DOT
1990.
>
Figure 10. Contour map of average one-way fares in 1993 for the 114 largest air-passenger cities. Source: Back
Associates 1993.
Table 6. Changes in Air Fares and Yields for Core-Periphery Categories

Average Yields
Average One-Way Fares (Dollars) (Cents per Passenger Mile)
1979a 1993 Percent 1979a 1993 Percent
Average Stand. Change Average Stand. Change
Dev. Dev.
Hub core (22 centers) 181.64 163.81 26.08 -9.8 23.76 17.85 3.80 -24.9
Concentrated (12) 173.14 174.63 29.55 +0.9 24.84 19.79 3.41 -20.3
Unconcentrated (10) 191.84 150.83 18.94 -21.4 22.47 15.52 3.26 -30.9
Gateway cores (6) 211.13 161.54 10.36 -23.5 19.47 12.42 1.78 -36.2
Semi-core (25) 202.27 137.59 20.69 -32.0 24.11 13.90 1.94 -42.3
Semi-periphery (61) 179.90 166.47 30.40 -7.5 25.70 16.94 2.77 -34.1
Far periphery (320) 192.14 182.39 39.44 -5.1 27.90 21.28 8.75 -23.7
a
Adjusted to 1993 dollars according to the Consumer Price Index.
Sources: U.S. DOT 1990; U.S. GAO 1990a, 1990b, 1993; Back Associates 1993.
core cities have received lower fares, while those Figure 3. Yields and market concentration are
in hub cities dominated by one or two airlines lowest for the gateways and semi-core, and rise
have not. Fares also fell substantially in the largely on either end of the system’s spectrum, i.e., to-
unconcentrated gateway core and semi-core and ward the hub cores and toward the far periphery.
less substantially in the relatively more concen- Turning to regional patterns by core-periphery
trated semi-periphery and far periphery. Figure category, average one-way fares among core cen-
11, illustrating average yield levels across core- ters are highest in the concentrated hubs in the
periphery categories, displays a striking similarity mid-South and Midwest, especially Cincinnati
to the levels of market concentration depicted in ($195.59), Memphis ($188.81), Raleigh-Durham
Figure 11. Average yields (fares per passenger-mile) in places across core-periphery categories. Source: Table 6.
($187.45), Charlotte ($186.77), and Minneapo- One of the major concerns about deregula-
lis/St. Paul ($184.81) (Figure 12). Fares are much tion—whether carriers would be able to carve out
lower in the unconcentrated hubs such as resort geographic monopolies and charge higher fares in
centers Las Vegas ($98.12) and Phoenix those markets—may be well-founded. If deregu-
($111.10). Semi-core centers (e.g., Reno at lation has reduced average fares overall, fares in
$95.21 and Ontario/San Bernardino at $113.18) concentrated domestic hub markets and in many
also had lower fares, though Hartford ($186.41) small communities have increased. Monopoly
was an exception (Figure 13). The semi-periph- revenues appear to be subsidizing discount fares
ery, meanwhile, had higher average fares espe- in more competitive markets. A recent example
cially in southeastern and northeastern cities comes from Denver, where average fares between
including Huntsville, Alabama ($229.36), White June 1994 and June 1995 increased by 46 percent
Plains, New York ($213.65), Mobile, Ala- following Continental’s hub dismantlement and
bama/Pascagoula, Mississippi ($204.17), and Al- the ensuing market dominance established by
lentown/Bethlehem/Easton, Pennsylvania United which led to the latter’s best financial
($201.42) (Figure 14). Meanwhile, several Texas performance in Denver in many years (Leib
cities served largely by Southwest Airlines, such 1995). Overall, it seems that concentrated do-
as Lubbock ($86.17), Midland/Odessa ($86.65), mestic hubs have benefited from increased airline
Brownsville/Harlingen/San Benito ($92.30) and employment, flight departures, and passenger
Amarillo/Borger ($96.83), had quite low fares. flow, but not from lower air fares.
Far periphery centers had the highest average As for the far periphery, average fares tend to
fares and yields of any core-periphery category be higher than those in other centers. These
and also the greatest range. Of 320 far-periphery findings are corroborated by the U.S. GAO
centers reporting fares and yields, 83 had average (1991), which found that passengers in small
one-way fares in excess of $200 (5 were greater communities9 paid 3 percent more than passen-
than $300), and 61 had average yields in excess gers flying from major airports and 6 percent
of 25.00 cents per passenger-mile. more at concentrated small-city airports than at
AVERAGE AIR FARES, CORE CENTERS

Seattle
Boston
Minneapolis/St. Paul
Newark
Detroit
New York
Salt Lake City Chicago
Cleveland
Pittsburgh
Philadelphia
San Francisco Denver Baltimore
Cincinnati Washington
Las Vegas St. Louis

Raleigh/Durham
Nashville
Los Angeles
Memphis Charlotte
Atlanta
Phoenix
Dallas/Ft. Worth
Houston
Hubs Dollars Gateways
> 225.00
200.00 - 224.99
175.00 - 199.99 Miami
150.00 - 174.99
125.00 - 149.99
100.00 - 124.99
75.00 - 99.99
Concentrated Not Concentrated
Figure 12. Average air fares for concentrated and unconcentrated domestic hub core centers and international
gateway core centers. Sources: Back Associates 1993: figure 1.
AVERAGE AIR FARES, SEMI-CORE CENTERS
Portland
Buffalo
Hartford
Milwaukee
Reno Columbus
Indianapolis
Sacramento
San Jose Kansas City
Tulsa
Ontario/Riverside Albuquerque Oklahoma City
San Diego
Tucson
El Paso
Jacksonville
Austin
Dollars New Orleans
Orlando
> 225.00 San Antonio
Tampa/St. Petersburg
200.00 - 224.99
175.00 - 199.99 W. Palm Beach
150.00 - 174.99 Fort Myers
125.00 - 149.99
100.00 - 124.99
75.00 - 99.99
Figure 13. Average air fares for concentrated and unconcentrated semi-core cities. Sources: Back Associates 1993:
figure 2.
AVERAGE AIR FARES, SEMI-PERIPHERY CENTERS
Dollars
> 225.00
200.00 - 224.99
175.00 - 199.99
150.00 - 174.99
125.00 - 149.99
100.00 - 124.99
75.00 - 99.99
Figure 14. Average air fares for concentrated and unconcentrated semi-periphery cities. Sources: Back Associates
1993: figure 3.
unconcentrated small-city airports. The most dustry concentration via mergers, acquisitions,
startling finding, however, was that passengers and bankruptcies and the shift to hub-based op-
flying from small-city airports to major airports erations have resulted in the spatial concentra-
paid 34 percent more if the major airport was tion of airline activity evident in the emergence
concentrated and 42 percent more if both the and dominance of core control centers within a
small-city and the major airport were concen- core-periphery structuring of the U.S. air trans-
trated. Small cities relying upon concentrated portation system.
hubs for their service are at a clear disadvantage. Core cities, represented by the major airline
These results suggest that pure market size has corporate headquarters, domestic hub centers,
less to do with changes in air fares than do levels and international gateways, exhibit sharp con-
of concentration at major airports or geographic trasts to peripheral “spoke” cities with respect to
location tied to specific airlines. Thus a large industry structure, service, and pricing. The core
city/small city taxonomy misses the key elements, cities, particularly the domestic hubs, have en-
namely, corporate control, market concentration, joyed a disproportionate share of the increases in
and regional location. These elements are better airline employment, service frequencies, and pas-
addressed through a core-periphery approach senger traffic. Where market concentration is
that can explicitly incorporate such dynamics. low, consumers have enjoyed lower fares; but
where markets have become more concentrated,
fares have risen. Fares have also risen in the
Airline Deregulation: Market peripheral service hinterlands of concentrated
Power and Spatial Concentration hub centers. Conversely, in places with more
competition (e.g., gateways and semi-core cities),
Deregulation in the U.S. airline industry has fares have declined considerably. Cases in point
meant that fewer and larger airlines now control are the low-fare cities in the more competitive
the domestic air passenger market predominantly southwestern U.S. as contrasted with the high-
through their “hub-and-spoke” service networks fare cities located in the more concentrated
and extensive computer reservations systems. In- southeast.
Cities benefiting most from deregulation are sword. One edge increases airline employment
typified by the presence of domestic and/or inter- and expands departure frequencies to more des-
national operations of several carriers, none being tinations. The other edge increases the dominant
able to dominate passenger traffic. Cities such as airline’s power to charge higher fares and to effect
Dallas, Chicago, Phoenix, Houston, and Los An- greater dependency on that airline’s service.
geles have experienced the highest increases in While smaller markets are more prone to airline
airline employment, service frequencies, and pas- domination, larger markets are not immune.
senger traffic, plus lower fares. In each of these Concentration in hub cities such as Charlotte,
cases, the market consists of three or more airlines Cincinnati, Raleigh-Durham, Atlanta, Memphis,
that are strongly competitive. and Minneapolis can be traced to: (1) an explicit
Cities benefiting least from deregulation are of competitive strategy of hub domination exercised
two sorts: (1) peripheral places that have been by the major airlines; (2) a hub’s role as a strategic
dropped altogether from the air-service network node in carriers’ networks; (3) a somewhat
and (2) semi-periphery and far periphery cities smaller market that made capture possible; (4)
that have received reduced service and higher carrier acquisition of airport gates and terminal
fares. Examples of the former include Corvallis, space through merger, bankruptcy, or by outright
Oregon; Carson City, Nevada; Clarksville, Ten- lease purchase making it easier to control an
nessee; and Montpelier, Vermont. Examples of airport; and (5) economies of scale, scope, and
the latter include several cities in the southeast density for the larger airlines and barriers to entry
such as Mobile, Alabama; Chattanooga and for smaller airlines. To this we should add that the
Knoxville, Tennessee; and Jackson, Mississippi. system as a whole is dynamic. Core designations
The majority of peripheral cities that are still in can change depending upon airline strategies and
service have experienced some benefits, but these survival; some previously peripheral cities have
are uneven in space and less substantial than for taken on core functions (e.g., Charlotte, Nash-
core centers. ville, Raleigh-Durham), while some core centers
These results provide compelling evidence of have become peripheralized (e.g., Kansas City,
core-periphery dynamics. First, the core has Dayton, San Jose).
benefited more than the periphery. The periphery The spatial impacts of airline deregulation are
has been at least relatively disadvantaged, and, in consistent with those found for other industries.
some instances (service declines and termina- As key control centers become dominant, service
tions), absolutely. Even though the semi- and improves in larger markets and fares rise in more
far-periphery groups reaped some benefits, e.g., concentrated ones (Lord 1992; Love et al. 1992;
increased employment and lower fares overall, Graham 1993). In sum, deregulation has sharp-
many peripheral places (especially in the south- ened spatial contrasts via differential market con-
east) have not fared well under deregulation. centration in core centers. The U.S. experience
Second, dependency on the core has increased. with airline deregulation thus sends mixed mes-
Service linkages to the far periphery are provided sages to policymakers. To the extent that deregu-
by commuter airlines owned or controlled by the lation has increased airline employment,
majors and routed through the core hubs. Fares frequency of service, and passenger traffic, and
at peripheral centers are increasingly dependent lowered fares (on average), it may be judged
upon levels of concentration at the nearby hub. successful. But as we have seen, market concen-
Core centers have become more important to the tration has blunted these gains. That said, ulti-
major airlines as airlines increase their control mate judgments on airline deregulation will
over the system through the core. depend on two caveats. First, the post-1978
The only major deviation from core-periphery trends may owe less to deregulation than to an
expectations is the association of market concen- extension of positive long-term trends in employ-
tration and higher fares and yields at many of the ment, service, and fares begun before 1978. Sec-
domestic hub core centers. On these measures, ond, recent financial experiences may be moving
the gateway core, semi-core, and semi-periphery the industry in the opposite direction. Between
report lower fares and yields than do the hub core 1990 and 1993, for example, U.S. airlines re-
or the far periphery. In fact, as Figures 3 and 11 ported their worst financial performance with
illustrate, similar bar graph patterns apply across total losses amounting to nearly $13 billion.
all five of the core-periphery categories. An air- Though 1994 and 1995 were better years, the
line’s level of market control thus is a two-edged industry is still weak. Moreover, the recent startup
of several small new carriers notwithstanding, the different circumstances, they are not included in
industry in 1995 is as concentrated as ever. Con- this study.
centration has meant that one or two airlines 4. The U.S. General Accounting Office (1990a;
exercise control over increasing numbers of large 1993) defined a concentrated market as one in
which one airline handled at least 60 percent of
and small cities where average fares tend to be
the enplaning passengers or two airlines handled
higher and vulnerability to airline decisions and at least 85 percent. This definition of concentra-
market vagaries are greater. It is incumbent upon tion is used throughout this study.
government policymakers to recognize these tell- 5. Computer reservations systems (CRSs) are pro-
ing spatial trends as well as aggregate ones and to lific income-generators on their own. CRS-own-
forestall the negative effects of financial distress ing airlines benefit greatly from CRS-generated
and market dominance by promoting sustainable, revenues.
long-term competition which benefits industry, 6. Code-sharing is a practice whereby one airline’s
consumers, and the air-passenger transportation flights can be co-listed under another airline’s code.
system. For example, Mesa Airlines has a code-sharing
agreement with United Airlines, hence many Mesa
flights are listed as United flights. Scheduling and
baggage handling is coordinated so that passengers
Acknowledgments perceive a “seamless” single-carrier operation.
7. Figures 9 and 10 were created by using the spheri-
Thanks to Paul Marr of the Department of Geogra- cal semi-variogram option of ArcInfo’s kriging
phy at the University of Denver for producing the fare command. The spherical method refers to the
contour maps and to the cartographers in the Depart- mathematical model used by the kriging program
ment of Geography at Monash University for producing to create the contours (Environmental Systems
early drafts of the maps. We acknowledge the anony- Research Institute 1992).
mous Annals reviewers for their efforts in providing 8. Yields (fares per passenger-mile) are often used as
useful commentary. Special thanks go to Kevin O’Con- a supplemental measure to actual fares in order to
nor of Monash University for comments on the original control for intercity differences in average trip
manuscript and for his much-appreciated support dur- distances flown. Since some cities are farther from
ing Goetz’s sabbatical leave in Australia. major centers, fares will be higher simply because
of the greater distances traveled. Likewise, many
smaller cities have shorter trip distances that re-
sult in lower fares but not necessarily lower yields.
Notes 9. The U.S. GAO (1990b) defined small communi-
ties as those with a metropolitan statistical area
1. Other companies using the names Midway and (MSA) population of 300,000 or less, medium-
Pan Am have since started operations. sized communities as those with an MSA popula-
2. These are not absolute delimitations; there is tion of 300,001–600,000, and large communities
some functional overlap. For instance, Chicago is as those with an MSA population of 1.5 million
a major domestic hub and an important interna- or more.
tional gateway. Several metropolitan areas—New
York, Los Angeles, Chicago, Houston, Washing-
ton, San Francisco, and Dallas—have more than
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Correspondence: Department of Geography, University of Denver, 2130 S. Race St., Denver, Colorado 80208 (Goetz);
Department of Social Sciences, Northwestern State University, Natchitoches, Louisiana 71497 (Sutton).

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The Geography of Deregulation in the

*Department of Geography, University of Denver

Table 2. Functional Attributes of Core-Periphery Classification, 1993

Table 3. Market Concentration at Domestic Hub Coresa

Baltimore Eastern 26.1 Piedmont 58.7 USAir 52.8

Charlotte Eastern 74.8 Piedmont 92.6 USAir 94.6

Chicago United 32.6 United 45.1 United 42.5

Cincinnati Delta 35.1 Delta 77.6 Delta 89.8

Cleveland United 63.4 USAir 25.2 Continental 42.1

Dallas/Ft. Worth Braniff 34.4 American 57.0 American 53.1

Denver United 32.0 United 44.5 United 51.8

Detroit American 21.6 Northwest 59.9 Northwest 73.1

Houston Texas Int’l 18.6 Continental 52.6 Continental 55.7

Las Vegas Hughes AW 23.6 America West 33.7 Southwest 26.5

Memphis Delta 42.2 Northwest 83.5 Northwest 76.3

Minneapolis Northwest 31.7 Northwest 77.4 Northwest 80.6

Nashville American 28.5 American 62.7 American 69.8

Table 3. Market Concentration at Domestic Hub Cores (continued)

Philadelphia Allegheny 22.4 USAir 36.8 USAir 60.0

Phoenix American 27.1 America West 44.2 America West 39.4

Pittsburgh Allegheny 46.7 USAir 85.4 USAir 88.9

Raleigh-Durham Eastern 74.2 American 68.6 American 80.4

St. Louis TWA 39.4 TWA 82.2 TWA 60.4

Salt Lake City Western 39.6 Delta 80.2 Delta 71.4

Washington Eastern 24.3 United 23.0 United 29.8

CORE MARKET CONCENTRATION

SEMI-CORE MARKET CONCENTRATION

Austin New Orleans Orlando

Figure 3. Average levels of market concentration in places across core-periphery categories.

SEMI-PERIPHERY MARKET CONCENTRATION

Eugene Billings Burlington Portland

FAR PERIPHERY MARKET CONCENTRATION

Table 4. Concentration in Air Transportation Employment across Core-Periphery Categories

Table 5. Increasing Hub Core Dominance in Flights and Enplaned

AIR SERVICE TERMINATIONS

Period when service ended

ABSOLUTE CHANGE IN FLIGHT DEPARTURES

Number of Flight Departures

Table 6. Changes in Air Fares and Yields for Core-Periphery Categories

AVERAGE AIR FARES, CORE CENTERS

Las Vegas St. Louis

Concentrated Not Concentrated

AVERAGE AIR FARES, SEMI-CORE CENTERS

San Jose Kansas City

AVERAGE AIR FARES, SEMI-PERIPHERY CENTERS

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