Hub-and-spoke networks and the inclusion of environmental costs on airport pricing

Previous studies into hub airports have tended to concentrate on the economic dimensions, such as market power, airline fares and barriers to entry. Airline hubbing has considerably altered airport economics: it increases the number of flights into and out of a major airport and it increases externalities such as airside and landside congestion, aircraft noise and emissions. The principal contribution of our paper is to focus on the environmental externalities associated with extensive hubbing. Such externalities are equally relevant to other large airports. We first present a conceptual spatial model which addresses the environmental impacts related to extensive hubbing: increase in environmental costs, and spatial redistribution of environmental externalities. Then, we formally address the conceptual problem by proposing a model of airline economics. Schmalensee's model is adapted to allow for a monopolist airline to determine the optimal network, and to set prices and the number of flights. Finally, the paper explores the effect of charging the airline for these externalities through an ‘environmental’ tax when it operates a hub-and-spoke network. We examine two scenarios, a passenger-related tax and an aircraft-related tax, and show the extent to which prices and the number of flights are affected by the tax.