How do carriers price connecting flights? Evidence from intercontinental flights from Europe

In civil aviation, hub-and-spoke (HS) networks are used by all large carriers. The importance of this system implies that many travelers use connecting flights. Nevertheless, only scarce knowledge is available on price formation of these trips. In this paper, we focus on the fares of connecting intercontinental flights, with one stop and at least one competing direct flight. We develop a simple model of a HS network, with imperfect substitutability between direct and indirect flights and Cournot competition on every route in the network. We test the model empirically, using reported fares for flights from seven European origins, including the five major airports in Europe, to five non-European destinations. We find that the fare of a connecting flight can be expressed as the weighted average of the fare of its direct competitor, the travel times of both flights, its costs and the monetary value of the utility attached to the trip. The weight of the direct fare decreases as product diversity increases.