Airlines‐within‐airlines strategies and existence of low‐cost carriers

This paper investigates hub carriers’ airlines‐within‐airlines (AinA) strategies, intended to establish low‐cost divisions offering nonstop flights on rim routes. An initial hub‐spoke network is optimal if passenger differentiation between one‐stop and nonstop services and via‐hub time cost are small. If differentiation is substantial, a mixed one‐stop and nonstop (point‐to‐point) network under AinA is optimal when via‐hub time cost is small (large). Low‐cost rivals on rim routes weaken AinA adoption and enhance welfare from a monopoly mixed network. In a perfect‐substitute case, hub carriers may have excessive incentive to adopt AinA from a welfare viewpoint, especially, when low‐cost rivals exist.