Most large airlines operate networks, hub-and-spoke systems, which connect many spoke cities (or nodes) with flights to and from a hub airport.

a) How can a network airline profitably serve smaller cities than a low-cost-airline?

b) A network carrier serves some small cities close to its hub with regional jets which have much higher seat-mile-costs (CASM) than larger mainline jets. The average fare from these cities to the hub does not cover fully allocated costs. Is this rationale?

c) Networks are subject to negative externalities. How might such externalities affect a network carrier’s decision to add another spoke city to its network? Explain. (You may wish to use marginal benefit/cost analysis).