Exploring network effects of point-to-point networks: An investigation of the spatial patterns of Southwest Airlines’ network

Abstract

This paper explores network effects in Point-to-Point airline networks by examining the spatial patterns of Southwest airlines' route network during Southwest's major network expansionary period for completing continental US geographic coverage between 1990 and 2006. Estimation results from a spatial probit model reveal clear spatial dependence in profitability across different routes served by the carrier. Detailed investigation suggests two main sources of network effects, namely: (1) airport and regional presence, and (2) substitutability between airport-pair markets. Findings of the paper suggest also that the network effects embedded in Southwest's Point-to-Point network have many distinguishing features as compared to those identified in a typical Hub-and-Spoke network. The results of this study on Southwest's network expansionary period help us to predict how emerging LCC networks in other large aviation market, such as China, are likely to be developed over time if regulators give carriers reasonable freedom to develop their service network efficiently.