Profit maximizing hub location problem in the airline industry under coopetition

Abstract

Earlier airlines worked in silos to develop their global networks to earn profits in their domestic and the international territories. With the growing demand for interconnectedness, the airlines have started to collaborate and compete simultaneously to expand their networks to earn sustainable profits. In this study, we explore the duopoly coopetitive profit maximizing intercontinental hub location problem. We establish the hypothesis that airlines do need coopetitive alliances as the operating cost and competition is rising and profit margin is shrinking. We propose a two-phased mixed-integer linear programming formulation under duopoly setting to determine the airlines’ individual networks and intercontinental hub links to route the demands through these jointly established arcs. We develop various collaborative and competitive cost functions and propose a new dataset for 25 cities from the European Union, UK and Russia. We introduce formulation strengthening properties and valid inequalities to converge towards optimal solution faster. Various numerical experiments under varying parameter settings in both non-coopetitive and coopetitive scenarios are performed and financially beneficial scenarios are suggested for the airlines. The results highlight that the profit levels are unstable when airlines operate in silos or when they decide to go into direct competition. Results further show that the coopetitive alliance ensures stable profit levels, reduces infrastructural duplication and leads to a win–win situation in terms of profits in majority of the scenarios for both the airlines.