Airline operational disruptions and loss-reduction investment

Airlines have experienced disruptions from random shocks such as extreme weather conditions and airport congestion. Airlines thus have invested in improving their flight and scheduling system to minimize the losses from shocks. This paper analyzes the effects of the airline network structure on the incentives of airlines to invest in their operations system. The analysis shows that under reasonable conditions, the level of investment is higher under the hub-and-spoke network than under the fully-connected (or point-to-point) network, and airlines invest less than the efficient level that maximizes social welfare under the fully-connected network. In addition, flight frequency regulations decrease investment under either network.