Fostering Connectivity on Thin Routes - Should Regional Airlines Cooperate with Network Airlines or with Local Governments?

Q: What capacity purchase agreement (CPA) types are compared in the paper?

The paper compares two CPAs for regional airlines: one negotiated with a local government and another negotiated with a network airline. Both are analyzed within a two-stage Nash bargaining framework.

Q: How do CPAs affect airline profits and consumer surplus in small regional markets?

Within a specific bargaining-parameter range, both CPAs increase airline profits and net consumer surplus in small regional markets compared with the no-CPA case.

Q: Why can consumer surplus decrease in the trunk market under CPAs?

The results show that while CPAs improve outcomes in small regional markets, they may reduce consumer surplus in the trunk market under the model’s competitive and bargaining effects.

Sep 2, 2026

Uploaded by Dozel

This paper develops two-stage Nash bargaining models to study capacity purchase agreements (CPAs) for regional airlines, comparing contracts with either a local government or a network airline. It evaluates effects on airline profits, consumer surplus, and social welfare. Results indicate that within a bargaining-parameter range, both CPAs raise profits and net consumer surplus in small regional markets versus no-CPA benchmarks, though trunk-market consumer surplus can fall. Social welfare increases under both CPAs, and the network-airline structure shifts profit from the network carrier to the regional carrier while reducing network-wide welfare. After CPAs finalize, flight frequency is modeled as a decision variable, enabling network CPAs to outperform in regional consumer surplus and network welfare under high frequency-specific costs.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages23

Reading Time58 min

AccessFree to download

Abstract

Model comparison under two CPA arrangements

Effects on profits, consumer surplus, and social welfare

Extension: flight frequency as a decision variable

Comparative outcomes: local government CPA vs network airline CPA

| Fostering the connectivity on thin routes: Should regional airlines cooperate with network airlines or with local governments?
Yilin Chen a, Hangjun Yang b, Shiyuan Zheng c, Kun Wang d, Changmin Jiang e,*
a School of Economics, Qufu Normal University, Qufu, PR China
b School of International Trade and Economics, University of International Business and Economics, Beijing, PR China c College of Transport and Communications, Shanghai Maritime University, Shanghai, PR China
d Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hong Kong, PR China e Department of Logistics and Maritime Studies, The Hong Kong Polytechnic University, Hong Kong, PR China | | | | --- | --- | --- | | A R T I C L E I N F O | | A B S T R A C T | | Keywords:
Regional airline
Capacity purchase agreement Network airline
Local government
Nash bargaining | | This paper constructs two-stage Nash Bargaining models to examine two types of capacity purchase agreements (CPAs) for regional airlines: one with a local government and one with a network airline. The study compares the impacts of both CPAs on airline profits, consumer surplus, and social welfare. The results show that within a specific bargaining parameter range, both CPAs increase airline profits and net consumer surplus in small regional markets compared to the scenario without a CPA. However, these agreements may reduce consumer surplus in the trunk market. The social welfare levels under both CPAs are higher than in the case of no CPA. In comparison to the local government CPA, the network airline CPA results in lower profits for the network airline but higher profits for the regional airline. Additionally, the network airline CPA leads to lower consumer surplus in both the trunk and the regional markets, as well as reduced overall social welfare across the network. The model is further extended to incorporate flight frequency as a decision variable after CPAs are finalized. In this case, the network airline CPA can outperform the local government CPA in regional consumer surplus and network-wide social welfare when the regional airline faces high frequency-specific operational costs. | | pLi | pLAB = 381 (α + 1 − c2 ) | | --- | --- | | qLi | pLBC = 311 ( − α + 28c2 + 3)
1
pLAC = 31 (7(α + 3c2 ) + 10)
qLAB = 311 (23α − 7(1 − c2 ))
1
qLBC = 31 (α + 28(1 − c2 )) | | ̂δ | qLAC = 311 ( − 7α + 27(1 − c2 ))
1
62 ( − 4α + 43(1 − c2 )) | | L
π1 | 2 2
961(8α + 7(1 − c2 )) | | (1 − θ)(ϕL − ̂δ ∗ (qLAC + qLBC) + πL2) | 612 (1 − θ)(2α2 − 12(1 − c2 )α + 49(1 − c2 )2 ) | | ϕLAB | 19122 (529α2 − 322α − 98c2 + 322αc2 + 49c22 + 49) | | θ (ϕL − ̂δ ∗ (qLAC + qLBC) + πL2) | 6θ2 (2α2 − 12(1 − c2 )α + 49(1 − c2 )2 ) | | SWL | 19122 (847α2 − 246α − 3528c2 + 246αc2 + 1764c22 + 1764) | | pMi | pM = α AB 2 | | --- | --- | | qMi | pMBC = 1~~ ~~+2c2
1 + c2
pM = AC 2 qMAB = α2 | | ̂t
θ (πM1 + πM2) | qMBC = 1~~ ~~−2~~ ~~c2
1 − c2 qM =
AC 2
c2
( )α2 + 2(1 − c2 )2
θ ~~ ~~
4 | | (1 − θ)(πM1 + πM2) | (α2 + 2(1 − c2 )2)(1 − θ) 4 | | ϕMAB | α2
8 | | ϕM | 1 c2 c22
~~ ~~ − ~~ ~~ + ~~ ~~
4 2 4 | | SWM | 38α2 + 34c22 − 32c2 + 34 | | | Local government CPA vs. the benchmark | | Network airline CPA vs. the benchmark | | Network airline CPA vs. Local government CPA | | | --- | --- | --- | --- | --- | --- | --- | | | Network Airline | Regional Airline | Network Airline | Regional Airline | Network Airline | Regional Airline | | Δq | > 0 | > 0 | > 0 | > 0 | > 0 | < 0 | | Δπ | > 0 | > 0 | > 0 | > 0 | < 0 | > 0 | | ΔϕAB | < 0 | | < 0 | | < 0 | | | Δϕ | > 0 | | > 0 | | < 0 | | | ΔSW | > 0 | | > 0 | | < 0 | |

FAQs

What capacity purchase agreement (CPA) types are compared in the paper?

The paper compares two CPAs for regional airlines: one negotiated with a local government and another negotiated with a network airline. Both are analyzed within a two-stage Nash bargaining framework.

How do CPAs affect airline profits and consumer surplus in small regional markets?

Within a specific bargaining-parameter range, both CPAs increase airline profits and net consumer surplus in small regional markets compared with the no-CPA case.

Why can consumer surplus decrease in the trunk market under CPAs?

The results show that while CPAs improve outcomes in small regional markets, they may reduce consumer surplus in the trunk market under the model’s competitive and bargaining effects.

Sep 2, 2026

Uploaded by Dozel