The impact of network optimization on airline financial performance: Evidence from China domestic routes

Abstract

Network structure is a crucial strategic factor influencing airline revenue. A hub-and-spoke network can reduce airline costs due to economies of scale; however, it may lead to passenger leakage when alternative transportation modes are available. On the other hand, a point-to-point network offers greater convenience for passengers but is generally less profitable for airlines. This paper develops an optimization algorithm (Self-Regulated Ant Colony Optimization) to design a hybrid airline network that can simultaneously optimize route design and frequency setting. Then, applying a case study of the airline network of China Southern Airlines, we find that the designed hybrid network generates better financial performance, manifesting as higher revenue and larger load factors compared to the original network. At the same time, the airlines' operating time is significantly reduced. The results also indicate that, following network optimization, airlines tend to use smaller aircraft. Finally, we identify the characteristics of the suspended and newly generated routes after optimization. This paper has important policy implications for airline operations and network design.