Economies of Density Versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ *

In the literature on the U.S. airline industry there are two widely held beliefs regarding the structure of costs. First, there are rapidly declining unit costs of service within any city-pair market (Bailey and Panzar, 1981; Keeler, 1978; White, 1979). Second, there are approximately constant returns to scale for airline systems that have reached the size of the U.S. trunk carriers (Caves, 1962; Douglas and Miller, 1974; Keeler, 1978; White, 1979). A third, more tentatively held belief is that there are scale economies available to be exploited by carriers smaller than the trunks (which is to say, smaller carriers have higher unit costs than the U.S. trunk carriers) (Keeler, 1978).