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American Airlines counter-attacks Virgin America's expansion at Dallas-Fort Worth hub

American Airlines CEO, Gerard Arpey
American Airlines CEO, Gerard Arpey

American Airlines has mounted an all-out effort to protect its powerful Dallas-Fort Worth hub, in order to counter the recent expansion of Virgin America into its home territory. American needs to flex its muscle, because DFW is also about to be under attack from a merged AirTran-Southwest and American is feeling exposed as Delta and United look to use their clout for strategic gains.

So the battle lines are drawn: a high quality smaller, low-cost airline against the muscle of network carrier American, right at the heart of its operations.

Some US hubs remain near-monopolies

Earlier CAPA studies examined US hub cities and reviewed the concentration of service by the primary carriers at those points. Hub cities in mid-Atlantic and southern parts of the US showed the most pronounced hub carrier concentrations.

Top on the list were Newark (Continental Airlines), Washington Dulles (United Airlines), Atlanta (Delta Air Lines), and Miami and Dallas (American Airlines). Each is dominated by the primary carrier, but only two, Miami and Dallas, have no low cost competitors at their hubs. Both do however have nearby airports that offer alternatives, Fort Lauderdale and Dallas Love, but the primary airports are American fortress hubs and AA has been, and apparently still is, willing to do battle to maintain the status quo.

AA has a history of defending its turf

If any evidence for this is needed, it can be found in the airline’s response to Virgin America’s planned services from DFW to both Los Angeles and San Francisco. Both routes are currently dominated by American, with United offering a few flights, primarily utilising regional jets. United had only a 1.2% seat share at DFW as of November 2010, and presents little threat - but as the battle of the behemoths begins, any competitor showing the slightest weakness will be attacked.

American has a history of defending its turf. In 2000, startup Legend Airlines began services from downtown Love Field with F-100s, configured with only 56 seats and exempt from the limitations imposed by the Wright Amendment.

American’s reaction was swift and multi-faceted and the new carrier entered bankruptcy within a period of months. This could at least partly be attributed to American’s aggressive response.

Virgin America, with a service quality regarded as one of the best in north America, now hopes to capture a portion of the market by offering travellers an alternative value proposition. Virgin is actively seeking non-coastal markets in which its business model can offer passengers a different product - and Dallas is its first step in achieving that goal.

American moves to repel boarders, with all guns blazing

But American has thrown down the gauntlet by saying that it “seeks to 'Surprise and Delight' customers flying between DFW and LAX or SFO”, clearly trying to challenge the reputation the Virgin has established for doing just that.

American has spared no effort in its drive to keep Dallas safe from new entrants. The airline has matched fares, offered double AAdvantage miles, including elite qualifying miles, and has instituted a “15 days of giveaways” program in which passengers on services to LAX and SFO can win inflight giveaways.

"American Airlines is celebrating two of our frequent West Coast routes with a promotion to show customers how strongly we value their loyalty," said Rob Friedman, Vice President – Marketing. "With 25 nonstop flights between Dallas/Fort Worth and Los Angeles and San Francisco each day, American offers more nonstop service in these markets than any other carrier.”

This celebration of loyalty is in response to Virgin America’s two daily non-stops to each California city. A third is anticipated. With the Southwest/AirTran merger pending, that “other” Dallas carrier will gain a toehold at DFW by the acquisition of AirTran’s existing services. It appears that American is intent on stopping - or at least blunting - any other incursions.

... but Virgin America says it has limited goals at DFW

The new entrant might wonder why AA feels it important to mount such an aggressive assault on this modest offering. Virgin America has not expressed any grand designs on the hub. In fact, the carrier has noted any new service to the northeast quadrant of the US falls to JetBlue - which is their corner of the new generation market. But if Virgin expected to be shown any mercy by American on these grounds, it was sorely mistaken.

With American and its affiliates holding more than an 86% market share at DFW, there should be little danger of a major threat from any existing carrier - but this is perhaps no time to be taking chances,even where the intruder holds a meagre 0.2% share.

Airline market shares at DFW (week commencing 29-Nov-2010)


% share

American Airlines


American Eagle


American Eagle/Executive


US Airways


Delta Air Lines


United Airlines


Continental Airlines


AirTran Airways


Republic Airlines


Mesaba Airlines


Alaska Airlines


Frontier Airlines


UA EXP/Skywest


British Airways


Expressjet/CO Express


Lufthansa German Airlines


SkyWest Airlines


Comair Inc


Sun Country Airlines


Air Canada Jazz


Virgin America


UA EXP/Shuttle


Korean Air


KLM-Royal Dutch Airlines


Atlantic Southeast Airlines


Chautauqua Airlines


Taca Intl Airlines


Compass Airlines


Pinnacle Airlines


It is unlikely for example that American's corporate agreements, and the resultant traffic, will be greatly affected by the VX appearance, with the carrier's still limited destinations and schedule offerings. At this stage at least, these provide no real alternative for regular travellers. Virgin is perhaps trading on its high profile service product, seeking to pick up the always significant minority of travellers which resents a major incumbent's market (and pricing) power, and using its lower cost base to maintain a foothold.

These can however be precarious foundations where its competing airline has such massive network strength, effectively negating cost differentials in the contest.

AA feels hot breath of mega-merger rivals; Virgin may be made an example

American has so far chosen a course quite different from its legacy peers. It has not been involved in a merger since the TWA takeover, and nor has it gone through a cleansing process of bankruptcy protection which would have allowed a broad-ranging cost reduction. Now, despite protestations to the contrary, it must now be feeling the hot breath of the mega-merger airlines which now surround it. Above all in these circumstances, it cannot be seen to show the slightest sign of weakness, or any lack of intent to repel any boarders at its stronghold.

So either Virgin America is blundering into a scenario where it needs to become another example of how American deals with intruders, or it is accurately reckoning that it can get under the radar and anchor a small market share. There are costs in establishing, but the point to point model does allow a strategic withdrawal if the going looks too tough, so the risk profile is not overly threatening for the low cost operator.

Meanwhile, Southwest, along with the fire-breathing monster legacies, Delta and United, will be watching closely for the slightest signs of weakness on American's part. DFW is such an attractive target - and so central to American's future viability - that it will continue to be a beacon for all aggressors. And, unlike many hubs, DFW's welcoming capacity is dangerously open to any aggressor wishing to establish there.

In these conditions, American has every reason to over-react to Virgin; and this battle between the little, agile low cost operator and the powerful network incumbent is the stuff that LCC history is made of.

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