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Delta finally dehubs Memphis after years of pruning unprofitable flights


After years of scaling back its Memphis hub, Delta Air Lines has officially declared Memphis is losing that status in late 2013. The airport’s fate has been sealed as Delta has been steadily cutting service from Memphis – from a peak of 300 daily departures during 2000 to roughly 93 daily flights. Once the de-hubbing its complete Delta’s departures from Memphis will decrease a further 35% to 60 daily departures.

Delta’s reasoning in closing Memphis rests on the significant reduction in 50-seat jets it is undertaking to reduce its small jet fleet to roughly 125 shells from a peak of more than 500 five years ago. The carrier determined it is unprofitable to operate those aircraft in Memphis where the amount of local originating traffic is somewhat sparse.

Even though the official de-hubbing of Memphis comes as no shock to the airport, which has been courting other airlines, political backlash has ensued against Delta. Tennessee politicians are accusing the carrier of making false promises when it merged with Northwest in 2008 when the company assured service from Memphis would not diminish. As American and US Airways work through the requisite approval processes for their merger, the decision by Delta to de-hub Memphis will only create additional pressure on those carriers to pledge no hubs within their respective combined networks will lose their respective status.

Tearing down Memphis and building-up Seattle

Despite the diminishing importance of Memphis during the last few years, Delta still retains roughly 71% of the one-way seats deployed from the airport (based on schedules in Innovata for 3-Jun-2013 to 9-Jun-2013). And at 60 flights per day, Delta will remain the dominant carrier at the airport. Once the pull-down is complete, the line-up of the top destinations from Memphis will not dramatically change as the airport will simply serve as a spoke for major carrier’s hubs – Delta in Atlanta, American in Dallas, US Airways in Charlotte and Chicago O’Hare for American and United.

Memphis International capacity by carrier (% of seats): 3-Jun-2013 to 9-Jun-2013

Memphis International Airport top 10 domestic routes by seats: 3-Jun-2013 to 9-Jun-2013

Given the more efficient flow operations of Delta’s largest hub in Atlanta (located 595km from Memphis), it was not feasible over the long term to connect passengers from cities like Fort Smith, Arkansas and Pensacola, Florida at two hubs that are located so close to one another. The operation of less fuel efficient 50-seat jets in some of the markets that have been eliminated from Memphis supplied Delta with even more incentive to re-adjust the role that Memphis plays in its overall network.

The reality is Delta needs to build its overall connectivity from positions of strength, and Memphis brings no value to the carrier as a connection point. As Delta has been cutting service from Memphis, the carrier has been strategically building up other markets, most notably Seattle as it leverages feed from partner Alaska Air Group from its extensive network to fuel its long-haul services from Seattle, which include both of Tokyo’s airports Narita and Haneda as well as Beijing and Paris.

While Alaska Air Group is the dominant carrier in Seattle, accounting for 53% of the total seats on offer, Delta accounts for the majority of seats deployed in international markets, holding a 28% share. Presently, the ASKs Delta deploys from Seattle are more than double than from Cincinnati and more than triple Delta’s ASKs operated from Memphis, reflecting the greater importance levied on Seattle. Memphis and Cincinnati are Delta’s two smallest hubs in terms of daily departures as 93 and 112, respectively, as of May-2013.

Seattle/Tacoma capacity by carrier (% of seats deployed to international markets): 3-Jun-2013 to 9-Jun-2013

Delta's ASK deployment to Seattle, Memphis and Cincinnati: 3-Jun-2013 to 9-Jun-2013

Market ASKs
Seattle 347,771,475
Memphis 71,386,403
Cincinnati 110,788,428

While seasonal adjustments play a role in ASK deployment at any given point in a yearly cycle, Delta’s ASKs deployed from Seattle increased by nearly 10% between Oct-2012 and 3-Jun-2013 while ASKs fell nearly 40% in Memphis during that time and 21% in Cincinnati.

See related reports:

As Memphis becomes unviable, Cincinnati could be the next to fall 

Based on statistics from the population of Memphis City has remained essentially flat since 2000 (falling 0.4%), while the median household income of Shelby County, (the jurisdiction in which Memphis is located) is USD41,807 compared with a US average of USD50,054. During 2010 Shelby County’s unemployment rate was 9% compared with an average 8.3% for the sate of Tennessee.

Those factors could make it tough for any carrier to view Memphis as a market to boost local traffic, which means the airport’s hopes for attracting other carriers to backfill Delta’s exit from smaller markets could be tough.

Memphis received a small boost in late 2012 when Southwest announced its AirTran subsidiary would launch service to Baltimore-Washington International Airport, Chicago Midway and Orlando International during Aug-2013, with plans to transition to Southwest service later in the year. While it is encouraging, it could be a tough sell to lure other airlines into a market where Delta is still the dominant carrier and Southwest has established some presence. There might be an opportunity for Spirit Airlines, who often during the last few years has entered legacy strongholds to stimulate lower-yielding traffic no longer desired by network carriers.

Spirit charges ultra low fares and then adds on fees for every other aspect of the journey, even printing boarding passes at airports. It usually enters a market like Chicago O’Hare and operates one-two daily flights, with a product that is only desired by highly price-sensitive travellers. Memphis has many of the attributes Spirit has looked for as it spread its network across the continental US over the last few years, most notably high fares, but Spirit has yet to make any rumblings about serving the airport.

After regularly ranking among top five highest-fare airports in the domestic US, Memphis fell off the list during 4Q2012 (the latest available data). The average fare for Memphis during that time was USD480, a USD5 drop from the average fare recorded by Memphis during 3Q2012. Cincinnati sustained its second place ranking with respect to the highest airfares in the US. Its average fare dropped by a single USD between 3Q2012 and 4Q2012 to USD518.

Cincinnati’s fate as hub in the combined Delta-Northwest network has also been under scrutiny since the 2008 merger given its proximity to Detroit, which at 421km is a shorter distance than Atlanta-Memphis. Detroit’s 535 daily departures (as of Jun-2013) are more than triple Cincinnati, which have fallen 10% since Jul-2012. Detroit is also Delta’s second largest domestic hub in terms of daily departures behind Atlanta’s 1,023. (see background information) Now that Memphis is officially being de-hubbed, obvious questions are arising about Cincinnati’s future.

After Delta announced the latest cuts in Memphis, a carrier spokesman told the airline is constantly reviewing the viability of all its markets, and there are no significant cuts planned for this time, which is not exactly an overwhelming vote of confidence. The outlet reported that airport officials were reasonably confident that Cincinnati’s hub status would not change during 2013. But with the number of departures diminishing in Cincinnati, and the prominence of nearby Detroit in Delta’s network, it could be only a matter of time before Cincinnati suffers a fate similar to Memphis.

Memphis shows American and US Airways should be candid in outlining network adjustments

If Cincinnati loses its status as a hub within Delta’s network, Delta will likely try to space out the the demotion given the highly-charged political sensitivities around hub closures. Criticism is already being fired at Delta from Steve Cohen, a US Congressman representing the state of Tennessee. He charged that Delta’s CEO Richard Anderson stated in 2008 that the merger with Northwest would not affect flights in Memphis, noting the merger was about addition and not subtraction. Given that American and US Airways will be making the necessary persuasions to get their merger approved, the de-hubbing of Memphis will only stoke the flames of fiery political rhetoric over how consolidation in the US will harm consumers.

The reality is Delta is making commercial decisions that are based on a calculus of sustaining profitability and increasing shareholder rewards, something the carrier is embarking on after years of debt reduction and balance sheet clean-up.

See related report: Delta aims to usher in lasting business model change with new shareholder rewards

There are unpleasant decisions that must be taken within all businesses, and the move to de-hub Memphis is no different. However, perhaps management teams at American and US Airways could take note of avoiding declarations that all commercial operations will remain status quo once the merger is complete – it will save some grief down the road when network alignment produces the inevitable downsizing in some markets.

Background information

Delta Air Lines daily departures at US hub as of May/Jun-2013

Hub Daily departures
Atlanta 1,023
Cincinnati 112
Detroit 535
Memphis 93
Minneapolis 473
Salt Lake City 277

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