WEEKLY REFLECTIONS WITH RON KUHLMANN AND THE CENTRE. The US legacy carriers, and even the new generation carriers except Southwest all operate from one or more primary hub cities. Nonetheless, even Southwest, which disdains the terminology, has powerful focus cities that act like hubs. For instance, in announcing new service at Boston’s Logan airport, the company issued this announcement.
“Southwest Airlines is now serving Boston travelers from Logan with ten daily nonstop flights - five daily nonstops to Chicago Midway and five daily nonstop flights to Baltimore/Washington International. In addition, …Southwest Airlines' new service out of Boston Logan will offer direct or connecting service to 48 other destinations”
Sounds to me like MDW and BWI are being pretty “hubbie”.
Multiple hubs lead to lots of capacity
The multiple hub phenomenon is pretty much limited to the US. Lufthansa does both Frankfurt and Munich, the Chinese carriers increasingly do both Beijing and Shanghai (and sometimes Guangzhou) and the refurbishment and expansion of Haneda may disperse operations across two Tokyo airports with only a little non-Tokyo hubbing. But that’s about it except for regional services that are more comparable to US domestic legs.
Consequently, in the US this surfeit of A to C service over a wide variety of B hub alternatives creates a lot of capacity.
As a foreign flag, British Airways ties with Lufthansa for the greatest number of flights from its Heathrow hub to points in the US: 17 . Consequently, and sometimes unfortunately, virtually all of BA’s connections are routed over a single point of intersection at Heathrow.
Meanwhile, all five US competitors to London collect traffic (Chart 1) at a number of primary or secondary hubs that feed from various (and often overlapping) points across their systems. This requires a multiple point schedule integration each day that for BA is all done at a single home base. Meanwhile, American has 7 origin points, which as BA’s oneworld partner may someday make more sense, Delta and United have 4, Continental has 3 and US Airways, two. That’s a lot more complexity and availability than BA and other foreign flags have to deal with in the operation of their single hub model.
|LHR USA Operations|
As ab example of how this works from the US side, I have looked at service from St Louis, a former TWA hub which once had its own nonstop to London. The result, researched for departure on Sept 14, 2009, is revealed in Chart 2. St Louis has 18 primary connections over 8 hub cities. Most of the combinations offered more than one connecting flight time from St Louis and often, by selecting an earlier departure with a longer wait-time at the hub, the price was affected.
|STL/LHR 14 Sep|
The prices varied considerably as did the connecting time required at the hub city. The chart also omits the very interesting offer on the Northwest website. This presents a flight from St Louis at 1815 operated by Compass Airlines; connecting at Minneapolis to KLM 6745 - a nonstop to London which is actually a 767 operated by Delta. The fare is reasonable, as is the connection of under two hours. What is pretty unfathomable to most travelers is the fact that Northwest is selling an itinerary in which it has no operational stake and furthermore, it markets its parent Delta’s 767 as a KLM service. So make that 19 options over 9 hubs – sort of.
It is quite an impressive display and, especially now with traffic off, is very likely a powerful overkill. Of course, those hub flights are also being fed from large networks and are in no way dependent solely on St. Louis passengers. But it is a pattern repeated in countless cities across the nation with a limited demand chasing a seemingly ever-growing supply. And remember, St. Louis has had a roughly 17% drop in capacity between September 2009 and 2008, making this a “trimmed-down” version of previous alternatives.
Is consolidation the solution?
US Airways’ Doug Parker has long been a champion of consolidation and as recently as March of this year announced that the Delta/Northwest merger would benefit his company because, “Where the real value occurs is the reduction of fragmentation.”
Maybe eventually Doug. But this simple example does not reflect a lot of defragmentation in the marketplace. Instead of two formerly separate and clear competitors offering lots of alternatives over their various hubs, we have a combined entity selling essentially the same mix of alternatives but with the added benefit of confusion over who is providing what. US Airways itself pushes a Philadelphia routing, but a little research reveals that St. Louis to London can also be flown on US over Charlotte, so make that 20 options over 10 hubs.
Not much reduction of fragmentation yet.
Chart 3 dissects two of the possible routings - highlighted in bold in Chart 2. I looked at the fare and per mile yield for the full journey from St. Louis to London and then did the same calculation for the component flights involved. The yields are applicable to the same seats sold – but in different combination. All flights were outbound 14 September with a 24 September return.
For the most part, the international fares on the same carrier were consistent regardless of the routing. In other words, American’s fare from St Louis to London was mostly the same whether one traveled over Chicago, Boston or Dallas. This was less true of the components if purchased separately, especially the domestic portions.
|Same Flight Comparisons|
|STL ORD LHR||1133.80||8396||0.14|
|STL DFW LHR||896.90||10580||0.08|
Pretty interesting stuff and consistent with other findings.
- In both cases, the yields were essentially unchanged by the addition of the St. Louis segments. This despite domestic point-to-point seat yields that were much higher when the same flights were not used as connectors;
- The passengers, their bags and other handling costs were incurred twice on a connection as opposed to once on a single flight that produced higher revenue;
- United is significantly more expensive, charging more for a shorter distance (2184 miles) actually traveled;
- American does not enjoy immunity with British Airways (yet) but has claimed that such a development will help to cut costs and allow it to offer lower fares. One wonders how much lower they can be pushed, with prices already this low;
- Despite some cuts, American offers by far the largest number of seats to London of any US carrier. Perhaps this sheer volume makes it necessary for AA to attract large numbers of passengers with low fares. However, the lower per mile fare on the domestic portion leads one to believe they may consistently have lower fares; and,
- Southwest is a major player in both domestic markets, operating frequent service between St. Louis and Chicago’s Midway as well as Dallas’s Love field. This probably impacts the number of passengers using the majors for point-to-point domestic travel. The lowest possible fares offered for those dates on Southwest were $139.20 to Midway (the same) and $137.70 to Love (much less).
The lack of correlation between distance and cost is not a US carrier exclusive. It is inherent in the hub and spoke structure that point-to-point traffic alone will not fill most flights nor support high-frequency schedules; hence the need for collecting and dispersing traffic. Foreign carriers frequently offer lower through fares to competitor’s cities than are available to their home market.
As one example, I am able to book a flight from San Francisco to Frankfurt for $964 for the same September dates. However, if headed to Lyon over Frankfurt, adding 680 miles to the total journey, the fare is $974, just $10 more.
One extreme example: some years ago I had a meeting in Munich but decided to go early and spend a week in Delhi, intending to pay the small differential out of pocket. When I finally checked the SFO – MUC fare 21 days out for expense account purposes, the Munich round trip was significantly higher than my Delhi fare with a stopover on the return. Everybody does it.
But in the end it is a question of scale. My San Francisco/Munich/Delhi journey was only possible on Lufthansa without adding numerous side trips. Had I just been interested in SFO/DEL there would have been other options but far fewer than the 20 that our St. Louis/London traveler enjoys.
This pattern repeats itself between most other points on the globe. To fly from San Francisco to Paris, I have numerous routings on foreign carriers but essentially only one possible point of connection; nonstop on AF, LHR on BA, AMS on KL or either of the two LH hubs, providing I am willing to do a backhaul. However, the US carriers offer me multiple alternatives using ORD, IAH, JFK, EWR, ATL, IAD, MIA, DFW, PHL and even the non-hub of BOS. It boggles the mind.
Nobody is going to make the hub and spoke system disappear. Alliances have altered the need for every carrier to fly everywhere and they work passably well. But by replacing the old interline system with online hubs, we have eliminated the ability of carriers to benefit from those passengers arriving at the connecting point by alternative airlines. Consequently, every carrier must operate a closed system network and by doing so encourages the competition to add its own capacity. As a result we get the following;
|Chicago to Denver
|Chicago to Atlanta|
From Chicago to Denver in a 24 minute period there are four departures with United and Southwest feeding between hubs (focus cities) and American and Frontier respectively taking folks from and to their hubs.
Just prior to that, a similar scenario played out between Chicago and Atlanta, with carriers doing the same dance. These are not prime travel times of morning and late afternoon and the schedules are choreographed to mesh with connections at one or the other ends.
While the system has inherent efficiencies, there is no way the airways or airlines could accommodate nonstop service between all the origins and destinations involved. Similarly, I doubt that there is enough point-to-point traffic between 1511 and 1535 to justify four flights. And that’s only two examples. At the same time there are interlinks between every other hub and Chicago as carriers try to maximize their feed.
And what we know and had reaffirmed by the St. Louis to London example is that yields typically drop and costs go up when multiple flights are involved in an itinerary.
Only in the US does this kind of overlapping scheduling exist. The European multiple hub option is nowhere near as sophisticated (or backward!) as the US - yet. There it is generally a bilateral rather than multilateral arrangement with far fewer seats in the market. And, as the full service carriers cut back, there are fewer every day.
[Next week, a look at how the dominance of US carriers at various domestic hubs creates concentration at multiple cities that can rival the foreign flags’ power at a single point].
 Since nothing is ever absolutely simple, BA operates four outliers; three services from Gatwick to Tampa, JFK and Orlando, plus the soon-to-come A318 from London City.
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