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US airline hubs in the time of alliances: balancing the odds

2-Apr-2010

The US airline hub system counts among its number certain key airports which are long established and which, for various reasons, will almost certainly continue to be important parts of the nation’s aviation framework. This review looks at the key hubs and their likely future in a time when global alliances are increasingly relevant.

US hub status, as often as not, is achieved largely as a result of random historical reasons, but must contain at least the criterion of occupying a strategically important geographic position. The most successful hubs, and those with the greatest longevity are also cities or regions that have a strong origin/destination traffic base as well. Cities like Pittsburgh now suffer because the networks that were established far exceeded the region’s aviation needs.

Consequently, some of the airports reviewed in earlier studies have lost that role, some as a key airline failed or restructured, or as mergers made them irrelevant due to the proximity of stronger hubs. So, they have come and gone, with only Memphis possibly still at risk.

This relatively random development has no peer in any other geography; non-US hubs almost always correlate to capital cities or primary commercial centres that have had a longstanding history of being primary gateways. In the very few cases where there was a national carrier drawdown, at secondary cities like Barcelona or Geneva, for example, the void has been filled by a new generation carrier that has kept the bulk of the shorthaul network intact.

But today, the future of all hub airports, existing and potential, will be influenced by the functioning of global alliances

The US hub system remains unique

While the US clings to its precarious title as the largest aviation market, it continues to have the largest number of airline players in a national market, as well as a glut of hubs that is unmatched elsewhere. The five US legacy carriers together claim over 20 cities as hubs. Then there are in addition, the focus cities claimed by Southwest and others whose model does not specifically acknowledge hubs. Nor does this report look at the effects of non-aligned carriers like AirTran or JetBlue that operate hubs outside of the alliance model.

Despite the rise of Asian aviation, the region’s carriers will be hard pressed to muster a similar number of hub operations, even given the significantly greater geographic area involved. This will change over time, but its focal points are still predominantly capital cities, where the national flag carrier accounts for a third or more of capacity.

All of this has influenced the evolution of the US system itself, one that differs from the rest of the world, full of fiefdoms and protectorates that skew the competitive landscape. As a result Americans living in the catchment areas of many major US cities have considerably less choice than is available in most of the rest of the world.

Additionally, at most US airports, the effects of alliances on domestic travel are still far less prevalent than say in London, where the sum of oneworld is a large plus to the British Airways hub, or Bangkok where Star provides a boost to the Thai presence.

Matching up the alliance presence at US hub airports

Nonetheless, the US hub system too is in flux; not only from a single carrier viewpoint but from the collective effects of alliance affiliation. The three tables below chronicle the presence and dominance of the US majors at their various hubs. Even a cursory glance reveals some important information as to the ways in which carriers have positioned themselves.

(1) oneworld – Fewest hubs, lightest presence

First, oneworld has the smallest number of hubs and the smallest market presence. Having AA as its only US member gives it little substantial presence (hubwise) in the western half of the country. From LAX, American operates nonstops to both London and Tokyo but lacks the critical mass on the west coast to be more than a presence, as opposed to a player. And most of its European alliance partners have little or no activity in the western US.

The same is not true for Asia, where CX, JL and QF offer a wider oneworld selection of Pacific services.

Additionally, American is the only carrier that operates from hubs currently free of any Southwest presence; Chicago and South Florida have Southwest service but from other, nearby airports.

oneworld Alliance US hub market shares

 

DFW

ORD

JFK

MIA

Dom %

87.0

37.6

14.9

72.6

Intl %

89.1

22.7

16.0

65.7

Alliance %

92.7

34.1

29.0

74.6

(2) SkyTeam – dominant at its hubs, but mostly it’s just Delta

Second, SkyTeam is a much different player than it was just two years ago. At that time the alliance boasted three member carriers and even more hubs. But the defection of Continental and the DL/NW merger has left Delta standing alone as the alliance’s US face and with the most single carrier hubs at its disposal – seven.

Additionally, SkyTeam’s dominance across its hubs is constant, with all but New York’s JFK exceeding 70% of the capacity offered at each. The same is true in international markets where, again except for JFK, its numbers start in the 80+ percentages. At four of those points, those numbers are achieved by Delta alone, without any aid from alliance partners. Overall, Delta displays the most dogged pursuit of being unchallenged in the markets it tries to control.

SkyTeam Alliance US hub market shares

 

ATL

JFK

MSP

MEM

DTW

CVG

SLC

Dom %

76.0

32.3

76.6

84.8

79.5

84.7

71.3

Intl %

87.9

17.8

83.5

100

86.4

86.9

97.7

Alliance %

92.3

28.0

   

90.2

   

(3) Star – most hubs, most carriers, most powerful – and now in New York

Star provides the most member carrier options as well as the most hubs - a position bolstered by the addition last year of Continental. That change provided a powerful presence in the northeast, and especially the New York metropolitan market, which had previously been a notable weak spot in an otherwise strong network.

Generally, the New York market has some unique characteristics. It is the only US metro area with two international gateway airports - plus several more that add a large chunk of domestic capacity.

JFK, despite being the US airport with the widest assortment of global carriers, is dominated domestically by JetBlue, a non-legacy carrier that also ranks third in the JFK international tally. The difference, of course, is that all those JetBlue destinations are “near international”, primarily in the Caribbean.

At JFK, oneworld, with the presence of 11 member carriers, has the largest alliance international share. Star, with 9 airlines, actually outranks SkyTeam’s 8 in terms of the number of carriers operating at the airport. Yet those 9 contribute only 9.3% of the lift.

This shortfall is more than counterbalanced by the alliance’s representation at Newark, where the other two groups barely register on the radar.

Given the size of the New York market and its geographic spread, the spheres of influence are fairly well drawn, with American and Delta battling for traffic from Long Island and points north and west as well as Manhattan, while Continental lays claim to New Jersey, plus a chunk of the Manhattan and borough catchment.

Star Alliance US hub market shares

 

SFO

IAD

ORD

DEN

LAX

PHL

CLT

IAH

EWR

Dom %

44.9

69.6

50.7

45.1

23.1

66.2

88.7

86.0

70.5

Intl %

34.3

59.2

37.9

52.1

5.2

82.3

96.0

80.4

73.7

Alliance %

56.2

71.2

51.4

67.4

20.3

87.9

100

87.2

83.1

Some hubs are more real than others

United, while bringing the most hubs to the party, is also least dominant at its hubs of any of the majors. And, for example, while its website lists LAX as a hub, the numbers fail to support its position. American, that lays no hub claim to LAX, has 20% of the domestic capacity, just shy of United’s 23.1% and American operates 4.5% of the airport’s international capacity with its own aircraft.

The oneworld alliance share at LAX, 20.2%, is virtually tied with that of Star. Any United claim of LAX as a hub is pretty much “busted”. Its strength is at nearby San Francisco.

Chicago, however, is a different story, where United and Star have a clear edge on American and oneworld. Both domestically and internationally Star commands O’Hare.

The nation’s three largest metro areas, New York, Chicago and LA remain more openly competitive and are amongst the least dominated of the US cities. And, as outlined in an earlier study, the cities with the most competitive airports lie in the west, as evidenced at SFO, LAX and DEN.

While Salt Lake is somewhat more dedicated to Delta, the airport’s runner-up operator in capacity terms is Southwest—always a challenge to the status quo. The international traffic is primarily to Mexico and Canada and the Delta flight to Paris (5x per week) is a recent arrival whose longevity is yet to be proven.

But there are some real fortress hubs:

Assuming that market shares of 75%+ domestic and 80%+ international are close to monopoly positions, there are, however, plenty of US hubs in that category. Here is a quick assessment of the rest, excluding New York, Chicago and Los Angeles which have been already considered:

(1) Sky Team’s dominance at Atlanta, Minneapolis, Memphis, Detroit, Cincinnati, Salt Lake City

Atlanta: As Delta’s primary hub and home base, there is little doubt that ATL will be a DL stronghold for the duration of the airline’s history. AirTran, Delta’s only real rival at the airport, recently announced that Delta was showing resurgence at the airport that and future AirTran expansion would focus on other cities.

Delta and its SkyTeam partners will continue to discourage any meaningful competition at the airport. The drawback is that the concentration is so focused that any disruption or delay at the airport ricochets immediately across the network. And, as a consumer, if you live in Atlanta, your options are limited.

Minneapolis: Up until very recently, Northwest had the same kind of stranglehold on the Twin Cities as was true of Delta in Atlanta. But in 2009 Southwest arrived and opened the region to a few nonstops and a huge number of online connections. Past history has shown that WN will likely continue a steady and measured expansion of service at MSP. Additionally, Sun Country, a homegrown low cost carrier that has been present for some time, begins once-weekly service to London this summer with a stop in Gander. While Delta is probably not terrified by the move, it does represent a gutsy challenge to the incumbent giant.

Memphis: An earlier study reviewed the history - and possibly tenuous status - of this hub. While not likely to be abandoned outright, Delta has reduced most of its service to RJs and its proximity to ATL makes it the most redundant of the current hubs.

Detroit: Decades ago Detroit figured prominently in the networks of American and United but following deregulation, the airport came to be increasingly served by Republic Airlines. When that company merged with Northwest, Detroit’s status moved to NW and eventually, again via merger, to Delta. Republic with its fleet of DC-9s was unable to serve California and the west coast with nonstops, which continued to be operated by AA and UA.

The networks of many start-ups, like Midway, also included Detroit. In 1987 Southwest arrived, with Spirit also represented at DTW. Delta will not be dislodged, but there is a long history of challengers at the airport. Despite all that, SkyTeam will continue to be the dominant alliance presence at the airport.

Cincinnati: The rise and fall of CVG has been covered in this series. This is a sad tale for the airport and its constituents, but the reality of Delta’s downsizing is not likely to be reversed. And its continued designation of the airport as a hub has perhaps made others slow to challenge.

Salt Lake City: The Salt Lake hub was inherited in the merger between Delta and Western. It is unlikely to be abandoned by Delta due to its geographic location and the ability to aggregate traffic from the sparsely populated mountain states. But Southwest is a real presence and likely to grow. In response, DL has continued to transition many flights to RJs. Its long-term viability as an intercontinental gateway has yet to be proven.

(2) oneworld: localised strength, but not nationally

Dallas/Ft. Worth: There is no doubt who is in charge here. American and oneworld have an even stronger hold on DFW than is the case for DL and ATL. Internationally, Lufthansa, Air Canada, Mexicana and KLM add to the mix, but their feed comes at the origin points since, with 87% of the domestic service, there are few opportunities for non-AA connections. Southwest, operating from DAL, is a player in the market but not at the airport.

Miami: Miami has been reviewed in this series. Miami is the nation’s most international hub with half of its traffic destined to non-US points. Despite the fact that other US carrier hubs also provide widespread service to Latin America, Miami remains the key transit point and destination for such traffic. American is very unlikely to let go.

(3) Star: a wide spread of hubs, with significant dominance

Thanks to the array of US airlines in Star, the Alliance’s diverse national coverage also provides a large number of hubs that are geographically well placed.

San Francisco: While long seen as a United stronghold, the gateway is actually greatly enhanced by the carrier’s Star partners, which account for about 40% of the international alliance total. Domestically, United is challenged not only by other legacy carriers but also faces Southwest, JetBlue and Virgin America, reinforcing our assertion that fortress hubs have not been sustainable in the west.

Denver: A similar situation applies at Denver where United’s prominence is diminished by both Southwest and Frontier. Denver’s international traffic is dominated by service to Canada and Mexico with the airport having only two intercontinental flights; one operated by Lufthansa to Frankfurt and the other to London by BA.

In the past, United has operated a seasonal nonstop to LHR that will return in 2010. ANA has announced tentative plans to begin Tokyo service in 2012 but much can happen in that time span. Because of its intermountain location, it will retain its UA hub status—but will be increasingly challenged by the other players.

Washington Dulles: IAD is as close as United gets to having a fortress hub. The large number of Star carriers, coupled with the global importance of Washington, has created a powerful Star presence at the region’s primary international airport. All of United’s east coast European service is headquartered there and much of the domestic service is designed to feed those operations. Southwest has a small presence at IAD but overwhelms all others at nearby Baltimore. While United maintains a presence at both BWI and DCA it consists primarily of flights to its other hubs.

Philadelphia: Long a hub for not only US Airways but also for many of its antecedent carriers, there are ties between the airline and the city that are unlikely to diminish. The pre-eminent position that was held by US suffered in 2004 with the arrival of Southwest, which, with just over 14% of the capacity, has established itself as number two at the airport. The only non-Star intercontinental service is supplied by BA to LHR and the region’s proximity to Newark makes that hub a viable alternative for many residents. US Airways is relatively new to the international scene, with a smaller, but growing number of destinations as compared to nearby competitors.

Charlotte: A clear fortress for US Airways, the international service is exclusively supplied by Star members, with Lufthansa and Air Canada supplementing US. The bulk of its international traffic is headed for destinations in the Caribbean, which US blankets from CLT. The region’s growth has attracted both AirTran and JetBlue but they have yet to make significant inroads.

Houston: As noted earlier with Newark, Continental brought regional diversity to the Star presence in the US. Neither of the original two, UA or US, boasted any particular strength in the southern tier of states - a condition remedied by the addition of CO. The airline also brought the alliance a very substantial network in Latin America, a region only marginally served by the other two. In the same way that oneworld owns DFW, Star is the overwhelming winner at Houston-Bush. Southwest, which once had a presence at IAH, has since moved all of its flights to Houston-Hobby.

Balancing the alliances at US hubs: Star heads the access list

Following airline deregulation in 1978, US carriers were initially elated at the possibilities presented to expand across the country. But they soon recognised that being influential everywhere was unsustainable. As a result, turf wars became the order of the day. Some, overstretched, simply disappeared. A number of carriers cemented their dominance by absorbing rivals, as was the case with TWA and Ozark, as well as Northwest and Republic. Consolidation has been an ongoing process - and still has some additional combinations to come.

Most recently, the Delta/Northwest deal left Delta with not only the most hubs of any individual airline, but also a dominance of those points that is impressive. In addition, the carrier has utilised both those US hubs and Northwest’s existing Japan rights to become a single-carrier powerhouse in Asia. If SkyTeam had to have only one US partner, Delta is the one that brings the biggest gift to the party. Via its many hubs, the airline is able to provide one-stop domestic connections.

Meanwhile, still lacking anti-trust immunity with its European partners, oneworld remains handicapped against its larger competing Alliances, and the eastern concentration of AA hubs makes onwards carriage problematic to the Pacific Rim alliance members: Hong Kong to Phoenix, for example, means using a non-alliance carrier. But having survived the SkyTeam grab for JAL, the alliance has staying power in the US market. Had it not prevailed in Japan, and SkyTeam had further entrenched itself, oneworld would have suffered a major setback globally, highlighting the importance of having a strong Asian foothold from which to access the US market.

Star Alliance however wins the leadership award in market access because its US presence is comprised of three members with a geographic mix that is the most comprehensive. Its limitation is that United brings hubs with less overall concentration of service. However, intermingling the services of its two partners, there are few domestic points beyond its reach. And Star continues to expand its membership more aggressively than the other two, now clearly dominant in Asia and in Europe, in terms of both coverage and strength at its key hubs.

“Up in the air” - The consumer market generally overlooks allegiance. But the road warrior is a different matter

Alliances are not just about connectivity. Loyalty programmes are becoming more and more powerful as their global coverage expands. Perhaps the greatest consumer benefit of alliances is the integration of both mileage programs and loyalty recognition. This disbursement of benefits across a widespread network of airlines has been the most visible benefit of the creation of alliance “brands”.

In fact, when it comes to actual travel, the vast majority of US domestic travelers is probably far more driven by price and schedule than by alliance affiliation. The grandparents that travel primarily to their children’s residences are unlikely to amass enough miles to see real benefit from the programs, despite their appeal.

Domestically, a quarter of the US domestic market travels on the new generation entrants and Southwest, especially, has established its own comprehensive connecting network as well as a bullet-proof reputation for value, blunting the appeal of global networks for many, less-frequent travelers.

Furthermore, the options for convenient travel can be heavily influenced by geography. For a potential passenger living in Atlanta or Houston or Dallas, the viable options are fairly limited from the get-go. So if there is to be any alliance affiliation, in these cases it is largely pre-determined.

The same is not true for the road warriors who effortlessly build up both miles and status. Though they constitute a small percentage of travelers, they have heavily disproportionate effects on carriers’ bottom lines, and for an airline, being unchallenged in a major market helpfully tilts the odds towards attracting and keeping their business. Thus, it is for those high volume/high value passengers that Continental continues to operate a full schedule of RJs between Houston and Atlanta, a city where it has less than a 1% market share.

There are inevitably both strong supporters and opponents of the growing power of alliances – and their impact at particular hubs. Despite their detractors, there is little to support arguments that the alliances have been able to drive substantial pricing power, even where the grouping may have a dominant position.

The future of hubs in America

So, aside from consolidation, do current indications suggest there will be a significant legacy drawdown at any of these hubs? Aside from Memphis, which has a number of risk factors, the short answer is: probably not. The US has developed a system that, while unlikely to appear elsewhere, is firmly ingrained in the national aviation pattern. It means that if you live in Omaha, you have multiple flights to numerous hubs but few direct non-hub flights. And if you live in Dallas, you can access the world—but you should get to like American Airlines.


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