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US domestic air travel: hubs exceed limits, ex-hubs rebuild

Consolidation in the US market has resulted in large hubs reaching or exceeding their passenger thresholds while other airports caught in the crosshairs of mergers have spent the better part of the past decade attempting to rebuild in the wake of losing their hub status. Thanks to service expansion by low cost airlines, many of those airports are getting close to reaching historical passenger levels, reflecting their ability to adapt to new marketplace dynamics.

With the three large global network airlines relying on their hubs now more than ever to maximise high-yielding connecting passengers, it is imperative that the infrastructure at those airports supports growing passenger numbers throughout. That scenario is casting the spotlight on the age-old debate in infrastructure funding that pits airlines against airports.

A new infrastructure plan introduced by US President Donald Trump in early 2018 proposed some changes in the governance of airports, but it remains unclear whether those proposals will materialise into actual legislation. The result is a continuation of a status quo that in many ways fails to meet the demands of the US market. The inertia begs a question – is it time to give serious consideration to airport privatisation in the US?

Summary

  • Several US hubs are undergoing infrastructure projects as controversial caps for PFCs fall by the wayside.
  • Proposed changes by US President Trump for certain airport funding transactions do not hold much promise in becoming a reality.
  • Former hubs deserve recognition for their efforts to rebuild passenger levels.

The latest efforts to raise caps on PFCs fall flat in the US Congress

Several hubs airports in the US are working through major infrastructure projects costing billions. Chicago’s city council recently approved a USD8.5 billion expansion. Crain’s Chicago Business has stated that the improvements should attract an additional 20 million passengers annually to the airport. Chicago O’Hare logged a 2.4% increase in passengers during 2017, to 79.8 million.

Airlines will pay for some of the projects, and the city plans to borrow USD4 billion in order to begin construction. Other large US airports, including the world’s largest, Atlanta and Los Angeles, also have billion dollar projects under way to accommodate anticipated passenger demand.

Those projects are proceeding as Airports Council International-North America calculates that USD100 billion is necessary to fund airport infrastructure through 2021.

Airports have long lobbied to eliminate caps on the passenger facility charges (PFCs) that airlines collect from passengers. Those fees are handed over to airports to help to maintain and support their infrastructure. The Senate version of the FY2018 DoT appropriations bill included a provision to raise the PFC cap from USD4.50 to USD8.50 for originating passengers.

See related report: President Trump’s new infrastructure plan: potential for aviation and private airport financing

Ultimately, the provision to raise the PFC cap was shot down in an omnibus funding bill passed by both chambers of the US Congress. Unsurprisingly, airlines commended the retention of the current cap intact, arguing that an increase is not justified when “airports are sitting on billions of dollars in record revenue collected from airline passengers”, Airlines for America stated.

Proposed changes in privatisation by President Trump show little promise

In the meantime, Mr Trump continues to push for his infrastructure plan, which includes changes to the US Airport Privatisation Pilot Programme. The President is proposing to remove limits on the number and size of airports participating in the programme.

Some of the largest airports in the world, including London Heathrow, are privatised, but the concept has had little traction in the US. San Juan in the US territory of Puerto Rico is privatised, along with Springfield-Branson International airport.

Privatisation advocates have argued that regulatory constraints prevent private investment in US airports, and Mr Trump’s infrastructure proposal would change laws governing airport lease or private-public partnership (P3) transactions. Presently, either one of those transactions needs approval from 65% of all airlines operating at an airport, and airlines that represent 65% of annual weight landed at the airport.

Mr Trump aims to reduce the airline approval requirement from this current double-65% supermajority to a single simple majority.


While those changes would be welcome to the antiquated US system of airport privatisation, they are not likely to materialise any time soon. In the US Congress Democrats are largely opposed to most of Mr Trump’s infrastructure plan, according to Roll Call, and his proposals have had a tepid reception by conservative Republications.

Essentially, the status quo will remain intact for the foreseeable future, which means that arguably outdated privatisation restrictions will remain in place even as huge infrastructure projects loom large.

Former hubs chart a steady course to regain historic passenger flows

At the opposite end of the spectrum in the US market are former hubs stripped of that status after a decade and a half of consolidation in the US marketplace. Airports including Memphis, Cincinnati, Cleveland and Pittsburgh have been working to backfill service after the dehubbing by the United, Delta and American’s merger partner US Airways.

Those airports deserve credit for their efforts to regain lost ground. Although service levels, particularly international routes, are not what they once were, passenger throughput continues to regain traction.

All of those airports recorded passenger growth of more than 5% in 2017, and many are climbing steadily toward attaining 2009 passenger levels.

2017 passenger levels and growth versus 2009

Airport

2017 passenger levels

and % change

2009 passenger levels
Cincinnati 7.8 million 15.5% increase 10.6 million
Cleveland 9.1 million 8.5% increase 9.7 million
Memphis 4.2 million 5% increase 9.9 million
Pittsburgh 8.9 million 8.2% 8 million

Much of that growth is fuelled by low cost and ultra low cost airlines. For example, although United remains the largest airline at its former hub Cleveland, with 24% of the airport’s ASKs, the ULCCs Spirit and Frontier combined hold 33% of its ASKs.

Cincinnati has also attracted service from the ULCCs Allegiant and Frontier, but the airport is also experiencing some growth from Delta, which still holds 51% of its ASKs. Cincinnati is now one of Delta’s three focus cities, joining Boston and Raleigh-Durham.

Delta recently announced new service from Cincinnati to Austin and Phoenix, as well as upgauging aircraft at the airport as part of its years-long initiative to upgauge its domestic fleet. According to WCPO in Cincinnati, Delta has logged 27 consecutive months of growth from Cincinnati airport. And even though Delta’s presence at Cincinnati will never rise to past levels, the airline’s growth in the market shows the unique evolution it is making in the US market place, zeroing in on markets that do not warrant hub operations, but hold solid revenue potential to warrant some degree of service and investment.

Most of the former hubs will continue to attract low cost providers, and low cost international airlines are now landing at those airports. Iceland’s WOW Air serves Pittsburgh and is adding new service to Cleveland, Cincinnati and St Louis in the spring of 2018. The Sacramento Bee has also reported the county has approved incentives to attract European LCCs, including Norwegian Air Shuttle and WOW.

It may be time to revisit new ways to drive efficiency in the US aviation system

Those are just a couple of examples of small to medium sized airports adapting to their post-consolidation reality in an arguably successful manner. Former hubs are showing a level of nimbleness in shifting their focus in a consolidated market.

At the other end of the spectrum are major hub airports that are working to meet the needs of their airline partners and passenger preferences.

All of this within a framework that warrants a revisit to ensure that the US aviation system operates at maximum efficiency.

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