ANALYSIS: Large US airports gain from consolidation

Washington DC
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It was not that long ago when American Airlines flew to Burbank and United Airlines to Oakland, two cities that they had served for decades, and Southwest Airlines ringed cities like Washington DC with flights to secondary airports far from the city centre.

Enter rapidly rising fuel prices, a major recession and a round of mega-mergers, and the landscape of airline services to airports in major regions has changed dramatically.

American and United have dropped their respective services to Burbank and Oakland, and Southwest is on the cusp of becoming the third largest carrier in terms of the number of slots at Ronald Reagan Washington National airport, situated just over 6km from the White House.

“If you look at the major metro areas, you’re seeing a consolidation around one major airport instead of two, or two instead of more,” says William Swelbar, a research engineer at the Massachusetts Institute of Technology’s International Centre for Air Transportation and an executive vice-president at InterVistas. “It’s a way for airlines to serve metro areas without having redundant service.”

Major airports in the Boston, Dallas/Fort Worth, Los Angeles, Miami, New York, San Francisco and Washington DC regions all saw passenger traffic increase by as much as a quarter while in most cases, traffic fell at secondary facilities in the same regions, according to an Airline Business analysis of passenger traffic in large multi-airport regions in the USA from 2007 to 2013.

In all of these areas, low-cost carriers flocked to major airports and mainline carriers consolidated their operations following each airline’s respective merger. JetBlue Airways supplanted American Airlines and Delta Air Lines as the number one carrier in Boston, Delta has built a profitable dual hub at New York's JFK and LaGuardia airports, and Virgin America has successfully made inroads on United’s monopoly in San Francisco.

Growth at these airports occurred even as national traffic numbers fell. Only 826 million passengers flew in 2013, a 1.8% fall from the 841 million in 2007, US DOT data shows.

The San Francisco and Washington DC areas are examples of these shifts at work.

BAY SHIFT

San Francisco International Airport has seen some of the most dramatic passenger traffic growth among major airports in the USA since 2007. It handled 45 million passengers in 2013, more than a quarter higher than six years ago.

Passenger numbers at nearby Oakland International Airport fell by about a third to 9.7 million in 2013 and those for San Jose International Airport declined by 18% to 8.8 million during the same period.

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Source: San Francisco airport

Kimberly Becker Aguirre, director of aviation at San Jose airport, says the launch of Virgin America from San Francisco airport in 2007 was a turning point. JetBlue and Southwest announced new services to the region’s primary airport the same year and have since shifted their focus there and away from Oakland and San Jose.

Competitive spirit is not the only driver behind the moves. Scott Laurence, vice-president of network planning and partnerships at JetBlue Airways, said recently that low-cost carriers cannot command the same unit revenue premiums at Oakland and San Jose that it can at San Francisco.

This is one of the drivers behind the New York-based airline’s decision to place its new Mint premium product aboard a dedicated fleet of Airbus A321s on the New York JFK-San Francisco route from the second half of 2014, he adds.

JetBlue has no plans to expand its presence at either Oakland or San Jose beyond red-eyes to the east coast and limited services to its Long Beach focus city, says Laurence.

The carrier has since disclosed plans to end its red-eye between Oakland and Washington Dulles, citing a need to “free up aircraft” for its new service to Washington National airport.

In addition to JetBlue’s cuts, San Jose will lose both Alaska Airlines and Virgin America on the San Jose-Los Angeles route when they each end services on 5 April and 14 May, respectively.

United, long the dominant carrier at San Francisco, optimised its network in the bay area following its merger with Continental Airlines in 2010. This included discontinuing services to Oakland in 2012, which the airline determined that it could not support with only a few flights a day to Denver, and a significant build-up of its hub at San Francisco.

“San Francisco is the premier Asian gateway from the United States… [and] is key to our growth strategy to Asia,” said Jeff Smisek, chief executive of United, at the opening of the carrier’s new boarding area E at the airport in January.

The Chicago-based carrier resumed nonstop service to Taipei on 29 March and Atlanta on 1 April, and will add new services to Chengdu on 9 June.

United’s capacity at San Francisco was up 15% to 36.8 billion ASKs and departures were up 13% to nearly 107,000 in 2013 compared with 2010, Innovata data shows.

CAPITAL DESIRE

Washington National is in the midst of a passenger boom. Traffic increased 9% to 20.4 million from 2007 to 2013, and American’s recent divestiture of 43 slot pairs to JetBlue, Southwest and Virgin America has operator Metropolitan Washington Airports Authority (MWAA) expecting another 2.4 million annual passengers in the next few years.

“There’s been a series of regulatory decisions made that have made it easier for carriers that could not service Reagan National before to shift to the airport,” says Margaret McKeough, chief operating officer of MWAA. These actions include forcing mainline carriers to divest slots to LCCs in exchange for approval of various business deals and creating new slots for flights outside Washington National’s 2,012km (1,250 mile) perimeter.

As a result, traffic at Washington Dulles, the region’s expansive but distant international airport, has fallen by 11% to 21.9 million passengers between 2007 and 2013, according to data from the operator.

“It’s an imbalance in the distribution about the domestic passengers in this market,” says McKeough.

LCCs cannot get enough of the improved access.

JetBlue gained eight slot pairs from the Delta-US Airways slot swap in 2011 and 12 pairs from the American-US Airways merger earlier in 2014. Southwest also bought 27 pairs and Virgin America four pairs from American.

Southwest’s gains come despite ample access to Baltimore/Washington and Dulles airports. Bob Jordan, the carrier’s chief commercial officer, says that Baltimore – where Southwest controls nearly 61% of the market, according to the DOT – is not a “meaningful alternative” for business and government passengers from Washington DC despite being a “great airport”.

“Southwest wants to compete,” he said recently. “The only thing standing in our way to competing more effectively at Reagan is access.”

The Dallas-based airline will operate 44 daily flights from Washington National once it completes the roll-out of the new flights in November. Only American and Delta will have larger slot portfolios.

Baltimore/Washington has yet to be hit by growth at Washington National. Passenger traffic increased by 6.9% to 22.5 million passengers from 2007 to 2013, airport data shows. This trend is expected to continue as the airport invests $125 million in an expanded international concourse.

The slump in traffic at Dulles is not expected to continue. McKeough calls the current imbalance a “short-term situation”, citing the airport’s large footprint and ability to expand as the Washington DC region adds an anticipated 2 million more residents by 2040.

Southwest has already disclosed plans to add new nonstop flights from Dulles to Las Vegas and San Diego in November, and United, which operates a large hub at the airport, may be prompted to expand at the facility with the loss of feed in the southeastern USA from its former codeshare partner US Airways and the decision to close its Cleveland hub.

MWAA is not alone in its belief that the shift in traffic to primary airports is a short-term trend. The Airports Council International (ACI) North America sees passengers slowly returning to secondary airports in the San Francisco area as well as elsewhere around the USA.

“It’s going back to the day that airlines see those secondary airports as a way to enter the market without competing directly with United at San Francisco,” says Matt Cornelius, managing director of air policy at the association.

Oakland and San Jose have seen new services on foreign carriers with Norwegian beginning services from the former to Oslo and Stockholm this May and ANA launching services from the latter to Tokyo Narita in 2013. Spirit Airlines has also selected Oakland as its entry point to the Bay Area.

More shifts are likely. The American-US Airways merger is still in its early days, which includes a move by the latter into Oneworld from Star Alliance, and both Southwest and United continuing to optimise their networks following their respective 2010 mergers, says Deborah McElroy, executive vice-president of policy and external affairs at ACI North America.

“The deck chairs are still shifting,” she says.