By Jennifer N. Dienst | Aug 03, 2013
Second-tier cities are absorbing the brunt of cuts in airline capacity and competition — and some of them are better off for it.
Massive consolidation and rising fuel prices have resulted in fewer flights and higher fares at destinations across the country. Second-tier cities are absorbing the brunt of cuts in airline capacity and competition — and some of them are better off for it.
By Karg se (Own work) [CC-BY-SA-3.0], via Wikimedia Commons
Maybe you’ve noticed the changes and confusion that the U.S. airline industry is experiencing — consolidating or eliminating routes and reducing airlift at destinations across the country. According to William S. Swelbar, research engineer for MIT’s International Center for Air Transportation (MIT-ICAT), it comes down to a single factor that is driving the upheaval: oil prices. In 2011, U.S. airlines paid an average of $2.94 for a gallon of fuel, according to the U.S. Department of Transportation — 51 percent more than what they paid in June 2000.
‘This industry was built on the price of oil at roughly $20 a barrel. In 2008, when oil prices hit $147 a barrel, the airline industry recognized that it was simply operating more capacity than economics could support.’ -William Swelbar, MIT-ICAT
“The push to cut capacity in the [airline] industry can be placed at the foot of oil prices,” said Swelbar, one of the authors of a new MIT-ICAT study, Modeling Changes in Connectivity at U.S. Airports: A Small Community Perspective. “This industry was built on the price of oil at roughly $20 a barrel. In 2008, when oil prices hit $147 a barrel, the airline industry recognized that it was simply operating more capacity than economics could support.”
Since the recession began in 2007, 25 U.S. airlines have ceased operation or filed for bankruptcy. Now, with the impending American Airlines-US Airways merger, the future of domestic air travel within the United States will ride on just four major carriers: Southwest, Delta, United, and American. As a result, airports are seeing their flight capacities cut and the number of airline options available to passengers diminish.
Almost all major U.S. cities have seen decreases in the number of flights serving their airports since 2007 — from a loss of 7.4 percent in Chicago to 18.9 percent in Orlando, according to the MIT-ICAT study, which was released in June. But the study also reveals that small- and mid-sized airports in the United States have been disproportionally affected. For example, former hub cities like Pittsburgh, Memphis, and Cincinnati have lost upwards of 35 percent of their flight capacity in the last six years.
The study found that from 2002 to 2012, more than 14.3 percent of yearly scheduled domestic flights were cut from the U.S. air-transportation network. Smaller airports lost 21.3 percent of their scheduled domestic flights compared to just an 8.8-percent decline at the 29 largest U.S. airports. “What the industry is doing is better matching its capacity to the demand in that airport marketplace,” Swelbar said. “Now, you have four meaningful competitors in all four corners in the U.S., whereas before, the industry was more regionally focused.”
That means, according to Swelbar, that “there are going to be winners and losers in the airport community, no question.” The broad numbers would suggest that second-tier destinations are going to absorb some of the worst of it — but that’s not the whole story.
Airports that experience or have the potential to experience changes in air service need to respond. [They] do their best to hold on to the airlines they have, but when circumstances change, they change, too.’ -Matt Cornelius, ACI
‘A LEVEL PLAYING FIELD ACROSS THE COUNTRY’
“As they’ve merged, the airlines have been able to rationalize where they fly and how they fly,” said Matthew J. Cornelius, managing director of air policy for Airports Council International, which represents local, regional, and state governing bodies that own and operate commercial airports in the United States and Canada. Cornelius explains that airports in mid-sized cities like Memphis, which has lost 40.6 percent of its total flights since 2007 due largely to Delta shifting its focus to its larger Atlanta hub, are experiencing the side effects of mergers such as the 2008 deal between Delta and Northwest. This past June, Delta announced that Memphis International Airport would no longer be a hub for the airline as of Sept. 3, 2013, and that the number of flights Delta offered at the airport would drop by nearly one-third, from 94 to 60. Pittsburgh is going through a similar situation. From June 2007 through June 2012, Pittsburgh International Airport has seen 40.1 percent of its scheduled passenger flights cut.
‘We would certainly love to have more flights to make it easier and cheaper to get here, but we believe that because it has impacted so many other destinations that it has became the norm for everybody.’ -Jason Fulvi, VisitPittsburgh
How have these changes affected meetings and conventions business? According to Jason Fulvi, CDME, executive vice president of VisitPittsburgh, they haven’t made as big of a dent as one would think. “We initially thought it was going to be very detrimental to us,” Fulvi said of the increasing flight cuts. “I’m not saying it hasn’t had an impact, but it really hasn’t made that big of an impact. A lot of second-tier destinations are experiencing the same thing. It has created a level playing field across the country. [Many destinations] are dealing with reduced flights, losing their hubs, and passengers having to connect to get there. We would certainly love to have more flights to make it easier and cheaper to get here, but we believe that because it has impacted so many other destinations that it has became the norm for everybody.”
Although the decreases at first glance seem to be dramatically negative, industry experts like Cornelius and Swelbar say there are upsides. First, when major airlines like Delta and United take away flights from small- and mid-sized cities, it leaves open slots for low-cost carriers like Spirit, Alaska, and Southwest to fill them — which has already happened in Memphis, where Southwest recently announced it would start offering daily nonstop flights to Houston, Baltimore, Chicago, Tampa, and Orlando beginning this November.
“Airports that experience changes in air service, or have the potential to experience changes in air service, need to respond,” Cornelius said, “and Pittsburgh and Memphis have done that.” When Pittsburgh lost its hub status with US Airways in 2004, for example, low-cost carriers like Southwest moved in to fill the slots. This helped bolster service and offer more competitively priced fares to passengers. “Whoever the major carrier is benefits from that,” Fulvi said. “At one point, we saw flights to Washington, D.C., on Southwest that were very reasonably priced, at about $250. When those went away, US Airways was able to raise prices, because the competition was knocked out of the marketplace. So it’s an ebb and flow here, just like everyone else [is experiencing].” Cornelius added: “A lot of these places do their best to hold on to the airlines they have, but when circumstances change, they change, too.”
MORE THAN MEETS THE EYE
But it’s not always as simple as fewer flights equaling less service. At Salt Lake City International Airport, the total number of flights has decreased by 22.8 percent from 2007 to 2012, but today the airport offers service to more destinations and more nonstop flights than ever before, according to Scott Beck, president and CEO of Visit Salt Lake. Salt Lake City is a Delta hub, and as of July 2013, the airline offered 277 peak-day departures to 85 nonstop destinations.
‘One of the underlying pieces of information that may be not intuitive in the numbers reported is that, when it comes to meetings and conventions, we get asked about the destinations served more than [the number of] flights.’ -Scott Beck, Visit Salt Lake
Takeoffs and Landings Changes in number of flights at 10 U.S. airports from 2007-2012:
Salt Lake City
SOURCE: Modeling Changes in Connectivity at U.S. Airports: A Small Community Perspective, MIT International Center for Air Transportation
The fact that Charlotte has been a low-cost facility for airlines to operate has ‘helped us grow as an airport hub. The [airport’s] management team runs it like a business; they understand that both passengers and airlines are customers.’ -Mike Butts, Visit Charlotte
“We have benefited immensely from all of the recent changes,” Beck said. “One of the underlying pieces of information that may be not intuitive in the numbers reported is that, when it comes to meetings and conventions, we get asked about the destinations served more than [the number of ] flights.”
Some of the cuts made at Salt Lake City International Airport eliminated duplicate service to cities, so the destination is still being served, but there are only two flights instead of three. This is an example of how, according to Swelbar, the airline industry is making itself more efficient. “Consolidation and capacity cutting are the two big contributors to a more financially stable and healthy industry,” he said. “... Just like we’ve seen winners in the airline industry, and losers that have gone out of business, we’re likely to see airports that won’t necessarily lose all of their service, but they certainly won’t get back to the levels of service they once enjoyed.”
WINNERS AND LOSERS
But why are some second-tier cities experiencing drastic cuts, while others are seeing only minuscule drops — or even increases in service? “At the end of the day,” Swelbar said, “it comes down to the local economics, which are very, very important in areas where airlines are growing and where they’re not.”
For example, Charlotte Douglas International Airport has seen a 9.7-percent increase in its flights from 2007 to 2012. It’s the world’s sixth-busiest airport in terms of aircraft movements, and the eighth-busiest U.S. airport, with 41.2 million passengers passing through in 2012. The US Airways hub, currently undergoing a $400-million expansion, could get even busier if it remains a hub for American after the two airlines finalize their merger.
“Charlotte has been diverse and vibrant from an economic perspective,” said Swelbar, who notes that the airport has also been a low-cost facility for airlines to operate. That’s not an accident. “[Those low costs] have helped us to grow as an airport hub,” said Mike Butts, executive director of Visit Charlotte. “The [airport’s] management team runs it like a business; they understand that both passengers and airlines are customers.”
And sometimes it’s just lucking out with the right assets. Denver International Airport has seen a 0.6-percent increase in flights from 2007 to 2012. In terms of aircraft movements, it’s the fifth-busiest airport in the United States and the 11th-busiest in the world. Besides having a vibrant local economy, Swelbar said, Denver International also has the ideal geographical asset of providing a good connecting point both domestically and internationally. The airport already offers nonstop service to 23 international destinations, and in June, United launched Denver’s first nonstop flight to Asia — on the new Boeing 787 Dreamliner — to Tokyo-Narita International Airport.
“We were very fortunate,” said Richard Scharf, president and CEO of VISIT DENVER, speaking about how recent airline mergers have affected airlift at Denver International, which is United’s fourth-largest hub. “It gave us an even stronger airport with more connections and international access. The United Airlines merger [with Continental in 2011 and the] Frontier Airlines merger [with Midwest Airlines in 2010] have been pretty positive for us.”
‘We were very fortunate [regarding recent airline mergers]. It gave us an even stronger airport with more connections and international access. The United Airlines merger and Frontier Airlines merger have been pretty positive for us.’ -Richard Scharf, VISIT DENVER
HIGHER PRICES AND A HEALTHIER FUTURE
So what will all of this cost? “Generally, fares have risen, if you look at the last seven years,” said Cornelius, who noted that the compounded annual growth rate of domestic fares has increased about 3 percent since 2005. “When there is lost competition, that’s basic economics — the consumer sees a price increase. But it’s also a market-by-market situation.”
For example, there are exceptions like Denver, where, according to Scharf, the number of flights has increased even as the average domestic airfare has dropped 27.5 percent since 2002. But experts maintain that the cost of flying as a whole will not drop, especially in destinations with less flights and less competition. “Fares will increase, absolutely, there’s no question,” said Michael C. Boyd, chairman of Boyd Group International, an aviation consulting, forecasting, and research firm. “Let’s put it this way — the cost of air travel will go up. Fares will go up a little bit, but other costs like bag and reservation fees, those are going to go up. The cost of getting on an airplane is going to go up. It’s going to appeal to fewer and fewer price-sensitive populations.”
Despite these fare increases and flight cuts, most of the experts and analysts Convene spoke with had positive outlooks on the changes happening in the airline industry and what lies ahead — for everyone. “I believe that absent another shock to the system, we have seen the end of whole-capacity cutting in markets around the country,” Swelbar said. “A lot of the capacity cuts were largely due to duplicate capacity. All the airlines were really doing was taking their flights to their larger, more efficient hubs so as not to compete with themselves.”
Another reason the future looks rosy is that airlines have had time to adapt to the triggers that have traditionally made it so susceptible to economic turbulence. “If you look at the cost of fuel right now, it’s very high, but [the airlines have] retooled themselves to be able to make money in this environment,” Cornelius said. “They’re a lot less vulnerable to external shock than they were at any point in history.”
And although meeting attendees who live in or travel to medium-sized destinations may view these service cuts as a hindrance, they’re actually a sign that the airline industry is moving toward becoming healthier and more efficient. “There are fewer flights and fewer seats, but the planes are more full,” Cornelius said. “The load factor is higher than it has ever been. The airlines are just doing a better job of matching capacity with demand.”
“It’s hard to say or suggest that there are lots of positives, because choice has been reduced, no question,” Swelbar said. “However, I do believe that what we’re seeing is an industry that is making itself healthy.
“The airline industry is not a healthy business. It’s an industry that managed to lose nearly $60 billion since the industry was deregulated in 1978. It certainly doesn’t have the capital to reinvest in itself. They may lose some choice in hubs to fly through, but I do believe that we’re going to see airlines beginning to invest in a better product that customers can enjoy over time.”
‘Let’s put it this way — the cost of air travel will go up. Fares will go up a little bit, but other costs like bag and reservation fees, those are going to go up. The cost of getting on an airplane is going to go up.’ -Michael Boyd, Boyd Group