Why US airlines are going with the flow
Tom Bacon takes a look back at the rise of the hub airport and why connect traffic is seeing a resurgence
Revenue management systems are designed to prioritise demand and to fill planes with the highest value passengers. Thus, a key feature is actually non-acceptance – turning away demand that is deemed lower value in favour of saving seats for more valuable passengers.
Of course, this marginal demand varies by season, day-of-week and time-of-day. However, there are broad trends that have been identified over time. United Airlines, one of the largest US airlines, recently announced that it could improve revenue dramatically by rescheduling key hubs to attract even more so-called ‘connect’ traffic. After a period of too much connect capacity, United is indicating a potential swing back to valuing connect traffic more highly than the lowest value local demand.
United Airlines is thus effectively reprioritising connect traffic; they have determined that connect passengers are more valuable than previously. Of course, connect traffic was once the most prized set of passengers.
A short history lesson
The first hubs, scheduled purposefully for connect traffic, were launched post de-regulation, in the early 1980s. After the largest hubs were introduced (including Atlanta, Dallas/Fort Worth, and Chicago O’Hare), smaller hubs (including Raleigh-Durham, North Carolina; Cincinnati, Ohio; and Memphis, Tennessee) were developed by large airlines to tap into even more flows.
Most of these smaller hubs were even more dependent on flow traffic than the first hubs, given the relatively small local market for services to/from the hub city itself. Competition for such flow traffic then became incredibly stiff; over the next few years, more than 20 hubs competed for flow traffic in the eastern US. There were multiple hubs located within a few hundred miles from each other. There were numerous ways for passengers to get from the Northeast/Midwest to the Southeast/Southwest.
After such hubs proliferated, American Airlines (AA) was one of the first carriers to begin to refocus away from such highly competitive connections.
When I was at American, we closed hubs at both Raleigh-Durham and Nashville; we concluded that a significant local market was key to the success of any hub no matter how well a city was positioned for flow traffic. American also closed TWA’s St. Louis hub post 9/11 (AA had acquired the hub only months earlier). USAirways was another leader in hub consolidation; its predecessor, America West, closed Columbus; USAirways itself closed Pittsburgh (focusing instead on Philadelphia). More recently, industry consolidation has given the new larger carriers the courage to close Memphis (by Delta Northwest in 2013), Cleveland (in 2014, by United Continental), and Cincinnati (in 2015 by Delta). ‘Capacity discipline’ or growing capacity equal to or less than demand growth has helped reduce such flow capacity. Virtually all of the formerly small hubs are now closed.
Meanwhile, however, growth in point-to-point services has not only continued, it has accelerated. After Southwest acquired AirTran, it replaced AirTran’s Atlanta hub with a more local oriented schedule (2013), consistent with the Southwest business model. New ULCC’s, Spirit and Frontier, offer a more local oriented schedule as part of their lower-cost operating model.
Revenue Management, of course, is designed to maximise revenue in any environment – in an overcapacity situation, it keeps low fares open; in a tight capacity situation, it turns away lower revenue demand. As capacity has been reduced in the smaller hubs, and as new point-to-point competition brings pressure on local yields, flow has become relatively more profitable again. At the same time, the marginal local passenger has become less valuable. As United Airlines is demonstrating, it’s now time to raise the priority of flow traffic.
Tom Bacon has been in the airline business for 25 years and is now an industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including RM, scheduling and fleet planning. Email Tom or visit his website