The Evolving Airline Industry: Impacts on Airports
2.2 Airline Network Structures
Asia uses larger aircraft for some international routes in Asia, whereas JetBlue in the Un-ited States and Azul in Brazil have acquired smaller 100-seat aircraft for lower demand routes.
For airports, the diversity of airline fleet characteristics and the absence of universal trends in aircraft types used by airlines simply mean that tremendous flexibility will con-tinue to be paramount. From the smallest regional jets to the largest A380, different aircraft types can have significant airport implications in terms of gate configurations, runway and taxiway requirements, as well as terminal waiting lounge and passenger processing facilit-ies. With the increased pressures of airline competition, volatility of airline profitability and growing movement toward consolidation in the global airline industry, airports will have to accommodate a range of aircraft sizes at any given time and will also have to respond to changes in the fleet characteristics of their airline tenants, sometimes with little advance notice.
FIGURE2.6 Hypothetical connecting hub network.
In this small example of a connecting bank, each flight leg arriving or departing the hub provides simultaneous service to 11 O-D markets—one “local” market between the hub and the spoke, plus 10 additional “connecting” markets. This airline thus provides service to a total of 120 O-D markets with only 20 flight legs and as few as 10 aircraft that traverse the hub. In contrast, a complete “point-to-point” network providing nonstop service to each market in this example would require 120 flight legs and 50 or more aircraft, depending on scheduling patterns and aircraft rotation requirements.
By consolidating traffic from many different O-D markets on each flight leg into and out of the hub airport, the airline can provide connecting service to low-demand O-D markets that cannot support nonstop flights. Consolidation of O-D market demands further allows the hub airline to provide an increased frequency of connecting departures, by offering multiple connecting banks per day at its hub airport. This increased departure frequency further increases the airline’s revenues and contributes to higher market shares relative to its competitors.
Hub networks require substantially fewer flights and aircraft (as well as flight crew and other airline staff) to serve a large number of O-D markets, as compared to complete point-to-point networks. The concentration of its operations at a large hub airport also provides the hub airline with additional operational and cost advantages—economies of scale in terms of its aircraft maintenance operations, catering facilities, and airport ground handling services, for example. Hub operations also give the airline more opportunities for real-time
“swapping” of aircraft in response to mechanical or weather delays and cancellations, giv-en the large number of aircraft that converge at the hub during a connecting bank.
Hub operations also create incremental costs for the airline. Longer aircraft ground or
“turn” times associated with connecting hubs can reduce aircraft and crew utilization com-pared to point-to-point networks. Whereas a point-to-point LCC can turn a narrow-body aircraft in 20 to 30 minutes, a large hub airline will keep the same type of aircraft (as well
as its pilots and flight attendants) on the ground at the hub for 60 minutes or more, to ac-commodate connecting passengers and baggage. Increased turn times reduce the output of each aircraft (ASKs) over which fixed costs can be spread, leading to higher unit costs.
A large hub operation can also result in uneven use of airport resources (such as airport gates and runway capacity), and of airline resources and personnel. Surges of arrivals and departures during connecting banks require high levels of ground service and gate staffing, while leaving these human resources underutilized during off-peak periods. The number of scheduled departures and arrivals during connecting banks can exceed the airport’s runway capacity, leading to flight delays in peak periods and unused capacity in off-peak periods.
Operationally, weather delays at the hub airport can have severe impacts on the ability of passengers to connect successfully at the hub according to plan. Missed passenger and bag-gage connections in turn increase operating costs for the airline.
From a route planning perspective, a hub-and-spoke network structure affects how air-lines evaluate the economics of new services. New routes to smaller spoke cities become easier to justify in an established hub network. In the hypothetical hub network ofFig. 2.6, the airline might require only five passengers per flight out of a new spoke city to each of 10 connecting destinations (in addition to the spoke-to-hub “local” demand of, say, 25) to make the operation of that flight with a 100-seat aircraft profitable. Even if the local O-D market demand is too small to justify the new service on its own, the new connecting passengers carried by the flight can make an incremental contribution to the airline’s total network revenue that exceeds the operating costs of the new service.
Despite repeated forecasts of more point-to-point flights, the development of bigger and stronger hubs has continued in all regions of the world, especially during slow economic times and/or periods of high fuel costs. During the financial crisis of 2008, the largest U.S.
and European airlines responded to the drop in demand and spiking fuel prices by elimin-ating virtually all flights that did not originate or terminate at their hubs.
The reliance of U.S. airlines on hub operations is very high and increasing in recent years. As Fig. 2.7 shows, well over 90 percent of all U.S. domestic flights in 2010 originated or terminated at major connecting hub airports for all of the large legacy airlines—American, Delta/Northwest, United/Continental, and US Airways. For United/
Continental in particular the proportion of hub flights exceeded 99 percent in 2010. This reliance on hub operations is not limited to U.S. legacy airlines. Low-cost carriers AirTran, Frontier, and JetBlue all operate over 80 percent of their domestic flights through their own connecting hubs. The only exception is Southwest, which pioneered the point-to-point style replicated by other LCCs around the world, but even it now operates over 50 percent of its flights into a connecting hub. As air transportation markets mature, the opportunity for LCCs to profitably serve point-to-point routes without any connecting traffic support di-minishes. Although we have not yet seen this same level of saturation of LCC services in other regions of the world, the U.S. experience is nonetheless instructive.
FIGURE 2.7 Proportion of hub flights operated by U.S. airlines, 2010. (Source: Belobaba et al., 2011.)
For the vast majority of world airlines, the economic advantages of hub network opera-tions have consistently outweighed their operational costs. There is little reason to expect the dominant hub-and-spoke network model to falter. There are undoubtedly still many routes in the world that can support new nonstop service by an LCC focused exclusively on serving local point-to-point traffic. However, as air travel markets mature and LCC costs rise, these opportunities will inevitably become scarcer. As has occurred in North America, LCCs in other world regions will have to consider some form of connecting hub operation to contribute incremental traffic and revenues to sustain their growth plans and profitabil-ity.
Several global airline industry trends reinforce the reliance on the connecting hub model among non-LCC airlines. These include the increasing liberalization of international routes, growing global alliances, as well as the development of new longer-range aircraft with smaller capacities, described in the previous section.
“Open-skies” bilateral agreements between countries remove most of the regulatory con-straints on the scheduling and pricing of international services. They effectively allow all airlines of either country to operate flights between any two points in the countries volved. They allow airlines to fly what once were thought to be relatively low-demand in-ternational nonstop routes from their hubs (e.g., Salt Lake City-Paris/de Gaulle by Delta, Frankfurt-Phoenix by Lufthansa, and Dubai-Hamburg by Emirates). The growth of
glob-al airline glob-alliances has encouraged these new internationglob-al services, with one or both end points being major hubs for one of the partners in the alliance. For example, Salt Lake City is a Delta hub and Paris de Gaulle is an Air France hub, and both carriers are partners in the SkyTeam alliance (seeChap. 1). In addition, the increased range capabilities of smaller international aircraft like the Boeing 767 and 787, and the Airbus A330 and A350 mean that airlines can offer these nonstop flights with a lower risk of not filling seats.
For airports, these trends in network evolution and airline route planning suggest that a proactive approach to attracting new airlines and new routes could be beneficial. Airports must, however, understand the changing business models and network characteristics of airlines with differing values and objectives, in order to offer them attractive proposals. An LCC with primarily point-to-point operations will be most interested in finding new air-port destinations with large traffic catchment areas, which can offer lower user fees and improved operational reliability than competing airports (e.g., in terms of short turnaround times and lack of congestion). A large network carrier considering a new service from an airport to its hub will be more interested in the potential for its flight to capture an adequate amount of connecting traffic from the new spoke city via its hub, above and beyond the local market potential.