"Airline hub-and-spoke system questioned"

Sunday, September 22, 2002

Airline hub-and-spoke system queried
By Caroline Daniel in Chicago
United Kingdom - The London Financial Times


The traditional hub-and-spoke system adopted by many of the world's
biggest airlines will need to be fundamentally re-thought, amid the
growing penetration of low-cost carriers, which can now compete in at
least 70 per cent of the US market.
 
That analysis by Booz Allen Hamilton, a management consultancy, will add
to the growing debate about whether the hub-and-spoke model, where
travellers connect through a central airport rather than flying direct,
is sustainable.

"Low-cost carriers threaten to undermine the whole hub-and-spoke
system...It is the price impact, not the loss of traffic that is the
real threat," said Tom Hansson, one of the report's authors.

Shares in the traditional carriers have plummeted amid concerns about
liquidity, declining revenues and the rise in fuel prices that would
follow an attack on Iraq.

Shares in American Airlines closed below $5 at the end of last week,
near 20-year lows.

Unions at United Airlines, the second-largest carrier, struggled over
the weekend with an attempt to devise an alternative business plan, as
part of an effort to avoid making $1.5bn of annual concessions sought by
United's executives.

United must cut costs severely before it can re-submit its application
for a $1.8bn federal loan guarantee. The unions had hoped to present the
plan last week, but missed the deadline. A new set of proposals is
expected as early as today.

The problems faced by companies such as American and United were
underlined by Booz Allen, which noted that low-cost rivals such as
Southwest have typically offered tickets at half the cost of rivals, for
routes of about one to two hours, reducing the prices attainable by
traditional carriers by 25-35 per cent.

It estimated that there was about twice the required connecting capacity
in the US market, provided by hubs, which has led to "sub-scale hubs
that compete for traffic, trash prices and create a hyper-competitive
environment".

The threat was underlined in a report last week from Deutsche Bank,
which forecast that the big six carriers would cut capacity by 11.6 per
cent in 2002, while low-cost carriers would increase by 12.6 per cent in
2002.

It estimated that market share of low-cost carriers in the US would
increase from 14 per cent in 2001 to 19 per cent in 2003.


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