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"Weakening of airlines' "hub and spoke" model could imperil Denver airport"


 
Tuesday, August 17, 2004

Weakening of airlines' "hub and spoke" model could imperil Denver
airport
The Denver (CO) Post


Before the U.S. airline industry was deregulated in 1978, Denver
travelers couldn't catch a nonstop flight from Stapleton International
Airport to Atlanta or Miami.

They had to fly TWA and change planes in St. Louis. The other way to go
was through Chicago, Dallas or Kansas City, Mo., with a connection to a
flight on another airline.

On the other hand, flying was less stressful than today. Travel agents
made all the arrangements and handled any problems.

A passenger could expect few delays, an in-flight meal and some pleasant
chatter with the flight attendant. The fares were high by today's
standards, but not exorbitant.

Then, beginning in 1978, everything changed. As competition swept across
the industry, airlines were forced to confront glaring gaps in their
service fostered by five decades of government control.

Haphazard route maps fell away as airlines consolidated their operations
in a few large cities. Flights radiated from these hubs in every
direction to destinations large and small.

The resulting "hub-and-spoke" network allowed airlines to offer
travelers far more flight options with the same number of planes.

Stapleton, and later Denver International Airport, became a key airline
hub. Its mid-continental location made it an ideal place to connect
passengers flying coast to coast.

Today, DIA is the nation's fifth-busiest airport with 38 million
passengers a year. Nearly half are simply passing through on connecting
flights. The airport is United Airlines' second-largest hub and home to
Frontier Airlines' growing operation.

Indeed, the major carriers grew so strong in cities like Denver during
the late 1990s that they looked unassailable.

But now the hub model is under siege as the major carriers struggle with
entrenched cost structures and nimble competition. Low-cost rivals, once
content to skirt the big hubs or operate on their fringes, have invaded
these strongholds.

In the early years of deregulation, competition raged. Fares fell, and
new airlines entered the industry for the first time in decades.

Airlines developed frequent-flier plans to promote loyalty and
complicated fare structures that put different prices on virtually every
seat.

The industry saw its first big wave of low-cost competition as Southwest
Airlines grew beyond its Texas roots and others such as PSA Airlines and
People Express sprouted.

By the early 1980s, Stapleton was a competitive battleground. It was a
hub to four airlines -- United, Continental Airlines, the old Frontier
Airlines and Western Airlines.

Denver travelers seeking a nonstop flight to Phoenix, San Diego, Los
Angeles, Salt Lake City or Las Vegas could choose from any of the four.

Southwest began flying from Denver to Phoenix and Albuquerque. People
Express came to Denver in 1985 when it purchased failing Frontier.

It wouldn't last. Southwest eventually withdrew from Stapleton. By 1987,
Continental had gobbled up People Express, and Delta had swallowed
Western, closing its Denver hub.

In the late 1980s and early 1990s, a tough economy and the Persian Gulf
War forced the industry to consolidate. Pan Am and Eastern shut down.
Continental, TWA and America West went bankrupt but survived.

Still, the benefits of competition were evident. According to Alfred
Kahn, who spearheaded deregulation for the government in the 1970s,
average fares fell 30 percent in real, inflation-adjusted terms between
1976 and 1990. He estimates the annual savings to travelers at $5
billion to $10 billion.

Air travel, once a luxury experience, was changed forever.

"The type of people who travel by air has changed in the last 30 years,"
said David Cox, a retired United flight attendant from Highlands Ranch.
"It went from being the preferred mode of transport for the affluent to
being the travel of the masses." 

Consolidation put the nation's hub airports in the hands of fewer
carriers. In Denver, the rivalry between Continental and United grew
increasingly one-sided as Continental slid further into financial
distress during the early 1990s.

In 1994, spooked by the high operating costs of the city's new airport,
Continental closed its Denver hub, ending a close association with the
city that had lasted six decades.

When DIA opened in February 1995, United flew two-thirds of its
passengers. That number would soon grow to three-quarters.

Like a growing number of big-city airports, DIA had become a "fortress
hub." American had Dallas. Northwest had Minneapolis. Delta had Atlanta.

Worse, debt-laden DIA had the highest operating costs of any major
airport, making it even less attractive to new competition. Still, the
seeds of competition were germinating.

Frontier had been resurrected by a group of former company executives.
They started out small and grew cautiously in United's shadow at DIA.

During those years, Denver's airfares were among the highest in the
nation.

The hubs are anything but fortresses today.

United Airlines is in bankruptcy and is trying to reduce costs at its
hubs. Struggling US Airways is dropping its Pittsburgh hub, and American
Airlines slashed its St. Louis operation last year after acquiring TWA.
Other hubs look vulnerable.

Many experts say the hub system will bend rather than break. Some hubs
will go, but others will survive as the beleaguered major carriers find
ways to operate more like their discount competitors.

"The hub-and-spoke systems are an important part of the air-transport
system and will continue to be in the future," said Phil Roberts of
Unisys R2A Transportation & Management Consultants in San Francisco.
"The issue is how they are used in the future. It's how you operate the
hub, not that you have one." 

United's grip on DIA traffic began to slip in 2000, as flight
disruptions from a pilot work action pushed tens of thousands of
customers to Frontier.

After Sept. 11, 2001, United's fortunes declined swiftly, and it filed
for bankruptcy protection 15 months later. Meanwhile, Frontier's market
share continued to climb. In 2003, it was 15 percent compared with
United's 60 percent.

The disparity still looks large, but Frontier and other low-cost
carriers now challenge United on virtually every significant Denver
route.

As a result, fares have dropped. The airport's fares were 4 percent
below the national average during the first quarter of 2004, according
to the U.S. Department of Transportation. In 1999, DIA's fares were 8
percent above the national average.

The airport, once a cash cow for United, was break-even in 2003. That
raises the question: How will the carrier survive if it can't make money
at what was once its most profitable hub?

United officials say they're looking closely at airport operations to
cut costs, though they've provided few details.

United could follow American in developing "rolling hubs." American has
smoothed out flight schedules at its hubs so that flights no longer
arrive and depart in massive waves.

That reduces the number of employees, gates and aircraft it needs at
each airport, though it has increased wait times for connecting
passengers.

But United is reluctant to reduce the gates it controls at its hubs.
Doing so would give rivals such as Frontier an opportunity to seize more
market share.

United could learn from Ted, its new discount carrier. Ted has reduced
costs by increasing utilization of aircraft, crew and gates, all key to
lowering airport costs. United is already cutting hub costs by putting
smaller aircraft on many routes to match capacity with demand.

The airline must reduce costs to the point that it can charge
competitive fares and still cover its expenses. But that doesn't mean it
must match the lowest fares. Discounters can't yet match United's global
reach and business-class amenities.

"Many customers prefer the scope and convenience of the legacy airline,
and they always will," said Michael E. Levine, a law professor at Yale
University and former executive at Northwest and Continental airlines.

"United may end up with total costs that are higher than a
point-to-point airline like Southwest," he said. "But there are people
who will pay a premium for convenience."


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