Delta’s Half-Empty Threat to Shrink Atlanta

My posts have definitely been traveling around the world this week, so let’s bring it back home. Let’s talk Delta. The airline is having a spat with its largest airport, Atlanta, over new construction that will Delta Atlanta Fightinevitably raise the cost of operating at the airport. Delta is so unhappy that they’re threatening to move traffic to other airports that are more cost effective. So should you Atlantans worry that you’re going to lose a ton of flights to other airports? No. Might you lose some flights? Sure. That’s why I consider this a “half-empty” threat.

A Delta spokesperson was quoted as saying, “Over time, if the cost per passenger doubles at [Atlanta], it’s Delta’s responsibility to consider the advantage of routing some of the two-thirds of passengers connecting here to hubs where the costs are lower.” Yeah, sure. Too bad that economics don’t agree.

It’s a basic rule of hub operations that you need to have a local traffic base. You can’t just create a hub in the middle of nowhere and send all your passengers there to connect. That idea has been floated before (Mid America Airport WAY outside St Louis), but it’s never drawn any serious attention. Instead, we’ve seen smaller local population bases receive hubs that were overbuilt and they’ve now been scaled back. (Pittsburgh? St Louis?) Connecting traffic isn’t profitable enough to base your entire operation on it. So when Delta says it’s going to move a bunch of its connecting traffic to places like Memphis, that seems to be a threat that has no teeth.

Memphis may have local traffic, but its hub is already more than serving that local traffic. Atlanta is the best market in all of the southeastern US, and Delta would be insane to move flights away from that population base solely to connect people over Memphis. But don’t think that means this threat is completely empty. While I can’t imagine a massive shift of flights to Memphis (neither can Memphis, apparently), I think it’s highly likely that some flights in Atlanta will disappear as costs rise.

This one is basic math. If your costs rise, then you need to make more money for each flight to be profitable. If a flight is relatively marginal now, it will be a money loser under the new structure and that flight will disappear. That doesn’t mean that the flight will move to Memphis. It just means it will go away.

So, the Atlanta airport has some serious thinking to do here. Do they really need that massive new international terminal for $1.6 billion? If so, then they have to be willing to face the consequences of raising their costs to airlines. That will most likely mean fewer flights, but it probably won’t be nearly as dire as Delta is making it sound. So, don’t get excited if you live in Memphis. You’re not going to see any huge growth simply because your airport is cheaper.

13 Responses to Delta’s Half-Empty Threat to Shrink Atlanta

  1. The Traveling Optimist says:

    The current “new” international terminal is inadequate and painfully outdated just to even look at much less experience. It’s like the TBIT only bigger.

    And DL shouldn’t whine. Their decision to “channel Pan Am” and fly everywhere under the sun has a lot to do with ATL trying to accommodate them.

    Cranky is right. All this adds up to is 4x/BNA instead of 5x/daily and other similar moves. The fact remains that all those shiny new international flights and remaining domestic services need domestic feed. And their customers don’t need confusion as to which hub their connections are built over.

  2. Eric says:

    As always Cranky is spot on and, as I have said before, remember allot of ‘new Delta’ is run by ‘old Northwest’. This is a tried and true NWA play used on MAC in MSP when MAC would not play ball. This hardball creates two positive outcomes for DL: 1) possibly squeeze some of the fixed costs out of their fortress hub and 2) raitonalize & justify (to shareholders) a pull down of frequency that is in the pipeline already.

    Now, IMO, there are some traffic flows that are better served by CVG & MEM (eg gulf coast to the midwest or mid-atlantic to the west) and they already have capital investment in those facilities that they will not be able to walk away from for a while….might as well use it on right-sized aircraft . In the end, it may be a GOOD thing for ATL to loose some of the RJ2RJ flying and free up gate space and airside congestion.

  3. The Traveling Optimist says:

    Eric – Agreed on traffic flow using CVG & MEM but recall the failed AA dual-hub experiment with BNA/RDU.

    If DL already has metal flying in to/out of ATL to the same O&Ds, while out of the way, adding/increasing service via the smaller two will simply double the connecting options. ie. JAN-MCI via MEM or ATL instead of just ATL. Some redundancies are inevitable in a multi-hub system but to purposely create them?

    Again, I further agree that ATL will really only benefit from DL’s blustering. New terminal, purpose built for the future (see LAX) and less crowded skies. Sounds win-win to me.

  4. Jason H says:

    From the news reports it wasn’t just Delta that was saying they would have to review flights if costs rise. Airtran said much the same thing according to news reports I saw, so in effect ATL is risking both DL and Airtran flights if they don’t control costs at the new terminal.

  5. Eric says:

    Yes, I am aware of the failed science expierament with BNA/RDU; but those were organic projects, not pre-exsisting hub structures…and had an no international scope.

    Lets use JAN as an example…say (this is all hypothetical) the 0900 departure with 50 seats has only 2 pax going to ATL; with the rest going to ORD,MDW,DTW,SDF,DCA,BOS & STL…connecting to other RJs mind you. Those 48 can be just as well served using MEM..in fact perhaps better, with a shorter min connect time. Obviously the JAN-ATL O&D is till there, and many connectionscombinations that work only in ATL…but they can cut frequency (and cost) from 8x a day to 5 while still giving the JAN market the connectivity it demands. So its not so much a redundancy as making use of the facilities and equiptment they are hamstrung with.

  6. CF says:

    Jason H – Yeah, I saw AirTran jumped on the bandwagon after Delta spoke up. I’m actually glad to see both airlines fighting Atlanta. Airports get away with spending too much with the assumption they can just pass the costs on. The airlines can and should be fighting back much more. This threat isn’t empty, but it shouldn’t scare the locals in Atlanta to think that they’ll lose all their service.

    Eric and Optimist – Splitting hubs like that doesn’t really make any sense. When you split hubs, you make it less convenient for the local population while probably marginally increasing convenience for the connecting passengers if at all. The focus should be on the locals, especially when you have a market as big as Atlanta.

  7. Gary says:

    Dear Delta

    I whole-heartedly support your move to draw down capacity at Atlanta Hartsfield-Jackson International. In fact, I LUV the idea! ;-)

    Sincerely,

    GK

  8. The Traveling Optimist says:

    CF – I agree that splitting hubs is not the way to go. Any reduction in service can sometimes make the locals nervous about the viability of their air service, however unrealistic the threats from the airline.

    At the same time, while I don’t approve of runaway municipal spending I look to the often decried and much maligned situation at LAX. An intransigent city council has let a major international gateway go to seed. Also, like you spoke out against such frivolity, some of the spending finally approved has gone to cosmetics (the wave ceiling design).

    A balance is needed. If ATL wants to compete as a viable Eastern (rest in peace) US gateway, it needs a functional and flexible new international terminal. If DL wants to continue to dominate ATL and fly to every viable corner of the earth from that city, then it needs to support a reasonable (whatever that is) increase in fees to do it.

    No one wants another LAX or MIA but at the same time I tire quickly of airlines not willing to pay fairly for the infrastructure improvements they demand.

  9. The Traveling Optimist says:

    Nice touch, Gary. When will the LUV come to ATL? Been waiting on that one for years, now, sir. :-)

  10. CF says:

    Optimist – You’ll get no disagreement from me. If we use my favorite example, LAX, I don’t think anyone would deny that they need to put money into that place. But spending billions of dollars to make it pretty is a completely waste of money. I don’t know much about the Atlanta project, so I can’t comment on it too much. If the project is to build a palace like LAX wants to do, then it should be scaled back. But if it’s really a worthy $1.6 billion investment in a massive terminal, then that’s fine. Still, the airlines are the ones that need to keep the airports honest. I’m guessing Delta and AirTran are trying to do just that.

  11. Ari says:

    “This one is basic math. If your costs rise, then you need to make more money for each flight to be profitable.”

    I thought in aviation you’re only supposed to get marketshare.

    $1.6 b doesn’t seem to buy as much terminal space as before. In China it’s a whole different matter.

  12. CF says:

    Ari – It depends on if it’s an odd week (load factor) or an even week (revenue), of course. ;)

    $1.6b is double what B6 paid for its new JFK terminal and $0.5b more than Indy paid for its entirely new terminal (including taxiways and a new tower). So, without having any actual knowledge of the project, comps make it seem that there could be some cost-cutting in the project. I just don’t know how much.

  13. Theo says:

    LOL CF, nice info in your posts, i’m learning so much just from watching you and Eric’s responses.

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