Miami’s Unlikely Cost Drop is Good News But Won’t Help Lower Fares

There was some surprising news recently when it was revealed that Miami Airport’s operating costs per passenger aren’t going to climb nearly as high as previously thought. That is good news in a sense, but it’s not going to help bring fares down. It may seem strange, but the opposite may occur instead.

Miami has spent billions of dollars and several years on all sorts of new projects. Those projects are finally winding down, and now it’s time to just watch the operating costs climb. In 2012, costs had reached just shy of $20 per enplanement ($19.72 to be exact) while it was $18.51 the year before. That’s a VERY high number already, but the expectations were that it would climb to well over $30 per passenger. Now the outlook is much brighter. Fitch, an agency that rates Miami’s debt, says this:

The combination of rising passenger levels, growing non-airline revenues, and containment in operating costs results in [cost per enplanement] CPE rising to less than $22 by 2018. Earlier forecasts assumed CPE levels rising to $30 and higher over the same time period. Fitch notes the airport’s forecasted CPE may become a barrier to bring in new carrier service for domestic based traffic but is partially mitigated by higher yields typically attained by the airlines for international travel.

That does seem like good news on the surface, and it is. But it’s not all roses and sunshine.

Domestic Dominance
It’s important to keep in mind that while costs are dropping, the airport is still charging $20 per passenger and that’s a ton of money. In the domestic world (which accounts for a little more than half of Miami’s traffic), $20 is a huge chunk of a ticket and could easily push a flight’s profitability into the red. That’s why we’ve seen domestic airlines as well as some Caribbean airlines reduce or eliminate service at the airport in favor of much lower operating costs at Ft Lauderdale.

I should say “some” domestic airlines, not all, have reduced service. What’s left? The formerly-and-soon-to-again-be-mighty American. American has taken advantage of the fact that low cost carriers don’t want to bother flying to the airport with its high costs. Including American Eagle, American has increased domestic passengers nearly 20 percent since 2009.

American Miami Passenger Growth Domestically

Naturally, that means American has added flights while others stagnate or walk away. That has increased American’s share of domestic traffic in Miami significantly over the last few years. At the same time, fares have gone up 15 percent.

American Raises Fares Increases Share in Miami

So what we see is American growing more dominant in the market precisely because operating costs are so high. And as American adds service, operating costs drop making it more sensible for American to add even more service. The other airlines will be at a greater competitive disadvantage and aren’t going to add much, if any, service. And the costs are still high enough that new entrants aren’t going to touch the airport.

You might be tempted to compare this with the situation at Phoenix Sky Harbor that I wrote about last week, but there’s a difference. Sky Harbor is already an affordable airport. The spread between Miami and Ft Lauderdale, however, is so large that the threshold for convincing an airline to make the switch is much higher. Even with all the money Ft Lauderdale is spending today on lengthening a runway, it’s cost per enplanement is expect to top out at under $7. That’s actually similar to where Phoenix will end up. So with Miami’s still sky high, it’s hard to see how a low cost carrier would make that switch.

International Dynamics
Internationally it’s a little different because $20 is a much smaller percentage of the ticket price. Latin travel remains very strong in general and Miami is the epicenter of US-Latin travel. For that reason, there will always be robust service from a variety of carriers (including, yes, some misguided attempts by low cost carriers), though it remains to be seen what happens when Latin air travel demand starts to tank (as it will eventually). But no matter what, Miami will be the most important Latin airport in the US for years to come.

But looking toward Europe, we can see a different pattern emerging. KLM left the airport, and Lufthansa just axed its Dusseldorf route. But American and its partners continue to grow. In fact, oneworld-partner Air Berlin’s increase in service on the Miami-Dusseldorf route is probably one reason why Lufthansa walked away.

Miami will remain an important business and tourist destination, and for that reason, the big airlines around the world will continue to serve it. But the power of American’s hub means that oneworld and other partner airlines will be able to thrive much more, and they will be able to grow. Air Berlin has added service. BA is rumored to want to fly the A380 in. And Cathay Pacific has listed Miami as one of four finalists for service to Hong Kong. (I see no way Miami wins this, and it shouldn’t, but it was at least mentioned.) And don’t forget that TAM is leaving Star Alliance now that it merged with LAN so it can join oneworld as well.

If you’re American, you love this. Miami is your playground and the high costs act as a solid barrier to entry for other airlines that might want to come in and lower fares. And the fact that costs are in the $20 range instead of the $30+ range means that American’s service will do even better without tempting the low cost carriers. (Sure, Interjet is in the market to Mexico City and Gol flies to Santo Domingo, but those are very isolated efforts at best.)

If you like American, you live in Miami, and you don’t mind high fares in exchange for great nonstop service, you should be pretty happy about all this. But those looking for a little fare relief will still need to drive north until they see the signs for Ft Lauderdale.

18 Responses to Miami’s Unlikely Cost Drop is Good News But Won’t Help Lower Fares

  1. Andrew says:

    Cranky, if this lower CPE number is allowing AA to add even more domestic service, as you show, do you see this having an impact on the whole “will the new AA reduce flying at the CLT hub and shift that flying to MIA” question/debate?

    • CF says:

      Andrew – Good question. I don’t think it makes a difference. I would bet that a lot of the domestic service is focused on Latin connectivity, though of course Miami being as big as it is, there are local flights as well. But you can’t really use Miami as a good intra-South hub at all. Charlotte is way better designed for that and its costs are so much lower.

  2. If BA flys a 380 into MIA will it be because people really want to travel to South Florida or will BA see it may be better to send people to Latin America via AA in MIA and drop some of it’s own nonstop service. VS/BA fly to a number of Caribbean island and that can’t really be money making flights even if only done twice a week.

    CX would have been in MIA a long time ago if there was really a large market traveling HKG/China to Latin American. There has always been limited Asia-Latin America service so the market for more direct service must not be there. But what do I know.

    • CF says:

      David SF – I think more likely is that BA will see a much better opportunity to flow its passengers via Madrid and on to Iberia nonstops to South America. The US is a terrible place to connect for international travelers and Madrid is much better.

  3. There is a low cost train between Miami and Fort Lauderdale airport. Why drive?

    • Gary E says:

      Train does not go airport to airport. you need to take bus—>train—>bus

      • Depends on how well timed the connections are for the bus–>train–>bus. If they’re frequent enough and/or timed properly it shouldn’t be a problem.

        • Dan says:

          The train is Tri-Rail and runs about once every two hours off peak, twice that during peak times, though service interruptions are frequent and rarely announced. Cost MIA-FLL is $5. Construction at the MIA terminal has disrupted bus service and made for frequent comedic/dangerous dashes by drivers to connect with trains at the Hialeah station. Cab is costly but prefereable if your connection time is less than, say, 5 hours.

          • Yeah thats nowhere near frequent enough. It’d probably work if it got down to 30 minute frequencies off peak and 15 minute frequencies during peak.. That being said heavy rail doesn’t lend itself to those sorts of things.

  4. Jim says:

    MIA is putting all their eggs in one basket. Bad idea. AA is in a position to blackmail them. The day AA decides to cut back, they are screwed.

  5. Mike says:

    Any idea why KLM dropped service to MIA?

  6. I fly ONE WORLD more than any other system/airline. When going to Europe from LAX, and while comparing service and price, AA frequently loves to quote MIA either going or returning. After many bad incidents with either the rude or unreasonable treatment by TSA or the American/Cubans working for US Customs I stopped using MIA. It is not worth the headaches. When flying only to FL domestically to connect to another city in FL I find the AA pricing uncompetitive. Therefore I look to Orlando, Tampa or FT Myers. Any where but MIA. I know of others that are fed up with MIA for the same reasons.

    Most of the year Air Berlin flys direct to Germany from LAX, so does IBERIA (to Madrid), I use these lines as much as possible. Flying direct to Europe on either of these lines avoids MIA or any other domestic connection. AB also flies direct to Ft Myers, FL from Germany – thus avoiding MIA.

    If the AA/US AIR mega merger does occur there may be additional ONE WORLD options to avoid MIA. By the way, in a few days I will be flying to FL – via ORLANDO, not using AA.

  7. Arubaman says:

    Wait until Runway 10R/28L opens at FLL. Watch what happens then.

    • CF says:

      Arubaman – Are you talking about what will happen to costs when the runway extension opens at Ft Lauderdale? In 2012, cost per enplanement was $4.01. Taking into account all the current capital expenses, cost per enplanement should peak at $6.97. It’s nowhere near Miami.

  8. Arubaman says:

    Correct, Daddy-O!……Watch the traffic counts at FLL increase on the second runway. Double the previous traffic capability at roughly 1/3 the enplanement costs. Hmmmm!………By the way, how is my prediction that Indigo would divest its stake in Spirit and buy Frontier working out?

    • CF says:

      Arubaman – Looks to be happening. I think that if Indigo is willing to pump some money into Frontier, it could get very interesting.

      • Arubaman says:

        That’s what I’m talking about! I believe Indigo’s plans extend beyond Frontier. I believe this is an opening gambit. What do you think?

        • CF says:

          Arubaman – I would think they have aggressive expansion plans, but I would think it would be through internal growth more than mergers.

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