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.

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