Raymond James held its 2021 Diversified Industrials Conference last week, and as is always the case, American’s Chief Revenue Officer Vasu Raja had plenty of substantive, interesting things to say. He touched on the airline’s strategy to overfly hubs to get an advantage, something that is not conventional wisdom in this industry. You can watch the whole thing on American’s website, but I’m going to break this down today.
[Disclosure: I was compensated to participate on the airports panel at the Raymond James event, but that had nothing to do with Vasu or American. I figured it was still worth disclosing.]
As Savi Syth from Raymond James explained it in her note on Vasu’s talk:
Over time, American’s view on hubs has shifted from serving specific and distinct purposes to providing as many connections/itineraries as possible, with the same domestic destination served by multiple hubs. However, hubs retain more of a specific and distinct mission when it comes to long-haul international service.
This is an unwritten rule, of sorts, in the airline industry. The idea is that if you overfly your own hub, say go from Dallas/Fort Worth to Long Beach, you’re going to weaken the hubs you fly over by diverting traffic. In this example, that would be Phoenix. This is one of the main reasons there had been so much speculation about Phoenix going away as a hub. With LA on one side and DFW on the other, why do you need Phoenix? With DFW expanding so much, Phoenix’s potential specialty shrinks more and more… unless you don’t need a specialty as Vasu suggests.
Despite what Vasu said, this strategy was around before the pandemic. American learned long ago that DFW and Charlotte could work to just about anywhere. They already served their catchments well, but to grow, they needed to go longer. And so they did. DFW picked up flights to Flagstaff, Monterey, and San Luis Obispo among others.
To illustrate this visually, I took some liberties to set boundaries. I looked all destinations from DFW within the continental US that were over 1,000 miles away as served this November vs five years ago. Chicago is 800 miles north, Phoenix is 870 miles west and Charlotte is 940 east. So, by taking destinations over 1,000 miles, it’s going to isolate the overflights, even though it’s not perfect.
DFW Continental US Destinations Further Than 1,000 Miles
July 2016 vs July 2021
Gray: Existed in 2016
Green: Additional Flying in 2021
That is a whole lot of new domestic routes over 1,000 miles, and DFW is not alone.
American Stands Out
I dug into Cirium data to put together a chart looking at three of the domestic hubs for each of the big three airlines. Because of the placement of other hubs, I had to vary distances. I defaulted to 1,000 miles, but for Delta in Detroit and Minneapolis/St Paul as well as American in Charlotte, I lowered it to 600 miles due to geography. Here’s what we see.
Change in Continental US Hub Overflight Destinations by Hub, by Airline
July 2016 vs July 2021
Number of Continental US destinations by hub, by airline greater than 1,000 miles (Charlotte/Detroit/Minneapolis use 600 miles)
What we can see here is that over the last 5 years, not much has changed for Delta at all. In fact, Minneapolis has lost destinations as Delta has tried to rationalize how that hub works with the other, surrounding hubs.
United saw little change as well except in Denver. United has been bulking Denver up significantly, even before the pandemic made the Mountain West trendy and cool. It’s not a surprise to see it, but I should note that 11 of the newly-added destinations are in the Southeast US and Florida. These are leisure destinations that don’t have great connectivity to the Mountain West through other hubs. Houston is also not the perfect hub from a lot of places north and west, so this is more complementary and less overflight.
Then there’s American which really has just exploded overflight service in these hubs, even including Chicago. This change is really about turning those connecting hubs into even bigger beasts. And when that happens, it creates better utility for travelers in the spokes.
An Expansion of the Merger Plan: Harrisburg, PA
This idea goes back to the US Airways justification for the merger with American. There were a whole host of cities that had service to some hubs on US Airways and others on American, but they didn’t provide enough connectivity in different directions to create a whole solution for people who lived in those cities. Combining the two airlines created a true competitor to United and/or Delta depending upon the city. Or at least, that was the idea. So now, by adding even more hubs into the equation, American can in theory become even more useful.
I went poking around Cirium to pull some examples, and I found a couple to share. Let’s start in the northeast with good old Harrisburg, PA. At the time of the merger, American had westbound flying covered via Chicago. Meanwhile US Airways had north-south flying covered via Philly and Charlotte (along with a rare Boston point-to-point route). DFW was added to the schedule in June 2019 which created much better connectivity to the Southwest US. Let’s go back a decade and see what happened.
Domestic Harrisburg Performance 2011 – 2020
These lines show the difference between passenger share and seat share in the market. At first blush, it looks like American was way overperforming while US Airways was doing far worse, but there’s more to it here. Notice that US Airways did much better in the winter. That’s probably because its network was designed to get people down to Florida during peak season. (Also, that winter of 2012/2013 where US Airways really crushed it? That was right after Southwest pulled AirTran out of the market.)
On top of that, American had only about 6 percent of the market while US Airways had north of 30 percent. So the scales are just very different, and if you add them together, it generally just echoes the US Airways underperformance.
When the airlines merged starting in 2014 and ending in 2015, you can see that the long term trend has been positive. The combined American began taking a passenger share closer and closer to its seat share. And the shaded gray shows that the average fare hasn’t suffered. If anything, it has come up a bit.
Adding DFW in 2019 only helps American get better coverage and become stronger… but the numbers look completely insane once the pandemic begins, so I couldn’t include that here. It requires normalizing for blocked middle seats, and I just don’t have the data to support that properly.
An Expansion of the Merger Plan: Monterey, CA
Now let’s look on the other coast. Here’s Monterey.
Domestic Monterey Performance 2011 – 2020
Here you can see it’s US Airways that outperformed pre-merger with its Phoenix flights while American lagged serving only LA. The LA service was killed right around the time of the merger’s completion, and then American focused solely on Phoenix.
It looks like the airline suffered until the summer of 2018 when it figured out the right mix and then it started to do better with rising fares. Interestingly, United left Denver between July 2014 and October 2018. When it returned, you can see fares may have come down a bit, but the damage to American could have been greater if not for American bringing the DFW flight into the market.
There are a million ways to slice and dice this data to the point where your head will spin and you will start thinking up is down if you get too far into the weeds. But what is clear is the broad idea behind American’s plan to increase hub overflight… The more connectivity you have, the more relevant you become. Delta and United may not agree or at least not find it necessary to the same extent, but if American starts seeing more success, they will have no choice but to pay closer attention.
26 comments on “American Overflies Its Hubs to Get an Edge”
This shows more than anything that the bigger the hub the more efficient it is. American can offer more connections from Monterey through DFW than Phoenix or LA, both domestic and international.
Delta has the same advantages in Atlanta.
But it doesn’t work for all hubs, as you have to already have a strong presence. Plus at that level of traffic you can manage RJ partners better. It definitely takes a job with a lot of gate and runway capacity as well. CLT’s constraint is that they only have 3 runways for jets and it can get congested.
But the larger hubs can also build the smaller ones. Example: American can build enough presence in a place like Lubbock or Oklahoma City or Asheville through the nearest big hub that they can slide in an extra flight to the farther major hub to add connections.
I saw a news report some years ago & the gist was that ultimately the US will have a few global super-hubs such as ATL, EWR/ JFK/ ORD, LAX/ SFO & DFW. I guess this is what American was referring to in some form with overflying certain hubs. The same global hub process is occurring in other parts of the world such as Asia, the middle east & the EU.
A quibble, Sean. EWR, JFK, and LAX are definitely NOT superhubs. They are busy international centers but nowhere near as busy as hubs like DFW, ATL, or even IAH. They don’t have the gate and runway capacity for that.
But DFW & IAH don’t have the same international coverage that of JFK/ EWR, LAX or ORD despite the smaller airport footprint. You can somewhat solve the JFK/ EWR runway & gate constraint by limiting the number of regional flights. Besides how many flights do you need to BUF & BWI?
International is only a small percentage of a major hub’s flights. A lot of traffic at places like JFK and LAX is originating traffic.
The most efficient (and profitable) hubs offer many different banks of flights, so there are five, six even eight flights a day from secondary markets through the hub. Doing so means your people are working steadily through the day instead of having blocks of time in which they aren’t doing anything.
It’s more efficient for an airline to have 8 RJ flights than 3 mainline flights in a day. And runway and gate constraints mean you can only have so many flights at one time.
If you have the gate and runway capacity, you can have seven or eight flights a day to Buffalo (and fill them).because you can offer so many more destinations for them to connect to.
Economies of scale. Every flight added to a hub enhances every other flight.
Is this really a surprise ? I would have expected this from AA the most. After all, they were the only carrier not to rationalize their hub structure after their merger. The pandemic has now forced them to do something.
The bigger question in my mind is what do they do in the East. PHL, NYC, DCA, CLT……lots of overlap there.
While it’s possible to connect in DCA, I believe the vast majority of service here is O&D.
I realize serving smaller western cities via DFW literally overflies PHX, but I’m not sure it meets the true intent of overflying. The PHX hub was not designed to serve second-tier eastern cities. For example, the only cities served in FL are MCO, MIA, & TPA. If western people want to go anywhere else, they’re forced to connect in DFW or CLT. I wouldn’t consider that “overflying”.
A couple of random musings:
Why do so many people feel that similar airlines have to have precisely the same business model? Why can’t each carrier be slightly different? It seems to me that Southwest has begun using more connecting “hubs” in recent years. So why can’t legacy airlines fly point-to-point or overfly major hubs when they have data that suggest that it makes sense? It could be that Southwest and the legacies may be more flexible about where they fly in the future. If it helps the bottom line, then why not do it?
The fact that some airlines rationalized their “redundant” hubs after a merger doesn’t mean it’s the best course of action in every case. It seems to me (and it’s just my observation) that American and US Airways had rationalized their hubs before their merger. Again, why do different airlines have to do things precisely the same way?
How can any of us know why airlines make the choices they do? Most readily available data reflect the past. The past doesn’t always predict the future. Sometimes a company just has to make an educated guess – to take a shot. Airline boards, executives, and route planners will make mistakes. None of us are immune from those. If I had a dollar for every time I’ve made a mistake, I’d make Warren Buffet look like a pauper.
Reiterating what I wrote above from a slightly different angle, I think it’s a mistake to think that all of these moves will be permanent. But some could be. It’s possible that this pandemic, like most setbacks in life, will make airlines rethink their business models to some extent and become more flexible about how they operate. It’s possible that Southwest and the legacies may be adopting more and more aspects of each others’ business models. Stay tuned.
Using my hometown CHS as an anecdote here (because our sense of self importance is only rivaled by some boroughs of New York), but Delta’s unwillingness to overfly Atlanta is very noticeable… and maddening. Over the past few years:
American? Adding destinations left and right (DFW, ORD, and just about every other hub & focus city east of the Mississippi). I’ll also give them credit for having SEA (Alaska), LAX (JetBlue), and LHR (BA) in their partner network from here.
United? Added DEN, IAH, and a bunch of little stuff in the rust belt to compete with the ULCCs.
Delta? If you die in Charleston, you’ll still have to connect in Atlanta on your way to heaven. Really frustrating that (other than a handful of obligatory regionals to NYC, Boston, and Detroit) almost every single one of their seats is ATL or bust.
In defense of Delta, Atlanta is the hub you want to fly into since it’s the one that connects to most of its network. It’s a quick flight to Atlanta and then pretty much anywhere in the world on your second flight. I haven’t flown out of Charleston, but I have flown ATL-SAV and ATL-JAX quite a bit, which are quite similar.
I get the rationale, and understand why they do it. I just want my SLC / SEA / MSP / LAX flights and don’t think we’ll ever get them until there’s a strategic direction shift about willingness to overfly ATL.
It looks like AA is taking Charlotte and DFW and making them do what Atlanta does for DL. In some ways it works better since you can flow east/west traffic through DFW and north/south traffic through Charlotte.
I’m curious how DFW – Bangor will work long term. Bangor is a small city in rural northern/central Maine. I get that people like to go to Acadia and it’s the closest airport, but is that really enough to make that flight sustainable?
That flight (DFW-BGR) is seasonal. This year, it ran a few times in July, every other day in August, will run daily in September and October, once in November, then disappears. I don’t see it in the schedule for next year yet. PWM is similar, except it started in May.
I believe several of AA’s flights to TVC (Traverse City, Michigan) from its hubs are seasonal too, and I’m sure there are plenty of other examples for outdoor destinations in the northern half of the US. Even DL added a nonstop to TVC that bypasses its hub (BOS-TVC, bypassing the usual connection in DTW).
TVC is a similar situation to BGR, lots of water and outdoor activities, and plenty of summer cabins/homes in the area, but like BGR, TVC isn’t known for its skiing (though it does have some), and isn’t an area that really attracts people from other parts of the country in the colder months.
I think of Portland as more of the coastal city since it’s right on the coast. Bangor is about an hour from the coast by car, though there is a polluted river that runs on the edge of the city.
The Maine coast is a major summer recreation area, and especially when people are less likely to travel overseas it’s a desirable destination.
The Maine coast is also attractive to people in Texas and surrounding areas where it is oppressively hot all summer.
Doesnt take much to fill a 319 once a day with people from Texas, Oklahoma, Louisiana, etc looking to escape the heat and get a long way from home but still be in the US.
OK I think I fly too much. I looked at Brett’s list of cities over 1,000 miles from DFW served nonstop by American, and the only ones I haven’t flown on are Yuma, Santa Barbara, and IDA.
Gee, so AA is finally figuring out how WN works. Now maybe they’ll figure out that swapping Eagle flights with mainline aircraft and dropping the fare generates even more traffic and ultimately more revenue.
When you look at flying WN from coast to coast, you can connect in ATL, BNA, MDW, BWI, DAL, STL, HOU, DEN, PHX, LAS. And guess what- it works really well!
Since American has “favored” the redevelopment of certain hubs over others during the covid era moreso than other multi-hub airlines, it isn’t a surprise that AA will end up overflying certain hubs.
Since other airlines have intentionally been much slower to return capacity but have done it across all of their hubs proportionate to local demand – while growing but not passing over certain hubs – it isn’t a surprise that AA might end up with some short term capacity advantages in some spoke cities.
The real test of the success of AA’s strategies will be when demand returns to some level of normal and will have to be measured across all hubs and all spokes. Other airlines are already returning higher percentages of capacity to markets than they did a year ago.
Tim, I’m more than a bit surprised it took you so long to weigh in. It might be useful to remember that Delta was beginning to do some overflying of its hubs pre-pandemic as well. But, of course, if Delta does something, it’s pure genius. But if American or United do exactly the same thing, it’s pure folly.
As I wrote above, I’m of the opinion, which could be dead wrong, that we’ll begin to see more point-to-point flying by the traditional hub and spoke airlines, while we’ll see a continuing move by Southwest to create more connecting opportunities in its larger cities.
To your last paragraph, the real test of all airline strategies, not only American’s, is how they’ll perform when things return to “normal.” And at this point, no one knows what the new normal will look like. If you believe what airline managements are saying, there will be an increased emphasis on operational flexibility, and less reliance on traditional airline thinking. It should be interesting to see what happens in the next few years.
As I noted elsewhere, my neighbor across the street passed away from covid over the weekend and was buried today. I have done what I can to help the family.
Airlines regularly overfly hubs but they usually do that when demand is strong enough to not cannibalize service from the closest or largest hub served from a spoke. I don’t recall ever saying that anyone was brilliant or stupid for overflying hubs per se but I have commented that the economics of small gauge long flights are harder to make work for any airline.
Airlines are clearly trying to gain advantages and I don’t expect that to change. The positives from overflying hubs have to be considered alongside market and revenue share gains and losses across the network. We simply cannot tell that with any certainty about any airline until normal demand levels return – which they likely will not do until the spring of 2022 at the earliest – and airlines decide what they want to do with each of their pre-covid hubs and focus cities – and then competitors also weigh in. Even if covid ended in a few weeks, we probably won’t see the final outcome of covid era induced hub restructuring until this time next year. We are agreement that we live in a “temporary” era.
Tim, I didn’t see your other comments. I’m sorry to hear about your neighbor. My condolences. With all due respect, you consistently imply that Delta is perfect and the other legacy airlines are flawed in virtually everything you write here and elsewhere. I agree that Delta does a lot of things extremely well, but it’s not quite as perfect as you suggest. No business is perfect. Businesses are run by and employ human beings. Human beings aren’t perfect. They have bad days. They make mistakes. A baseball position player can make it to the Hall of Fame if he gets 30 hits for every 100 times he comes to bat. No player in sports history has been perfect every day. Don Larsen threw a perfect game in the World Series, but he was a good, not Hall-of-Fame, player overall. Enough sports analogies. What I think we can all agree about is that it will be interesting to see how airlines and the public at large adapt to the new normal, whatever that turns out to be.
Memphis departures have a few overflys: AA overflys CLT to DCA/PHL/LGA and DFW to PHX. WN overflys DAL/DEN to PHX. DL overflys SLC to LAX. UA overf;ys IAD to EWR
Sorry I forgot one. Mid-month September when the flight resumes DL will overfly ATL to LGA.