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.
