Network Hubs vs. Point-to-Network Hubs vs. Point-to-Point,Point,

Is There a Problem?Is There a Problem?

Robert J. GordonRobert J. GordonNorthwestern UniversityNorthwestern University

Airline Economics Seminar, Airline Economics Seminar, April 7, 2004April 7, 2004

““The Basic Business Model of the The Basic Business Model of the Network Carriers is Broken”Network Carriers is Broken”

““They will have to reinvent themselves or They will have to reinvent themselves or go out of business” Why?go out of business” Why?

WN, B6, FL have 30% cost advantageWN, B6, FL have 30% cost advantage Non-unionized workforce Non-unionized workforce Better business practicesBetter business practices

Selling most tickets over internetSelling most tickets over internet Higher utilization, shorter turns, no waiting at Higher utilization, shorter turns, no waiting at

hubs, B6 redeyeshubs, B6 redeyes Capacity share of LCCs in domestic U. S. is Capacity share of LCCs in domestic U. S. is

rapidly approaching 1/3rapidly approaching 1/3

The Indictment of HubsThe Indictment of Hubs(Economist, 3/27/04)(Economist, 3/27/04)

LCCsLCCs Simple point to pointSimple point to point No transfers, no baggage transfer, no loungesNo transfers, no baggage transfer, no lounges Charge for food and drinkCharge for food and drink

Network carriersNetwork carriers Planes sit around for a long time waiting for Planes sit around for a long time waiting for

connectionsconnections Flight crews hang around, ground staff hang Flight crews hang around, ground staff hang

aroundaround Key flaw, budget airlines turn a plane Key flaw, budget airlines turn a plane

around in 25 minutes while “it takes 90 around in 25 minutes while “it takes 90 minutes for a jumbo”minutes for a jumbo”

Some Observers have Predicted Some Observers have Predicted for for

a Decade that the future is a Decade that the future is point-to-point, the Network Hub point-to-point, the Network Hub

is Doomedis Doomed Why?Why? Naïve observers mesmerized by the Naïve observers mesmerized by the

inexorable advance of Southwestinexorable advance of Southwest Yes,Yes,

Southwest dominates short-haul point-to-point Southwest dominates short-haul point-to-point in markets where they compete. BWI, DAL, in markets where they compete. BWI, DAL, HOUHOU

Oops, “dominance” is not true when a hub Oops, “dominance” is not true when a hub carrier is on either end carrier is on either end

UA at SFO vs. WN at OAKUA at SFO vs. WN at OAKUA at ORD vs. WN at MDWUA at ORD vs. WN at MDWHP at PHX vs. WN at PHXHP at PHX vs. WN at PHX

WN’s Expansion has createdWN’s Expansion has createdA Hub and Long-haul CarrierA Hub and Long-haul Carrier

Southwest is now a major hub and long-haul Southwest is now a major hub and long-haul carrier. It supports its own flying by one-carrier. It supports its own flying by one-stops and connections through:stops and connections through: LAX, PHX, HOU, DAL, SLC, MCI, MDW, BNA, BWILAX, PHX, HOU, DAL, SLC, MCI, MDW, BNA, BWI For WN’s build-up at BWI, connecting is essentialFor WN’s build-up at BWI, connecting is essential

Does WN’s operational difference in Does WN’s operational difference in operating a hub predict a major change for operating a hub predict a major change for network legacies?network legacies? WN planes turn in 25 minutes at hubsWN planes turn in 25 minutes at hubs Passengers wait for the connection, the planes Passengers wait for the connection, the planes

don’t wait for the passengers. Many waits are 2 don’t wait for the passengers. Many waits are 2 hours+hours+

Even constrained to the Even constrained to the American Landscape, LCC’s ≠ American Landscape, LCC’s ≠

Point-to-PointPoint-to-Point Not just the evolution of WN into a hub Not just the evolution of WN into a hub

carriercarrier Look at the successful LCCs which operate Look at the successful LCCs which operate

a core, old-line, network hub operationa core, old-line, network hub operation Air Tran at ATLAir Tran at ATL Frontier at DENFrontier at DEN

JetBlue is differentJetBlue is different Huge local market at JFKHuge local market at JFK No need to connect, can fill planes with localNo need to connect, can fill planes with local Connecting is gravy, so far upstate NY and BTVConnecting is gravy, so far upstate NY and BTV

How Can a Network CarrierHow Can a Network CarrierMake Money Against a Massive Make Money Against a Massive

LCC Attack?LCC Attack?

No network carrier more under assault than BANo network carrier more under assault than BA RyanAir, EasyJet operate most of their capacity RyanAir, EasyJet operate most of their capacity

ex-Luton, Stansted, etc. to Europeex-Luton, Stansted, etc. to Europe ““The European market is going the same way as U. The European market is going the same way as U.

S. but it is all happening much faster” (Economist)S. but it is all happening much faster” (Economist) Aviation Strategy: LCC account for 33% of UK Aviation Strategy: LCC account for 33% of UK

domestic capacity, 33% UK-Europedomestic capacity, 33% UK-Europe Surely BA is reeling from this attack, on its Surely BA is reeling from this attack, on its

knees?knees?

Surprise! BA is not on its Surprise! BA is not on its KneesKnees

BA: Predicted to make $1.1 billion BA: Predicted to make $1.1 billion profit (£600) in year ending March profit (£600) in year ending March 2004, despite SARS!2004, despite SARS!

Emerging from recession and SARS, Emerging from recession and SARS, AF and LH are also highly profitableAF and LH are also highly profitable

Why are Big European hub carriers Why are Big European hub carriers successful despite the LCC invasion?successful despite the LCC invasion?

British Airways, what’s the British Airways, what’s the secret?secret?

$1.1 billion profits in past year$1.1 billion profits in past yearThe MOST affected of all European The MOST affected of all European

airlines by LCCs.airlines by LCCs.Ryanair, $9 to Barcelona, Charleroi, Ryanair, $9 to Barcelona, Charleroi,

Pescara, BergamoPescara, BergamoEasyjet to major competing airports like Easyjet to major competing airports like

AMSAMSYet major European hub network Yet major European hub network

carriers are not battling for the traffic carriers are not battling for the traffic from Luton to Pescarafrom Luton to Pescara

How European Hub Carriers How European Hub Carriers Differ,Differ,

Can we Count the Ways?Can we Count the Ways?Decades of Fighting the Charter Decades of Fighting the Charter

CarriersCarriersB6 15*JFK-FLLB6 15*JFK-FLLGermany? Germany? UrlaubsflügeUrlaubsflüge

5*daily Paderborn/Lippstadt to Majorca5*daily Paderborn/Lippstadt to MajorcaMany others all over the Mediterranean from Many others all over the Mediterranean from

Tenerife to RhodesTenerife to RhodesMore still from Hamburg, Berlin, DusseldorfMore still from Hamburg, Berlin, DusseldorfThese are on carriers you never heard of: These are on carriers you never heard of:

Air Berlin, CondorAir Berlin, CondorBritain? The same, “bucket shops”Britain? The same, “bucket shops”

More Ways Europe is More Ways Europe is DifferentDifferent

Decades of Fighting the High-speed TrainDecades of Fighting the High-speed TrainMost Important France, then Germany and Most Important France, then Germany and

NL, least important BritainNL, least important BritainLess VFR TravelLess VFR Travel

Ryanair takes people to French villages (Pau) Ryanair takes people to French villages (Pau) where they don’t know anyonewhere they don’t know anyoneNot Like U. S. where everyone has relatives Not Like U. S. where everyone has relatives

everywhereeverywhereRyanair, Easyjet are creating travel that Ryanair, Easyjet are creating travel that

didn’t exist before, not just diverting from BAdidn’t exist before, not just diverting from BA

European Network Carriers do European Network Carriers do what they do best, NETWORK!what they do best, NETWORK!

Misguided financial analysis, heard for yearsMisguided financial analysis, heard for years ““BA makes all its money on its intercontinental BA makes all its money on its intercontinental

network, loses money in Europe”network, loses money in Europe” BUT BA could not have that intercontinental BUT BA could not have that intercontinental

network without backup from Europenetwork without backup from Europe Poor cost and revenue accountingPoor cost and revenue accounting A network is a network, you can’t unravel itA network is a network, you can’t unravel it

Pan Am in the late 1980s was the oppositePan Am in the late 1980s was the opposite By never becoming dependent on charter, By never becoming dependent on charter,

rail, VFR traffic, European airlines do what rail, VFR traffic, European airlines do what they do bestthey do best

BA and LH,Where are they BA and LH,Where are they Flying?Flying?

(no code-shares, explain)(no code-shares, explain)           

    LHR LGW FRA MUC

           

Domestic   48 41 85 80

Western Europe   130 62 138 108

Eastern Europe   15 0 27 19

Middle East   10 0 11 4

Africa   10 0 7 1

Asia   10 0 13 3

North America   35 5 25 3

Latin America   3 4 3 0

           

Total   261 112 309 218

# not Dom/WE   83 9 86 30

% not Dom/WE   32 8 28 14

Contrast with U. S. Network Contrast with U. S. Network CarriersCarriers

Even the Most International of the U. S. Even the Most International of the U. S. Network carriers don’t match BA or LHNetwork carriers don’t match BA or LH

UA:UA: 13 international wide-body departures each 13 international wide-body departures each

from SFO, ORD, IADfrom SFO, ORD, IAD ORD: 13 out of 620, barely 2%ORD: 13 out of 620, barely 2%

Smaller planes (DL)Smaller planes (DL) More dependence on Florida, LAS, PHX, More dependence on Florida, LAS, PHX,

prime territory for LCCs, would have been prime territory for LCCs, would have been charter decades ago in Europecharter decades ago in Europe

Other Accusations at Other Accusations at NetworkingNetworking

““New Longer-range planes undermine New Longer-range planes undermine dominance of hubs in many regions”dominance of hubs in many regions” Does SQ flying SIN-LAX undermine any hub or Does SQ flying SIN-LAX undermine any hub or

just strengthen SIN and LAX as hubs?just strengthen SIN and LAX as hubs? Does EW flying DXB-ORD undermine any hub or Does EW flying DXB-ORD undermine any hub or

just strengthen DXB and ORD as hubs?just strengthen DXB and ORD as hubs? On the contrary, smaller planes have On the contrary, smaller planes have

strengthened hubs (they are not flying P-to-strengthened hubs (they are not flying P-to-P)P) 744 to 777 on Pacific (DFW-NRT, ORD-KIX)744 to 777 on Pacific (DFW-NRT, ORD-KIX) 747 to 763, 757 on Atlantic (EWR-EDI)747 to 763, 757 on Atlantic (EWR-EDI)

The Future of U. S. Network The Future of U. S. Network HubsHubs

The solutions?The solutions? Network where the LCCs “aren’t”Network where the LCCs “aren’t”

More international supports the domestic More international supports the domestic networknetwork

This year:This year: CO EWR-OSL, EWR-EDICO EWR-OSL, EWR-EDI UA ORD-KIX, SFO-PEKUA ORD-KIX, SFO-PEK

The inexorable march of the RJs: The inexorable march of the RJs: 35=>50=>70=>90=>100 seat RJs35=>50=>70=>90=>100 seat RJs RDU-ORD last week on a 100-seat RJRDU-ORD last week on a 100-seat RJ RJs vs. the congestion problem: the RJs vs. the congestion problem: the

compromise at ORDcompromise at ORD

It’s the COSTS not the It’s the COSTS not the CONCEPTCONCEPT

No-brainer, any network carrier can make No-brainer, any network carrier can make money at any hub with the right costsmoney at any hub with the right costs

Efficiency? The rolling hub conceptEfficiency? The rolling hub concept WN’s achievement vs. AA’s attemptWN’s achievement vs. AA’s attempt AW&ST: AW&ST:

AA Shaved 4 min at hub, 8 min at spokeAA Shaved 4 min at hub, 8 min at spokeMedian connecting time extended 7 min, mean much Median connecting time extended 7 min, mean much

longerlonger4% loss of market share vs. UA at ORD4% loss of market share vs. UA at ORD

The recipe for monopoly hubs? No hub is The recipe for monopoly hubs? No hub is a monopolya monopoly

Technology is Steadily Attacking Technology is Steadily Attacking CostsCosts

The spread of technology helps the The spread of technology helps the legacy carriers as much as the LCCslegacy carriers as much as the LCCsInternet distributionInternet distributionAt-home check-inAt-home check-inLobby e-kiosk check-inLobby e-kiosk check-inIn-concourse kiosk rebookingIn-concourse kiosk rebookingAt-gate bar-code readers, EGRAt-gate bar-code readers, EGR

Where Have the Lobby Lines Gone?Where Have the Lobby Lines Gone?Crandall’s comment about oil pricesCrandall’s comment about oil prices

The Real Problem: Legacy not The Real Problem: Legacy not NetworkNetwork

We refer to “Legacy Network Carriers”We refer to “Legacy Network Carriers” The problem is:The problem is:

The “legacy”The “legacy” Not the “network”Not the “network”

Any old corporation unwise enough to create Any old corporation unwise enough to create defined benefit pension plans is saddled with themdefined benefit pension plans is saddled with them LTV, Bethlehem SteelLTV, Bethlehem Steel

Vs. Defined contribution, 401Ks, profit sharing (in Vs. Defined contribution, 401Ks, profit sharing (in cash, not company stock, a secret of WN)cash, not company stock, a secret of WN)

Legacy carriers digging themselves out from Legacy carriers digging themselves out from outdated union contracts and lease rates. AA most outdated union contracts and lease rates. AA most successful by cutting costs out of bankruptcy. Still successful by cutting costs out of bankruptcy. Still to come: NW, DLto come: NW, DL

The Future of NetworkThe Future of NetworkHub CarriersHub Carriers

Escaping the LCC competition, Escaping the LCC competition, inexorable drive to international inexorable drive to international routes that can only be fed from a routes that can only be fed from a networknetworkWhether CO flying to 20 cities in Europe Whether CO flying to 20 cities in Europe

from EWR or to 20 cities in Mexico from from EWR or to 20 cities in Mexico from IAH with RJsIAH with RJs

Whether UA chipping away at China route Whether UA chipping away at China route rights, next to come, nonstop SF-rights, next to come, nonstop SF-Guangzhou?Guangzhou?

Hollowing Out the MiddleHollowing Out the Middle

Current uniformly sized 737, M80 fleets Current uniformly sized 737, M80 fleets concentrate capacity in 110-140 seat concentrate capacity in 110-140 seat rangerange

Too large for domestic, too small for intlToo large for domestic, too small for intl Wave of the futureWave of the future

EMB 170, 190EMB 170, 190 CRJ 70CRJ 70 Not a happy future for the 737Not a happy future for the 737

AA reinventing east coast via ERJs with 35, AA reinventing east coast via ERJs with 35, 45 seats (BOS-LGA-PHL-DCA-RDU)45 seats (BOS-LGA-PHL-DCA-RDU)

Legacy Carriers will Legacy Carriers will Hunker Down to HubsHunker Down to Hubs

B6 will push AA and UA off transcons except for a B6 will push AA and UA off transcons except for a few “movie star” routes and international few “movie star” routes and international connectionsconnections

Big hubs are favored over small hubsBig hubs are favored over small hubs More network connectionsMore network connections More ability to reschedule to rolling banks More ability to reschedule to rolling banks

Hubs that may be doomed (too small, no Hubs that may be doomed (too small, no international)international) US in general, esp. PITUS in general, esp. PIT DL at SLCDL at SLC CO at CLECO at CLE

Can AA and DL at JFK survive B6 onslaught?Can AA and DL at JFK survive B6 onslaught?

Hubs of the FutureHubs of the Future

Any city with low local traffic generation Any city with low local traffic generation should look like CVG, with RJ feedshould look like CVG, with RJ feed Could STL have been saved?Could STL have been saved? Will NW at MEM be viable?Will NW at MEM be viable?

Hubs that will be here 20 years from nowHubs that will be here 20 years from now All of theseAll of these

AA at MIA, DFW, ORDAA at MIA, DFW, ORDCO at EWR, IAHCO at EWR, IAHDL at ATL, CVG (but not DFW, SLC)DL at ATL, CVG (but not DFW, SLC)NW at DTW, MSPNW at DTW, MSPUA at IAD, ORD, DEN, SFO (not LAX)UA at IAD, ORD, DEN, SFO (not LAX)

US? Silence . . . .US? Silence . . . .