Wednesday, February 12, 2020

Oklahoma City: No Longer a Fly Over City

For those that know me professionally, I lived in Oklahoma City for nearly three years. In the first year and a half, I was commuting mostly daily between Dallas and Oklahoma City by air or by car. In April 2018, Southwest reduced DAL-OKC from 4x to 3x which, for a commuter, made daily commuting difficult. For the next six months, I drove weekly to Dallas in a crashpad. I would finally throw in the towel in September 2018. And yes, if you were wondering, it was my team that decided to reduce DAL-OKC (which I entirely supported).

This post, however, is not about me. Instead, I want everyone to understand why I am digging much deeper into Oklahoma City. One of my biggest pet peeves as a planner and a general aviation dork was airlines and planners focusing on what is currently sexy. Most of my followers may consider Oklahoma a flyover state. Cities such as OKC often do not get the headlines on national releases nor the attention they deserve, but it appears at least one airline is seeing growth opportunities in Oklahoma City.

For fourteen years (2004-2017), OKC seat capacity was mostly flat outside high blimps in 2008 and 2012. However, in 2018 and beyond, the city has returned to a positive seat growth rate, which we will discuss shortly. During the same time, however, scheduled commercial flights into and out of the airport were down 17.5% (-1.4% annual growth rate). Industry gauge growth trends largely offset the decline in flights out of the airport.



While the decline in capacity could be seen as alarming, OKC's flight decline can be explained by Delta's network realignments following their DFW and post-Northwest merger hub closures. In total, Delta reduced its footprint in the city from 24 daily departures in 2004 to 10 daily departures in 2017.


While seats and originating passenger growth largely remained stagnant, the Oklahoma City economy did not. Strength in the local Oklahoma City economy helped drive airline revenue originating from Oklahoma City on relatively flat capacity growth. This revenue growth came almost entirely from higher fares and excludes baggage fees or other ancillary product fees.



A city with a strong economy and growing revenue on flat passenger growth, to me, is indicative of an airport needing new service or fare stimulation. This may not always be the case at every airport; however, here in Oklahoma City, it appears to be at least one of the indirect drivers to recent capacity moves.

After years of stagnant seat growth at OKC, American began to increase their OKC footprint. American's average daily seats between 2017 and currently scheduled 2020 seats are forecasted to be up 41%.  During the same time, American started or has announced nonstop service to all of their previously unserved hub cities. For those counting, yes, I include JFK and LGA as part of a single metro even though the airports serve very different missions on the AA network.



American's impressive growth within the city started in early 2018. Phoenix and Philadelphia were added to the city within two months of each other, followed by new DCA six months later. Now in 2020, American has rounded out its hub service with new service to Miami and New York. It should not be lost that even with American's growth, total seats by all other carriers have primarily remained flat. This could means other carriers are not seeing negative pressures from the additions to warrant capacity reductions. 



With service to all nine of American's hub cities, Oklahoma City is now one of only nine American Airlines non-hub cities (4% of all cities) that has nonstop service to all hub cities. OKC is also batting far above its weight to get here. Of the eight other cities with full hub city coverage, the average American Airlines daily departure count is over twice as large as Oklahoma City. There are 30 other American cities with more daily departures than OKC who do not have full hub coverage.



While Oklahoma City should celebrate this accomplishment, I do not believe all is well on the home front. When I worked in the industry, I repeatedly preached for communities to use their service or lose it. To me, it feels like the Oklahoma City community better start using the Philadelphia service or they are going to lose it.

What do I mean? Well, let's first take a look at all of American's flown performance for the last year. Unit revenue and load factors on the PHL flight have been soft since its launch.



Soft load factors dragged on the OKC-PHL's revenue performance during the 2018-2019 winter quarters with load factors dropping as low as 50% during the first quarter of 2019. American has quickly reduced the route throughout 2019 and early 2020 to just a single daily frequency during the off-peak months. During the second and third quarter, the performance of the route, aided in part by capacity reduction, performed near system-level RASM target for the route. 

While published 2020 schedules show second and third quarter capacity returning to twice-daily service, given the historical revenue performance, I wonder if this will hold. After I developed the graph below, American reduced their May OKC-PHL route back to a once-daily flight pattern. 




To complicate matters, American's new LaGuardia service will put further pressure on Philadelphia’s performance. Philadelphia’s top flow markets include Boston and LaGuardia, and the new LGA service duplicates itinerary options.    

While most of Oklahoma City's love has come from American, there appears to be some experimentation by other carriers to non-traditional cities. After Southwest departed the DAL-OKC market in November 2019, they backfilled the reduction with increasing Houston, Phoenix, and new daily service to Nashville. (Note: These capacity discussions and decisions were had after I departed Southwest).

Frontier has also experimented within Oklahoma City. During late 2017 and 2018, the carrier launched Orlando, San Diego, and San Antonio. Today, only Frontier's Denver and Orlando service remain, however, the experiment did point to potentially untapped demand in the San Diego market. When Frontier entered the OKC-SAN market with 3-4 times weekly service, they were able to stimulate the market to nearly 160 PDEWs. Interestingly, OKC-SAN was also part of the failed ExpressJet experiment. ExpressJet operated 1-2x daily service during almost the entirety of their experiment.


Other carriers such as Alaska and United also have increased their investment in the city. At the end of last year, Alaska up-gauged its E175 service to A320 service (doubling seats in the market). United is also investing additional capacity in the market with flight increases to Dulles and Denver. This is on top of United's Chicago product enhancements with the CRJ-550 over the CRJ/ERJ flights.

It is great to see Oklahoma City getting the attention it deserves. We are clearly batting above our size with American's hub service. But it is clear. Some risks have to be addressed if we hope to keep the impressive product offering in place. We need to support all of our carriers, whenever possible, to make sure the service that we have at our airport stays and grows with our city.

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Thank you all for swinging by the blog. There will not be a post on 2/19 (unless an airline does something interesting). The following week, I am planning a deep dive into Breeze's DOT application. 

Wednesday, February 5, 2020

Feeling United's Paine: United Couldn't Compete with Alaska's Service

The tale of commercial air service in Paine Field is about as old as time. Since the late-2000s, various airlines have expressed interest in operating commercial service from the airfield. However, air service at the airport was always going to be a challenge. The airport lacked an existing public terminal and the local community was combative to the idea of commercial air service at Paine.

It wasn't until Propeller Airports built a new terminal and a lawsuit or three resolved before airlines could announce their service. Once everything was in place, Alaska quickly announced service in May 2017, followed by United over the summer, and Southwest early winter 2018. Southwest would later bow out of the running. (Really boring, but informative read regarding the history)


With so many airlines trying to access to Paine, demand for the two gate facility quickly exceeded the planned capacity of 16 daily flights. By April 1, 2020, the terminal saw 24 daily departures on just two gates. Neither of the carriers really adjusted their schedule down on off-peak days. Offhand, I can't think of another airport in the US that is turning 12 flights per gate every day. 


With 12 flights per gate per day, the operation was tightly scheduled. This could lead one to believe that the airport would be operationally challenging. This really does not appear to be the case. Since the services started, airlines operated at the airport with roughly 88% on-time rate. But, just because the airport operated on time, does not necessarily mean the airlines could schedule to fit their commercial network, which we will get into here shortly. 



Alaska's commercial strategies at PAE seem to be pretty clear: operate in top Seattle originating markets within range of their respective regional fleets. Alaska with their 18 flights blanketed seven out of the ten originating markets. Most of these markets fit nicely into Alaska's growing California network. 


United's commercial strategy seemed to follow Alaska, just via their DEN and SFO hubs. With most of Seattle's originating traveling to California, Vegas, and Phoenix, you can see why United placed most of their capacity into SFO. In theory, if the flights were well-timed and connected to the SFO bank structure, we should expect to see robust connections to all of these top markets. But we didn't.


Each of the PAE-SFO markets only connected to 4-5 of the top Seattle originating markets. The PAE flights often arrived 30 minutes to an hour after their ideal connecting bank into SFO. At a normal airport, this is often easy to fix, just adjust the departure time. However, with PAE's 12 turns per gate, adjusting departure times was likely out of the question unless Alaska wanted to play nice. But with no upside for Alaska, why would they play nice? With no ability to adjust their schedule, United's SFO schedule stayed nearly identical since they launched service in late March 2019. 


The lack of quality itineraries over SFO can be seen in the passenger data. PAE saw sizable passenger demand in its top markets. These markets largely mirrored the Seattle originating passenger demand as well as where the airlines allocated capacity. However, since United did not have quality itineraries via SFO, especially to Southern California, United only saw single-digit PDEWs to these top destinations.


Let's not forget, United was also going head-to-head in San Francisco versus Alaska. Since United operated four daily flights vs Alaska's two daily flights it would be logical to assume United would carry twice as many passengers, however, this is not the case.

When we look at the SEA-SFO market, the market is evenly split between originating in SFO vs SEA. However, in the PAE-SFO market, the market skews towards PAE 60-40. This should not be unexpected since PAE is a new, mostly originating airport. This was ultimately a huge disadvantage for United. While the two carriers equally split the SFO originating market, Alaska nearly doubled the passenger demand on the PAE side of the market. 


With the local PAE-SFO market favoring Alaska and United's inability to build connections to top PAE markets, United's revenue performance on the route suffered significantly. My models show the route was roughly 60% below what United would expect on a similar staged market.


Now, I caution anyone from using the graph above in absolute terms. I debated for quite some time about even including the chart given how negative PAE-SFO was. It is important to remember this information comes from modeled data. Airlines do not publish their actual RASM production figures. However, we can see the direction and magnitude of United's performance in the market. It was negative. Really negative. This likely explains why United killed the route even before its first birthday. 

Astute readers will likely point out that DEN is also performing below system production. While this is true, the data available to us only includes the first six months of service. It is common for new routes to underproduce revenue during their first couple of years as a market matures. So while the market might appear to be a red flag, I say it is a wait and see. Why?

DEN does not have the disadvantages that we saw with SFO. Currently, Alaska is not flying to nor over DEN. Even if we see Alaska attempt to operate to or beyond DEN, their ability to put substantial pressure on United would be much more muted than SFO. This would not preclude Alaska from operating DEN as it is still a large originating market for the Seattle area.

So what will happen with the available gate time saved from United reduction? It is hard to say. The facility was built originally for 16 flights. I have to wonder if Propeller would like to dial capacity back for a bit, but they are an investment group and investment groups typically aim to maximize returns.

If Alaska were to pick up the gate times, it would be reasonable to see them in DEN as discussed above. It would be equally possible to see them add depth to existing markets or new service to a secondary Basin market.

I would doubt that Delta would be interested in operating three flights into the airport, especially if they are locked into United's old times. As these old times likely would not fit operationally or commercially into LAX or SLC. In the unlikely event Delta was to jump in, I would not be surprised to see them operate a non-hub such as Vegas really to just be a thorn in Alaska's side. 

There's also Allegiant if the costs are low enough. They had expressed interest in the past.

There's plenty of gamesmanship that could be played here. But ultimately, we will all just keep an eye on the schedules and see who, if anyone, takes the gate times in PAE.  

Wednesday, January 29, 2020

How much has Frontier's network changed?

This week, I decided to take a step back from hardcore revenue analytics like we have seen in the past few weeks. While revenue is one of the most important metrics in determining the health of a market, I thought I’d switch to an operational and schedule analysis this week. So this week we’ll take a look at the Department of Transportations on-time performance report. I’d argue this dataset provides some of the most insightful views to the operation of an airline, but is wildly underutilized.

Why? If you are not one of those data nerds that often pull raw datasets yourself, you likely assume that the OTP information basically tells you if a flight arrives on-time or not and that is about it. But in today's post, we will use OTP information to see aircraft routing, aircraft metrics, fleet used for service, etc. There is plenty of other metrics that could also be estimated from the dataset including operational spares and turn times.

While these might not sound as sexy metrics, consider this. If you can examine an airlines' aircraft utilization to a few hundredths of a point and have a good future fleet source, then you can have confidence when estimating how much capacity a target airline may have left by fleet to deploy at any given point of the schedule.

Today, we will combine both the Frontier schedule and on-time performance information to see exactly what has changed within the Frontier network over time and what has stayed the same.

First, let's take a look at aircraft utilization. As you might expect, ULCCs push their assets longer to spread fixed costs across more ASMs. However, if you expected Frontier to be firewalling their fleet compared to previous years, you are going to be surprised.



When we look at the Frontier operated schedule from the DOT's OTP report, we can see Frontier's April schedule has been pretty consistent in their fleet deployment since 2007. There is a noticeable decline in Frontier's utilization in 2011, however, it should be noted during 2011, Republic was handling a significant share of Frontier's flying. Republic was removed from today’s data.



But what about other ULCC carriers? How does Frontier stack vs Spirit or Allegiant if they have not increased their utilization? Frontier and Spirit are largely identical in their deployments. Allegiant, interestingly, has a hard cutoff around 13 hours which you do not see at Spirit or Frontier.



If you are an inflight crew, you likely know this is only a piece of an aircraft's daily story. While I do not currently have turn time (time on the gate). Turn time and total aircraft operating can be decoded from the OTP data, however, I have not built the model for it at this time. In time. I promise. Maybe.

In addition to core aircraft utilization metrics, we can also track tail number specific movements within airline networks. Here's Grizz (N227FR) on 4/19 - 4/22.


By the way, if you are an old hardcore Frontier fan, you will be disappointed to know Flip and Larry have been retired. They were A319s living in an A321 world.

But beyond tracking our favorite fictitious Frontier tail, we can glean useful information from tracking tail numbers. Based on Frontier’s OTP data, starting in 2014, it appears we can see two distinct base schedules per year, at least in terms of aircraft routings. Really, these appear to be highs and lows for aircraft routing thru Denver. There appears to be a distinct Denver high (April thru November) and a Denver low (December thru March).

While it might seem like a general, "oh that's pretty cool", there are real-world implications here. Aircraft have to be maintained and crews need to be based. I’d be interested in learning if crews are moved to non-DEN bases during this time or if non-DEN crews are pushed harder during higher non-DEN routing periods. The chart also shows that Frontier is no longer directly dependent upon Denver to route their aircraft.

Additionally with this data, we can begin to see how many aircraft frames Frontier is deploying within their operation over any set period of time. This is different from frames within the fleet since a percentage of frames will be down for scheduled maintenance among other events.


Finally, while we often see on the forums jokes regarding Frontier's "dartboard" approach to capacity planning, what we find is what appears to be a 40%, 20%, 20% strategy. 40% mature routes, 20% maturing routes, and 20% yearling routes.

When we look on an absolute basis, most planners will see Frontier's declining absolute maturity within their routes. In other words, Frontier has cut deeply into their maturing frequencies that have existed for 3+ years for yearling frequencies (< 1-year-old) or maturing frequencies (2-3-year-old routes).


But the chart is somewhat misleading. The drop in mature frequencies is more a function of Frontier's shift towards more breadth and lower frequency within its existing network.


Absolute route counts have skyrocketed since 2016 as Frontier has diversified its network. During the peak travel demand period, Frontier operated nearly 350 routes, albeit at very low frequency. 


In relative terms, Frontier has invested 40% of its routes towards mature capacity (> 3 years old), 20% towards maturing routes (2-3 years old), and 20% towards yearling routes. This appears to flex some, but it appears to be a good rule of thumb. 


Finally, as we all have come to know Frontier over the last few years the airline has become known as the king of churn. We have all seen the press releases where Frontier has started one billion new markets across a million new cities. They are often announcing so many new cities and routes, they have to deploy their general council to announce route on their behalf. (Rant: If you have to use your general council for route announcements, you are either too thinly staffed or announcing far too many routes).

What we often do not hear is Frontier's "seasonal" service that never seems to return


Frontier will be interesting to watch over the next few years. With the amount of new frames coming from Airbus, I do wonder if the churn rate is sustainable. Finding new homes for airframes gets increasingly more difficult when the amount of frames continue to increase

In the near term, it sure feels like we are days or weeks away from another massive expansion from being announced, just in time for summer 2020 travel. 


Wednesday, January 22, 2020

Behind the Cuts: Examining Why JetBlue is Cutting Long Beach

In the early winter of 2017, a small group of us Southwest Airlines network planners were gathered in a conference room. We were given our marching orders. The 737 classic fleet was headed into retirement on September 29th, moved the 30th, and the MAX would join the fleet on October 1st. With the reduction in airframes, we were going to have to reduce frequencies and eliminate routes to keep the network operational with balancing commercial constraints. After months of debating, it was time to decide.

Cutting sucks. There’s a good chance you had to eat crow after defending the poor performance as you believed the route just needed to mature. But it was finally time. Due to aircraft constraints, pressure to get network performance up, or this route’s performance just dragged for too long without meaningful long term strategic value, today is execution day for this route. Regardless of the reason, someone is going to be pissed at your decision.

In my time as a planner, I heard it all:
  • This is the most short-sighted decision ever made 
  • I am going to have (name the ULCC) enter the city and they will take all your customers
  • You do not understand the city/market. 
  • You are lying
  • Well, I'll be calling (name the Leader) and they will be reversing this decision
Once, I heard three of these in just one 20 minute meeting.

I bring this up not for sympathy, but for understanding. I was fortunate enough to have and still maintain great industry relationships. I bring this up as JetBlue's network planners are likely experiencing this exact same reaction both internally and externally with their decision to cut Long Beach. JetBlue employees are likely being displaced or their hours reduced and front line employees may be feeling left in the dark. However, JetBlue has been struggling in Long Beach since 2008 and are executing on their fourth attempt at a city recovery.

The reality is there was little JetBlue could do with Long Beach that would make commercial and financial sense. Its commercial teams were left with no great options. It all likelihood, network planners could have been handicapped by constraints to delay what many may believe as an inevitable outcome.

With that digression, let's dig deeper into JetBlue's history and ultimate decision to reduce its operation to just 15 daily flights.

In August 2001, JetBlue entered Long Beach with twice daily JFK service, which was quickly accelerated to three times daily. After JetBlue's initial launch, B6 rapidly built up its position at Long Beach in response to their initial success in the market. This continued until 2008 when they topped out on slots and performance.


Depth to Breadth 

While the initial service into Long Beach appears to have been pretty successful for JetBlue, the performance love affair was shortlived. The Great Recession took a healthy bite into JetBlue’s revenue and in 2008 Long Beach's unit revenue production turned negative. Of the 14 routes, 12 were performing below the system RASM curve.



To counter the declining performance, JetBlue had to change something with the Long Beach service. Over a few years, JetBlue slowly began to transform Long Beach's network. The carrier believed their path to system returns lay with more markets at a lower frequency. The planners began to reduce higher frequency markets like IAD and JFK for lower frequency markets like AUS, PDX, SEA, and SFO.


Seasonalization 

Even with the breadth approach, the network performance in Long Beach still dragged on the network. In 2011, Long Beach's unit revenue performance really took a turn for the worst. At this point, most routes were double-digit negative compared to JetBlue's RASM curve. The only routes that appear to be working were back to the East Coast. All other Long Beach markets really pulled on the JetBlue network.


Without immediate action, this level of revenue performance would become quickly unsustainable. In 2012, JetBlue began aggressively cutting off-peak flying. Typically, JetBlue would reduce its seasonal schedule by 5-10% off the peak. However, in 2012 thru 2014 the carrier reduced its off-peak schedule by 20% of peak schedules. This approach trimmed JetBlue's yearly departures by as much as 10%.




Save the Slots 

In 2014, the Basin began to heat up as carriers started to fight for limited airport space. All secondary airports in the Basin, excluding ONT, are constrained by some type of noise controls. Orange County and Long Beach have slots, while Burbank has gate caps. As Orange County and Burbank started to fill, carriers began to shift their attention to Long Beach's limited slots.



Appetite for Long Beach began in earnest in late 2015 when the airport announced it would lift the noise cap to allow nine more flights into the airport. Of the nine new slots, JetBlue received three, Southwest four, and Delta two. Later, Southwest would use JetBlue’s underutilized slots to fuel additional growth in the city.

As is often the case with JetBlue’s focus city, these competitive incursions initiated a response from JetBlue. In August 2016, JetBlue announced its plans to fully utilize all of its slots. This shot JetBlue's departure count from ~23 daily flights in 2016 to 35 flights in 2017.


Plowing this much capacity into subpar routes is one heck of a way to start a turbine with cash. During this period, most routes moved further down the revenue production ladder. Long Beach now saw a sea of red as most routes were producing 20-40% below the system RASM curve.



The opportunity cost associated with operating these routes was astronomical. If these flights were deployed to routes that produced system average returns, JetBlue would have seen roughly $80M in additional ticket revenue. This value excludes all ancillary fees.



Now, I want to be extremely clear. The graph above does not state JetBlue lost $80M in Long Beach during their slot utilization ramp-up. Rather, the graph is an opportunity cost for flying underperforming routes. No one can say exactly how much money JetBlue made or lost in Long Beach except JetBlue. Please see my cost tangent if you receive airline "profitability reports". But the graph above can be used to understand the direction and magnitude of JetBlue's performance.

Slot Saving is Expensive 

After what appears to be a massive drop in Long Beach performance, JetBlue tossed in the towel. Twice. Kinda. In September 2018, JetBlue reduced flights by 30% but would not return the slots back to the airport until months later. Interestingly, the carrier decided to only exit FLL and removed frequencies across a variety of underperforming markets rather than more significant market exits.

This is the one time I’ll fault JetBlue’s logic in this entire process. Long Beach was bleeding cash and the first round of reductions really did not feel in line with the city’s performance. The first round of cuts announced by JetBlue were focused on stopping the hemorrhaging, but not on truly getting the city healthy.


The reductions in capacity greatly increased the performance of the city in terms of year-over-year unit revenue production. However, year-over-year RASM growth is largely meaningless when JetBlue's 2018 route performance is factored in.

This is where we found JetBlue until last week. Most routes continued to underperform their system RASM curve. Intra-California routes to SMF and SJC were particularly terrible. This is in line with JetBlue’s market exits.


Will Cutting to Profitability Work? 

After all the aggressive protectionism then retreating, do I think JetBlue may finally be stable within Long Beach? I give it a big maybe.

When we examine JetBlue as a whole, rather than just focusing on Long Beach, after the latest rounds of cuts, while still underperforming the system, Long Beach could be in much better financial position than it has been in quite some time. The routes that remain are generally within the tolerances of acceptable unit revenue performance. Don't get me wrong, the remaining routes are not stellar, but the entire system cannot be above system averages. Averages don't work that way.

Another thing to keep in mind, following this round of cuts, Long Beach is unlikely to have the JetBlue’s worst-performing routes attached to it. If JetBlue is looking to harvest and redistribute aircraft within their network, it appears they would have a healthy selection of other poor performers to sift through first.


Finally, there has to be consideration given to the logistics of routing crews out of the Long Beach crew base. Further cuts would make it nearly impossible for JetBlue to efficiently move crews. The costs associated with dislocating LGB based crews are might be prohibitive given the production of the remaining routes compared to extremes such as shutting down a flight crew station.


It is still very possible that we may see a reallocation of flights between the remaining markets, but I honestly do not expect any more earthshattering moves at least in the near term.

The only wildcard for Long Beach is competition, but I would not expect immediate meaningful competitive growth. Kate Kuykendall, Long Beach's public affairs officer, stated the airport has not received an official notice from JetBlue regarding their intention to relinquish slots at the airport. The airport is well aware of the announced reductions, however, until JetBlue returns slots, the airport cannot start the process of reallocating them to other carriers.

According to the Long Beach airport, JetBlue has 24 permanent flight slots. These slots have minimum usage requirements which JetBlue will dip below during the 3Q2020. This could mean, without JetBlue voluntarily surrendering their slots, it may be the 4Q2020 or 1Q2021 before slots are reallocated from this flight reduction. If the 14.8 average daily flights are the baseline for JetBlue's new slot allocation, we should expect to see JetBlue be allocated 17-18 slots, which free 6-7 slots for competitors.



JetBlue's potential delay in relinquishing slots should not come as a surprise. When JetBlue reduced capacity in September 2018, the carrier did not return its unused slots until the spring of 2019. Further, in New York, I suspect there are a lot of hard feelings following increases in curfew fines, increases in slot utilization requirements, and the city walking away from the international terminal. I do not expect JetBlue to play along nicely with its slots.

By the time the JetBlue surrenders the slots and the airport executes on the allocation process, we could be looking at early 2021 before Long Beach sees carriers backfill in the airport. In the more near term, the airport is already in the process to allocate three new noise supplemental slots. This process should be completed in February.


According to CrankyFlier, three carriers remain interested in additional Long Beach slots: Delta; Hawaiian; and Southwest. Based on JetBlue's remaining network, I believe there is limited exposure that you can reasonably see these three carriers overlapping with JetBlue.

If Delta were wanting to increase pressure in SLC, they already have the opportunity with their last slot allocation which they sent to Vegas. On the Southwest network, a reasonable person could argue for additional Las Vegas flights or maybe a long shot at Austin service. Otherwise, I’d expect the new capacity to be allocated away from JetBlue’s Long Beach network by these carriers.

Barring Alaska jumping into the mix, which is possible, but not likely, SEA, PDX, and SFO are unlikely to see additional competitive pressures. With Alaska exiting Long Beach in 2015, I do not see a large possibility of them wanting to relaunch the city.

This should for the time being bring stability to JetBlue in Long Beach.


Wednesday, January 15, 2020

American's New Boston Service Is A Direct Shot at Delta

If you are a true aviation geek like me, which I assume you are if you enjoy reading a nerdy aviation analytics blog, yesterday was an interesting aviation day. First, Delta announced its impressive $1.4B in fourth-quarter operating profit. This was a 28% increase in profitability year-over-year. The performance was largely driven by a 14% drop in absolute fuel expense (-$315M). If you would have told me when I joined the industry that a legacy carrier would finish the year with a 14% yearly operating margin, I would have fallen out of my chair. Oh, but how times have changed.


However, it was not what Delta earned that really caught my eye. Rather, it was American's quiet new Boston announcement that really caught me by surprise. Around noon, American announced to their employees that American would be operating Boston to twice daily Indianapolis (IND), five times daily Raleigh-Durham (RDU), and Saturday service to Wilmington, NC (ILM). If you listened to Delta’s earnings call, it appears American pitched this announcement to reporters shortly before Delta’s earnings call as well. While we all love Wilmington and its great beaches, this post is going to focus on IND and RDU where we are about to see a massive throw down between American and Delta.


The irony of American's new service announcement on Delta's earning day is not lost on me. If you listened to the call, you might have caught Delta's nonchalant attitude towards American's possible growth in Boston. From the transcript on Seeking Alpha:
Ted Reed (Forbes)Thank you. My question is for Glen. I imagine that the 10% coastal growth in hubs, includes Boston and I'd like to know, if you anticipated that American would start to grow so fast in Boston they're growing very rapidly there and they added three new routes this morning. 
Glen Hauenstein (Delta's President)Yeah. I think we've had an incredible success in Boston and Boston, customers are choosing us at – as a matter of fact the third quarter data from the government just came out and we were in a virtual dead heat with JetBlue as the largest revenue carrier in Boston. So I think we've made great progress and I think customers will stick with us. And so we'll see who ultimately are the winners and losers in Boston. But I know we'll be a winner.
Either Delta considers JetBlue its only Boston competitor or Delta does not care about American in the city. However, these new American routes show Delta should be worried American’s growth and the impact it will have on Delta’s financial performance.

Now, if you are looking for American's new service on AA.com, you won't find it. The new service will not be available for purchase until January 20 nor have I seen an official start date for the routes.

This is an abnormal approach to announce new service. Typically, routes and fares are loaded then a national press release hits the news wire late morning to mid-afternoon. If you look in American's press release for their new Austin service, not only was flights for sale that day, American included the flight schedule. You will not find that in their latest Boston announcement. This approach leads me to believe the routes were rushed through to be announced prior to the routes being loaded. Why? I'm not sure, but the timing with Delta's earnings call sure seems convenient.

Before we dig deep into American's new service, I think it is important to take a look back what the American Boston network of years ago and why this latest network build-up is different.

Similar to what we saw in my Austin to San Jose analysis, American had a love-hate relationship with Boston. Starting in the late 1990s, American really invested heavily in the Boston market then during the 2000s, Boston really saw death by a thousand cuts




When American's network peaked in 2001, the carrier had an impressive product offering. American largely served intra-Northeast, near Canadian, long haul West Coast, Florida, the Carribean, and Europe service with roughly 144 daily flights. In 2012, when American finally put the butcher's knife away, only a fragment of the network remained. London service was discontinued in 2013 and Paris, the only non-One World hub that stood in 2012 was sacrificed in 2017. 


Since American’s merger with US Airways the Boston market picked up a few non-hub markets (from US Airways) and in 2020, American has invested its own metal to Austin and London.




Until American's Austin and London service, American had not added a new daily market to Boston since 2006 when American returned Montreal after suspending the route in 2005. The route would be suspended again in the later part of 2006 not to return.

Including the recently announced service, American will operate roughly 106 daily flights to 19 destinations. This compares to Delta at 148 daily flights to 49 destinations and JetBlue at 180 flights to 59 destinations. Clearly, American is a distant third place in service.


So why am I so excited about American's increase? Well, it sure appears that American placing very pinpointed flights to maximize revenue pressure on Delta.

What do I mean? When looking at Delta's RASM curve and overlaying its Boston performance, there is not a whole heck of a lot of markets performing above Delta's system RASM curve. That should not be unexpected since Delta is still investing in the city. However, Delta has found a performance sweet spot in Boston. These are 600-800 mile markets, mostly to the Midwest and the Carolinas. These higher-performing markets are exactly where American is targeting its new service.





For Delta to be successful within the BOS-IND market, Delta depends on generating very high fares. Unlike traditional hub-and-spoke markets that Delta typically operates, BOS-IND is entirely dependent on the local market. Historically, Delta has operated the route with relatively high local fares and a willingness to yield to a lower load factor. Naturally, American's E175 product line and presumed flight schedule would likely competitively match Delta's current offering. This could potentially put pressure on a market dependent upon high fares.



The RDU market, however, has been no stranger to the competition. Currently, both Delta and JetBlue operate the market with roughly five daily flights each. Even with JetBlue’s competitive service, Delta’s flights produced upwards of +20% system RASM gap. This was until both Spirit and Frontier flirted with the market in 2019.




In normal years, both IND and RDU to Boston appear to be higher performing markets for Delta. This new American service, however, will put direct pressure on these financial results.

In both IND and RDU, Delta is highly dependent on the local markets as American will be when they enter. This local market dependence is a high risk for any carrier on any route as competitive pressures naturally will depress fares as carriers attempt to fill their planes. Both IND and RDU will have to see significant stimulation to see either market to carry a reasonable load factor.

In the last 10 years, peak RDU demand saw roughly 900 passengers per day. If the current schedule holds in July 2020, RDU will see roughly 1600 seats per day to Boston. I'll be surprised if we see most carriers operate in the mid-60 to low-70 percent load factors if this schedule.



Turning back to Delta's RASM curve, higher-performing, sub-500 mile markets that Delta and American overlap on currently see potential investments by American's summer schedules. That said if you are a traveler that books six months in advance, you already know these flights counts are subject to change and American could reduce these flights back to flat or even down.



American announcement yesterday, coupled with the Austin announcements could demonstrate American's desire to serve some of their legacy focus cities. A shift away from being strictly hub-and-spoke. However, unless you are in the inner workings of American, it is currently tough to understand the longer-term strategy here.

Based on American's actions yesterday, re: no formal press release, flights were not filled, and the soft announcement was timed immediately after Delta's earning call, this could just be a competitive response. To what, I am not exactly sure. However, American targetting Delta's higher-performing Boston routes will have a significant impact on Delta's Boston P&L. If Delta is willing to continue to operate in subpar routes will have to be seen.

If you want my bet, this is not over.  We will likely start to get a better understanding of American's strategy next week during their earnings call. At this point, it feels like there is a larger battle brewing between Delta and American with Boston caught in the middle. Do not be surprised to see further Boston deployments by either American or Delta as both attempt solidify their service.

The real wildcard here, however, is JetBlue does not take competitive incursions to their cities lightly. Do not be surprised if you see JetBlue announce more Boston service within the next couple of day (or hours).