Wednesday, November 6, 2019

CVG-SFO: One Complicated Route

Thank you, everyone, for sticking with me for another week. This week is a much longer analysis of CVG and United's CVG-SFO market. This review is much more in-depth than previous posts. Please let me know if you like the more in-depth reporting or a shorter read. Thanks! 

Cincinnati has been an interesting city to watch over the last few years. In 2017, Delta announced it no longer considered it to be one of their hubs but still considered CVG as a focus city. The declaration that CVG was no longer a Delta hub came after over a decade of near-continuous trip and seat reductions in the city which stabilized around 2015.

While Delta went into a status quo type state with its capacity set in CVG market, other carriers were growing and started to expand significantly starting in 2013. Allegiant and Frontier have all set up large operations within the city and believe it or not, Allegiant is the second-largest O&D passenger carrier in CVG. In addition, Southwest launched service in 2017 and some legacy carriers have been adding flights to previously unserved hubs. Let’s also not forget that Amazon’s air operation has developed a significant logistics operation on the field with a significant expansion planned as well. After a decade of continuous cuts, in the past few years, it has been good to be the CVG airport. 

While the Cincinnati has lost 70% of its seats since 2004, the local O&D market has never been stronger. Cincinnati had roughly 10,000 one-way PDEW in 2019, up 61% versus 2004 when seats peaked (in the data currently available). This is due to how airlines are operating within the airport. Back in 2004, only 20% of the Delta passengers were originating or terminating their travel into the city. Today, however, Delta has minimal connections over the city.

Please allow me a minor soapbox moment. While the number of flights and seats have been greatly reduced, the recent story of CVG is actually a great one. The airport is serving the local market better than it ever has. Often airport executives or board members in general focus on seats and flights as their core metrics, rather than originating or terminating passengers (PDEWs). These passengers are customers living in or visiting the city/surrounding area which helps drive the local economy. Flow passengers, however, provide a limited amount of local contribution other than extra support jobs. Sustainable growth is often rooted in the local market. With relative ease, an airline can displace flow passengers between hub cities, however, an originating or terminating passenger can only originate or terminate at your airport (ignoring leakage).

When I was developing capacity sets, many times our capacity sets would produce fewer trips but more seats and O&D passengers, however, we would often be raked over the coals by consultants, board members, and local community officials even though our capacity set would actually produce a better economic outcome for the airline and airport. But I digress.

I would like to point out this was not the case with CVG. They were a great group of professionals to work with. Okay, soapbox moment over. Back to normal programming.

So, why all the interest in CVG? In 2017, United was one of the legacy carriers that expanded their service into CVG from one of their unserved hubs. However, this route appears to be short-lived. A few weeks ago, United announced they would discontinue their once-daily Cincinnati to San Francisco service.

The route cut piqued my interest. Why? A couple of reasons. First, CVG was an airport that I analyzed regularly during my airline days, so I continue to keep tabs on capacity moves in the market. Second, given the dynamic ULCC activity in CVG, I thought this might be one of the first time a ULCC pushed a legacy carrier out of a major hub market (this does not appear to be the case). CVG, however, is an incredibly complex city and CVG-SFO an interesting market.

In June 2017, United launched new daily service between CVG and SFO as part of a larger new market announcement. The new service directly competed with existing daily service on Delta and seasonal service on Frontier.

In response to United's announcement, Delta increased its less-than-daily service to near-daily. At the same time, Frontier reduced their Bay Area service from seasonal less-than-daily and summer daily to seasonal less-than daily to San Jose. I can only assume this was an attempt to differentiate their Bay service from others. After a year, Frontier returned their seasonal service back to SFO. Frontier has yet to extend their summer schedule, so it is yet to be determined if they return to the market in 2020.

For those surprised that Delta is still in the SFO market, writing the route off as a reduction to Delta's de-hubbing, Delta still has a significant nonstop network out of CVG. With over 68 average daily flights to 32 destinations in March 2020, Delta still has a significant operation in CVG with nearly three times the amount of seats of any other carrier. I am not going to lie, I completely forgot how large Delta is still within the CVG market.

Turning to United's route performance, year-ending 2Q2019 performance shows the route performed below system expectations. While both directions were soft, there appears to be a pretty significant divide in directional performance as well. The route as a whole appears to be performing 27% below system RASM in YE20192Q. While neither direction appears to hit system goals, overall performance appears to be hindered by the CVG-SFO directional flight.

Digging deeper into the schedule, the CVG-SFO directional flight would generally depart CVG in the later evening, roughly 7pm. This late CVG directional departure would put the flight into SFO around a little past 9pm. This connected the flight to a late evening bank in SFO largely to the west coast, backhauls, and limited long-haul international Pacific service. The return SFO-CVG flight would generally depart SFO between 10:00am and 11:00am local. Again, this would allow the flight to connect to the west coast, backhauls, and long-haul international Pacific service.

With these timings, the route offered few unique connections via SFO. Only HKG, SIN, and AKL would provide unique round trip connections not offered by other UA hubs. This means the route would only offer a unique nonstop between CVG-SFO as well as connection that complimented other hubs.

It should, however, be pointed out that the market timings were not consistent. When the market started, the route departed CVG in the evening, however, in the winter of 2019, the route was adjusted to a morning departure from CVG. Both of these departure times are consistent with market departure timings from IND and CMH to SFO. Indianapolis has a morning and evening departure to SFO. Columbus’ new service departs in the morning. When CVG-SFO was retimed, the route saw a significant increase in load factor. Throughout the first part of 2019, the load factor was up double digits. 

It is, however, difficult to tease out the impact of the market retiming. Generally, originating CVG passengers was a much larger population set than originating SFO. So a market retiming favoring CVG would likely increase route performance, assuming no significant changes to the flow timings. However, as the route was retimed, United’s fares declined 20-30% in the first and second quarters. This type of fare decline should significantly stimulate the market.

Digging deeper into the route makeup, I was interested to find that CVG, as well as nearby SFO markets, were very local. In fact, CVG-SFO local makeup was perfectly average compared to SFO to CLE, DTW, and IND. 

However, compared to other UA operated markets, CVG struggled with its segment fare. After CVG-SFO was retimed in 2019, it appears the United's revenue management team restructured the fares within the market in an effort to stimulate passengers in the market.

While I believe Frontier's nonstop service in the market had an impact on the fares during peak season, I believe the biggest impact towards United's route performance has to do with the originating makeup of the CVG to SFO. Of passengers originating and terminating between CVG and SFO, 60% of the market live in the CVG area.

This type of market makeup naturally favors Delta on the route. In the city of CVG, Delta still captures roughly 44% of all originating traffic. While down from 83% of the originating market in 2004, it still is a large lead versus any other carrier. This can naturally cause Delta to outperform in routes when the market favors CVG point-of-origin.

Finally, it is important to discuss the opportunity cost of the route. Yes, while the route did underperform with revenue production, it is also important to discuss the cost of the route in terms of aircraft time. On average, CVG-SFO cost the network 9.7 hours of total block time to operate the route. This equates to two average roundtrip markets on the United network. Even if the route was producing system-level returns, network planners would have to weigh the value of the route in terms of tactical importance versus flying two shorter haul routes. If we briefly ignore network and hub design, it could be possible for United to serve twice as many passengers in their embattled California hub with the CVG-SFO time. And let's not forget, United is having to harvest aircraft out of their schedule with the grounding of the MAX fleet. Cutting a longer haul, underperforming route is much easier than pulling out multiple shorter haul flights. 

While I am a little surprised United did not allow the retiming and what appears to be a new fare structure to fly a little longer, with all the considerations above, I can understand why they are exiting CVG-SFO. I would, however, not count them out of the market forever. While Delta is stable within CVG, if Delta were to exit CVG-SFO, I could see United quickly jumping back in. At least until then, United will be discontinuing the route in January 2020.

1 comment:

  1. A fantastic read! I'm really enjoying your articles.