Wednesday, December 18, 2019

Austin to San Jose: Why This Nerd(bird) Just Might Work Out

Disclosure: As you will find my on ethics and disclosures page, my employment contract with Southwest Airlines does not allow me to directly analyze Southwest Airlines. I can point out public factual information, but analyzing their expected financial impact and performance by American's announcement is not currently permitted. It is clear Southwest will be impacted, any new competition would have some impact, but you will not find an analysis of this impact due to the aforementioned agreement. Now, on to the post. 

The classic nerd bird route between Austin and San Jose has recently become a hot market again. The route has historically operated as one carrier market. Now, three carriers are fighting to take this nerd to the prom. Normally, the pessimist in me would normally believe this much competition could ultimately backfire, but this route feels different. This feels like a market that might, just maybe, able to support all three carriers at the current capacity levels.

It is hard to believe, but Austin to San Jose is one of the few non-hub, point-to-point markets that has been operating near continuously since 1992. Since 1992, there has been only one time the route did not have service. This gap in service lasted all of eight days in 2009 when American discontinued the market and Alaska Air had not started their service yet. In 2010, Southwest jumped into the mix and Alaska jumped out in 2011 then back in 2017. Now, American has decided it wants back in.

Frontier had also operated the route for a very short time with less than daily service. Since I cannot begin to figure out what Frontier is doing yesterday, let alone today, we are largely going to ignore them in this piece. 

American has long had a love-hate relationship with San Jose. In the early 1990s, San Jose had an impressive American offering. The network focused mostly on the west coast, American hubs, and Toyko service.



By the time Austin was added to American's San Jose portfolio in late 1992, American was already pulling its network investment back. In the summer of 1993, American cut their departures from 60+ daily flights to 17 destinations down to 27 daily flights to seven destinations. The exact reason American had such a dramatic decline in service is not entirely clear, however, spiking fuel costs from the Gulf War plus the lagging US economy following the 1991 recession could have easily caused the focus city to be cut.


It did not take long for San Jose to see another large American presence in the market. Following American's purchase of Reno Air in the late 1990s, the San Jose market became another large focus on the American network. But even after the purchase, San Jose saw a slow, steady, death by a thousand cut approach. By 2006, San Jose was served just to American hubs (LAX, ORD, and DFW) and three non-hub airports (AUS, SAN, and SNA). Finally, American pulled all of the non-hub flying out of SJC in 2009.

While 2009 was not a banner year for any carrier, it was particularly tough for American as a whole. As other carriers entered liquidation or entered bankruptcy around this period, American staved off bankruptcy even with their $1B operating loss.

Since 2004, American was in continuous state cutting under-performing flights off their network. Between 2004 and 2009, American reduced their overall size by 15% of their ASMs. 8pts of the 15% reduction was reduced between 2008 and 2009 during the Great Recession. Nearly all of these reductions were focused on their domestic network.


It should come as no surprise that, if a domestic route turned negative in performance, American was quick to react. During 2009, what little remained of the American SJC non-hub flying turned negative. While SNA appears to be inline with system performance, SAN and AUS under-performed system unit revenue results by over 10%.


This was not always the case. Before the recession, American's Austin to San Jose appeared to be performing quite well, producing a healthy double-digit RASM premiums American's system averages until the recession hit. However, things took a dramatic turn in 2007 as the housing crisis spread across California.


After American dropped their Austin to San Jose service, Alaska picked up the route within eight days. Alaska started the AUS-SJC service in September 2009 and operated it without competition until November 2010 when Southwest launched its own service.


In the first year of operation, Alaska appears to have performed just slightly below its system revenue expectations. This is not uncommon has it often takes a few years for a route to fully mature. However, when we dig deeper into their revenue performance, there were clear areas of weakness.

The route started off extremely soft in 3Q2009, however, as the route aged, it began to pick up some steam. A vast majority of the quality market performance came during 2Q2011 and 3Q2011 performance. Once Southwest entered the market in the latter part of 4Q2011, Alaska's revenue performance tanked (down 15-20% year-over-year) until Alaska exited the market in 2011.



As previously discussed and can be found on my ethics page, I am unable to evaluate Southwest Airlines' network performance. 

A lot has changed for Alaska in San Jose since they originally launched the market in 2009. Alaska has invested nearly four times the flights and six times the ASMs than were deployed when Alaska originally entered the AUS-SJC market.



This investment has generated a significant amount of local customer loyalty within the SJC market. Year-ending 2Q2019, Alaska is up 400% in SJC originating traffic compared to 2009.


Alaska is not necessarily unique to the San Jose growth. The entire point-of-origin San Jose market has grown significantly since 2009. In fact, San Jose is 69% larger than what it was in 2009. Nearly every carrier has experienced some level of growth. However, Alaska and Southwest are clear gainers in the market.


This leads me to why I believe Austin to San Jose can support all three carriers at the announced capacity levels. First, let's take a look at Alaska's performance in the market since they restarted the market. Since Alaska has restarted the market, its performance appears to be inline to slightly above their system-level RASM performance.


So what had changed within the Austin to San Jose market? Well, the economic foundation in each of the cities is completely different. In the last ten years, the entire GDP for the Bay Area and Austin has nearly doubled in size. This economic growth puts natural upward demand pressure in market from both Austin and the Bay Area.


This is reflected in the Austin to the Bay Area traffic demands as well. The entire market (Austin to all of the Bay) as nearly doubled in nice from 600 PDEWs to 1,200 PDEWs. Interestingly, most of the growth has been to San Francisco, not San Jose. San Francisco is up nearly 400 PDEWs (144%) vs San Jose at 175 PDEWs (84%).


This is exactly why I foresee the ability of all three carriers to be (marginally) profitable and sustainable within the Austin to San Jose market. The entire Bay Area to Austin market has grown unevenly and the new service to San Jose will add increase competitive pressure to not only SJC, but also SFO and OAK. With only minor stimulation and share shift from SFO to SJC, each of the carriers could have plenty of demand between all three to serve the market (marginally) profitability. Let’s not kid ourselves, this much capacity across this many carriers it would be unlikely the route would bankroll any carrier’s P&L, but they should be able to make it work.

United service between Austin and San Francisco, however, might take a hit. With their hub in the Bay, they could shift their revenue management strategies to take flow passengers if they are struggling within the local market.

Finally, I do not believe any carrier, regardless of their profitability, can exit Austin to the Bay Area. Why? Alaska's last non-hub focus city in California is SJC. I appear to be incorrect on Alaska refocusing on San Diego. With Alaska's retrenching back to San Jose, any additional flight reductions within the market will only decrease their SJC relevancy. Alaska currently services 12 of SJC's largest 20 markets, but they are already missing major markets (LAS, PHX, DEN). Reducing a 200 point-of-origin PDEW market only increases their marginalization within the city. If they were to reduce a top 20 market, it could start to question their relevancy in the city, as well as their entire California, non-hub strategy.


For Southwest, (again see disclosure), they are the largest carrier in both Austin and San Jose by far. The probability of the largest carrier In both sides of a market being driven out of the market seems remote. If any carrier were to weather competitive pressure best it would be Southwest.

This leaves American. With American launching this new service, they clearly believe the benefits far outweigh the risks associated with this market. I have little doubt that American can make this market work in the longer term. With economic growth in both San Jose and Austin, any short term market weakness will likely be grown into as the economies on both sides of the market continue to grow.

Ultimately, this market is going to be a wait and see. But do not color me shocked if as we near 2021 if all three careers are still operating in the market. Heck, I also would not be too shocked if we see one other carrier tries "focusing" their Austin service to San Jose as well. If that were to happen, the market dynamics in Austin to San Jose could be completely up in the air.

Thank you all for a great 4Q launch. I continue to be impressed by the growing audience. With the upcoming holiday season, I am taking the next couple of weeks off (unless some carrier does something truly crazy) to spend time with family and friends. To all the crews and support staff operating at the airports this season. Thank you. You guys do far more than many of your passengers will ever realize. 

To the back office professionals, thank you for coming by and reading the blog. I have received quite a bit of positive feedback from my professional network. If you guys have ideas for future posts, please feel free to send them my way: Levi@FlyDataGuy.com. 

Everyone, have a great (and safe) holiday season and I'll see everyone again January 8, 2020. 

Wednesday, December 11, 2019

American's Additions into Austin: This Won't End Well

Disclosure: As you will find my on ethics and disclosures page, my employment contract with Southwest Airlines does not allow me to directly analyze Southwest Airlines. I can point out public factual information, but analyzing their expected financial impact and performance by American's announcement is not currently permitted. It is clear Southwest will be impacted, any new competition would have some impact, but you will not find an analysis of this impact due to the aforementioned agreement. Now, on to the post. 

On Tuesday, American announced a load of new, non-hub following. This included event-specific flights, such as a Kentucky Derby to the Berkshire Hathaway annual meeting in Omaha. These types of commercially available, event specific flights were new to American. American, if you really want a unique flight, you should have done a flight between Louisville and Omaha on May 3 (Kentucky Derby to Berkshire Hathaway). These types of flights are not unique to other carriers. Delta is typically the most liberal legacy carrier with event flights, especially with CES in Las Vegas every January. American, however, really seemed to stay out of this type of operation. I am sure they might have charter flights with similar events, but to be honest, I did not go back into the flight records to find them.

But what really caught the AvGeek community by surprise was American's announcement of new, daily, non-hub flying out of Austin to San Jose (2x daily) and Boston (2x daily), as well as their less than daily flights to Cabo. There are plenty of great articles that discussed the new service (here and here). This article, however, will focus on what the impact of these flights may be to other carriers, especially JetBlue. But first, a little history.

Both Boston and San Jose were hubs or hub-lets/focus cities within the ghost of American network past. Austin, however, never was. But that doesn't mean Austin is not important to the American network. In fact, when digging into the Austin originating traffic, in 2018, American #2 carrier in Austin and 50% larger with Austin originating traffic than Delta, which considers Austin a focus city. At a macro level, I do not believe these new routes have anything to do with Delta, even though it does overlap within Boston. Rather, it appears American is just making a similar play in Austin, where it has a large base of customers.




Beyond American entering the point-to-point network, why do I found this route announcement so interesting? Well, American will be the third point-to-point carrier in San Jose and the fourth in Boston. Clearly, American is seeing what others are. Austin is growing and demanding additional service to both of these markets. Do I think this will end well? Nope. This week I’ll examine Austin to Boston. I’ll follow up next week with Austin to the Bay Area.

Who is going to stay in Boston?

When looking at Boston on the macro level, Boston is a true market unicorn. Since 2010, the market has increased from 228 PDEW to over 500 PDEW in 2019. All of this happened without a decrease in the industry average fare. This is extremely rare to find this much stimulation without degradation in the fare.



However, when we dig deeper into the airline-specific performance, we might a slightly different story.

For JetBlue, Austin to Boston has been their one consistent route since they launched the city. In 2006, JetBlue launched Austin with 1x Boston and 3x JFK. Since then, JFK has been reduced to 2x, but other markets such as Long Beach, Orlando, and Fort Lauderdale have been added to the city. San Francisco was also added to the list between 2008 and 2014. 


When we start digging deeper into JetBlue's performance, it really is a mixed bag in Austin. Flights to Florida and California seem to slightly underproduce, while the Northeast performs at or above system revenue performance. This might not come as a huge surprise, but remember JetBlue struggles within the Houston market.


What is most surprising to me is how well Austin to Boston has continued to hold up for JetBlue. Since 2012, the route generated a 20% RASM premium to the network. If the competitive pressure could not be enough, JetBlue also is flying mostly A320s, which their size would put natural pressures on RASM compared to the E190.

If you are surprised regarding JetBlue's performance, so am I! Considering the pressures we discussed in Houston and the intense competitive capacity additions, at best I would have expected JetBlue to perform at system averages, but really I expected them to be subpar. This is not the case.


JetBlue's performance within the Boston market is no small feat. Since 2014, the number of flights has increased by 250%. American's new, roughly twice-daily service will increase the flights by 450% since 2014. American's twice-daily service will be much more formidable than Delta's and Southwest's one daily flight each. American’s schedule will match JetBlue's frequency and timing, which added a second daily flight in September 2019.



JetBlue's performance seems to be driven from the Boston side of the market. Since JetBlue entered the market, they have been able to continuously grow their Boston point-of-origin traffic. Even when Delta entered the market, Delta really just caused a plateau in JetBlue's Boston passenger growth rather than stealing from them.


On the Austin side of the market, Southwest really appears to be the leader within the market. This really leaves Delta without a dominate city to defend their share in.


Turning to Delta's AUS-BOS performance, we see a different story forming. Delta entered the Austin to Boston in 2017 with six weekly flights. While Delta's routes have been relatively full (near 80%), their unit revenue performance appears to be significantly lagging its network peers. While underperformance might be expected when a route launches, sustained underperformance, similar to what we are seeing here, is a cause for concern.


Now to be fair, it is impossible to know if these metrics are inline with Delta's expectations on the market. Delta may be flying this underperformer to unlock revenue with a corporate contract elsewhere. This information is impossible to obtain from the outside. However, even if Delta were capturing an additional contract, this level of underperformance would be difficult to justify staying in the market.

How much underperformance are we seeing? For Delta to get to system 2018 RASM averages, my model shows they would need to produce $6.6M in additional leg revenue. This equates to $43 per passenger in additional fare or 38 pts of load factor. Clearly, 38pts of load factor is not possible, so Delta has to get their fare up to close much of this gap. But it is highly unlikely Delta will be able to increase their fare and increase the loads, especially with new competitive pressures.

Now, for those new, I want to make the $6.6M revenue gap really clear. This gap does not mean Austin to Boston on Delta is losing $6.6M, rather it is an opportunity cost measurement. If they were to deploy this aircraft at the same distance and get system-level returns, they would expect to get $6.6M in additional revenue.

However, what we can tell, at least compared to JetBlue, Delta is underperforming both in prorated leg fare and load factor. As a market is developing, it is common to see underperformance within one of these metrics, typically fare, but underperformance in both load factor and fare appears to be a bad omen. And let us not forget, this performance is while American is not in the market yet.


Delta should be concerned about their lack of passenger point-of-origin strength either side of the Austin to Boston market. They are clearly underperforming in the market and not being a dominant carrier in either city is clearly not helping their position. When examining Delta's Boston point-of-origin share, Delta has grown their Boston local base, but they still trail American. As we showed earlier, American is 50% larger than Delta within the Austin point-of-origin market.


Clearly, Delta will be feeling intense pressure to make a change, especially with American's entrance. In Atlanta, I suspect if hard conversations were not already underway, someone is modeling the impact of American's service and what it means for the sustainability of the market. I suspect, Delta may let this route continue to fly at least a few months into American's new service. However, if revenue management feels more fare and load factor pressure, which I suspect they will, it is not improbable, and I'd argue quite likely, that we will see Delta exiting Austin to Boston within the next year.

Next week, what American's addition to San Jose means for the Austin to the Bay Area market.

Wednesday, December 4, 2019

Digging Deeper into the CRJ-550

Typically, when I start analyzing a project, I try to dig as deep as possible into the city, route, program, or airline as possible. I try to be as factual as possible in my analysis to provide you all the best possible articles possible. So when I mess up or get something wrong, I think it is incredibly important to correct the record. This is why I wanted to address the CRJ-550 again.

Before I begin, I reached out repeatedly to United for comment and they have yet to return my emails. I did reach out to Bombardier and they confirmed they have not sold a new CRJ-550 nor do they have orders for the aircraft. Rather, United purchased the aircraft certificate from Bombardier. Also, I have reached out to Mesa regarding their announcement yesterday regarding more E-175s and the transfer of CRJ-700s to "another United express carrier". As of this writing, I have not received a comment from Mesa either.

So where did I fail on the CRJ-550 analysis? As many of the news agencies across the country reported, I assumed the CRJ-550 was actually a brand new plane, not just a retrofit on a new certificate. As many of you correctly pointed out to me online, these "new" CRJ-550s were actually used CRJ-700 placed on a new certificate with lower weights and configuration. I clearly did not understand the full context of the CRJ-550 program and I'll own it.

So how old are United's CRJ-550s? Well, the youngest current operating CRJ-550 is 10 years old according to the FAA's registration database. If this old of an aircraft caught you by surprise, don't worry, it caught me as well.


During my research for the piece, I did pull United's SEC file and paused when the regional fleet orders only discussed the E170/E175. Heck, I even pulled Flight Radar live flights to get an idea of how many CRJ-550s were operating. All of these should have been red flags, but I missed them. I should have gone a step further and pulled the individual tailnumbers similar to what I did above.

Well, that's exactly why we are digging deeper into the CRJ-550 program. Even since my last post, United still appears to be making moves within the CRJ-550 program. Further, during the last week, my data provider, AirlineData.com, opened a new module with DOT on-time performance data. Typically, I do not use on-time delivery information for analyzing commercial decisions as it often does not make a material difference in an airline's commercial decisions. More often, OTP might make an impact on how a route or schedule is designed, such as how an aircraft is turned or blocked, but not often is a decision made how rather a route will be flown or not. However, if you are looking to see understand the customer experience, OTP would be the number one driver for customer satisfaction.

However, the DOT's on-time delivery data does unlock a host of schedule design metrics that directly impacts how much flying an airline might accomplish during the day. The data is extremely detailed down to the tail number of an aircraft and the routing that it took on an individual day.

Let's take United for an example. Since we have both aircraft counts and block hours, we can see United's network monthly average utilization in 2018 and 2019. Overall, United utilization is up year-over-year across all bases. This could be due to pushing harder on the schedule, longer block times, decreased spares, or a whole host of other issues. It's really not the point of this week's post, but it shows the power of other data sources that are often left unused when analyzing an airline on the network level.



So, if we are writing about the CRJ-550, why do I have DOT on-time performance data? Well, this allows us to understand the history of the CRJ-550 aircraft. The next part is a little confusing but bear with me.

My original hypothesis, as I believe many industry observers also believed, United was swapping CRJ-700s to CRJ-550s at an equal rate of E175 deliveries. This hypothesis was evidenced yesterday when Mesa announced they were adding 20 E175s to their fleet and offloading 20 CRJ-700s to "another United express carrier". These 20 aircraft would result in Mesa completely exiting all CRJ-700 operations. Which carrier might receive the aircraft? I think it is safe to assume GoJet, but I would not count Skywest out of the picture either. Who gets the aircraft will be a function on how United wants to deploy the fleet. More on that later.

When researching the history of the original GoJet eleven CRJ-550 aircraft, I tried to use the DOT on-time performance data to see which routes the aircraft were operating. I was surprised to find that each of the N-numbers of the aircraft was changed, even though most of them were operated by GoJet. This might be due to the new aircraft certificate, but this would be a question for United.

I was equally surprised to find three of the CRJ-550 aircraft were old CRJ-700s operated by ExpressJet for American Airlines. These three aircraft were grounded and placed into storage in December 2018 or January 2019 timeframe as the ExpressJet CRJ700 aircraft were grounded. I originally thought all CRJ-550 aircraft were 1:1 capacity downgrades for the E-170/175s for United. This does not appear to be the case.


Using the old GoJet tail numbers, I was able to find that GoJet had completely retracted all of these aircraft from their operation by mid-August. This makes me wonder how long the actual conversion process takes for these aircraft. United might have been conservative to make sure they had all FAA checks in place or wanting to make sure they had a critical mass of aircraft. It could also point to the aircraft being converted as part of a regularly scheduled heavy maintenance check, but honestly I would just be speculating. If you know the details of the conversion process, I’d like to hear from you.

In United's last earnings call, they stated they expected to have 54 CRJ-550 aircraft operational by the fall of 2020. So far, we have found 31 of the 54 aircraft (Mesa 20 + 11 original). So where else might the aircraft come from? Again, we turn back to the on-time performance data to give us guidance.


If we assume United's guidance of 54 CRJ-550 aircraft is rock solid, United will need to rob an entire fleet from Skywest or the remaining CRJ-700 aircraft from GoJet. I suspect the easiest decision will be to convert the remaining GoJet aircraft since they appear to be the main operator of the aircraft. However, even so, we would be six aircraft short.

For those expecting a simple move from Skywest to GoJet, I highly doubt the transaction would be that simple. When examining the ownership records of these 23 aircraft, Skywest owns 22 of the 23 aircraft. I doubt Skywest would willingly shift the ownership of any of these aircraft to another regional operator which they do not own. So, I would not rule out the possibility of the CRJ-550 flying under the Skywest flag.

If Skywest's entire fleet was converted to the CRJ-550 and no other GoJet were converted, we would have our 54 guided CRJ-550 by the fall of 2020. It would bring into question what United would expect to do with the final 17 GoJet CRJ-700s. I’d suspect they would be converted in time as well.

If you stuck with me this far, I assume you are wondering why any of this matters. Well, crews have to be based somewhere. If GoJet were to take the entire fleet without expanding its crew bases, the aircraft would likely be limited to Chicago, New York, and Dulles with limited options within the remaining hubs. Expanding the fleet to Skywest may allow the fleet to expand westward into Houston and Denver and I could easily be talked into SFO. I personally think the CRJ-550 would be a great California aircraft.


Finally, I want to touch on the 4 million pound gorilla in the room: why the CRJ-550 is such a hot button issue with the United pilot union. In 2018, ALPA started to produce videos regarding scope and the E175. In these videos, ALPA makes it clear, they want the E175 to operate as mainline or a United to purchase a new narrowbody fleet.

In 2018, I suspect the pilots assumed they had the company in a jam to push one of these proposals through. United had just purchased 20 new E175s and while they were nearly capped out on their 70 seat flying. Again, I suspect the pilot union suspected they could just wait the company out. With no solution, the company would have to remove 70 seat aircraft from the fleet to add the new E175s. I doubt they expected, as many of us did not suspect, Bombardier would come up with a scope compliant aircraft certificate for what appears only to be United.

This converting CRJ-700 aircraft to the CRJ-550 certificate effectively removed the log jam to bring more E175 aircraft into the fleet without having to negotiate for scope relief from their pilots. This is why you will see pilots talking about United skirting the scope clause.

While the CRJ-550 may have provided temporary relief to the company, by the fall of 2020, there will only be around 20 CRJ-700 aircraft that can be converted for scope compliance. The CRJ-550 is not a permanent solution rather a stay of execution. By early 2021, without an agreement with their pilots, United will likely find itself back in the same position it was in 2018. Needing to expand the 70 seat fleet without having the ability to do it.

I assume we will continue to see the CRJ-550/700 discussion continuing for some time. There will continue to be fleet movement until the fleet discussion is settled, maybe when the latest pilot contract is completed.