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.

3 comments:

  1. B6 is now going up to 3x daily BOS-AUS next summer! Popcorn please.

    ReplyDelete
  2. If it is not going to end well why in the world would an airline start the route in the first place? Aren't they in the business of making money and not losing it?

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  3. American is the number two carrier point of origin in both stations. I think American thinks they will make money over the longer term.

    Other carriers, like Delta, who appear to be underperforming might have the route operating as a loss leader or break even for customer development in either city. There are reasons, not many, that airlines would operate a subpar producing route.

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