Monday, May 4, 2020

Delta's Push to Drop Small Cities

Few things chap my hide as individuals or companies going back on a deal. In the middle of April, airlines announced the agreements with the federal government as part of the CARES act funding. At the time of the agreement, airlines submitted their requests for minimum service exemptions required as part of their CARES funding. If you have been paying attention, most of these service exemptions were rejected by the DOT.

It appears the DOT will only approval exemptions to minimum service levels if an airline can demonstrate a local travel ban (Hawaii and Puerto Rico), show they will offer a unique service pattern, or travelers can be recovered by co-term airports. United most recently tried the latter to expand the number of cities to be temporarily dropped from their network. The DOT flat rejected all requests that were not supported by the local government. 

This rejection did not prevent Delta from attempting to drop nine domestic cities due to their proximity to other Delta cities. The entire premise of Delta’s filing is these nine cities are generally within 60 miles of the nearest Delta city, but no other meaningful data was provided. 

The level of analysis provided by Delta should warrant a giant red rejection from the DOT. Delta’s “evidence” that these airports were in co-terms with other cities was the airport name:

“Similarly, Savannah, GA (SAV) is an adequate substitute for Hilton Head, SC (HHH), and Orlando, FL (MCO) is an adequate substitute for Melbourne, FL (MLB), as evidenced by the fact that SAV is actually called the Savannah/Hilton Head International Airport and MLB is called the Orlando Melbourne International Airport.” (DOT-OST-2020-0037)

The practice of airports naming themselves after a large, semi-near attraction has always bothered me. Melbourne’s and Orlando’s airports took their airport naming fight to federal courtOrlando felt so threatened by an airport 1% their size, they filed a federal lawsuit to force Melbourne to stop calling themselves “Orlando.” I guess they forgot about Orlando/Sanford up the street... 

When it comes to airport naming, I have always taken the position an airport should feel free to call themselves whatever name they would like. Why? It is quite simple. Unless the airport can convince ticket distribution channels to update their name, it really does not matter. Airline and distribution channels co-term airports by their definitions. If an airline or distribution channel feels like airports are indeed in the same area, they often present both airports as travel options. In fact, Delta does this with its website as well. When we type in Los Angeles, both Burbank and LAX are presented as options. However, if I search for Orlando, only MCO appears. Melbourne is nowhere to be found.

In my opinion, airports should stop this practice. Renaming an airport has real costs to it (signage, documents, time, etc.) with no real benefit. I have yet to see an airport rename itself, without the support of a distribution channel name change as well, and see positive results. 

But, I cannot fault completely Delta for attempting this maneuver, regardless of how much I disagree with it. When it came time for Melbourne to eat crow and demonstrate they are a different airport from Orlando, they mostly missed the opportunity. In fact, the airport helped support Delta’s request by stating:

“Lastly, Delta mentioned it can simply shift all operations to nearby Orlando International Airport (MCO) and that since we share the same market, out customers can simply use Delta’s existing capacity at MCO. We ardently disagree with this approach as MLB has worked extremely hard to provide distinctive service amenities for our customers and we would regret losing even more of our market share because of this decision” (DOT-OST-2020-0037-0113). 

Notice in the response, the airport worries about its market share with Orlando. Pretty much arguing they are the same catchment area, even when this is not the case. While the airport might compete with some Florida visitors, Orlando and Melbourne are entirely different markets in how they function. Orlando is the king of inbound traffic; however, MLB relies on the local economy to drive outbound traffic. When we look at all Florida airports, only Tallahassee and Gainesville airports generate a higher percentage of their traffic from the local demand.

Melbourne’s response is mostly silent on this fact. They touched on their local businesses, but the airport’s response was primarily emotional-based with a few links to news articles. I fault the airport here as they could have been much more data-driven in their response. Delta’s original request to suspend service and their response were equally lacking in data to warrant a grant for suspension. 

In Delta’s follow up response, Delta claims, “the actual demand has fallen to almost zero at the airports at issue in the request.” Again, this is extremely misleading as Delta has said this is the case across their entire network: “This has led to an unprecedented situation where demand for near-term air travel dropped to almost zero in a matter of weeks.” With the information alone, Delta has failed to show how the financial results of these markets are any different than the rest of their network.

Instead, I suspect Delta’s request to drop MLB comes entirely down to its decision to accelerate the retirements of its aging fleet. On Thursday, Delta announced they would retire the MD-88s and MD-90s. Even with a large amount of their fleet grounded, these Mad Dogs are still active in the May schedule (Source: The Hub by Airline Data Inc). Delta will be under pressure to backfill at least some of the MD-88/90 flights with a smaller gauge aircraft. While regional jets might look like a preferred option, grounding mainline aircraft in place for regional backfill would likely break Delta’s scope clause. 

Melbourne has a unique asset compared to other cities. Currently, Delta operates once daily 717 service. Since the 717 operates with only 110 seats, Delta can use this aircraft to replace much larger mainline aircraft without running into possible scope clause issues. The other cities requested that Delta has requested to be discontinued are operated by 50 seat CRJ-20, excluding HHH, which has E75 service. (Source: The Hub by Airline Data Inc) But Delta uses load factors as an attempt to show equality between the cities. 

This is disingenuous at best. Delta has access to fleet-level load factor comparisons, which could actually make the case to drop MLB, but the carrier failed to provide detailed level analysis. Additionally, if Delta truly wanted to show MLB and MCO were the same market, Delta has zip code level customer data, which they could map out purchasing patterns between the two markets. But again, they failed to provide this information. The airline provided, at best, the good ol’ college try with Google Maps. 

If Delta wants the 717 out of MLB and reduce costs, they have other options than discontinuing the Melbourne. Regional service would keep MLB on the network for now. 

Generally, I believe airlines should have the choice to enter and exit cities as they please. However, most major carriers made a deal with the federal government for grants and loans in exchange for minimum service guarantees. The DOT had predefined catchment areas, which the airlines had to agree to upfront. If the DOT allows more a more liberal definition of which cities can be discontinued, expect a bloodbath at the small city level. If Delta were granted the ability to drop any of these cities, expect American and United to submit a carbon copy to drop these cities as well within a week. 

At least with MLB, Delta has failed to present a reasonable case to drop MLB. The DOT should quickly deny this request, but I fear with many airports focusing on emotional rather than data-driven responses to these requests, the major carriers will get approval to start hacking cities off their network. And once a city comes off a carrier’s network, don’t expect it to return anytime soon. But hey, airlines, if you want approval to drop cities, you can have blanket approval on October 1, 2020.