Wednesday, September 2, 2020

California Love? NK's SNA Announcement

Over the last few weeks, airline networks have become increasingly dynamic. As expected, airlines have continued to hack away at their future fall and winter schedules. At the same time, planners are returning previously operated routes back to their network and experimenting with new routes (American new routes, United to Florida, Delta MEM-IND). 

While a lot is going on, Spirit's new Orange County service really caught my eye. Why? There's a lot of history tied up in these three flights. Yesterday, Spirit announced they are placing Orange County (SNA) on their network with service to Oakland (2x) and Las Vegas (1x) starting November 17th. 

Since the Wright Brothers flew at Kitty Hawk, airlines have been fighting over the LA Basin. In the early 1990s, Southwest grew quite extensively in Intra-California as the original PSA was cut down after US Air acquired them. Fight after fight, Southwest ended up the king of the Intra-California market by way of their secondary market, Intra-California strategy. 

Southern California has always been one of those complex markets. The main airport, LAX, is insanely expensive and with continued (and often unnecessary) capital investment, cost per enplaned passenger has become outright insane with the Fitch credit rating stated cost per enplanement is expected to reach $30 per enplaned passenger. Even at $30 per enplanement, the airport still hasn't fixed their access/egress problems at the airport. 

It also should be pointed out the $30 per enplanement projection was prior to COVID suppressed enplanements and after Fitch raised their pre-COVID cost per enplanement forecast by $5 per enplanement from their forecast only one year earlier. I would expect LAX's unit costs to skyrocket further in today's environment. Remember, these costs are fees paid by the airline to the airport and do not include any of the airline's operational costs associated with their employees. 

In past economic downturns, airlines typically consolidated around LAX and abandoned the secondary Basin airports. This would typically make sense as alliances and more extensive operations allowed for enhanced connectivity. However, overall Basin Airport seat share for LAX topped out in 2016 and has been in a steady state of decline as carriers have started to fight over the secondary markets. 

Each of the secondary markets is unique. BUR, LGB, and SNA are all artificially constrained by noise caps. Burbank by gates, SNA by seat allocations, and LGB by slots. Ontario is the only secondary airport that is not limited to noise operations in any way. As airlines shifted away from LAX starting in 2016, two fights developed in the secondary airports: access to constrained airports and Alaska growing their California operation. 

Orange County, in particular, is an interesting airport. The airport, controlled by strict enplanement regulations, was left in the dust by most carriers during the last recession. Only Southwest continued to grow in the market until 2016 when their seat allocations were cut as other carriers requested access into the city. 

While Orange County has largely stayed flat in seats due to their seat allocations, the other constrained, secondary LA Basin airports started to see growth in beginning in 2016 as well. This was in part due to airlines shifting more capacity into the cities, as well as competitive pressures from Alaska. Long Beach, which peaked in their capacity in 2017, declined due to JetBlue's attempts to make the market work. ONT really deserves its own future post as it has transformed itself in a post-LAWA world. 

When we take a more in-depth look into secondary airport growth, we can see two trends Southwest cut a massive amount of their seats following the last recession and the 2015 forward growth came from Delta and Alaska as well as Southwest adding back the seats they previously cut. This really should not be a surprise if you've paid attention to the industry over the last couple of years. Both Southwest and Alaska competed heavily to be California's intra-state carrier

If you've made it this far, you're like asking yourself, "So, what does all this after to do with Spirt's new routes from SNA?" Well, one of the most essential things to route development is understanding who is actually making the route decisions. Some of the network planners at Spirit encompass both old AirTran/Southwest and Alaska folks. These network planners know how well Southwest performed within Intra-California. 

When we look at publically available DOT data, in 2016, before Intra-California was flooded with capacity, most Southwest's routes performed at or above system RASM curves. This helps explain why Alaska saw an opportunity to skim off the top in California. They knew Southwest overperformed in California and Virgin America had a large and loyal customer base. 

Even after all the capacity from Delta, Alaska, and Southwest, what route appears to perform better than all other Intra-California routes? You've guessed it, SNA-OAK. Spirit is hoping to skim off the top with their two new flights and expect to find California gold on the route. Do I think it will work? I give it a big maybe, but they have the best chance out of all carriers. 

When we take a look at the overall market share of Oakland, Southwest has a commanding lead of 73% of all passengers, with splitting the #2 and #3 Spirit and Alaska operating around 6-7% market share ( This is before American quit the market at the start of the virus. 

Now, I do want to be clear, I do not think the Spirit planners are targeting SWA more than any other carrier. All of the ULCC planners pull competitor's RASM curves and look for high passenger volume, over-index RASM performing markets. These high-performing, competitive markets are often ripe for passenger and fare stimulation. 

But, what is interesting to me is OAK-SNA will be Spirit's first secondary-to-secondary market route in California. Spirit skipped over other, larger Intra-Cal passenger and revenue markets to go after SNA to the Bay. SNA to the Bay produced a $20 premium compared to other Bay to Basin markets in 2019 (Source: The Hub by Airline Data Inc  

Unfortunately, we will never know how well the OAK-SNA market works for Spirit. The ULCC model relies heavily on "fees" (i.e., excise tax avoidance strategies), which are not reported on route level performance for their ancillary products. It is not possible to correctly prorate "passenger usage" fees, bag fees, etc., down to the leg level unless the DOT changes their reporting requirements. Don't hold your breath.  

I do think Spirit has a reasonable shot at making SNA-LAS work. From all of their California stations, Spirit operates at least one daily flight and often multiple daily flights to LAS. This appears to be beyond just an easy routing out of a crew base to make flight rotate easily. They are likely making some money here. Vegas is a bottomless pit of demand if you drop your fare low enough.... which Spirit is happy to do. 

Exactly what Spirit has in store for Oakland long term is difficult to know. Currently, October and November schedules show Spirit operating LAS and LAX multiple times daily, with less than daily service to Chicago and Houston. Currently, Houston and Chicago are scheduled to be discontinued in December, which I assume Orange County will take the place of. This would make the station balance around five daily departures, which Spirit promoted in their press release

Five flights do not feel like a long term solution for Spirit in Oakland, but we will have to wait and see. It would not surprise me to see Spirit turn more flights south out of Oakland once the economy starts to recover.