Wednesday, January 29, 2020

How much has Frontier's network changed?

This week, I decided to take a step back from hardcore revenue analytics like we have seen in the past few weeks. While revenue is one of the most important metrics in determining the health of a market, I thought I’d switch to an operational and schedule analysis this week. So this week we’ll take a look at the Department of Transportations on-time performance report. I’d argue this dataset provides some of the most insightful views to the operation of an airline, but is wildly underutilized.

Why? If you are not one of those data nerds that often pull raw datasets yourself, you likely assume that the OTP information basically tells you if a flight arrives on-time or not and that is about it. But in today's post, we will use OTP information to see aircraft routing, aircraft metrics, fleet used for service, etc. There is plenty of other metrics that could also be estimated from the dataset including operational spares and turn times.

While these might not sound as sexy metrics, consider this. If you can examine an airlines' aircraft utilization to a few hundredths of a point and have a good future fleet source, then you can have confidence when estimating how much capacity a target airline may have left by fleet to deploy at any given point of the schedule.

Today, we will combine both the Frontier schedule and on-time performance information to see exactly what has changed within the Frontier network over time and what has stayed the same.

First, let's take a look at aircraft utilization. As you might expect, ULCCs push their assets longer to spread fixed costs across more ASMs. However, if you expected Frontier to be firewalling their fleet compared to previous years, you are going to be surprised.

When we look at the Frontier operated schedule from the DOT's OTP report, we can see Frontier's April schedule has been pretty consistent in their fleet deployment since 2007. There is a noticeable decline in Frontier's utilization in 2011, however, it should be noted during 2011, Republic was handling a significant share of Frontier's flying. Republic was removed from today’s data.

But what about other ULCC carriers? How does Frontier stack vs Spirit or Allegiant if they have not increased their utilization? Frontier and Spirit are largely identical in their deployments. Allegiant, interestingly, has a hard cutoff around 13 hours which you do not see at Spirit or Frontier.

If you are an inflight crew, you likely know this is only a piece of an aircraft's daily story. While I do not currently have turn time (time on the gate). Turn time and total aircraft operating can be decoded from the OTP data, however, I have not built the model for it at this time. In time. I promise. Maybe.

In addition to core aircraft utilization metrics, we can also track tail number specific movements within airline networks. Here's Grizz (N227FR) on 4/19 - 4/22.

By the way, if you are an old hardcore Frontier fan, you will be disappointed to know Flip and Larry have been retired. They were A319s living in an A321 world.

But beyond tracking our favorite fictitious Frontier tail, we can glean useful information from tracking tail numbers. Based on Frontier’s OTP data, starting in 2014, it appears we can see two distinct base schedules per year, at least in terms of aircraft routings. Really, these appear to be highs and lows for aircraft routing thru Denver. There appears to be a distinct Denver high (April thru November) and a Denver low (December thru March).

While it might seem like a general, "oh that's pretty cool", there are real-world implications here. Aircraft have to be maintained and crews need to be based. I’d be interested in learning if crews are moved to non-DEN bases during this time or if non-DEN crews are pushed harder during higher non-DEN routing periods. The chart also shows that Frontier is no longer directly dependent upon Denver to route their aircraft.

Additionally with this data, we can begin to see how many aircraft frames Frontier is deploying within their operation over any set period of time. This is different from frames within the fleet since a percentage of frames will be down for scheduled maintenance among other events.

Finally, while we often see on the forums jokes regarding Frontier's "dartboard" approach to capacity planning, what we find is what appears to be a 40%, 20%, 20% strategy. 40% mature routes, 20% maturing routes, and 20% yearling routes.

When we look on an absolute basis, most planners will see Frontier's declining absolute maturity within their routes. In other words, Frontier has cut deeply into their maturing frequencies that have existed for 3+ years for yearling frequencies (< 1-year-old) or maturing frequencies (2-3-year-old routes).

But the chart is somewhat misleading. The drop in mature frequencies is more a function of Frontier's shift towards more breadth and lower frequency within its existing network.

Absolute route counts have skyrocketed since 2016 as Frontier has diversified its network. During the peak travel demand period, Frontier operated nearly 350 routes, albeit at very low frequency. 

In relative terms, Frontier has invested 40% of its routes towards mature capacity (> 3 years old), 20% towards maturing routes (2-3 years old), and 20% towards yearling routes. This appears to flex some, but it appears to be a good rule of thumb. 

Finally, as we all have come to know Frontier over the last few years the airline has become known as the king of churn. We have all seen the press releases where Frontier has started one billion new markets across a million new cities. They are often announcing so many new cities and routes, they have to deploy their general council to announce route on their behalf. (Rant: If you have to use your general council for route announcements, you are either too thinly staffed or announcing far too many routes).

What we often do not hear is Frontier's "seasonal" service that never seems to return

Frontier will be interesting to watch over the next few years. With the amount of new frames coming from Airbus, I do wonder if the churn rate is sustainable. Finding new homes for airframes gets increasingly more difficult when the amount of frames continue to increase

In the near term, it sure feels like we are days or weeks away from another massive expansion from being announced, just in time for summer 2020 travel. 

Wednesday, January 22, 2020

Behind the Cuts: Examining Why JetBlue is Cutting Long Beach

In the early winter of 2017, a small group of us Southwest Airlines network planners were gathered in a conference room. We were given our marching orders. The 737 classic fleet was headed into retirement on September 29th, moved the 30th, and the MAX would join the fleet on October 1st. With the reduction in airframes, we were going to have to reduce frequencies and eliminate routes to keep the network operational with balancing commercial constraints. After months of debating, it was time to decide.

Cutting sucks. There’s a good chance you had to eat crow after defending the poor performance as you believed the route just needed to mature. But it was finally time. Due to aircraft constraints, pressure to get network performance up, or this route’s performance just dragged for too long without meaningful long term strategic value, today is execution day for this route. Regardless of the reason, someone is going to be pissed at your decision.

In my time as a planner, I heard it all:
  • This is the most short-sighted decision ever made 
  • I am going to have (name the ULCC) enter the city and they will take all your customers
  • You do not understand the city/market. 
  • You are lying
  • Well, I'll be calling (name the Leader) and they will be reversing this decision
Once, I heard three of these in just one 20 minute meeting.

I bring this up not for sympathy, but for understanding. I was fortunate enough to have and still maintain great industry relationships. I bring this up as JetBlue's network planners are likely experiencing this exact same reaction both internally and externally with their decision to cut Long Beach. JetBlue employees are likely being displaced or their hours reduced and front line employees may be feeling left in the dark. However, JetBlue has been struggling in Long Beach since 2008 and are executing on their fourth attempt at a city recovery.

The reality is there was little JetBlue could do with Long Beach that would make commercial and financial sense. Its commercial teams were left with no great options. It all likelihood, network planners could have been handicapped by constraints to delay what many may believe as an inevitable outcome.

With that digression, let's dig deeper into JetBlue's history and ultimate decision to reduce its operation to just 15 daily flights.

In August 2001, JetBlue entered Long Beach with twice daily JFK service, which was quickly accelerated to three times daily. After JetBlue's initial launch, B6 rapidly built up its position at Long Beach in response to their initial success in the market. This continued until 2008 when they topped out on slots and performance.

Depth to Breadth 

While the initial service into Long Beach appears to have been pretty successful for JetBlue, the performance love affair was shortlived. The Great Recession took a healthy bite into JetBlue’s revenue and in 2008 Long Beach's unit revenue production turned negative. Of the 14 routes, 12 were performing below the system RASM curve.

To counter the declining performance, JetBlue had to change something with the Long Beach service. Over a few years, JetBlue slowly began to transform Long Beach's network. The carrier believed their path to system returns lay with more markets at a lower frequency. The planners began to reduce higher frequency markets like IAD and JFK for lower frequency markets like AUS, PDX, SEA, and SFO.


Even with the breadth approach, the network performance in Long Beach still dragged on the network. In 2011, Long Beach's unit revenue performance really took a turn for the worst. At this point, most routes were double-digit negative compared to JetBlue's RASM curve. The only routes that appear to be working were back to the East Coast. All other Long Beach markets really pulled on the JetBlue network.

Without immediate action, this level of revenue performance would become quickly unsustainable. In 2012, JetBlue began aggressively cutting off-peak flying. Typically, JetBlue would reduce its seasonal schedule by 5-10% off the peak. However, in 2012 thru 2014 the carrier reduced its off-peak schedule by 20% of peak schedules. This approach trimmed JetBlue's yearly departures by as much as 10%.

Save the Slots 

In 2014, the Basin began to heat up as carriers started to fight for limited airport space. All secondary airports in the Basin, excluding ONT, are constrained by some type of noise controls. Orange County and Long Beach have slots, while Burbank has gate caps. As Orange County and Burbank started to fill, carriers began to shift their attention to Long Beach's limited slots.

Appetite for Long Beach began in earnest in late 2015 when the airport announced it would lift the noise cap to allow nine more flights into the airport. Of the nine new slots, JetBlue received three, Southwest four, and Delta two. Later, Southwest would use JetBlue’s underutilized slots to fuel additional growth in the city.

As is often the case with JetBlue’s focus city, these competitive incursions initiated a response from JetBlue. In August 2016, JetBlue announced its plans to fully utilize all of its slots. This shot JetBlue's departure count from ~23 daily flights in 2016 to 35 flights in 2017.

Plowing this much capacity into subpar routes is one heck of a way to start a turbine with cash. During this period, most routes moved further down the revenue production ladder. Long Beach now saw a sea of red as most routes were producing 20-40% below the system RASM curve.

The opportunity cost associated with operating these routes was astronomical. If these flights were deployed to routes that produced system average returns, JetBlue would have seen roughly $80M in additional ticket revenue. This value excludes all ancillary fees.

Now, I want to be extremely clear. The graph above does not state JetBlue lost $80M in Long Beach during their slot utilization ramp-up. Rather, the graph is an opportunity cost for flying underperforming routes. No one can say exactly how much money JetBlue made or lost in Long Beach except JetBlue. Please see my cost tangent if you receive airline "profitability reports". But the graph above can be used to understand the direction and magnitude of JetBlue's performance.

Slot Saving is Expensive 

After what appears to be a massive drop in Long Beach performance, JetBlue tossed in the towel. Twice. Kinda. In September 2018, JetBlue reduced flights by 30% but would not return the slots back to the airport until months later. Interestingly, the carrier decided to only exit FLL and removed frequencies across a variety of underperforming markets rather than more significant market exits.

This is the one time I’ll fault JetBlue’s logic in this entire process. Long Beach was bleeding cash and the first round of reductions really did not feel in line with the city’s performance. The first round of cuts announced by JetBlue were focused on stopping the hemorrhaging, but not on truly getting the city healthy.

The reductions in capacity greatly increased the performance of the city in terms of year-over-year unit revenue production. However, year-over-year RASM growth is largely meaningless when JetBlue's 2018 route performance is factored in.

This is where we found JetBlue until last week. Most routes continued to underperform their system RASM curve. Intra-California routes to SMF and SJC were particularly terrible. This is in line with JetBlue’s market exits.

Will Cutting to Profitability Work? 

After all the aggressive protectionism then retreating, do I think JetBlue may finally be stable within Long Beach? I give it a big maybe.

When we examine JetBlue as a whole, rather than just focusing on Long Beach, after the latest rounds of cuts, while still underperforming the system, Long Beach could be in much better financial position than it has been in quite some time. The routes that remain are generally within the tolerances of acceptable unit revenue performance. Don't get me wrong, the remaining routes are not stellar, but the entire system cannot be above system averages. Averages don't work that way.

Another thing to keep in mind, following this round of cuts, Long Beach is unlikely to have the JetBlue’s worst-performing routes attached to it. If JetBlue is looking to harvest and redistribute aircraft within their network, it appears they would have a healthy selection of other poor performers to sift through first.

Finally, there has to be consideration given to the logistics of routing crews out of the Long Beach crew base. Further cuts would make it nearly impossible for JetBlue to efficiently move crews. The costs associated with dislocating LGB based crews are might be prohibitive given the production of the remaining routes compared to extremes such as shutting down a flight crew station.

It is still very possible that we may see a reallocation of flights between the remaining markets, but I honestly do not expect any more earthshattering moves at least in the near term.

The only wildcard for Long Beach is competition, but I would not expect immediate meaningful competitive growth. Kate Kuykendall, Long Beach's public affairs officer, stated the airport has not received an official notice from JetBlue regarding their intention to relinquish slots at the airport. The airport is well aware of the announced reductions, however, until JetBlue returns slots, the airport cannot start the process of reallocating them to other carriers.

According to the Long Beach airport, JetBlue has 24 permanent flight slots. These slots have minimum usage requirements which JetBlue will dip below during the 3Q2020. This could mean, without JetBlue voluntarily surrendering their slots, it may be the 4Q2020 or 1Q2021 before slots are reallocated from this flight reduction. If the 14.8 average daily flights are the baseline for JetBlue's new slot allocation, we should expect to see JetBlue be allocated 17-18 slots, which free 6-7 slots for competitors.

JetBlue's potential delay in relinquishing slots should not come as a surprise. When JetBlue reduced capacity in September 2018, the carrier did not return its unused slots until the spring of 2019. Further, in New York, I suspect there are a lot of hard feelings following increases in curfew fines, increases in slot utilization requirements, and the city walking away from the international terminal. I do not expect JetBlue to play along nicely with its slots.

By the time the JetBlue surrenders the slots and the airport executes on the allocation process, we could be looking at early 2021 before Long Beach sees carriers backfill in the airport. In the more near term, the airport is already in the process to allocate three new noise supplemental slots. This process should be completed in February.

According to CrankyFlier, three carriers remain interested in additional Long Beach slots: Delta; Hawaiian; and Southwest. Based on JetBlue's remaining network, I believe there is limited exposure that you can reasonably see these three carriers overlapping with JetBlue.

If Delta were wanting to increase pressure in SLC, they already have the opportunity with their last slot allocation which they sent to Vegas. On the Southwest network, a reasonable person could argue for additional Las Vegas flights or maybe a long shot at Austin service. Otherwise, I’d expect the new capacity to be allocated away from JetBlue’s Long Beach network by these carriers.

Barring Alaska jumping into the mix, which is possible, but not likely, SEA, PDX, and SFO are unlikely to see additional competitive pressures. With Alaska exiting Long Beach in 2015, I do not see a large possibility of them wanting to relaunch the city.

This should for the time being bring stability to JetBlue in Long Beach.

Wednesday, January 15, 2020

American's New Boston Service Is A Direct Shot at Delta

If you are a true aviation geek like me, which I assume you are if you enjoy reading a nerdy aviation analytics blog, yesterday was an interesting aviation day. First, Delta announced its impressive $1.4B in fourth-quarter operating profit. This was a 28% increase in profitability year-over-year. The performance was largely driven by a 14% drop in absolute fuel expense (-$315M). If you would have told me when I joined the industry that a legacy carrier would finish the year with a 14% yearly operating margin, I would have fallen out of my chair. Oh, but how times have changed.

However, it was not what Delta earned that really caught my eye. Rather, it was American's quiet new Boston announcement that really caught me by surprise. Around noon, American announced to their employees that American would be operating Boston to twice daily Indianapolis (IND), five times daily Raleigh-Durham (RDU), and Saturday service to Wilmington, NC (ILM). If you listened to Delta’s earnings call, it appears American pitched this announcement to reporters shortly before Delta’s earnings call as well. While we all love Wilmington and its great beaches, this post is going to focus on IND and RDU where we are about to see a massive throw down between American and Delta.

The irony of American's new service announcement on Delta's earning day is not lost on me. If you listened to the call, you might have caught Delta's nonchalant attitude towards American's possible growth in Boston. From the transcript on Seeking Alpha:
Ted Reed (Forbes)Thank you. My question is for Glen. I imagine that the 10% coastal growth in hubs, includes Boston and I'd like to know, if you anticipated that American would start to grow so fast in Boston they're growing very rapidly there and they added three new routes this morning. 
Glen Hauenstein (Delta's President)Yeah. I think we've had an incredible success in Boston and Boston, customers are choosing us at – as a matter of fact the third quarter data from the government just came out and we were in a virtual dead heat with JetBlue as the largest revenue carrier in Boston. So I think we've made great progress and I think customers will stick with us. And so we'll see who ultimately are the winners and losers in Boston. But I know we'll be a winner.
Either Delta considers JetBlue its only Boston competitor or Delta does not care about American in the city. However, these new American routes show Delta should be worried American’s growth and the impact it will have on Delta’s financial performance.

Now, if you are looking for American's new service on, you won't find it. The new service will not be available for purchase until January 20 nor have I seen an official start date for the routes.

This is an abnormal approach to announce new service. Typically, routes and fares are loaded then a national press release hits the news wire late morning to mid-afternoon. If you look in American's press release for their new Austin service, not only was flights for sale that day, American included the flight schedule. You will not find that in their latest Boston announcement. This approach leads me to believe the routes were rushed through to be announced prior to the routes being loaded. Why? I'm not sure, but the timing with Delta's earnings call sure seems convenient.

Before we dig deep into American's new service, I think it is important to take a look back what the American Boston network of years ago and why this latest network build-up is different.

Similar to what we saw in my Austin to San Jose analysis, American had a love-hate relationship with Boston. Starting in the late 1990s, American really invested heavily in the Boston market then during the 2000s, Boston really saw death by a thousand cuts

When American's network peaked in 2001, the carrier had an impressive product offering. American largely served intra-Northeast, near Canadian, long haul West Coast, Florida, the Carribean, and Europe service with roughly 144 daily flights. In 2012, when American finally put the butcher's knife away, only a fragment of the network remained. London service was discontinued in 2013 and Paris, the only non-One World hub that stood in 2012 was sacrificed in 2017. 

Since American’s merger with US Airways the Boston market picked up a few non-hub markets (from US Airways) and in 2020, American has invested its own metal to Austin and London.

Until American's Austin and London service, American had not added a new daily market to Boston since 2006 when American returned Montreal after suspending the route in 2005. The route would be suspended again in the later part of 2006 not to return.

Including the recently announced service, American will operate roughly 106 daily flights to 19 destinations. This compares to Delta at 148 daily flights to 49 destinations and JetBlue at 180 flights to 59 destinations. Clearly, American is a distant third place in service.

So why am I so excited about American's increase? Well, it sure appears that American placing very pinpointed flights to maximize revenue pressure on Delta.

What do I mean? When looking at Delta's RASM curve and overlaying its Boston performance, there is not a whole heck of a lot of markets performing above Delta's system RASM curve. That should not be unexpected since Delta is still investing in the city. However, Delta has found a performance sweet spot in Boston. These are 600-800 mile markets, mostly to the Midwest and the Carolinas. These higher-performing markets are exactly where American is targeting its new service.

For Delta to be successful within the BOS-IND market, Delta depends on generating very high fares. Unlike traditional hub-and-spoke markets that Delta typically operates, BOS-IND is entirely dependent on the local market. Historically, Delta has operated the route with relatively high local fares and a willingness to yield to a lower load factor. Naturally, American's E175 product line and presumed flight schedule would likely competitively match Delta's current offering. This could potentially put pressure on a market dependent upon high fares.

The RDU market, however, has been no stranger to the competition. Currently, both Delta and JetBlue operate the market with roughly five daily flights each. Even with JetBlue’s competitive service, Delta’s flights produced upwards of +20% system RASM gap. This was until both Spirit and Frontier flirted with the market in 2019.

In normal years, both IND and RDU to Boston appear to be higher performing markets for Delta. This new American service, however, will put direct pressure on these financial results.

In both IND and RDU, Delta is highly dependent on the local markets as American will be when they enter. This local market dependence is a high risk for any carrier on any route as competitive pressures naturally will depress fares as carriers attempt to fill their planes. Both IND and RDU will have to see significant stimulation to see either market to carry a reasonable load factor.

In the last 10 years, peak RDU demand saw roughly 900 passengers per day. If the current schedule holds in July 2020, RDU will see roughly 1600 seats per day to Boston. I'll be surprised if we see most carriers operate in the mid-60 to low-70 percent load factors if this schedule.

Turning back to Delta's RASM curve, higher-performing, sub-500 mile markets that Delta and American overlap on currently see potential investments by American's summer schedules. That said if you are a traveler that books six months in advance, you already know these flights counts are subject to change and American could reduce these flights back to flat or even down.

American announcement yesterday, coupled with the Austin announcements could demonstrate American's desire to serve some of their legacy focus cities. A shift away from being strictly hub-and-spoke. However, unless you are in the inner workings of American, it is currently tough to understand the longer-term strategy here.

Based on American's actions yesterday, re: no formal press release, flights were not filled, and the soft announcement was timed immediately after Delta's earning call, this could just be a competitive response. To what, I am not exactly sure. However, American targetting Delta's higher-performing Boston routes will have a significant impact on Delta's Boston P&L. If Delta is willing to continue to operate in subpar routes will have to be seen.

If you want my bet, this is not over.  We will likely start to get a better understanding of American's strategy next week during their earnings call. At this point, it feels like there is a larger battle brewing between Delta and American with Boston caught in the middle. Do not be surprised to see further Boston deployments by either American or Delta as both attempt solidify their service.

The real wildcard here, however, is JetBlue does not take competitive incursions to their cities lightly. Do not be surprised if you see JetBlue announce more Boston service within the next couple of day (or hours).

Tuesday, January 7, 2020

No 1/8/2020 Post

Hey all! 

Considering all the intense aviation-related news tonight, I have decided to pull tomorrow's post as it would get lost with the news cycle. I am currently debating posting on either 1/9/2020 or 1/15/2020. Please follow me on Twitter (@FlyDataGuy) to see when the next post will go live. 


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: 

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.