Understanding Airline and Passenger Choice in Multi-Airport Regions (2013)

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64 The U.S. airline industry has undergone major changes in recent years, in response to events and trends impacting both the revenue and the expense environments. Since 2001, these changes have sometimes been dramatic and sometimes subtle. A review of the most significant changes is instructive: • The events of September 11, 2001, caused an instantaneous drop in the demand for air transport, as the shock of those events affected the industry and its users, and the general public and policymakers. • The subsequent imposition of extensive passenger security screening processes at airports detrimentally affected air travel demand by increasing total trip time and passenger inconvenience and stress. • U.S. border crossings have become more tightly controlled, increasing total trip time on international arrival and preclearance. • Rising and fluctuating oil prices have translated into histor- ically high and unpredictable airline expenses for airlines, causing higher fares in some markets, and service reductions in price-sensitive markets and on long-haul domestic routes. • The rise of fuel prices has detrimentally impacted the eco- nomics of regional jet aircraft, especially older and smaller models (i.e., 50 seats or less) that are less efficient to operate and lack the capacity to spread operating costs over more revenue passengers. • The combination of these impacts has resulted in numer- ous bankruptcies, acquisitions, mergers, downsizings, and other actions by airline management as they have tried to weather the storm. • The financial crisis of 2008, and the ensuing Great Reces- sion, further depressed the demand for air travel, resulting in additional consolidation of the industry. • Airlines have focused on remaining disciplined in their efforts to balance capacity with demand on a market-by- market basis to achieve the goals of greater efficiency, high load factors, pricing power, and a return to profitability. • New airline entry in the United States during this period has been minimal, and typically unsuccessful, as capital sources avoided the risky airline environment and incum- bent carriers employed strong competitive responses to protect their services as needed. • Several ULCCs and travel companies have been able to suc- cessfully implement business models that thrive on point- to-point leisure traffic, offering leisure travelers limited alternatives to higher priced services by legacy carriers. • As the U.S. economy has gradually recovered and demand for air travel improved, airlines have continued to cautiously restrain seat capacity to preserve the newly found disci- pline that offered pricing power and profitability. These events and trends have impacted each airline’s per- spective on and approach to implementing its business plan and deploying air services. Airlines continue their cautious approach regarding the addition of capacity on existing routes or start-up of new services. Decisions on capacity expan- sion are now made with ever greater analytic and strategic consideration. Regions with multiple airport options pose additional choices to both airline decisionmakers and air travelers. The research undertaken and the case studies performed through this study reveal the nature of these choice factors, some of which are of widespread applicability and others of which are unique to each situation. In summary, the research and case studies yield the following key findings. Airline Choice in Multi-Airport Regions Airlines Prefer to Concentrate Services at as Few Airports in a Market as Possible The concentration of airline services at the fewest num- ber of airports is favored by airlines. The benefits of service concentration at a particular airport, especially to achieve C H A P T E R 7 Findings and Conclusions

65 efficiencies, economies of scale, and competitive responses to significant new entrant threats, are central to the achieve- ment of legacy and network airline business models. See Case Study 2: San Francisco Bay case study Vigorous Competitive Response is Likely if Incumbent Airline Feels Threatened The entry of a new competitive airline at the dominant air- port in a region is likely to precipitate competitive responses by the dominant airline at that airport, as well by other air- lines that are significant players in a region. The competitive response may include the shifting of services from alternative airports in a region to the dominant airport. See Case Study 2: San Francisco Bay. Niche Services at Alternative Airports Need Business Model Compatibility and Good Surface Access The diversification of airline services at alternative airports in a region is motivated by two primary drivers: the suitability of the alternative airport for niche services to be offered by the niche carrier, and ease of surface access to the alternative airport. The presence of traffic congestion and other access constraints regarding the major airports in a region can fur- ther encourage niche carrier services at alternative airports. See Case Study 2: San Francisco Bay. Niche and Ultra-Low-Cost Carriers Tend to Be More Opportunistic in Airport Choice Niche and ULCCs are more likely to establish a single (or limited number of) regional gateway(s) to serve their targeted market segments. Their limited resources and focus on point- to-point traffic flows result in the choice of serving an entire region through one gateway. See Case Study 1: Los Angeles Basin and Case Study 2: San Francisco Bay. Large Carriers Have the Resources to Serve More Than One Airport in a Region if Needed Legacy carriers, as well as some larger LCCs, have the capability to operate services at more than one airport in a large metropolitan region, as demand, economics, and competitive factors dictate. Such multiple service points in a region can occur even when the airports are less than 50 miles apart. However, carriers will reduce or eliminate service at one or more of the regional facilities if economic performance deteriorates, consistent with their overall preference for as few airports as possible. See Case Study 1: Los Angeles Basin. Small Airports Will Generally Face a More Challenging Network Environment in the Near Future Services at small airports are generally comparable in qual- ity and pricing, and typically involve limited service options to a few hubs. As carriers consolidate services and remain risk averse, passengers at small airports are likely to have few com- petitive choices, and more travelers will be inclined to consider driving to larger facilities, if available, that offer lower fares and more service alternatives. See Case Study 5: Central Wisconsin. Passenger Choice in Multi-Airport Regions Airfare Parity Can Balance out Other Differences among Airports Substantial airfare parity among the airports in a region removes a key differentiator in passenger choice. Whatever the reasons for such parity, passengers are more inclined to use air services at airports that are more remote or less convenient if the services being provided there are of comparable price. Lack of fare differentiation between proximate airports tends to negate other competitive choice factors. Airfare parity (or advantage) at the dominant airport in a region reinforces that airport’s dominance. See Case Study 2: San Francisco Bay, Case Study 4: Northern Gulf Coast, and Case Study 5: Central Wisconsin. Convenient Nearby Hub Airport Will Prompt Traffic Leakage from Areas Served by Smaller Airports The varied service options available at nearby hub airports will exert strong influence on passenger choice in a region. Depending on a traveler’s true point of origin or destination, the mileage and time needed to drive to a hub airport may not offset the resulting flight convenience. However, if both ser- vice level and fare at the hub airport for the desired city-pair travel are better than at the smaller airport, the influence on leakage will be even stronger. This is particularly true for lei- sure passengers, who discount the value of time more so than do business travelers. See Case Study 5: Central Wisconsin. Long and Difficult Drive to a Major Airport Invites Choice of Inferior Service at Nearby Smaller Airports Surface congestion and lengthy drive times to a major air- port can result in passengers choosing inferior airline service offerings (i.e., connecting vs. nonstop service), rather than enduring the drive to the dominant airport. If one airport in the region offers substantially more service than any other airport in the region, passengers will have to choose between

66 the difficult drive from the region’s peripheral areas to the major airport or the inferior air travel itinerary and price at a more convenient airport. See Case Study 1: Los Angeles Basin and Case Study 2: San Francisco Bay. City-Pair Service Advantages Can Overcome Drive Time Concerns An airport’s air service product advantage can become sig- nificant enough to overtake surface access congestion as a primary decision factor. Passengers will justify dealing with excessive surface access drive times to an airport if it offers sig- nificantly better service options, especially if the city-pair ser- vice is nonstop and uses preferred aircraft. See Case Study 1: Los Angeles Basin. Balanced Services at Multiple Airports Can Create a Competitive Environment Diversity of services at the airports in a region can offer air travelers various air service options. The location of the traveler’s origination/destination point in the region is a major consider- ation regarding the traveler’s preferred airport, all other service and price considerations being equal. Overlapping catchment areas across a region also facilitate passenger choice, with more than one airport being convenient to most airline customers. If the airports in the region are well situated to offer a balanced and convenient supply of air service to residents throughout the region, the airports and their services can better compete for traffic from most areas of the region. See Case Study 2: San Francisco Bay and Case Study 4: Northern Gulf Coast. Small Airports Can Retain Less Price-Sensitive Local Travelers through Convenience Small airports tend to capture a relatively large percentage of business travelers who either originate in, or are destined for, the immediate area. These travelers are willing to trade off, in varying degrees, higher fares in exchange for convenience. Price-sensitive leisure travelers, on the other hand, are less willing to make such a tradeoff, and opt to drive to the airport served by the lowest fare service. Smaller airports attempt to offset the difference in fares, nonstop destinations, and frequen- cies by touting the convenience of the airport, better customer experience, and the community’s loyalty. See Case Study 3: Western Carolina and Case Study 4: Northern Gulf Coast. Airline Service Reliability Concerns Prompt Travelers to Airports with More Flight Frequency Perceptions of service unreliability (i.e., flight cancellations, delays, missed connections) contribute to leakage problems at small airports. Some travelers believe that the time and expense of driving to a better-served airport is offset by the expectation of greater flight reliability and the availability of a larger number of nonstop flight options. Because large airports typically provide multiple daily nonstops to a broad array of markets, passengers believe that they are more likely to complete their trip to their destination. At small airports, even if a carrier offers multiple trips to its hub, the longer time between flights (with less connectivity) and high load factors (with the risk of not being accommodated after an earlier flight cancellation) raise concerns among travelers. See Case Study 3: Western Carolina. Conclusions The research, case studies, analyses, and reviews of airline and air travel trends performed in this study lead to a series of interrelated conclusions about passenger and airline choice in multi-airport regions. They also raise fundamental issues for those who seek to improve air service to U.S. communities, especially in small communities or small airports in multi- airport regions. Some conclusions are applicable to most, if not all, multi-airport regions, while others are only relevant to regions with similar characteristics. In their totality, they present a changed landscape for communities, airports, air- lines, and air travelers, and the need for alternative air service strategies. • Airline Industry Maturation—The U.S. airline industry has experienced 40 years of evolution since regulatory reform and subsequent deregulation. In that time, the industry has matured to a point where multiple, varied, and special- ized airline business models, each designed to serve differ- ent segments of the air travel market, are in place. Airlines are successfully calibrating capacity and pricing to serve demand at levels that conform to their business model, and thereby achieving profitability and sustainability. Although there are several airlines whose business models seek to stimulate demand in existing markets and tap new markets, these airlines are, at least for now, peripheral to the major traffic flows of the major airlines, and not a significant threat to their profitability. • Air Travel Market Maturation—Air travel demand levels have soared since deregulation, and especially since the expan- sion of low-cost-carrier services during the past 20 years. Markets have been stimulated through new service and competition during that period, but there have been wide- spread setbacks in many markets as a result of the above- noted maturation of the industry. Although some leisure markets will continue to benefit from service expansion by airlines that focus on that segment, overall it can be expected that domestic air travel in the United States will grow in

67 tandem with the growth in gross domestic product (GDP), as manifested in demographic and economic growth in various regions. • Airline Risk Aversion—The careful balance that airlines have achieved among capacity, demand, and sustainable pricing, combined with the traumatic experiences they experienced during the past decade or so, has created a high level of aversion to risk. As a result, expansion of air services in city-pair markets or regions must now meet very high suitability to an airline’s expansion strategy and competitive requirements. Decisions about service expansion are more complex and difficult when made in the context of a multi-airport region, with intricate com- petitive considerations and multi-faceted risks involved for each choice option. Airline expectations regarding risk-mitigation packages from airports and communities remain high, even in markets with clearly demonstrated air service deficiency and upside potential. • Airline Pricing Power—Airline industry maturation, risk aversion, and consolidation place airlines in a posi- tion of improved pricing power in most markets. Capac- ity constraint by incumbent airlines, and minimal threat of new entrant airlines, provide further pricing freedom, limited only to the extent that competitors decide to price more aggressively. Although this environment creates the potential for price discounting to increase market share and stimulate traffic, only niche or leisure-focused services are pursuing such strategies, and typically without significant impact on major carrier interests. • Fewer Airline Hubs—Airline industry maturation and consolidation has resulted in the downsizing or dismantling of numerous hub locations. Whether the result of merger/ integration or self-imposed downsizing, fewer hubs have resulted in the need for less aircraft and less overall capac- ity in the network. Flying by regional partners also will be affected as hub reductions translate into less need for regional feeder services, and high fuel prices continue to challenge the operating economic of small regional jets. This trend contributes to the overall effort to calibrate capacity and traffic in the context of each airline’s business model. Some point-to-point services have sprung up in markets large enough to support them, but not to the extent that it has affected hub consolidation. • Fewer Hub Service Options—Fewer hubs and reductions in regional equipment result in fewer hub service options, especially for small communities and for small airports in multi-airport regions. Duplicative services from several airports in a multi-airport region to an airline’s hub(s) can degrade the profitability of such services. Efficiency requirements tend to minimize the number of airports in a region that will receive service to a hub, and the flight frequency and seat capacity that will be provided. Service from an airport to multiple hubs also will be a challenge, given the replication of services and excess capacity that can result. • Drive to Alternative Airport—Static or reduced service levels at small airports in a region will fuel greater traffic leakage to an alternative airport. This is especially the case if the levels of service are significantly higher at the alter- native airport, and if the drive time and ground access are reasonable. Consolidation of services at hubs and other large airports will continue, and may exacerbate, the negative impacts on air service at affected communities. Multi-airport regions, with numerous airports within a reasonable drive time of each other, have additional com- plexity and challenges for small airports. • Fewer Passenger Options—Passenger choice options are increasingly circumscribed by airline decisions regarding where and how to serve markets with multiple airports. The conclusions noted above, in the aggregate, are gener- ally resulting in fewer passenger options. However, each region is unique, and is affected differently by the choices that each airline makes in that context. With price as the key driver of choice, passengers will use the service that takes them to their destination at the lowest cost. Service quality, with its many aspects (i.e., schedule, itinerary, aircraft, reliability, etc.), is no doubt a factor in passenger choice, but will vary with each discreet choice and in each circumstance. Each of these conclusions regarding passenger and airline choices is applicable to multi-airport regions, but in differ- ent degrees and in different ways for each region. The study clearly revealed the diversity of each multi-airport region, and that the choices available to passengers and airlines will differ in each case. At this point in the evolution of the U.S. airline industry and the air service that it provides, one broad conclusion is evident. More than ever, airline choices precede passenger choices. While this sequence is logical and natural (the ser- vice must be available before it can be purchased and used), supply is now the predominant driver of airline business planning in the U.S. air travel market. The discipline being exercised by airlines with respect to their business models and business strategies has created an environment in which supply (and the associated cost and risk of providing it) is the primary driver (in both a positive and a negative sense) of airline decisions on air service. Highly selective, severely restrained, and very risk-averse approaches to providing air service, while appropriately instrumental to achieving airline profitability and sustainability, are resulting in deficient air service in many communities that generate (or are capable of generating) more demand for air services than airlines are willing to provide.

68 This new air service era presents formidable challenges for many communities and their airports, and suggests the need for new and revised air service development strategies. This is particularly the case in multi-airport regions, where airlines may not be inclined to serve multiple airports or all airports in the region, and the resulting inter-airport competition is vigorous. The following are among the most prominent challenges that need to be addressed: • Greater recognition and understanding of the business model that is driving each airline’s choices, and how a region, com- munity, and airport fit (or do not fit) into those choices. • Greater attention to performing the detailed analysis and service-specific evaluation that can support a detailed business case to a particular airline about a specific city-pair air service opportunity. • Greater and better-defined involvement of community inter- ests in the support of air service development, with the air- port operator in the lead. The ability to present a substantial and targeted risk-mitigation program to an airline for a spe- cific service opportunity can bring that airline to overcome its inherent tendency toward extreme caution. • Higher priority by small airports on public information efforts in the local market to ensure that local residents and businesses understand the services available at the local airport. Such public information efforts also should address the benefits of using the local airport (i.e., time savings, total trip cost savings, convenience, ease of park- ing, etc.) as compared to using larger airports that require a long drive. • Support for the introduction of new entrant airline services as a means to developing services in underserved markets and improving the competitive environment in a region or at an airport. Care must be taken that the business model of the new entrant will ultimately be viable and sustain- able, that any support provided is non-discriminatory, and that the air service that is provided is used by the fly- ing public. • Provision of the most efficient airport operation possible, consistent with the requirements of public interest and ser- vices. Lower airport costs to airlines can help meet airline objectives, and at the same time counter, in part, airline tendencies toward consolidation of services. As air car- rier business models evolve, the one constant that can be anticipated is the continuing objective of the lowest possi- ble cost of operation by the airlines, including airport cost. • Institution of educational outreach programs for stake- holders on trends in the domestic air travel market and the impact of these trends on airline and passenger choice.