Hubbing Strategies Increase Impacts, But Do Not Create Sustainable Airline Profits

Airline stocks have been tanking lately, in no small part due to strategy shifts by United. In a nutshell, United is trying to design a broad restructuring of its three domestic-focused hubs in Chicago, Denver and Houston. Why? Because this trio of domestic hubs “…has profit margins that are 10 percent below the inland domestic hubs operated by American Airlines Group Inc. and Delta Air Lines Inc….”

The situation is discussed in this Bloomberg article (click here to view source, or view the archived PDF copy below).

Click on the image below for a scrollable view; the PDF file may be downloaded.

What is the most consequential quote in the article?

“As part of its strategy, United is boosting connections in its three mid-continent hubs by an average of 17 percent by adjusting its flight schedules, a process it’s completed in Houston and will commence in Chicago next month.”

In this one quote, United is making it clear that, for all major U.S. hubs, traffic growth is NOT about customer demand; it is airline schedule tweaking, to increase profits, that is causing the huge impact increases at major hubs, especially at KBOS, KJFK, KDCA, and KSEA.

Which airports/hubs are most monopolized?

Here are the main hubs for the four largest airlines:

  • American: Charlotte [KCLT], Dallas-Ft Worth [KDFW], Miami [KMIA], and Philadelphia [KPHL]
  • Delta: Atlanta [KATL], Minneapolis St Paul [KMSP], and Salt Lake City [KSLC]
  • United: Cleveland [KCLE], Washington-Dulles [KIAD], and Houston [KIAH]
  • Southwest: Baltimore [KBWI], Dallas-Love [KDAL], and Chicago-Midway [KMDW]

Most other major airports are either smaller market and dominated by Southwest, or they are duopoly hubs. Four duopoly hubs that stand out are:

  1. Denver [KDEN] – Southwest and United
  2. Chicago O’Hare [KORD] – American and United
  3. Phoenix [KPHX] – American and Southwest
  4. Sea-Tac [KSEA] – Alaska and Delta

Will hub concentration reduce over time?

No, not likely at all. The level of industry scheduling collusion, and the absence of real regulatory oversight, ensure this trend toward hub concentration will continue to intensify. As an example, look at the hub concentrations for 2013 data, at this aiReform Post. Note that nothing has changed: at the bulk of these 77 airports, monopolies and duopolies have only strengthened in the past four years.