July 6, 2012 The death of a hub
If you have connected in DFW on AA you know it can be an interesting experience. The airport layout of a series of semi-circle terminals is designed to move people from the parking lot to the gate in the shortest period of time. It’s not designed to be a hub. It was in-fact the last major airport designed before airline deregulation in the 1970’s. In the 1970’s airlines flew set routs at set fees. This is much the way Southwest Airlines operates today, but I’m wandering off the point. After deregulation set in the hub-and-spoke model was developed and perfected.
The hub-and-spoke model allows airlines concentrate resources at a limited number of airports in the country. This allows airlines to spend very few resources at airports where they have limited flights and spend a great deal where they have a lot of flights. This is in an attempt to capture economies of scale. However, there is something that people and I think that airline managers forget, and that is path dependency. Path dependency is simply this, the decisions we make today affect the decisions we make tomorrow. An example of this would be education, whatever, degree a person chooses is their life path. Changing that path is difficult, which is why people don’t do it that often. This path dependency effects the development of airlines.
Let’s apply path dependency to hub development and destruction. Hubs have both profitable and unprofitable flights. Profitable flights are great and I am not interested in those. Let’s look at the unprofitable flights. United has announced they are going to cut Houston-Paris. Ok the flight is unprofitable, there for the airline should cut it. Maybe. United has great analysts that tells them who is on the flight are they connecting or just arriving in Houston. These analysts tell United that any given flight maybe in the red, but if there is sufficient connecting traffic to flights in the black then it can be kept. Here is where the analysts go wrong. There is always going to be someone connecting on any given flight. Now when United cuts that flight, that passenger is simply gone.
But wait you say, the other flights are profitable and with the unprofitable flight gone United will make more money. Yes, but no. This idea is called “shrinking to profitability” and guess what it’s never worked. Why? Path dependency. With those connecting passengers gone, those other profitable flights are less profitable. Due to the lack of service, there are no some flights that were profitable, that become unprofitable. Those flights get cut and so goes the airline down the path.
Now every hub has theoretical limit on both ends. Now Charlotte-to-Houston will never support A380 service, but it will support some level of origin/destination service. Now, we know strictly connecting hubs with no level of origin/destination traffic will not support a hub. Memphis and Cincinnati are examples of that. But cutting without replacing service is starting down the path to the death of the hub.
What can airline planners do then? If the route is never profitable, then cutting it will be the only option. However, let us add a question; where can the hub grow service to replace the eliminated connection service that would also be profitable? There are a lot of untapped markets out, give them a try.