Question Re Aa's Hub Business Model

[corl737]

In a recent column in the Fort Worth Star-Telegram, DFW Airport Chairman Jeff Wentworth explains why it is so essential for a major hub to support its spokes. He ranted at Mitchel Schnurman, S-T columnist, for even suggesting that it was ok to have a few of the spokes break off as a result of a repeal of the Wright Amendment.

Said Wentworth, "The hub is the reason that Metroplex residents have 24 daily nonstops to New York or four daily flights to London. If you disconnect the smaller feeder flights, you risk 61 percent of your passenger base. In so doing, carriers would be forced to cut flights to New York, London and other destinations."

My question to the AA crowd is this (and I ask this seriously, not simply to stir the pot):

If the Chairman of the DFW Airport believes that breaking the spokes off the hub is suicidal, why does Gerald Arpy continue to insist that this is the exact course of action he would take if the Wright Amendment is repealed? (Virtually all the Eagle Cities have written to support keeping the Wright Amendment in place fearing a loss of service!)

Assuming (hypothetically here since nothing is certain) the Wright Amendment is repealed ... wouldn't it make more sense for AA to do more to emphasize its strengths at DFW than to water down its offerings just to compete on a few incremental long-haul flights from a cross-town second-tier airport? Is there something in the AA business model that I don't understand? AA has a good product at DFW. I'd think they'd want to show the world, not tear it apart.

(Link to Jeff Wentworth's guest column: "If you break the spokes ...")
(Mitchell Schnurman's column that got Jeff so worked up: "Why fear the end of Wright?")

 

[jimntx]

1. First off, the Chairman of DFW and Gerard Arpey are two different people. The Chairman of the DFW AOA does not dictate the AMR course of action and vice versa. All the DFW board chair is looking at is the loss of flights--and the accompanying loss of gate rentals and landing fees--if AA or any of the other DFW tenants move flights to DAL.

Second, I'm curious about your use of the phrase, "a cross-town second-tier airport." I would only add dingy, old, traffic-bound, and ugly. However, you or some of your fellow sycophants excoriated me when I expressed that sentiment and pointed out the millions SWA had spent to "improve" DAL making it a first-class facility.

Third, you can give up the argument that SWA flying from DAL and everyone else flying from DFW is fair competition. Colleen admitted on TV here yesterday that flying out of DFW costs a great deal more than flying out of DAL and that SWA could not make a profit flying from DFW. Yes, she did. I watched the interview.

 

[corl737]

1. First off, the Chairman of DFW and Gerard Arpey are two different people. The Chairman of the DFW AOA does not dictate the AMR course of action and vice versa. All the DFW board chair is looking at is the loss of flights--and the accompanying loss of gate rentals and landing fees--if AA or any of the other DFW tenants move flights to DAL.

I realize this. That's why I asked about the difference between what the two are claiming. I don't work for a hub-and-spoke carrier so I don't have the benefit of having studied the effects Arpys dehubbing might have on the entire AA network. If, as Arpy claims, moving flights to Love field would cause a reduction in service even as far away as Marquette, Michigan then perhaps Wentworth has a valid point. I'm trying to learn here!

Second, I'm curious about your use of the phrase, "a cross-town second-tier airport." I would only add dingy, old, traffic-bound, and ugly. However, you or some of your fellow sycophants excoriated* me when I expressed that sentiment and pointed out the millions SWA had spent to "improve" DAL making it a first-class facility.

Without a doubt, Love Field is the best of the "second-tier" airports. Yes, SWA has spent millions and it does look and work better than it has in decades. Still, as I have always contended, it's inadequate supporting infrastructure, access roads in particular, leave it less than an optimum facility. I'd think AA would prefer to have SWA trapped at Love instead of being easily accessible to the public at DFW. But then, that's just my thoughts.

Third, you can give up the argument that SWA flying from DAL and everyone else flying from DFW is fair competition. Colleen admitted on TV here yesterday that flying out of DFW costs a great deal more than flying out of DAL and that SWA could not make a profit flying from DFW. Yes, she did. I watched the interview.

Can't dispute your claim. I didn't see the interview. Let's both admit it, this isn't about being "fair" on any account. It's about business and competition without FEDERAL restrictions. SWA doesn't want to suffer DFWs costs. AA/DFW don't want SWA to have access to the nation's skies. Neither side is 100% pure in this regard.

With any luck SWA's pressing to have the Wright Amendment repealed may have the same effect at DFW as their recent Seattle proposition did. Faced with the possiblity of legitimate cross-town competition, the major airport (SeaTac in that case) reevaluated their extravagant, discretionary projects and began dropping the costs they passed on to tenant airlines. AA might wind up paying less at DFW thanks to SWA seeking a Wright repeal!



*You win the "big word of the day" award! Nicely phrased!

 

[Ch. 12]

I realize this. That's why I asked about the difference between what the two are claiming. I don't work for a hub-and-spoke carrier so I don't have the benefit of having studied the effects Arpys dehubbing might have on the entire AA network. If, as Arpy claims, moving flights to Love field would cause a reduction in service even as far away as Marquette, Michigan then perhaps Wentworth has a valid point. I'm trying to learn here!

corl737-

Despite AArpy's claims that lifting the WA would mean that small, far-away towns will lose service, the truth is that COMPETITION...not lifting the WA would cause AA to stack markets. Small towns would lose service even if AA is faced with any real competition out of DFW. The reason is that AA, just as they did with Vanguard, Midway, and Legend, will pull capacity from some markets and stack it up on markets served by competition...at least until the "burden" is slayed. So it isn't a WA issue, it is a competition issue.

That being said...AA will not face real competition out of DFW even with the "enticements" offered by the airport to new carriers. Why is that? B/C something like 85-90% of new service has to be to markets that currently aren't served out of DFW. So for any of you that still cannot admit that DFW and AMR are in bed together and that DFW is protecting its precious baby, tell me...how can you compete against AMR if you cannot even fly up against them?

I am sorry that I was unable to find the link with the percentages and apologize if they are not exactly what I stated but I do think that is what it was. If anyone can find the story (something within that last two weeks) about the specifics, please feel free to post here.

 

[corl737]

That being said...AA will not face real competition out of DFW even with the "enticements" offered by the airport to new carriers. Why is that? B/C something like 85-90% of new service has to be to markets that currently aren't served out of DFW.

I'm still waiting to hear back from DFW regarding their "free rent" offer. I'm sending a second letter to Mr. Capps, DFW's PR guy, to try and get more info on the details. Of course, I don't expect to hear much ("these are closely guarded, proprietary secrets!") but I have to ask to be credible with my posts.

That being said, there was an article earlier that included the reference to a high percentage of new service being put on currently-unserved markets.

Thanks for your comments.

 

[eolesen]

I'm still waiting to hear back from DFW regarding their "free rent" offer. I'm sending a second letter to Mr. Capps, DFW's PR guy, to try and get more info on the details. Of course, I don't expect to hear much ("these are closely guarded, proprietary secrets!") but I have to ask to be credible with my posts.

That being said, there was an article earlier that included the reference to a high percentage of new service being put on currently-unserved markets.

Thanks for your comments.

What I recall on this is that 70% of the service out of the rent-abated gates had to be to cities not currently served by the tenant. In WN's case, that would be 100% of all destinations, unless DFW were to include TZ's service to MDW.

As for "losing spokes".... It's a simple ripple effect no matter how you want to spin it or downplay it.

If AA puts a couple dozen flights a day into DAL, those aircraft have to come from somewhere. Not necessarily DFW, but somewhere within the AA system.

Whether or not those aircraft come out of DFW's schedule, some cities will likely have duplicate service from the Metroplex, e.g. LGA-DAL and LGA-DFW or ORD-DAL and ORD-DFW.

AA knows from the 56 seat F100 experience that there's going to be a large subset of local customers to/from Dallas will probably pick DAL over DFW if they're staying in downtown Dallas or live in the Park Cities. That in turn will mean less local traffic on DFW-LGA.

Assuming that DAL demand continues to exceed DFW's local demand, at some point, AA will need to look at downgauging equipment or reducing frequencies out of DFW.

If you start to reduce frequencies or downgauge equipment between DFW and XXX, at some point you start to limit the number of customers who are able to book a decent connection from XXX to YYY or ZZZ via DFW.

If those markets start to wither and cross the threshold of no longer supporting multiple MD80's, then Eagle has to back-fill with RJ's.

While some downgrades can be backfilled thru increased utilization, it only takes four or five flights being downgraded from an MD80 to an RJ to force Eagle to reduce frequencies in marginal markets to fund the aircraft required to backfill for the mainline.

Since there are very few if any RJ's still on order, cities having a harder time filling a 70 seater get downgauged to a 50 seater, those who can't fill 50 seaters get downgauged to a 44 seater, and those having trouble with a 37 seater are likely to get dropped entirely rather than be backfilled with Saabs.

It's really not a scare tactic -- if Eagle is asked to backfill 20 or 25 flights at DFW, I don't see any other option but to eliminate service to a couple cities in order to fund the backfills.

 

[FWAAA]

Since there are very few if any RJ's still on order, cities having a harder time filling a 70 seater get downgauged to a 50 seater, those who can't fill 50 seaters get downgauged to a 44 seater, and those having trouble with a 37 seater are likely to get dropped entirely rather than be backfilled with Saabs.

It's really not a scare tactic -- if Eagle is asked to backfill 20 or 25 flights at DFW, I don't see any other option but to eliminate service to a couple cities in order to fund the backfills.

As far as I know, all RJs on order have now been delivered to Eagle and no more are on the way.

What about the 18 MD-80s that were in temp storage as of the end of June? Couldn't they be brought back? On top of that, there were another 7 MD-80s listed as non-active at the end of June.

The flipside to the argument that downguaging would be necessary is the historical AA response to other discounters. Remember the Vanguard experience? Low fares stimulate competition, and AA tends to increase capacity in those situations. Some might say "AA floods the market with cheap seats." B)

Wouldn't the WN Effect cause increased demand at both airports? Wouldn't that call for bringing back those MD-80s rather than downguaging all those midwest cities? Or the scare tactics (talk of cancelling service altogether)?

 

[corl737]

Thanks for the response. The "destinations" restriction appears to aimed at carriers already serving DFW thus preventing them from simply adding frequency on existing routes the flew to and from DFW while sucking up the financial incentives. I had heard that the restriction was on destinations already served by any airline at DFW. Your explanation makes sense and helps push down the

AA knows from the 56 seat F100 experience that there's going to be a large subset of local customers to/from Dallas will probably pick DAL over DFW if they're staying in downtown Dallas or live in the Park Cities. That in turn will mean less local traffic on DFW-LGA.

Correct me if I'm wrong (like I have to ask anyone to do that!), but wasn't Legend Airlines' biggest threat the fact that they siphoned off the First Class/high-yield passengers? The product Legend offered was far and away superior to anything in the domestic sky at the time so those passengers who wanted that product went to Love Field to get it no matter where they lived or worked. I surmise that had AA operated similarily configured F100s with top-rack service from DFW they would have still put Legend out of business simply by virtue of their clientele's preference for access to the entire AA network and amenities. Sure, Legend may have been able to stay afloat a little longer, supported by those few folks who actually do prefer the Love Field location, but I don't think that for most upper-crust passengers the distance was even a consideration. Driving a few extra miles isn't a problem when you have a chauffer.

Based on my thought process above, if AA and SWA offer similar products -- albeit from different airports -- those who are collecting AAdvantage Miles will gladly drive to DFW regardless of where they live or work. Those who don't (most leisure travelers) will make their choice based on the schedule or airport that is most convenient. With the center of the metroplex's population shifting farther west, DFW will soon be the closest airport to the majority of the market (if it isn't already). Does it make sense to move flights more distant from that market, even if it's only a dozen miles (by car)?

 

[Ch. 12]

What I recall on this is that 70% of the service out of the rent-abated gates had to be to cities not currently served by the tenant. In WN's case, that would be 100% of all destinations, unless DFW were to include TZ's service to MDW.

I wish I could find the numbers again but for some reason I really do think that it was to O&Ds not served by anyone out of DFW b/c the point is (supposedly) to lure new carriers to the airport such as B6 and WN. I've been wrong once or twice before so I could have this wrong but I really recall seeing that it had to be new service for DFW...not just the carrier (which would make sense if they are trying to become more attractive as they state that they are).

 

[FWAAA]

Correct me if I'm wrong (like I have to ask anyone to do that!), but wasn't Legend Airlines' biggest threat the fact that they siphoned off the First Class/high-yield passengers? The product Legend offered was far and away superior to anything in the domestic sky at the time so those passengers who wanted that product went to Love Field to get it no matter where they lived or worked. I surmise that had AA operated similarily configured F100s with top-rack service from DFW they would have still put Legend out of business simply by virtue of their clientele's preference for access to the entire AA network and amenities.

You're not wrong - I remember things the same way.

Legend's entire business model was based on attracting AA's Paid First Class metroplex customers and offering a superior service at fares approximating AA's walkup fares. And there was no way that AA could permit that to happen. I assume that DAL was chosen due to the obvious attractiveness of DAL for Dallas business execs.

It is too bad that Legend was not richly capitalized like JetBlue as that might have forced AA to upgrade its front cabins at DFW to compete long-term.

 

[NewHampshire Black Bears]

corl737,

Just a note about Arpey and "Wright".

All he's doing is "postureing"(SP?), which is what ALL of us here expect him to do.

As you've said several times, the WA will NOT be changed any YEAR soon,
So all of this speculation is nothing more than "fodder" for this screwy board, that we're ALL addicted to !!

NH/BB's

 

[corl737]

corl737,

Just a note about Arpey and "Wright".

All he's doing is "postureing"(SP?), which is what ALL of us here expect him to do.

As you've said several times, the WA will NOT be changed any YEAR soon,
So all of this speculation is nothing more than "fodder" for this screwy board, that we're ALL addicted to !!

NH/BB's

Yeah, what a life we have!

 

[jimntx]

corl737-

Despite AArpy's claims that lifting the WA would mean that small, far-away towns will lose service, the truth is that COMPETITION...not lifting the WA would cause AA to stack markets. Small towns would lose service even if AA is faced with any real competition out of DFW. The reason is that AA, just as they did with Vanguard, Midway, and Legend, will pull capacity from some markets and stack it up on markets served by competition...at least until the "burden" is slayed. So it isn't a WA issue, it is a competition issue.

Maybe I'm not following you, but are you saying that it would be wrong for AA to pull capacity from marginal markets to compete if SWA should move to DFW? Why would that be wrong if SWA does not even have to serve those markets in the first place? After all, even with their extensive route network, SWA only serves 61 cities (IIRC) in the entire U.S. because they only serve markets where they know they can make money. When SWA does it, it's "free-market competition unfettered by government interference." When AA does it, it seems that it's just another case of "the evil empire denying small cities their Constitutional right to air service." :unsure:

That being said...AA will not face real competition out of DFW even with the "enticements" offered by the airport to new carriers. Why is that? B/C something like 85-90% of new service has to be to markets that currently aren't served out of DFW. So for any of you that still cannot admit that DFW and AMR are in bed together and that DFW is protecting its precious baby, tell me...how can you compete against AMR if you cannot even fly up against them?

I'm sure that you just "forgot" to include the phrase that specifies that the "new service" requirement only applies to "rent-abated" gates. If SWA wants to take advantage of the rent abatement, they have to provide new service. If they want to just compete head to head on a level playing field with AA then they can fly anywhere they want. But, as I've said before, all this sanctimonious bloviation (do I win again today?) about free market competition and eliminating government intervention is just that. What SWA wants is the ability to fly anywhere from an airport which SWA controls more completely than AA controls DFW.

 

[jimntx]

Correct me if I'm wrong (like I have to ask anyone to do that!), but wasn't Legend Airlines' biggest threat the fact that they siphoned off the First Class/high-yield passengers? The product Legend offered was far and away superior to anything in the domestic sky at the time so those passengers who wanted that product went to Love Field to get it no matter where they lived or worked. I surmise that had AA operated similarily configured F100s with top-rack service from DFW they would have still put Legend out of business simply by virtue of their clientele's preference for access to the entire AA network and amenities. Sure, Legend may have been able to stay afloat a little longer, supported by those few folks who actually do prefer the Love Field location, but I don't think that for most upper-crust passengers the distance was even a consideration. Driving a few extra miles isn't a problem when you have a chauffer.

Actually, Legend was doomed to fail from the beginning. Just like every other "premium" airline service that has ever started up in this country. What was the name of that airline that was all f/c from NYC to (IIRC) LAS and the West Coast? How quickly we forget! Even if AA had not started the competitive service, once the novelty of the smaller a/c and bigger seats and extra service and not having to fly with the great unwashed wore off, it would still just be an airplane flight from Point A to Point B. One of the ways rich people stay rich is they don't consistently overpay for anything.

The truth is that AA lost money every time one of those reconfigured F100s pulled away from the gate. There is no market that can consistently support even one flight a day with all F/C configuration--particularly when you are talking only 56 seats and 4 flight attendants. But, AA was just "competing." You seem to imply that what is ok for SWA is not ok for AA.

There is another way to look at the Legend story. AA just helped to prove the unworkability of their business model quicker than it would have anyway. Instead of the patient suffering a long, lingering death, it had a merciful, short demise.

Oh, one other thing. Are you saying that if AA had stayed at DFW and Legend started pulling customers from SWA that SWA would not have mounted a competitive response? I don't think so.

 

[Ch. 12]

Maybe I'm not following you, but are you saying that it would be wrong for AA to pull capacity from marginal markets to compete if SWA should move to DFW? Why would that be wrong if SWA does not even have to serve those markets in the first place? After all, even with their extensive route network, SWA only serves 61 cities (IIRC) in the entire U.S. because they only serve markets where they know they can make money. When SWA does it, it's "free-market competition unfettered by government interference." When AA does it, it seems that it's just another case of "the evil empire denying small cities their Constitutional right to air service." :unsure:

Nope...didn't say it was wrong but when the whole premise of AMR using the "small markets will lose service" arguement was to state that repealling the WA would have that effect. In reality...we all know (as you have just acknowledged) that even w/o repealling the WA, small markets will lose their service so that AA can bolster markets that ANY competition comes into. This little factoid clearly debunks that stronghold argument that AMR has been using as a rallying cry to the regional markets.

I'm sure that you just "forgot" to include the phrase that specifies that the "new service" requirement only applies to "rent-abated" gates. If SWA wants to take advantage of the rent abatement, they have to provide new service. If they want to just compete head to head on a level playing field with AA then they can fly anywhere they want. But, as I've said before, all this sanctimonious bloviation (do I win again today?) about free market competition and eliminating government intervention is just that. What SWA wants is the ability to fly anywhere from an airport which SWA controls more completely than AA controls DFW.

So why is it wrong to respond to the arguments that WN has no reason not to relocate to DFW since the airport has offerred "rent-abated" gates by stating the restrictions of the rent-abated gates? Seemes like a logical approach to me!! But now if you want to argue that WN can go ANYWHERE they want if they don't take up the DFW offer but simply just relocate ops to the airport...well I go back to the simple fact that that is just ridiculous to expect WN to take on many an unneccessary cost to relocate. Why doesn't AMR relocate its ops to DAL? Why doesn't TZ relocate to ORD? Why doesn't UA relocate to BWI?