How are legacy airlines surviving covid-19? By borrowing from the low-cost playbook3 min read . Updated: 06 Oct 2020, 09:13 AM IST
Full-service carriers have been forced to chase demand from sun-seekers, but restoring network connectivity remains crucial
Following the 9/11 attacks, big U.S. airlines were forced to slash fares to compete with their low-cost rivals. In the Covid-19 crisis, they are also learning how to act like them.
The economic model of the U.S. full-service carriers seems broken for the foreseeable future. American Airlines and United Airlines last week started cutting 32,000 jobs, even as they maintain hopes of a second bailout.
Unlike budget carriers, which fly “point-to-point" routes, the largest airlines rely on “hub-and-spoke" networks to feed traffic to key airports. With passenger capacity stuck at 50% of pre-pandemic levels and 86% of international routes still restricted, the connectivity of these carefully crafted networks has plummeted, particularly for second-tier hubs, an analysis of Oliver Wyman’s PlaneStats database suggests.
Network planners have had to massively speed up decision-making around route and schedule changes. Following the grounding of the Boeing 737 MAX jet last year, “a lot of our processes which used to take months at a time could happen in weeks," said Vasu Raja, American’s chief revenue officer. “Now it could happen in days."
About 70% of bookings now take place in the two weeks prior to departure, compared with 90 days before. Legacy carriers, which used to parse historical data at length before committing to a new destination, are chasing temporary spikes in demand in the vein of ultralow cost operators like Spirit Airlines and Allegiant.
Right now, sun seekers are just about the only Americans buying flights. This is traditionally a low-cost battleground, yet for the winter schedule American and United have announced warm-weather point-to-point offerings like Raleigh-Cancun and Milwaukee-Tampa.
“It’s a notable shift," said Patrick Quayle, United’s vice president of international network and alliances. “Airlines like ourselves are overflying our hubs, and that’s something we’d never done. Internationally, though, it’s still very much based on the hub-and-spoke model."
Overseas flights now depend on whether higher cargo yields can make up for the lost corporate customer, who used to account for most of the profit margin. United sped up long-term plans to launch flights to India and Africa, including linking California’s tech cluster with Bangalore’s. Fortunately, big business cities like Chicago and San Francisco, where United has hubs, offer traffic from cargo and diaspora communities even when businesses stop paying for travel.
American has exhibited particular flexibility: As early as July it was restoring aircraft to those few markets with demand. But this may also be a sign of its desperation for revenues. American was financially beleaguered even before the crisis, and its airports have suffered the greatest loss in connectivity. Trans-Atlantic travel restrictions have hurt all international gateways along the East Coast, but the situation is worse for American at its two crucial regional hubs there, LaGuardia in New York and Washington, D.C.’s Ronald Reagan airport.
Delta Air Lines, the most profitable of the three big U.S. players, is more cautious about overextending itself in the rush to tap lower-fare markets. “I wouldn’t want to take us into a market only for the next 90 days, because in this environment in which you are burning cash it’s a little bit reckless," said Joe Esposito, the company’s senior network planner.
Delta has reinforced its top airports by interconnecting them: Its hub-to-hub capacity is only down 20% from a year ago. Much of it has serviced Salt Lake City’s hub for the Rocky Mountain region, which has become a rare bright spot as Americans have headed for the great outdoors.
While airlines need to adapt to survive these times, the risk is that they are stuck indefinitely with suboptimal connectivity. Investors may eventually prefer to see them streamline their networks, as in previous crises.
All three count Los Angeles as a hub, which reduces its network value. United should probably get rid of overlapping routes across the Pacific and strengthen San Francisco, which has experienced a steep loss in connectivity. American’s recent partnerships with JetBlue and Alaska Airlines should be welcomed if they facilitate a shift away from money-losing markets and toward its stronger business serving Latin America. Delta may need to trim routes in Cincinnati and Raleigh—regional nodes that don’t count as hubs but used to be just as important before Covid-19, data suggests.
Full-service carriers can only get so much mileage out of competing with budget operators. Right now, deciding what to do with networks built up over decades might look like more trouble than it is worth. Eventually, though, airlines will need to make tougher decisions.
Write to Jon Sindreu at email@example.com