The most successful network managers are clearly acknowledging this important distinction. Unprofitable hubs are being downsized or closed, even when they produce significant traffic and revenue volumes. The familiar pattern of strongly directional hubs is under critical review, with continuous hubbing and omni-directional hubs emerging as significant alternatives.
Substantial reworking
Many of the world's largest carriers have carried out a substantial reworking of their route networks and their experience is important to other carriers facing restructuring or considering the future of their own networks. In virtually every example of restructuring the fundamental guiding concept has been the need to shrink the network to a core hub/spoke operation in order to become profitable. These moves run counter to the conventional wisdom that one can only be successful by expanding hub size and coverage.
America West has reduced its fleet by 25 per cent, eliminated all international service, dropped Hawaii, and concentrated its resources on its Phoenix hub. Meanwhile 'opportunity markets' such as those between Orange County and New York and northern California were dropped, as was most non-bank flying from Phoenix. America West successfully emerged from bankruptcy and has operated profitably for the past several years.
Northwest concentrated its resources at its hubs in Detroit, Minneapolis-St Paul, Memphis and Tokyo. It closed smaller operations at Milwaukee, Boston, Washington and Seoul. Once teetering on the edge of bankruptcy, Northwest has put its profit margins back among those of the industry leaders.
Continental has eliminated the linear route system operated by Continental Lite and dismantled its unprofitable Denver hub. Continental has reported record earnings during the past year.
Air carrier route networks have only become a management variable since markets have been deregulated or liberalised. Under regulation, airlines operated according to government largesse and used one of two primary operational strategies:
1 A linear network in which local traffic flows and fifth-freedom traffic rights were combined to make a route viable. This was especially true in geographically large domestic networks, but also characterised many long-haul international routes.
2 A focus city network in which a carrier operated to a number of points where local traffic was sufficient to justify service. Depending upon economic development within the carrier's home country there might be one large focus market, as with Paris or London for Air France and British Airways, or two smaller focus markets such as Rome and Milan, Zurich and Geneva and Madrid and Barcelona.
In both cases, but particularly where carriers focused service, rational scheduling resulted in flights cross-connecting whenever possible, assuming this would not result in serious inconvenience for local or through passengers. Direct flights provided the primary focus, with cross-connections considered a bonus.
Management variable
In the US, focus cities with a relatively central geographic location began to evolve as hubs as the number of possible cross-connecting opportunities increased. With the advent of deregulation, route structure truly became a management variable. Carriers either entered the densest and most profitable routes as a new competitor, or concentrated service at a focus city and built this operation into a hub.
While analysts have attempted to set threshold activity levels for defining a hub, such as 40 cities linked to a hub at least three times a day, more realistically an operation becomes a hub when new routes and flights are added primarily for beyond segment traffic rather than local traffic.
Many hubs emerged as the logical expansion of service by one or more dominant carriers at a major traffic centre, such as American at Dallas-Fort Worth, Delta at Atlanta or United at Denver. As carriers scrambled not to be left out, they built hubs at centrally located or regionally strategic larger cities, including Continental in Houston, Republic in Detroit, America West in Phoenix, and TWA in St Louis. Finally, more modestly sized cities emerged as hubs of last resort for less effective competitors (eg Western at Salt Lake City and Southern at Memphis), or as supplemental 'regional' hubs (eg American at Nashville, Raleigh-Durham and San Jose, United at Washington/Dulles, and Delta at Cincinnati).
Outside the US, passenger hubs have almost universally emerged from large focus cities dominated by the home flag carrier. Carriers in Europe have only recently begun to address the issue of supplementary hubs.
Once committed to a hub-and-spoke philosophy, carriers pursued what may be termed the 'big bang' theory aimed at maximising cross-connections. This required adding new cities, which couldn't justify service on the basis of local traffic volume alone. The primary limitation on hub size was the number of gates available.
American's hub at Dallas-Fort Worth exemplified the 'big bang' theory. Between summer 1979 and summer 1985, American increased the number of spokes from 40 to 85 and daily flights climbed from 140 to 312, not counting turboprop operations. While American added the equivalent of one new city every seven weeks, its average route density remained virtually unchanged; daily frequencies per route rose only marginally, from 3.50 to 3.63. The strategy was to maximise the breadth of the network, not necessarily to dominate each individual route segment.
With American also identified as the domestic leader in distribution and marketing, through the Sabre CRS and the AAdvantage frequent flyer programme, it was inevitable that carriers would rush to emulate American's 'big bang' theory of hub scheduling and network management.
The 'big bang' theory evolved partly because of the sudden availability of free market access, but the primary driving force was the logic that maximising connecting opportunities would also maximise traffic.
However, simply operating a huge hub didn't lead to a dramatic increase in profitability. In the US the most profitable carrier has been Southwest, one of the few carriers to ignore hubbing completely.
The big problem with the mega-hub theory is that all traffic is not equal. There are many dynamics to carrier pricing, but generally speaking passengers will pay a higher price for a higher quality service. Despite all the marketing bells and whistles, the primary advantage of air service is speed, and the fastest trip is a nonstop flight. Passengers will generally pay a premium for non-stop service in preference to a connecting service.
Hub premium
Carriers therefore began to increase frequency on their hub routes wherever possible, seeking to maximise the 'hub premium' drawn from local passengers. Connecting passengers came to be viewed as a prerequisite to support the service levels necessary to dominate a hub, and not as an end in themselves. As one airline executive put it in the early 1990s: 'You can dominate Charlotte just as easily with 250 flights a day as with 350.' In particular, flow traffic became less valuable as yields declined on longer distances.
When a passenger's travel options are restricted to connecting service, then the carrier offering the lowest fare will generally set the overall fare in the city pair. American may very well set the fare for Boston-Dallas and Dallas-San Diego, but it may well be Continental which sets the Boston-San Diego fare. Flow traffic has stopped being the objective; it is now a means to an end.
Flow traffic, in fact, can be viewed as potentially hurting a carrier in the local market. Revenue management systems allocate scarce capacity between local and connecting passengers, but for many carriers the hub system itself may be in conflict with the needs of local travellers.
Where local markets are large, sufficient frequency can be offered to ensure coverage of prime travel times. Where markets are smaller, and truly dependent on flow passengers, schedules may well ignore the preferences of local passengers despite the large hub premium they are contributing to the carrier.
Take, for example, American's schedules from its Nashville hub to the major business centres of the eastern US in summer 1993. Flights left for Detroit, Baltimore, Washington, Philadelphia, New York/Newark, New York/La Guardia and Boston between 0830 and 0840, arriving between 1110 and 1155. Local passengers couldn't reach the east coast centres earlier as they had to wait for flights to arrive from the west before sufficient traffic could be collected to operate the services. American has recently shut down its Nashville hub.
As network managers have noticed that increased connecting traffic does not automatically mean that revenues will increase linearly, they are also beginning to understand that hubbing is inherently cost inefficient (with the possible exception of the very largest mega-hubs and/or the megacarriers). Faced with a need to lower unit operating expenses, managers are turning their attention to the cost side of network management.
Hubbing produces a requirement for additional ground resources at the hub, while at the same time reducing the productivity of flying resources. The essence of hubbing requires simultaneous operations at the hub, so aircraft sit on the ground at the same time.
United's Denver operation is a typical example of a large, directionally focused hub (Table 1). A typical United aircraft sits on the ground at Denver for slightly under an hour, and 25 to 30 gates are used simultaneously. But with 11 daily banks the airport facilities are used almost continuously.
At a smaller hub, the gates and staff are not utilised nearly as well. Consider a more typically sized hub (Table 2). Three times every day, Northwest's activity at Memphis peaks for about 2 hours, and then falls off to virtually nothing during the interim periods. There must clearly be a cost associated with the facilities and staffing required to service these widely spread peaks.
In a perfect world, markets would be relatively equal in flying time from the hub, allowing flights to depart, service the spoke, and return all within a tight time band. The geographical realities are seldom this accommodating. While some flexibility arises from staggering the initial departures from a bank, the network planner has to strike a balance between utilisation and traffic potential.
Consider Northwest's hub at Minneapolis-St Paul. In its first eastbound departure bank, Northwest operates 15 jet flights to points east of Minneapolis, each of which must return for a mid-afternoon westbound bank. If Minneapolis were a 'stand-alone' hub, the 'big bang' schedule would resemble that in Table 3.
Ground times
Clearly no network manager can live with ground times averaging over 2.5 hours at the spoke point. Northwest serves many of these spokes from Detroit and Memphis as well, allowing it to achieve an efficiency which is somewhat better but still not optimum. This is a major reason why no major carrier has been able to approach the low unit operating costs of carriers such as Southwest which have spurned the hub-spoke network.
So long as all carriers are in the same boat, the cost inefficiencies of the hub system don't really affect the competitive marketplace. Unless a carrier operates a hub at a location which unduly impacts its costs relative to a competitor, everyone is on a level playing field. Costs are higher, and passengers pay higher fares reflecting the convenience of multiple connecting opportunities and more frequent nonstop flights.
However, it is clear that network optimisers are considering alternative strategies. One is straightforward - de-hubbing. Several carriers have eliminated or significantly downsized hubs within the US:
* American at Nashville, San Jose and Raleigh-Durham;
* United at Washington/Dulles and Orlando;
* Continental at Denver;
* TWA at Atlanta;
* America West at Columbus;
* USAir at Dayton and Baltimore.
Perhaps more significant - and, for some disadvantaged competitors, more ominous - is the shift from a classic directional hub to a continuous hub.
Continuous hubbing allows the network optimiser to utilise resources more efficiently while maintaining a high level of connectivity. Aircraft arriving at a spoke point turn as quickly as possible and return to the hub without waiting to ensure simultaneous directional waves. Aircraft arriving at the hub are not held to wait for arrivals from other spokes, but instead proceed through the hub as rapidly as possible.
A strong passenger allegiance enhances the ability to introduce competitive hubbing, but there are two or three further prerequisites for continuous hubbing to be successful. First, the hub operation has to be large enough to sustain a connecting mass even if optimum connections are not scheduled. With three to four flights a day, the layover from missing a connection is probably two hours or less. Connections are not optimised, but are at a minimum acceptable level. They keep the customer sullen, but not mutinous.
Second, the hub needs to be sited at a location which contains a relatively large set of directionally indifferent spokes. These may be spokes generally lying north or south of an east-west hub, or relatively short-haul markets where 'backtracking' is not considered a competitive disadvantage.
Third, it is desirable - though not absolutely required - for the carrier to operate at least one other hub. As well as allowing 'gaps' in the connecting pattern at one hub to be filled at an alternative hub, this also gives the carrier the ability to 'trade out' aircraft between hubs rather than having all flights simply return to a single hub.
For example, TWA's second (albeit small) domestic hub at New York/JFK gives it considerable flexibility. TWA's first flight from St Louis to Miami arrives at 1125, and a return flight isn't needed until 1320, a gap of almost two hours. However, the St Louis aircraft turns into a JFK flight at 1215, only 50 minutes later, and the return to St Louis uses an aircraft from JFK which arrives at 1226 and departs 54 minutes later. There is less ground time and two operations can be handled at a single gate by a single ground team.
American appears to have taken the lead in both de-hubbing and continuous hubbing. American has, for all intents and purposes, closed down hubs at Nashville, Raleigh-Durham and San Jose, and at the same time it is rescheduling Dallas-Fort Worth as a continuous hub. Note that American and DFW meet the three threshold conditions for successful continuous hubbing:
1 DFW is a large local market, ranking fourth in the US with 23.6 million local passengers;
2 DFW's location allows American to serve a number of spokes lying north/south of DFW to either the east or the west;
3 American also operates a major east-west hub at Chicago.
At American's continuous hubbing operation at DFW, over 40 per cent of the 850 daily departures are non-directional, as opposed to less than 20 per cent for United at Denver.
Networks evolve over time, and most are less evolved than American's. Scheduling to minimise costs must become part of network optimisation.
In Europe, London, Frankfurt and Paris are considerably larger markets than the others. The home carriers have traditionally scheduled for the needs of the local markets rather than specifically to accommodate flow traffic. Given infrastructure constraints at London and Frankfurt, little change can be expected in the home carrier network strategies at those points.
The strategies of carriers serving smaller hubs is less clear. Carriers such as KLM have relied on smaller aircraft and higher frequency to build flow traffic over their hubs, but the unit costs of smaller aircraft and the inherent inefficiencies of hubbing may bring unit costs to unacceptable levels.
Carriers operating dual hubs of less than critical mass face the most difficult decisions. If these hubs are located in relatively dense traffic corridors, then one solution might be to alternate banks, or waves, over each hub.
Complimentary hubs
Reno Air maintains service between the Pacific northwest and southern California by using seven to eight banks timed to operate over complimentary hubs at Reno and San Jose (Table 4). As carriers such as Iberia, Alitalia, SAS and Swissair grapple with network strategies over multiple hubs, this approach may offer some promise. More likely, one of the hubs is likely to face a downgrading of service as the carriers work towards critical mass at the primary hub, although Swissair's announcement of a reduction in long-haul flights from Geneva met with a storm of protest.
When networks were largely a given fact, execution rather than planning was the primary determinant of air carrier profitability. Today, with the network the critical management variable, network strategy is a primary differentiator between successful and unsuccessful carriers. The 'traditional' models of hub strategy may no longer be valid. The challenge is to anticipate changes in order to optimise the network now rather than as the result of a forced restructuring.
Source: Airline Business
