RICHARD PINKHAM WASHINGTON DC
As the majors gear up to renew their battle in Boston, the industry wonders if this type of market is one in which an outright victory is possible
Boston cherishes its history as the site of some of the Revolutionary War's most important skirmishes, notably including the Battle of Bunker Hill and the Boston Tea Party. Today, with a population of 5.8 million and 27.4 million air passengers a year, Boston is the battleground for a campaign being waged by the USA's largest airlines, with the end goal being market leadership.
With the city's large financial services and hi-tech industries generating substantial business traffic, as well as significant demand for leisure service, the self-styled (if ironically in this case) "Hub City" is a vital market for the nation's three largest air carriers - United, American and Delta Air Lines, as well as US Airways. Recently the three duelling majors have all made ambitious strides toward being the largest carrier in this lucrative air service market, adding new routes, building new facilities and buying new affiliates. Which carrier is likely to win this high-stakes battle and how wise a strategy is it to pursue supremacy in Boston to begin?
The combatants
American, considered the city's leading carrier, was the first airline to raise the Boston stakes in earnest, when it bought long-time Delta regional affiliate Business Express in 1999. By securing the largest source of feeder traffic in the New England region, American has been able to support 74% capacity growth and increase the number of destinations served at Logan Airport from 10 to 39 - including regional service - over the last five years. Other moves by the Dallas-based major include a $270 million project to double the floor-size of its currently cramped base at Terminal B, to include four new jet gates and customs and immigration facilities to handle three concurrent international arrivals. At present, as with all carriers, American's international arrivals are processed at Terminal E. On the service front, American has stood up with such aggressive moves launching service to Washington National, a market where cut-throat competition between Delta and US Airways has already resulted in low load factors, despite fares well below historical levels.
Delta, the carrier with perhaps the most historical ties to the Boston area, has also been aggressively building up its presence in New England's largest city. Initiatives it has undertaken include the $386 million decision to demolish the airport's Terminal A and construct a 25-gate replacement, up from the 17 jet gates it currently operates. Also, the carrier reacted to the loss of Business Express by contracting with United affiliate Atlantic Coast Airlines to start to fly RJs out of Boston, as well as New York LaGuardia.
Delta, which flies mainline frequencies to hub cities Atlanta, Cincinnati and Salt Lake City, as well as Bermuda and Las Vegas, applied in May for government authority to complement SkyTeam partner Air France's two daily flights to Paris with one of its own, to be launched next April. More signally, Delta recently announced two moves that served notice to the industry that it intends to challenge for the top spot in Boston.
When it stated that it would initiate twice daily wide-body service to Los Angeles and a new London flight Delta showed the importance with which it views the Boston market. The Los Angeles flight is significant because that market is long the domain of American and United, which both have significant connecting complexes at the airport. Furthermore, in a market in which frequency is paramount, Delta's twice-daily service would seem to be hard pressed to compete with United and American's four and six daily departures.
The London flight is daring, as Delta will be the fifth carrier offering the eighth daily flight in the market. Also daunting is that the carrier will be serving Gatwick, the less preferred of London's two airports. But Delta network director Joe Esposito, who acknowledges that the move is an aggressive one and will be "quite a test of the waters", says the carrier's strength in the local market will make the flight profitable in the end.
Noting the large, if relatively low-yield, market between Boston and Nassau, Bahamas, Delta recently began using aircraft from its Shuttle operations, which are single-class configured and do not post high rates of utilisation over the weekend, to fly the route on Saturday, Sunday and Monday, adding an important leisure destination to its portfolio.
United's service from Boston is principally limited to flights to other hubs. However, owing to the fact that United's hubs are some of the largest air markets from Boston, the carrier has an impressive range of offerings. The 43 daily departures United operates from Logan include extensive service to Chicago, Denver, Los Angeles and San Francisco, a shuttle of sorts to Washington Dulles and a daily flight to London Heathrow. Additionally, United has pledged to fly Boston-Tokyo and its Star Alliance partner Lufthansa flies two daily departures to Frankfurt.
Gaining ground
It is believed in the industry that United, which views everything through the lens of its long-running feud with American, recognised that the Boston match was being won by its Texas-based rival. Although the two run a close race in terms of departures to the West Coast, American has taken the lead on the basis of its North-South service, supplementing its historic service to Miami and San Juan, Puerto Rico, with enhanced mainline and RJ service to other cities. The inferior number of non-stop destinations available on United - seven to American's 39 - puts it a tremendous disadvantage when it comes to winning the big corporate contracts which are vital to success in the Boston market. This shortfall, industry insiders believe, was a major consideration in United's (yet-resolved) bid to purchase US Airways.
At first glance, US Airways would not appear to be a major power in Boston, controlling only 8.8% of the seat-kilometre capacity out of Logan, versus American's handle on 24.7% and United's 14%. However, this measurement does not give an accurate representation of the carrier's presence in the market: the figure is hugely influenced by the fact that US Airways does not fly transcontinental routes from Boston and operates no aircraft larger than a Boeing 757 there. However, the Arlington-based major is - if both carriers' regional operations are included - a close second to American in terms of destinations served and daily departures. US Airways' strength in feeding New England traffic into Boston and serving points in the southern USA from Logan would combine powerfully with United's long-haul capacity there. If it cuts regulatory muster, the merger would put United and American in a virtual dead heat in the market.
So why has Boston suddenly become such a battleground, with the majors going to great lengths to get bigger and offer the best service there? A likely answer lies in the nature of the industry's evolution. In the words of one network planner: "As hubs are getting bigger and more constrained, companies are finding that over-flying them by connecting major O&D (origin and destination) markets makes increasingly good sense. The advent of smaller aircraft - both RJs and 120-seat planes with the range to fly transcontinental missions - makes this strategy commercially as well as logistically attractive." Certainly, American's service pattern at Logan Airport would seem to support this thesis.
Strategy doubts
Others in the industry are less convinced on the merits of focusing resources on the Boston marketplace. A manager with another US major says that the city's geographical location and equilibrated competitive balance renders it unfit to be a major focal point. Found in an extreme corner of the country, there are no significant metropolitan areas to Boston's east or north. This fact makes it impossible for Logan to serve as a practical connecting facility.
Furthermore, its relative proximity to Europe and market size have resulted in long-standing and extensive service by foreign carriers. BA, for instance, has three Boeing 747-200 frequencies a day to Logan, while Lufthansa connects Frankfurt and Boston in the summer with twice-daily widebody flights. In total, 13 foreign carriers offer Boston service. These combined factors of location and foreign incursion render it unlikely, he says, for any US carrier to be able to exercise the control necessary to make major profits at a city.
Others agree that the battle for Boston is unlikely to produce a clear winner, but for different reasons. Joel Antolini, former marketing director at US Airways and currently vice president with the network strategy consultancy Airline Planning Group, explains that the combination of the market's importance for several carriers and its "open" status mean that no one carrier is likely to emerge from the battle victorious. "Boston is an integral component in several major airlines' systems," he says. "So, any effort a carrier makes to gain substantial market share there will almost certainly be matched."
This statement is buttressed by the manners in which carriers have endeavoured to obtain the ability to deliver market share-enhancing frequencies and the expense and trouble other airlines have gone to match them. The means which carriers have undertaken to deal with Logan's capacity shortage is a case in point, as, although not legally limited like New York LaGuardia or Washington National, Logan is a de facto constrained facility, with limited gate and runway facilities conspiring to limit the number of flights each carrier can operate.
The first blow in this battle was struck by American, which many feel stole Business Express from under Delta's nose. The regional carrier's limited gate requirements meant that American could vastly increase its feed and destination portfolio without sacrificing scarce terminal facilities. Although it took several years to formulate an effective response, Delta's new investments in infrastructure and affiliates, which will greatly facilitate its new regional and long-haul services, similarly appears likely to increase its standing in Boston. Lastly, United, which had insufficient gates and a network incapable of doing much beyond serving its hubs from Logan, may have struck the largest blow of all with its proposed $11.7 billion purchase of US Airways.
How effective these moves are is debatable. Few in the industry believe that Delta will effectively compete in the Boston-Los Angeles market or do terribly well with the eighth daily flight to London. Similarly, with US Airways and Delta engaged in a perpetual - and perhaps unwinnable - fare war in the Logan-National market, insiders are perplexed at how American believes it can be a profitable third entrant. The answer may be that the key to winning in Boston is not so much tied into what happens at the airport, as into what happens in the city's business district.
As, to an extent, with what occurs in New York and San Francisco, the key to success in Boston is inextricably linked to the number of lucrative business contracts a carrier can win. Among the keys to winning such agreements are the number and quality of destinations an airline has both in its route map and which it serves non-stop from Logan. This idea is consistent with Delta's Esposito explaining why the carrier continued to expand its service to National even as indications were it was not doing well. "If you're going to be big in Boston," he says, "you've got to be in Boston-Washington."
The bottom line
Antolini says the trick to making Boston work from a profit-and-loss sense is to give the city's all-important business travellers what they want in an airline, while knowing that these customers probably will also have large contracts with the other major carriers. "The bottom line is that it is unlikely any one carrier will ever hold a disproportional share of the Boston traffic. But by offering a comprehensive network portfolio, ie, a global route map, non-stop RJ service in the major secondary markets and direct service to the important international O&Ds, a carrier can earn consistently good revenue and passenger premiums there." United, which is thought to be consistently outsold in the Boston market by American, had the global route map, but without the US Airways acquisition, could not match the non-stop destination offerings posted by either of its rivals in the market. If the deal goes through, it will have purchased a solution to that conundrum.
Depending on the results of the US Government's ruling on the United/US Airways merger, it appears that this second Battle for Bunker Hill might once more be heading toward a three-way stalemate. If that happens, the industry's majors will have an interesting dilemma as to whether they want to accept a more-or-less equal balance with ample profits to share, or renew their attempts towards winning what could well continue to be a costly war of attrition.
Source: Airline Business
