Hub wars

The big five US interior airports are fighting it out to become the top international gateway in the heart of North America.

Patterns of international air service to and from the US are changing. A cluster of airports tucked well inside the continental US are starting to win significant amounts of international traffic. Not only are airports such as Atlanta Hartsfield and Dallas-Fort Worth challenging the traditional coastal gateways, but the battle is on to be the number one interior international airport.

Reasons for this change are many. Deregulation was the initial trigger, as carriers conscientiously sought to develop interior hubs that now support overseas flights. It would have been unthinkable 25 years ago that Cincinnati, Ohio, would have the six flights to Europe it has today - a fact made possible by Delta Air Line's decision to establish a hub in this inland, secondary city.

Contributing more recently to this trend is the huge jump in open skies agreements with other countries - 30 negotiated during President Clinton's two terms - which has led to a large increase in international flying to and from North America, both by US and foreign carriers. Equally important is the development of long-range equipment smaller than the Boeing 747-400, such as the Airbus A340 and Boeing 777, which can operate long, thin routes to secondary cities. New ultra long-range aircraft are also allowing the advent of nonstop services between interior US cities such as Chicago to points as far away as Hong Kong.

Simultaneous with these changes has been the maturing of many domestic markets. US airports, which represent multi-billion dollar investments by both their bondholders and their local communities, must now seek growth outside their national boundaries. The result is today's heated competition among airports to attract new international service. All are trying to convince their own hub carriers and, increasingly, the alliance partners of those carriers, to launch new overseas flights. They are also targeting totally unaffiliated overseas airlines.

A recent example of this phenomenon occurred during the arduous wrangling over the US-Japan bilateral. Executives at several major interior US airports, including O'Hare and DFW, were active participants in this process, lobbying the negotiating teams on both sides on behalf of their cities and actually observing the negotiations.

O'Hare's efforts, which involved a collaboration between the Chicago and Illinois chambers of commerce, were a tremendous success, according to Mary Rose Loney, Chicago's aviation department commissioner. The airport is more than doubling its weekly frequencies to Japan, from 20 to 42. Loney says the coalition of interests established to lobby the Japanese will continue its work to expand international air service. DFW's campaign in the Japan proceedings also was fruitful: American Airlines will offer daily nonstop service to Osaka in December, adding to its existing daily flights to Tokyo.

Beyond the Japan case, DFW has become one of the most aggressive US airports in its pursuit of new international service. Since August it has been operating 60 daily international departures, up from 51 one year earlier and 45 in 1996. Armed with a $1.5 million marketing budget, the airport has spent the past 18 months actively pursuing 26 overseas target markets - six in Asia, 13 in North, Central and South America, and seven in Europe. It has also targetted 13 foreign airlines, including: Aerolineas Argentinas, All Nippon Airways, Cathay Pacific, China Airlines, EVA Air, Iberia Airlines, KLM, Sabena, Swissair, TACA and TAM.

DFW officials tout the airport's chief selling points as its central location - especially useful for cargo - and available connecting services to Latin America. They also point to the low-cost, efficient operation, the number of high-yield business travellers (who made up 38% of all passengers last year) and the vibrant local economy, which contains 60 of the Fortune 500 companies. Unlike many other major US airports, DFW has breathing space - there are relatively few growth constraints.

DFW is pushing these attributes hard. "We develop a plan for each individual market, whether the question is the bilateral or aircraft. We don't sit back and wait for things to happen. We try to push whatever obstacles are in the way out of the way, as we attempt to position ourselves as an international gateway," explains Kevin Cox, DFW's first deputy executive director. "If a company has a long-range 777 on order, we want to be on their radar screen as a top market when they get their 'plane. Airlines make decisions over a long period of time; we try to get in on the front end of the power curve."

Those efforts are bearing fruit. DFW has gained new international service to nine of the 26 markets it has targeted, including Santiago, Chile; Lima, Peru; Caracas, Venezuela; Manchester, England; and Osaka, Japan. These routes are being served by American, which has its headquarters and largest hub in Dallas, and by its new central American codeshare partner, TACA.

Number one

Joseph Lopano, managing director of air service development, says DFW is trying to convince both American and Delta, which also has a hub in Dallas, and their alliance partners to boost overseas flights. He projects that DFW will be ahead of O'Hare in terms of operations by 2000 and in passenger count a year later. "Make no mistake," adds Cox. "We will be the number one interior international airport in the US."

But DFW also wants to lure foreign airlines that are not allied with these two key carriers. This is a challenge, Lopano admits. "There's a general hesitancy about going into someone else's hub. There's a lack of awareness about the vibrancy of the local economy and the fact that an airline can go into American's and Delta's hub and still make money," he says. On top of this is layered the uncertainty about how difficult it will be to compete at DFW if the AA/BA alliance gets approved. Cox and Lopano admit that this question has greeted them repeatedly on their tour of Europe. But they insist that there is a business plan for each of the targeted carriers that makes a sound financial case for considering Dallas - with or without the AA/BA alliance.

In particular, Lopano cites Lufthansa, which started a four-times weekly nonstop service between Dallas and Frankfurt in March, after serving the route daily via Houston, as an example of an airline not affiliated with American that can thrive in this fortress hub. He says the number of passengers carried by the German carrier jumped by more than 15% under the new schedule. Lufthansa continues to offer a one-stop service via Houston three days a week.

O'Hare, which in August had 102 daily international departures, does not appear disturbed by DFW's aggressive behaviour. Although noting that she is always concerned "when cities like Dallas and Atlanta continue to try to emulate us," commissioner Loney is confident it will be hard for DFW to beat them on the international front.

International traffic at O'Hare was up by 10% last year and 12% in the first half of 1998, helped in part by new services to Buenos Aires, Caracas, Cracow, Hong Kong, Glasgow, Guatemala City, Monterey and Osaka, as well as the boost in services to Japan.

Loney, who says she is pursuing new services to Russia and China, as well as flights by Cathay, ANA, Alitalia, Malev and Olympic Airways, believes these carriers will be attracted by O'Hare's strong local market (Chicago is the third largest US city); its central location; and by the numerous connecting possibilities offered by United and American, both of which have major hubs there.

Serious competition

O'Hare's greatest challenge, Loney says, ". . . is to insure our voice is heard and our interests served in negotiations where we're not permitted to sit at the table." One negotiation where Loney appears to be relatively powerless, however, is over the European Commission's deliberations on the AA/BA and the United-Lufthansa alliances. O'Hare could lose flights by all four carriers if the EC's preliminary recommendations go through.

Another serious competitor to both DFW and Chicago is George Bush International Airport in Houston, which by August was offering 67 international flights daily. This airport is served by ten foreign carriers, including Aeromexico, Air Canada, Air France, Aviacsa, Aviateca, British Airways, Cayman Airways, KLM, Lufthansa and TACA. It, too, was a winner in the recent US-Japan bilateral. Continental Airlines, which is headquartered in Houston, will start 777 service to Tokyo at the end of December.

Houston's marketing pitch is similar to the DFW campaign in many ways. Houston lists its advantages as a large local market - this is the fourth largest city in the US - with a major port that is useful to cargo carriers. The central location, with good connections to Los Angeles and to Miami, is also cited.

The gauntlet laid down by DFW to become the top interior international airport is unlikely to be ignored by yet another fortress hub. Atlanta's Hartsfield Airport, which benefited from a massive boost in the build up to the summer Olympics of 1996, now offers 50 daily flights from its new international concourse. Hartsfield's selling points, according to Miguel Southwell, director of marketing, are its location, which is accessible to 80% of the total US population; its low operating costs; and the connecting capabilities offered by Delta. Almost 60% of Atlanta traffic is connect. But Delta's massive operation at Hartsfield can also be a deterrent to new international entrants, Southwell admits. "In some cases, Delta's size may have been a concern for some carriers. In the past, you could simply identify regions such as Scandinavia as having passenger and cargo potential. But it's difficult to attract SAS to Atlanta now because it's not part of the Delta family of airlines," he says.

Leslie Madsen, assistant manager of aviation for air service development at Denver Airport, faces a similar situation at her airport, which is dominated by United Airlines. "The logical candidates for additional international service are United and its affiliated alliance partners, who will need United's feed," she says. Still, Denver has managed to convince British Airways to start daily nonstop 777 service to Gatwick, which was due to begin in September. Other foreign airlines include Air Canada, Condor, Korean Air, Martinair and Mexicana - but combined, they still generate less than 2% of Denver's passenger traffic.

Denver, like Atlanta, is also making much of the high growth that the city is experiencing. But it is clear that the international carriers they are wooing are not always convinced. "Airports can't change the fundamental dynamics of their air service market," says Kenneth Quinn, former chief counsel for the Federal Aviation Administration and now a partner at Winthrop, Stimson, Putnam and Roberts in Washington DC. "No matter how slick their presentation is, some airports can't change the fact that their market is heavily dominated by leisure travellers and produces insufficient yields," he says. "Bottom line; what matters is whether this is a good market. How much competition will I face, and can I make a lot of money there?"

Non-US carriers agree for the most part with Quinn, noting that their greatest concerns are the profit potential and whether they can coordinate at the airports with their US alliance partners.

"What makes the difference is whether there's enough demand," say Ian Callender, Cathay Pacific's vice president for the Americas. He says that Cathay makes its decisions on new US gateways independent of alliances and airports. "But if we do get into an alliance, I'm sure it will weigh importantly on the decisions we make," he adds. That could mean good news for Dallas if an alliance is forged with American.

Cautious Cathay

But Cathay is in no hurry. While it will begin a San Francisco-Hong Kong service in December, it is unlikely to start any more new US routes in the near term, despite the open skies agreement. "Given the depth of the Asian economic crisis, we've taken on a cautious approach," notes Callender.

Stephan Oehler, Swissair's head of market research and network planning intercontinental, says he prefers US airports where alliance partner Delta also "feeds and can be fed". Flying into such airports allows travellers on Delta and Swissair to accrue mileage in each other's frequent flyer program, which is an important marketing advantage, Oehler says. However, he adds that this condition is not an "absolute must," and points to Swissair's recent launch of service to Zurich from San Francisco. The city is not a Delta hub, but has sufficiently strong origin and destination traffic to make it attractive to the Swiss carrier in its own right.

Swissair plans to start new Basel-Newark New York, service in December, and Zurich-Miami service next year even though neither US city is a Delta hub. Oehler also finds Houston and Dallas attractive longer term. "Each is growing because of oil traffic, and we fly a good network for oil company executives to the Middle East and Africa," he says.

Airports Council International's North American president David Plavin supports the view that alliance relationships play a major role in a carrier's expansion plans. "Denver will have a tough time getting service from foreign flags affiliated with Delta or American," he predicts, noting, however, that Delta's planned domestic alliance with United potentially could change the situation and make Denver more attractive to Delta's foreign partners.

A second issue for non-US airlines, says Plavin, is the working relationship with the airport. "Airlines ask themselves 'what kind of place is this airport to do business?'," he says. Another major factor is how the US airlines decide to grow their fortress hubs; airports have little control over these decisions, he says. "If American and Delta put more passengers through Chicago, then Dallas will not catch up with O'Hare," he says. "But if American and Delta flow more passengers through DFW, it will be easier for DFW to overtake O'Hare."

Rocky relations

Denver's reportedly rocky relations with United illustrate how captive an airport can become to its major airline tenant. Denver's Madsen admits that the airport's international aspirations could be hamstrung if United chooses not to play ball.

"The airport's greatest challenge is working with United. We've secured their assurances that they're prepared to serve key markets nonstop out of Denver that would make us a real international gateway," she says. "They say they want to serve Frankfurt as early as 2000, but they've left themselves a great escape hatch." As if to prove the point, United says it has no clear-cut plans to launch a Denver-Frankfurt service, and that it is prohibited by the US-UK bilateral from flying Denver-London Heathrow.

One way to get around this dependence on hub carriers, suggests Quinn, is for the airports to pursue independent airlines. "Alliances should not be the overriding factor in an airport's marketing strategy," says Quinn. "You never place all your eggs in one basket. Like investors, airports need to fashion a diversified portfolio to attract air service from the widest varieties of competitors." He believes that astute airport managers can "maximise their benefits by expanding all their networks, and at the same time keep an eye on attractive new entrants" that can provide competition and alternative service. Denver Airport - wide open for international business

TOP 10 US AIRPORTS BY INTERNATIONAL PASSENGER TRAFFIC - 1997

	City	Airport	International Passengers		International as % of total
			million	change
1	New York	JFK	17.3	-0.1%	55%
2	Miami	International	15.5	4.0%	45%
3	Los Angeles	International	14.4	2.7%	24%
4	Chicago	O'Hare	7.9	9.9%	11%
5	San Francisco	International	7.1	6.2%	18%
6	New York	Newark	5.6	22.3%	18%
7	Houston	International	3.8	14.1%	13%
8	Boston	International	3.6	4.7%	14%
9	Dallas-Ft Wth	International	3.5	5.7%	6%
10	Atlanta	Hartsfield	3.5	13.7%	5%

 

US interior airports' data 1997

Hub		Passengers		(million)						Cargo	Hub carriers
		Total		Domestic			Int'l			(million t)	(seat share)
Chicago		70.3		62.0			7.9			1.4	United (47%) American (38%)
Houston		28.7		24.8			3.8			0.3	Continental (80%)
Dallas-Ft Wth		56.9		53.4			3.5			0.8	American (70%) Delta (20%)
Atlanta		67.8		62.4			3.5			0.9	Delta (80%)
Denver		35.0		34.6			0.4			0.4	United (71%)

 

Source: Airline Business