During an earnings call last week, American Airlines’ CEO Doug Parker intimated that bad hubs rather than poor management are to blame for widening profit gaps between industry-leader Delta and American or United.
When asked about the widening profit gap, Parker stated–
Margins by region come and go, margins by hub come and go, but what I can tell you right now is Delta has an airline that flies over 40% of their flights in and out of Atlanta, which is a really, really good hub. And if American flew 40% of its flights in and out of Charlotte, we would have a margin advantage there in the business because Charlotte’s a really, really good hub.
It’s not about mismanagement or anything close to it. It’s about the networks that are currently in place at the airlines. They have that advantage, by the way, in valuation.
Of course there is truth to his statement: hubs matter. Weather-prone hubs sacrifice operational performance, creating a ripple effect that causes millions of dollars to be lost during inevitable winter weather.
Here’s an example. During a United earnings call in January, Chief Financial Officer Andrew Levy was asked why United’s first quarter guidance lagged behind others. His response–
We have less exposure to Florida and the Caribbean. And so the first quarter is always the lowest quarter for United compared to Delta and America. It’s just about where our hubs are. We don’t have a hub in Atlanta or Charlotte.
And Southeast hubs also have another advantage: lowers costs. Taxes/fees tend to be lower, wages are lower, and all of that create more profitability. Bottom line, both Atlanta and Charlotte produce high unit revenue and high margins.
Management Matters Greatly
But I am not sure if I fully agree with Mr. Parker. It often IS about mismanagement: strategic blunders and other unforced errors that makes some hubs less profitable. Delta has done far more be blessed with a great hub in Atlanta. Since it emerged from bankruptcy, it has proven itself year after year operationally and offers an in-flight soft product that rivals its top-tier Asian competitors.
Meanwhile, can you blame United’s trouble in Houston in Chicago on its weather or labor costs…or on its antiquated systems?
CONCLUSION
Just like so much of life is determined by the country you are born in, much of an airline’s fortune is determined by hub locations. But the hubs do not run themselves. It always takes good management to successfully run an airline.
image: Delta
Being on time and nice product needs $$.
When you have a big hub with outsized margin you can spend that extra $ to produce the better product.
If UA wanted to compete, they would need to massively invest in Dulles facilities and connection opportunities. I realize that the O&D market is squeezed by DCA, but its the best they have!
Friday night flights back to the SE commonly force routing through EWR, regardless of where in the East you’re originating from. Pushes me to DL or AA, because I know I will get home. IAD is a reliable connection airport for me with not enough flight options.
Pre-$misek, UA had higher PRASM than DL. DL had ATL then, UA had ORD/SFO then…still do. Poor management flattened UA earnings and strong management goosed DL’s.
The revisionist history among UA defenders (on FT mainly) about hub quality is amazing.
We have devolved to a culture of lame excuses, and this one is notable for its particular lameness. ATL has no inherent advantage over DFW or IAH. All three are classic examples of captive hubs, with similar climates, and the Texas hubs are arguably more valuable (at least in the abstract) just based on the numbers (population and corporate activity). Nor would any airline in exec in their right mind trade DL’s hubs for UA’s.
Charlotte and surrounding areas do not have a large population compared to ATL, IAH, and DFW. Chsrlotte’s traffic is roughly 85% transferring passengers. CLT is a relatively small airport and efficient operations maximize gate usage which makes it a profitable hub.
ATL does have one inherent advantage, it is the only airport in Atlanta. DFW has local traffic drained of by Southwest in DAL and IAH has the same type of local competition from Southwest at HOU.
@Matt is spot on. While I am a big fan of UA, EWR is their achilles heel. In and out of the NE of the US is never going to be pretty, especially on Friday.
Thank you for the analysis. Parker comes across like a guy who did allright running RV Parks, and has convinced himself and others he can translate his methods into an International “better” hotel chain. Arpey saved AA for Parker to plunder. There is this nagging sense that Parker has no real ‘vision.” He has surrounded himself with those who share his seemingly narrow view.