Airline Consolidation Hits Smaller Cities Hardest

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The nation’s 10 biggest airports have increased their combined market share since 2007, a gain driven by seat increases at some megahubs, such as Los Angeles. Photo: PATRICK T. FALLON/BLOOMBERG NEWS

By Jack Nicas

The U.S. airline industry has undergone a dramatic transformation in the past seven years. Whether that’s brought pain or gain for fliers depends largely on where they live.

A Wall Street Journal analysis of industry and government data shows that while airline service and prices have changed little across the country’s major gateways as a whole, carriers have cut flights and raised fares at many smaller and medium-size airports.

From 2007 to 2014, domestic airfares at the nation’s 10 busiest airports, including Atlanta, Dallas and Denver, increased less than 1% on average, while the combined number of domestic seats fell 1.6%.

But at the 90 next-biggest airports—including Detroit, Honolulu and Birmingham, Ala.—airlines cut their total domestic seats by 14.5% and raised fares by 6.4%. All airfare figures are adjusted for inflation.

The uneven impact reflects sharp shifts in airline strategy. In the three decades after the U.S. deregulated the airline industry in 1978, carriers chased market share at the expense of profits, losing tens of billions of dollars over the period. From 2008 to 2014, four mergers combined eight big airlines into four: American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co.

Together, these four carriers control more than 82% of domestic seats in the U.S., and they are now much more focused on profits, methodically adjusting schedules and fleets to maximize their margins.

“Airlines are just moving their capacity where they can make more money, and you can’t make money in smaller communities,” said Mike Boyd, president of aviation-consulting firm Boyd Group International. “As a corollary, the automobile is becoming a more important part of air travel.…You might have to drive an hour for the flight you want.”

How airlines add and reduce service is drawing closer scrutiny. The U.S. Justice Department is investigating whether the four largest carriers colluded on expansion plans. The investigation followed comments by several airline executives that they planned to limit growth despite cheap fuel. Such restraint could help keep airfares high.

The carriers say they compete vigorously and make their growth plans independently. They say consolidation and other changes have stabilized the industry and made it possible for them to invest in new planes, which benefits air travelers.

To support their claims, airlines generally point to the 2000-to-2014 period, during which average domestic airfares fell 16% to $391. But from 2007 to 2014, during the most recent wave of consolidation, carriers overall raised fares by 5% at the 100 busiest airports and cut domestic seats by 10%.


John Heimlich, chief economist at industry trade group Airlines for America, said the fare increase was necessary to keep profit margins flat.

The 5% fare increase, however, doesn’t include the fees airlines charge fliers to check bags or change flights, which have soared recently. From 2007 to 2014, the price of the average round-trip domestic flight, including fees, increased nearly 16% to $291.30, according to industry data.

The airlines have reduced their flight schedules partly in response to volatile fuel prices, which drove them to stop chasing market share. The cuts intensified in 2009, following the financial crisis.

“As times got tough…carriers had to prune, and it tended to be at some of the smaller locations where demand was either lower or more volatile,” said Mr. Heimlich. “And, in response, they did concentrate resources at their hubs.”

The major carriers now route almost all their passengers through hubs because it reduces costs and lets them serve more cities, industry analysts and economists said. But that also requires many travelers to catch connecting flights at a hub, rather than fly nonstop between cities.


Domestic airfares rose less than 1% on average from 2007 to 2014 at the nation’s 10 busiest airports, which includes Dallas/Fort Worth. Photo: LM Otero/Associated Press

“Point-to-point traffic is really gone at this point,” said Michael Wittman, an airline researcher at the Massachusetts Institute of Technology. “Almost 100% of flights among the big legacy carriers begin or end at hubs.”

Last year, the 10 largest airports by departing seats together accounted for nearly 35% of the roughly 834 million domestic seats available, a 2.5-percentage-point increase from the top 10’s market share in 2007. The next 90 biggest airports now account for 58% of all domestic seats, about 2.5 percentage points less than in 2007.

The growth at big airports was driven by seat increases in Los Angeles, San Francisco and the American Airlines hub in Charlotte, N.C. But not all such megahubs expanded. Chicago’s O’Hare International and Phoenix Sky Harbor International Airport had above-average declines in seats and fare increases.

Carriers also have shifted away from secondary airports in larger cities, in favor of major gateways. At the primary airports in Los Angeles, San Francisco and Boston, airlines added 10.3% more domestic seats and decreased domestic fares by 4.3% from 2007 to 2014. But at the eight smaller airports surrounding those cities, in places including Burbank and Oakland, Calif., and Providence, R.I., airlines cut domestic seats by nearly a third and increased fares by 1.7%.

Airlines made some of their deepest cuts at smaller hubs. Delta eliminated Cincinnati and Memphis, Tenn., as hubs after its 2008 merger with Northwest Airlines, helping decrease those cities’ domestic seats by about two-thirds each from 2007 to 2014. Likewise, United eliminated Cleveland as a hub several years after its 2010 merger with Continental Airlines, leading to a 37% decline in the airport’s domestic seats over the same seven-year period.

Those cuts have had a mixed impart on fares. Cleveland’s fares rose nearly 13% over the period. But Cincinnati and Memphis fares stayed almost flat or fell, because discount carriers filled many of Delta’s gates, increasing competition on popular routes, airport officials in those cities say.

“We’ve had to go through a reinvention,” said Candace McGraw, chief executive of Cincinnati’s airport, where discount carriers now offer 100 flights a week, compared with none in 2007. “We were predominantly a business-traveler airport served by one very large carrier. Now, as we become more multicarrier…there are more price points in the mix.”

The industry’s move toward larger jets with denser seating also has fueled the migration from smaller airports. The new planes have allowed carriers to reduce flights while adding seats overall. Smaller planes have become unprofitable because they can’t carry enough passengers to offset the cost of fuel; bigger jets are less costly on per-seat basis and reduce congestion.

The pain for smaller cities likely isn’t over: The shift to larger jets and a worsening shortage of pilots are threatening regional airlines, which generally fly to smaller cities on behalf of the major carriers. Republic Airways Holdings Inc., for example, is hoping a final contract proposal to its pilots last month will help it avoid bankruptcy.

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Comments

Air travel deregulation led to more competition and lower prices.  That, in turn, put enormous economic pressure on airlines.  This economic pressure is what has now led to cutbacks, route reshuffling, and yes, mergers.

No amount of regulatory intervention will ever increase service without increasing prices to flyers.  If you want more, you're going to have to pay more.  Face it:  air travel is so ubiquitous that it really is now just a bus with wings.  That's it.  You can't have champagne service at beer prices...

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38 users have voted.

Right. Prior to deregulation, the airline industry was living in a fantasy land due to regulation. Prices and routes were determined by the government; cost-savings and profitability weren't an issue. With artificially high air fares, set by the now-defunct CAB, an airline didn't have to fill a plane to make it work.

Deregulation came about and that meant much less government interference, especially in terms of fares. Suddenly the traveling public thought a $99 trans continental fare was normal and their entitlement. But these grabs for market share were not sustainable. Pricing at those levels led to bankruptcy and to consolidation.

Smaller cities with 50,000 population do not have a broad range of consumer choices on many levels for good reason. The question to be asked, is "Are tax payers willing to subsidize airlines to keep them flying to smaller communities at 'affordable' fares?" We need to be phasing out the "Essential Air Services" act, not expanding it.

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34 users have voted.

This is an industry for which aggrgated profits since it started in the nineteen teens have been close to zero.  If the public wants investors to keep supplying capital they have to earn a competitive return.  The fees are optional and reflect increased usage of resources by customers.  Autos have come with options forever.  Those who want them pay for them, those who don't don't.  Why should someone pay for baggage handlers they don't use?  This industry's consumers are a great example of the economist, G. Warren Nutter's comment, "the price I pay is always too high, the price I receive is always too low."

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32 users have voted.

The problem with hubs is that you do lose traffic to driving.   The issues (even with TSA prechek) of security and access add several hours to any flight.   Unless you are going from some where near the airport to somewhere near the airport, the advantages of  driving increase.   You can leave on your schedule, not the airlines,  carry what you want,  eat when you want etc.    I find my prior driving limit of six hours for business has now increased to nine or ten depending on the destination.

It seems to me that JetBlue's model of no hubs could be duplicated regionally without relying so much on Florida traffic.   How much of an issue the multi-carrier ticket is in a post travel agent world may also play a role.

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40 users have voted.

There's demand for air travel in non top markets, so why is the service ( supply) limited and the price high.

Old legacy Airlines had archaic,  unsustainable labor costs that would have gone away in 2002 . But big government bailed out the big airlines in 2002,  and airlines responded with mergers and route reductions. resulting in higher fares for consumers not in top ten markets. The country's highest airfares as measured by cost  per mile,  is in Cincinnati. And it's not because gates or ground crews cost more in Cincy than they do in lower fare markets like Chicago or Newark, it's because for years, Delta  monopolized the gates. Until  free markets are allowed to work and until competition is assured, consumers can expect to pay more for less. 

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32 users have voted.

It is not just small towns that have suffered.  I fly between O'Hare and Phoenix many times a year on First Class.  Since the AA-US Air merger, AA has almost all the non-stop flights and the cost is up 50% while FF seats are much harder to come by.  I do not want the government involved, but it seems like a business opportunity for another airline to step in and force some competition.  Are you listening United, execrable airline that you are?  I would try you again if you jumped in with more flights.  Especially if you matched my AA FF status level.

Nostalgia for the old days, when you always got a 747 and could count on stretching out on an unused 5 seat middle row is a pleasant pastime.  Sigh.  Of course we paid dearly for those flights and I am not suggesting a return to the past.  But it was nice!  Better than first class today.

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34 users have voted.

It seems everyone forgets the basic premise.

Airlines are owned by shareholders who want a return on investment. Thus their only goal is to make money for shareholders. They do this by flying people and goods. Both are just cargo. They are not the Post Office who is required to have the same service in every City, Town or Village at the same price.

Airlines have several price points of service. First - Business and coach.  If the customer does not like the service, space, baggage rules in coach they are free to choose a higher class of service. Period.

People should not expect the same service in smaller cities that do not provide the necessary amount of customers to warrant the same service as larger cities. I read in comments people criticizing carriers as an example. I would bet these are not United Business First or Delta One or First class passengers.

I for one use Delta First and Delta One.  I find their service great. 10 times better than coach. But, I pay for it.

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48 users have voted.

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