Biography for William Swan

Retired Chief Economist for Boeing

Commercial Aircraft 1996-2005
Previous to Boeing, worked at
American Airlines in Operations
Research and Strategic Planning
and United Airlines in Research and
Development. Areas of work
included Yield Management, Fleet
Planning, Aircraft Routing, and
Crew Scheduling. Also worked for
Hull Trading, a major market maker
in stock index options, and on the
staff at MIT’s Flight Transportation
Lab. Education: Master’s,
Engineer’s Degree, and Ph. D. at
MIT. Bachelor of Science in
Aeronautical Engineering at
Princeton. Likes dogs and dark
beer. (bill.swan@cyberswans.com)
© Scott Adams
 Airline Route Developments
The Unexpected
6

5
World ASK Growth
4
ASK index

3
Growth Fit with 1%
2 Annual Reduction

0
1970 1975 1980 1985 1990 1995 2000

Bill Swan, Chief Economist, Boeing Marketing

Airline Route Networks Change Over Time
Outline of Discussion

I. The History of Route Developments

Similar patterns from all regions of the world

II. Why Do These Patterns Dominate?

Several reasons, which is most important?

III. Implications for Airline Strategies

Historical trends could change
The burden of proof lies on explaining why
I. Growth is Served by More Airplanes, Not Bigger

Jet
Jet Schedules
Schedules Show
Show Decreasing
Decreasing Seat
Seat Counts
Counts

Seat
SeatCount
Count ASKs
ASKs
Year
Year (Average)
(Average) (100%=1985)
(100%=1985)
1985
1985 192
192 100%
100%
1990
1990 195
195 138%
138%
1995
1995 194
194 174%
174%
2000
2000 187
187 225%
225%

Data from August schedules

Average Capacities Are Static Or Down
Growth is similar for all regions

Airline
Airline 1990
1990 2000
2000 1900-2000
1900-2000
Domicile
Domicile Seat
SeatCount
Count Seat
SeatCount
Count ASK
ASKgrowth
growth
WORLD
WORLD 195
195 187
187 163%
163%
China,
China,Hong
HongKong
Kong 212
212 205
205 353%
353%
Southeast
SoutheastAsiaAsia 281
281 293
293 226%
226%
Europe
Europe 201
201 191
191 200%
200%
Oceania
Oceania 215
215 212
212 185%
185%
Central
CentralAmerica
America 150
150 135
135 185%
185%
Japan
Japan&&Korea
Korea 290
290 271
271 182%
182%
Middle
MiddleEast
East 235
235 228
228 167%
167%
Africa
Africa 200
200 215
215 163%
163%
Southwest
SouthwestAsiaAsia 218
218 191
191 162%
162%
South
SouthAmerica
America 155
155 136
136 158%
158%
North
NorthAmerica
America 159
159 145
145 132%
132%
Russia
RussiaRegion
Region 153
153 150
150 113%
113%
Forecasters in 1983 Had a Really Hard Time
Forecasters in 1983 Had a Hard Time
200
190
Seats Per Airplane

180
170
160
150
140
130
120
1970 1975 1980 1985 1990 1995 2000
 Forecasters in 1990 Were Still Confused
230
1990
220 FORECAST
210
200
Seats Per Airplane

190
180
170 2004 data
1990 data
160
150
140
130
1970 1975 1980 1985 1990 1995 2000 2005 2010
 What We Missed: New Routes
3.5
Daily Departures per Nonstop Pair, average

Nonstop Pairs (index)

3.0 Departures/Pair

2.5

2.0

1.5

1.0
1970 1975 1980 1985 1990 1995 2000 2005
 Air Travel Growth Has Been Met By
Increased Frequencies and Non-Stops

Air Travel Growth Has Been Met By

Increased Frequencies and Non-Stops
250
225 Index
1985=100 Air Travel
200
175 Frequencies

150 Non-Stop Markets

125 Average Stage Length
100
Average Airplane Size
75
1985 1990 1995 2000
Seat Count is -4% of World ASK Growth

Smaller Airplanes - 4%

Longer Ranges 13%

New
Markets
41%
Added
Frequency
50%
Growth Patterns the Same at Closer Detail
Similar patterns all over the world

NE Asia regional Europe regional SE Asia regional Oceania regional

SWAsia regional S America regional C America regional Mid East regional

N America regional NE Asia-SE Asia SE Asia-SWAsia SE Asia-Oceania

Europe-SWAsia C America-N America Europe-Africa S America-N America

Europe-S America Europe-C America Europe-N America NE Asia-N America

 Big Routes Do Not Mean Big Airplanes
450

400

350
Seats Per Departure

300

250

200

150 Average

100

50

0
0 2000 4000 6000 8000 10000 12000 14000 16000 18000
Seats Per Day

All Airport Pairs under 5000km and over 1000 seats/day

 Size in 1990 Not a Forecast for Size in 2000
Size in 1990 Not a Forecast for Size in 2000
450

400
Seats/Dep in 2000 (same pair)

350

300

250

200

150
150 200 250 300 350 400 450
Seats/Departure in 1990, Atlantic pairs
 Small Airplanes Not on New Routes

450
400
350
New
Seats

300 Old
250
200
Distance (km)
150
5000 7000 9000 11000
Atlantic Airport Pairs with Service Aug 2000 but not Aug 1995
 Big Airports Do Not Mean Big Airplanes

350

300
Seats per Departure

250

200

150

100

50

0
0 200 400 600 800 1000 1200 1400
Jet Departures Per Day

Top 12 Markets in 12 World Regions

 Fast Growth Does not Mean Big Airplanes

60
HAV
1985-2000
40 Dacca
Change
BKK
Seats/ NGO
Departure 20
Lagos

0
-50% 0% 50% 100% Data
150%
-20 trend line
Kirachi

ATH CCS DEL

-40 SGN

FUK BOM
Paris
-60 Change in City Population 1985-2000
 II. Why Does Growth Add Frequency?
Many expect more demand to lead to bigger airplanes

a. Deregulation causes one-time move to smaller airplanes.

Competition drives airlines to more routes and frequencies.

b. Economic savings of larger airplanes diminish with size

For new airplanes of similar missions.

c. Cost savings come from avoiding intermediate stops.

Connecting passengers pay a time and cost penalty.

d. Natural network development.

Route networks move from skeletal to highly-connected.

e. Travelers’ priorities change as economies get richer.

Higher value for timely services, less emphasis on lowest cost.
d. Networks Develop from Skeletal to Connected
High growth does not persist at initial gateway hubs

 Early developments build loads to use larger airplanes:

Larger airplanes at this state means middle-sized
Result is a thin network – few links
A focus on a few major hubs or gateways
In Operations Research terms, a “minimum spanning tree”
 Later developments bypass initial hubs:
Bypass saves the costs of connections
Bypass establishes secondary hubs
New competing carriers bypass hubs dominated by incumbents
Large markets peak early, then fade in importance
 Third stage may be non-hubbed low-cost carriers:
The largest flows can sustain service without connecting feed
High frequencies create good connections without hub plan
 Skeletal Networks Develop Links to
Secondary Hubs
Early Skeletal Network

Later Development bypasses Early Hubs

 Consolidation Theory:
A Story that Sounds Good

• Large markets will need larger airplanes

• Industry consolidation increases this trend
• Alliances increase this trend
• This trend is happening
 Fragmentation Theory
• Large markets peak early
• Bypass flying bleeds traffic off early markets
– Some connecting travelers get nonstops
– Others get competitive connections
– Secondary airports divert local traffic
• New airlines attack large traffic flows
• Frequency competition continues
 Route Development Data:
Measures What Really Happens

• Compare top 100 markets from Aug 1993

– Top 100 by seat departures
– Growth to Aug 2003
• Data from published jet schedules
 Largest Routes are Not Growing
as bypass flying diverts traffic
60%

50%
World, 1993-2003
40%
Top 100 Routes
30%

20%

10%

0%

-10% ASK growth Frequency Airplane size

-20%
growth growth
 Large Long Routes are Not Growing
as bypass flying diverts traffic
100%

80%
World, 1993-2003

60% Top 100 Routes >

5000 Km
40%

20%

0%

ASK growth Frequency Airplane 747

-20%
growth size growth Departures
Very Largest Long Routes are Not Growing
as bypass flying diverts traffic

60%
50%
World, 1993-2003
40%
30% Top 10 Routes >
20% 5000 Km
10%
0%
-10% ASK growth Frequency Airplane 747
-20% growth size growth Departures
-30%
-40%
 JFK Gateway Hub Stagnant for 30 Years

1400
5% of US 48
1200
JFK
1000
Departures/Day

800

600

400

200

0
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
19

19

19
19
19
19
19
19

19

19
19

19
19
19
19
20
20
August Jet Schedules
 Seats/Departure
19

0
100
150
200
250
300

50
71
19
73
19
75

August Jet Schedules

19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
JFK Gateway Hub Airplane Size Is Declining
Competition Rising in Long-Haul Flows

30
Herfinadahl Number of Competitors

25

20

15

10
Atlantic
Pacific
5
Asia-Europe
Other Long
0
1970 1975 1980 1985 1990 1995 2000 2005
Networks Develop Beyond Early Airports

 Decline of Long-Haul Gateway Hubs 1990-2000:

Top
Top10
10Airports’
Airports’Share
Shareof
ofDeparting
DepartingASKs
ASKs
Market
MarketFlow
Flow Share
Share1990
1990 Share
Share2000
2000
Asia-Europe
Asia-Europe 88%
88% 70%
70%
Trans Pacific
Trans Pacific 80%
80% 69%
69%
Atlantic
Atlantic 54%
54% 49%
49%
Congestion Has Not Slowed Route Developments
Congestion is not driving seats per departure up

Seat Counts at Top 5 Airports Show Little Congestion

1990
1990 2000
2000
World
WorldRegion
Region Seats/Dep
Seats/Dep Seats/Dep
Seats/Dep
Japan
Japan&&Korea
Korea 281
281 265
265 
Middle
MiddleEast
East 226
226 213
213 
Southeast
SoutheastAsia
Asia 227
227 241
241 
Southwest
SouthwestAsia
Asia 219
219 184
184 
China,
China,Hong
HongKong
Kong 209
209 217
217 
Oceania
Oceania 173
173 176
176 
Central
CentralAmerica
America 173
173 144
144 
Africa
Africa 169
169 169
169
Europe
Europe 168
168 168
168
North
NorthAmerica
America 157
157 145
145 
South
SouthAmerica
America 154
154 145
145 
Russia
RussiaRegion
Region 147
147 139
139 
All
All60
60Airports
Airports 180
180 176
176 
 Congestion: Solutions From History
Congestion has been a cost, not a constraint

 Solutions favored by airports:

1. Redefining measurement of capacity movements
2. Technical improvements to raise capacity
3. Added runways
4. Building replacement airport

 Solutions provided by the airline market:

5. Using un-congested times of day
6. By-passing congested gateways with new nonstop markets
7. Building frequencies and connections at secondary hubs
8. Using secondary airports at congested cities

 Solutions beginning to be used:

9. Reducing smaller, propeller aircraft movements
10. Moving small, short-haul jet movements to larger aircraft
 Congestion Affects Short & Small Flights
60%

50% 1990 Departures

2000 Departures
Share of Departures

40%

30%

20%

10%

0%
717 737 757 767/777 747
Airplane Size Category (world fleet, all manufacturers)
 Chicago Airplane Sizes Do Not Show Congestion

170

160

150
Seats/Departure

140

130

120

110

100
77
79
81
83
85
87
89
91

97
99
01
03
71
73
75

93
95
19

19

19
19
19
19
19
19
19
19

19

19
19
19

19
20
20
August Jet Schedules
Congestion is Not Driving 747 Shares UP
80%
NRT
70%
HKG
747 Share of Departures

HND
60%
JFK
50% PEK
LHR
40% AMS
CDG
30%
FRA
20% LGW
LAX
10% SFO
ORD
0%

9 85 987 989 990 993 995 997 999 001 003

1 1 1 1 1 1 1 1 2 2
 Implications of History for Airlines
Route strategy should respect history

 Plan for growth:

70%-100% of it in added frequencies
 Plan for flexibility:
Long-term commitments should not hang on one specific future
 Plan to have more routes:
Growth will include new nonstop markets
 Plan to have more frequencies:
Growth will include more flights at more times of day
 Plan to face competition:
Competitors will by-pass your hub
 Plan to discuss history:
Leaders may imagine growth patterns different from history
 Hubs: The Whys and Wherefores
• Just over half of trips are connecting
• Thousands of small connecting markets
• Early hubs are Gateways
• Later hubs bypass Gateways
– One third of bypass loads are local—saving the
connection
– One third of bypass loads have saved one connect of
two
– One third of bypass loads are merely connecting over
a new, competitive hub
• Growth is stimulated by service improvements
– Bypass markets grow faster than average
 Most Markets are Small
16%
14%
Too Small For
12%
Share of RPKs

Nonstop
10%
8%
6%
4%
2%
0%

+
5

0
00

00

00

00
25

60
<5
<2

00
2.
.2

<2
<1

<4

<8
.1
<6

<1

<1

16
<3

Passengers per Day One Way

 Half of Travel is in Connecting Markets

16%
14%
Share of World RPKs

12%
Connecting Markets
10%
8%
6%
4%
Nonstop Markets
2%
0%

O&D Passengers per Day

 4-leg connect
Lots of O&D Connections Double Connect
1-connect
100% thru
90% nonstop
Share of O&D Passengers

80%
70%
60%
50%
40%
30%
20%
10%
0%

00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00 0 0 00
3 10 20 30 40 50 60 70 80 90 00 10 20
1 1 1
St. Mi. Range Block (excludes US domestic O&Ds)
 Half the Trips are Connecting
400000 3+legs
350000 2-legs
300000 Nonstops
ASMs (000/day)

250000
200000
150000
100000
50000
0

St. Mi. Range Block (excluding US domestic)

 Connecting Share of Loads
Averages about 50%
80%
Local Traffic Share of

70%
60%
50%
Onboard

40%
30%
20%
10%
0%
0 2000 4000 6000 8000 10000
Flight Distance (Km)
Long-Haul Flights are from Hubs,
and carry mostly connecting traffic
100%
90%
Point-to-Point Markets
80%
Local % of Onboard Load

70%
60%
50%
40% Trend
30%
20%
10%
0%
100 150 200 250 300 350 400 450 500
Markets over 5000km Seats per Departure
 Hub Concepts
• Hub city should be a major regional center
– Connect-only hubs have not succeeded
– Early hubs are centers of regional commerce
• Early Gateway Hubs get Bypassed
– Early International hubs form at coastlines
– Interior hubs have regional cities on 2 sides
• Later hubs duplicate and compete with early hubs
– Many of the same cities served
– Which medium cities become hubs is arbitrary
– Often better-run airport or airline determines success
– Also the hub that starts first stays ahead
 Three Kinds of Hubs
• International hubs driven by long-haul
– Gateway cities
– Many European hubs: CDG, LHR, AMS, FRA
– Some evolving interior hubs, such as Chicago
– Typically one bank of connections per day
• Regional hubs connecting smaller cities
– Most US hubs, with at least 3 banks per day
– Some European hubs, with 1 or 2 banks per day
• High-Density hubs without banking
– Continuous connections from continuous arrivals and departures
– American Airlines at Chicago and Dallas
– Southwest at many of its focus cities
 Regional and Gateway Hubs in US

JFK
ORD
SFO
DEN

LAX ATL
DFW

MIA
 Secondary Hubs in US
SEA

MSP
DTW PIT JFK
SLC ORD
SFO EWR
DEN STL CVG

LAX PHX ATL

DFW

IAH
MIA
 Minot, N. D., USA, is served over one Hub
airport Destination Dist (km) Passengers fare
MSP MINNEAPOLIS/ST. PAUL-INTL 724 23.9 $ 191
PHX PHOENIX, ARIZONA, USA-INTL 1879 8.7 $ 215
LAS LAS VEGAS, NEVADA, USA-MCCARRA 1771 5.6 $ 213
DFW DALLAS/FT. WORTH, TEXA-INTL 1747 5.0 $ 241
SEA SEATTLE/TACOMA, WASHIN-SEA/TAC 1574 4.9 $ 209
DCA WASHINGTON, DC, USA-NATIONAL 2211 4.8 $ 309
DEN DENVER, COLORADO, USA-INTL 974 4.7 $ 197
MCO ORLANDO, FLORIDA, USA-INTL 2797 4.5 $ 226
LAX LOS ANGELES, CALIFORNI-INTL 2139 3.7 $ 220
SAT SAN ANTONIO, TEXAS, USA 2097 3.6 $ 331
ANC ANCHORAGE, ALASKA, USA 3360 3.0 $ 245
ORD CHICAGO, ILLINOIS, USA-O'HARE 1263 2.9 $ 225
ATL ATLANTA, GEORGIA, USA 2152 2.7 $ 255
SFO SAN FRANCISCO, CALIFORNIA, USA 2082 2.7 $ 219
EKO ELKO, NEVADA, USA 1418 2.6 $ 48
IAH HOUSTON, TEXAS, USA-INTERCONT 2097 2.6 $ 290
LGA NEW YORK LA GUARDIA 2323 2.6 $ 228
Rest of World (117 more Cities) 2022 91 $ 240
TOTAL/avg 1818 177 $ 230
Minot Feeds to Minneapolis Hub
MOT

MSP
 18:00 Bank Gives Minot 38 Destinations
Inbound Bank Outbound Bank
Origin Depart Hub Origin Depart Hub Hub Arrive Destin' Hub Arrive Destin'
city time time city time time ==> time time city time time city
ONT 1200 1727 DLH 1655 1748 1848 2116 MBS
BOS 1505 1728 SAN 1210 1748 1849 2136 CMH
SNA 1200 1728 IND 1604 1749 1850 2227 HPN
PSP 1210 1729 TUL 1550 1750 1850 2130 AZO
PDX 1210 1729 DTW 1700 1753 ==> 1835 2030 MEM 1850 2130 AZO
MSO 1355 1730 GRB 1641 1755 ==> 1836 1932 FAR 1850 2215 TYS
CWA 1630 1731 MKE 1635 1756 ==> 1837 2159 IAD 1850 900 LGW
GFK 1620 1731 SJC 1215 1756 ==> 1838 2159 RDU 1851 2142 DTW
RST 1650 1732 RAP 1530 1757 ==> 1839 2209 PVD 1852 2128 FNT
SMF 1205 1732 DTW 1705 1759 ==> 1839 2214 GSO 1853 2217 BWI
ORD 1600 1734 DSM 1650 1759 ==> 1840 2207 BDL 1854 2246 BOS
DFW 1510 1735 MSN 1645 1800 ==> 1841 2108 GRR 1855 2255 ORF
YEG 1355 1735 MOT 1635 1800 ==> 1842 2139 BUF 1855 2008 MLI
YYC 1357 1735 SFO 1220 1800 ==> 1843 2104 OKC 1855 2124 LAN
ABQ 1405 1739 BOI 1415 1804 ==> 1844 2210 ATL 1856 2126 DFW
LNK 1615 1740 GEG 1312 1804 ==> 1845 2159 ROC 1857 2158 YYZ
DCA 1559 1741 ATL 1620 1805 ==> 1845 2022 SBN 1858 2007 GRB
STL 1600 1742 MDW 1635 1809 ==> 1845 2134 DAY 1859 2002 OMA
LAX 1215 1744 CVG 1655 1809 ==> 1846 2208 CLT 1900 2200 PIT
YWG 1618 1744 CWA 1715 1815 ==> 1847 2208 DCA 1900 2027 ORD
BIS 1630 1747 1847 2253 TPA 1901 2030 MCI
Minot Connects to the World
 Value Created by Hubs

The idea in business is to Create Value

Do things people want at a cost they will pay
Hubs make valuable travel options
Feeder city gets “anywhere” with one connection
Feeder city can participate in trade and commerce
Hubs are cost-effective
Most destinations attract less than 10 pax/day
Connecting loads use cost-effective airplanes
 Hubs Build Loads First, then Frequency
$600
Too Expensive
$500
Trip Cost Per Seat

$400

$300

$200
Good Balance
$100
Add Frequency
$-
0 50 100 150 200 250
Seats
Hubs Give Competitive Advantages
• Less peaking of demands, as variations in
different markets average out
• Dominate feeder legs
– Connect loads allow dominant frequency
– Connect loads avoid small, expensive airplanes
– Feeder cities can be “owned”
• Dominant airline will get 15% market share advantage
• Dominant airline can control sales channels
• Control of feeder cities makes airline attractive to alliances
Hubs Compete with Other Hubs
• Compete on quality of connection
– Does the airport “work?”
• Short connecting times
• Reasonable walking distances
• Reliable baggage handling
• Few delayed flights
• Recovery from weather disruptions
• Later flights for when something goes wrong
 Hubs Develop Pricing Mixes
• Higher fares in captive feeder markets
• Low discount fares in selected connecting
markets to fill up empty seats
– Low connecting fares compete against
nonstops
– Select low fare markets against competition
– It pays to discount and fill
• Unless you discount your own high-fare markets
 Hubs Win
• The dominant form of airline networks is hubs
and connections
• This is because networks are “thin”
– Meaning only a few, larger city pairs are nonstop
• As networks grow, secondary hubs develop
– Competing with early hubs
• Hubs dominate because they create good travel
– Save time over un-coordinated connections
– Avoid the use of small, expensive airplane sizes
 Why Hubs Work

Revenue Benefits for Hubbing

Spring 2005 Research
Working Paper
 Hubs Work
• Fare Rise Linearly with Distance
• Fares decline Linearly with Market Size
• Hubs serve Smaller Connecting Markets
• Hubs get premium revenues for connects
• Low Cost Carriers price Connections High
– Tend to charge sum of local fares
– Prices match Hub Carriers’ prices
 Hub Cost Carriers’ (HCCs) Fare
Trend is Linear with Distance
O-D Markets Without Low-Cost (LCC) Competition

$260

$240

$220
Average Fare

$200

$180

$160
HCCs Alone
$140
Linear (HCCs Alone)
$120

$100
0 500 1000 1500 2000 2500
US Domestic 2q04 Data City-Pair Distance (Mi.)
 Low-Cost Carriers’ (LCCs) Fares
are Linear With Distance
$200
$190 LCC Fares
$180 Linear (LCC Fares)
$170
Average Fare

$160
$150
$140
$130
$120
$110
$100
0 500 1000 1500 2000 2500
US Domestic 2q04 Data City-Pair Distance (Mi.)
 Hub Cost Carriers’ (HCCs) Fares
Match Low-Cost (LCC) Competition
HCCs Alone
$260 HCCs with LCCs
$240 LCC Fares
Linear (HCCs Alone)
$220 Linear (HCCs with LCCs)
Linear (LCC Fares)
Average Fare

$200

$180

$160

$140

$120

$100
0 500 1000 1500 2000 2500
US Domestic 2q04 Data City-Pair Distance (Mi.)
 HCC Fares Decline with Market Size
$220
Average Fare 2q04 (adjusted to 1100mi)

Connecting
$200

$180
HCCs without LCCs

$160

$140

$120
HCC fare Trend= $196 - 2.26 * Ln(Pax)

$100
1 3 5 7 9 13 20 30 41 61 86 122 172 281 479
Market Size, Log Scale
 LCC Fares Decline with Market Size
$180
Average Fare 2q04 (adjusted to 1100mi)

Connecting
$170

$160

$150 LCC fares

$140

$130

$120

$110
LCC Trend = $178 + 11 * Ln(Pax)
$100
1 3 5 7 9 13 20 30 41 61 86 122 172 281 479
Market Size, Log Scale
 Fares Decline with Market Size
$220
Average Fare 2q04 (adjusted to 1100mi)

Connecting
$200

$180

$160

$140

HCCs without LCCs

$120 HCCs with LCCs
LCC fares

$100
1 3 5 7 9 13 20 30 41 61 86
Market Size, Log Scale
 HCC Fares are Slightly Higher Than
LCC Fares, adjusted for Market Size
$220
Average Fare 2q04 (adjusted to 1100mi)

Connecting
$200

$180

$160

$140

HCCs without LCCs

$120 HCCs with LCCs
LCC fares

$100
1 3 5 7 9 13 20 30 41 61 86 122 172 281 479
Market Size, Log Scale
 The Real Difference is
Hubs Serve Many more Small Markets
• US HCCs have “given up” local markets
– Nonstop markets to hub city
– Used to gain premium revenues
– Now required to match LCCs
– Revenues no longer cover union labor costs
– HCCs have given up most traffic to LCCs
• Hubs serve connecting markets
– Share of HCC revenues in small markets high
– Share of LCC revenues in small markets low
– Fares in small markets higher
– More small market revenues mean higher HCC fares
 Hubs Emphasize Smaller Markets
18%
Share of Carrier Total Revenues

Connections
16%
14%
12%
HCCs
10%
LCCs
8%
6%
4%
2%
0%
1 3 5 7 9 13 20 30 41 61 86 122 172 281 479

O-D City Pair Market Size (log scale)

 LCCs Share of Small Markets is 5%
Share of Larger Nonstop Markets is 25%
35%
Discount Carriers Revenue Share

30%
of All Markets in Size Group

Connections
25%

20%

15%

10%

5%

0%

9
54
1

9
13

20

30

41

86
61

12

17

47
28

14
O-D City Pair Market Size (log scale)
 HCCs Raise Average Fare
By Emphasizing Connecting Markets

• Average Fare for All Passengers: $146

• Average Fare for HCC Passengers: $166
• Average Fare for LCC Passengers: $102
 HCC Revenues are 1/3 Small Markets
LCC Revenues are 10% Small Markets
70%

60% Connections
Cumulative Revenues

50%

HCCs
40%
LCCs
30%

20%

10%

0%
1 3 5 7 9 13 20 30 41 61 86 122 172 281 479
O-D City Pair Market Size (log scale)
 Hubs Make Travel Possible
• Hubs exist to serve small markets
• For US domestic network
– 25% of revenues are from small markets
– Over 30% of HCC revenues
– Under 10% of LCC revenues
• International “small markets” add to this
• US has higher share nonstop than world
 Economics of “Small Markets”
• Half of world-wide loads are connecting
• Small cities have small markets
• Small Markets pay more
• Value is there
– Small cities have lower living costs
• Lower housing costs
• Higher air travel costs
– Air Travel connects small cities to trade
Fares are Linear With Distance

• Average Fare = $153 + $0.043 * Dist

– R-square = 0.13
– All US domestic markets with valid data
– Excluding Hawaii
– Mix of HCC and LCC markets
– 18,000 data points (Airport Pair O-Ds)
 Fares are Higher for Small Markets
(Includes both Small and LCC Presence Effects)
For Pax < 10/day
Fare = $117 + 0.046 * Distance
257 data points; R-square = 0.42
For 10/day < Pax < 100/day
Fare = $106 + 0.037 * Distance
758 data points; R-square = 0.37
For Pax > 100/day
Fare = $98 + 0.035 * Distance
671 data points; R-square = 0.34
HCC Fares are Higher for Small Markets
For Pax < 10/day
Fare = $127 + 0.042 * Distance
R-square = 0.24
For 10/day < Pax < 100/day
Fare = $110 + 0.036 * Distance
R-square = 0.30
For Pax > 100/day
Fare = $115 + 0.031 * Distance
R-square = 0.22
LCC Fares are Higher for Small Markets
For Pax < 10/day
Fare = $111 + 0.0442 * Distance
R-square = 0.33
For 10/day < Pax < 100/day
Fare = $100 + 0.034 * Distance
R-square = 0.31
For Pax > 100/day
Fare = $83+ 0.032 * Distance
R-square = 0.38
 LCCs Price Close to HCCs
in Very Small Markets

Pax < 10/day

HCC fare = $127 + 0.042 * Distance
LCC fare = $111 + 0.044 * Distance
LCCs Price Connections Close to HCCs

10/day < Pax < 100/day

HCC fare = $100 + 0.036 * Distance
LCC fare = $100 + 0.034 * Distance
LCCs Fares In Nonstop Markets are Low
HCC fares are a mix of all-HCC and with-LCC Markets

Pax > 100/day

HCC fare = $115 + 0.031 * Distance
LCC fare = $83 + 0.032 * Distance
 Full Model Includes 3-4 Variables
Fare = $102 + 0.040* Distance
(R2 = 0.36)

Fare = $131 + 0.038* Distance – 6.4 * Ln(Pax)

(R2 = 0.36)

Fare = $153 + 0.037* Distance – 6.9 * Ln(Pax)

- $23 if LCC presence (R2 = 0.48)
Fare = $151 + 0.037* Distance – 7.0 * Ln(Pax)
- $20 if LCC presence + $26 if HCC only (R2 = 0.48)
William Swan:

Data Troll

Story Teller

Economist
 Minot, N. Dakota, USA, is served over one
Hub
airport Destination Dist (km) Passengers fare
MSP MINNEAPOLIS/ST. PAUL-INTL 724 23.9 $ 191
PHX PHOENIX, ARIZONA, USA-INTL 1879 8.7 $ 215
LAS LAS VEGAS, NEVADA, USA-MCCARRA 1771 5.6 $ 213
DFW DALLAS/FT. WORTH, TEXA-INTL 1747 5.0 $ 241
SEA SEATTLE/TACOMA, WASHIN-SEA/TAC 1574 4.9 $ 209
DCA WASHINGTON, DC, USA-NATIONAL 2211 4.8 $ 309
DEN DENVER, COLORADO, USA-INTL 974 4.7 $ 197
MCO ORLANDO, FLORIDA, USA-INTL 2797 4.5 $ 226
LAX LOS ANGELES, CALIFORNI-INTL 2139 3.7 $ 220
SAT SAN ANTONIO, TEXAS, USA 2097 3.6 $ 331
ANC ANCHORAGE, ALASKA, USA 3360 3.0 $ 245
ORD CHICAGO, ILLINOIS, USA-O'HARE 1263 2.9 $ 225
ATL ATLANTA, GEORGIA, USA 2152 2.7 $ 255
SFO SAN FRANCISCO, CALIFORNIA, USA 2082 2.7 $ 219
EKO ELKO, NEVADA, USA 1418 2.6 $ 48
IAH HOUSTON, TEXAS, USA-INTERCONT 2097 2.6 $ 290
LGA NEW YORK LA GUARDIA 2323 2.6 $ 228
Rest of World (117 more Cities) 2022 91 $ 240
TOTAL/avg 1818 177 $ 230
Minot Feeds to Minneapolis Hub
MOT

MSP
 18:00 Bank Gives Minot 38 Destinations
Inbound Bank Outbound Bank
Origin Depart Hub Origin Depart Hub Hub Arrive Destin' Hub Arrive Destin'
city time time city time time ==> time time city time time city
ONT 1200 1727 DLH 1655 1748 1848 2116 MBS
BOS 1505 1728 SAN 1210 1748 1849 2136 CMH
SNA 1200 1728 IND 1604 1749 1850 2227 HPN
PSP 1210 1729 TUL 1550 1750 1850 2130 AZO
PDX 1210 1729 DTW 1700 1753 ==> 1835 2030 MEM 1850 2130 AZO
MSO 1355 1730 GRB 1641 1755 ==> 1836 1932 FAR 1850 2215 TYS
CWA 1630 1731 MKE 1635 1756 ==> 1837 2159 IAD 1850 900 LGW
GFK 1620 1731 SJC 1215 1756 ==> 1838 2159 RDU 1851 2142 DTW
RST 1650 1732 RAP 1530 1757 ==> 1839 2209 PVD 1852 2128 FNT
SMF 1205 1732 DTW 1705 1759 ==> 1839 2214 GSO 1853 2217 BWI
ORD 1600 1734 DSM 1650 1759 ==> 1840 2207 BDL 1854 2246 BOS
DFW 1510 1735 MSN 1645 1800 ==> 1841 2108 GRR 1855 2255 ORF
YEG 1355 1735 MOT 1635 1800 ==> 1842 2139 BUF 1855 2008 MLI
YYC 1357 1735 SFO 1220 1800 ==> 1843 2104 OKC 1855 2124 LAN
ABQ 1405 1739 BOI 1415 1804 ==> 1844 2210 ATL 1856 2126 DFW
LNK 1615 1740 GEG 1312 1804 ==> 1845 2159 ROC 1857 2158 YYZ
DCA 1559 1741 ATL 1620 1805 ==> 1845 2022 SBN 1858 2007 GRB
STL 1600 1742 MDW 1635 1809 ==> 1845 2134 DAY 1859 2002 OMA
LAX 1215 1744 CVG 1655 1809 ==> 1846 2208 CLT 1900 2200 PIT
YWG 1618 1744 CWA 1715 1815 ==> 1847 2208 DCA 1900 2027 ORD
BIS 1630 1747 1847 2253 TPA 1901 2030 MCI
Minot Connects to the World
 Most Markets are Small
16%
14%
Too Small For
12%
Share of RPKs

Nonstop
10%
8%
6%
4%
2%
0%

+
5

0
00

00

00

00
25

60
<5
<2

00
2.
.2

<2
<1

<4

<8
.1
<6

<1

<1

16
<3

Passengers per Day One Way

 Half of Travel is in Connecting Markets

16%
14%
Share of World RPKs

12%
Connecting Markets
10%
8%
6%
4%
2% Nonstop Markets
0%

O&D Passengers per Day

 4-leg connect
Lots of O&D Connections Double Connect
1-connect
100% thru
90% nonstop
Share of O&D Passengers

80%
70%
60%
50%
40%
30%
20%
10%
0%

00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00 0 0 00
3 10 20 30 40 50 60 70 80 90 00 10 20
1 1 1
St. Mi. Range Block (excludes US domestic O&Ds)
 Half the Trips are Connecting
400000 3+legs
350000 2-legs
300000 Nonstops
ASMs (000/day)

250000
200000
150000
100000
50000
0

St. Mi. Range Block (excluding US domestic)

 Connecting Share of Loads
Averages about 50%
80%
Local Traffic Share of

70%
60%
50%
Onboard

40%
30%
20%
10%
0%
0 2000 4000 6000 8000 10000
Flight Distance (Km)
Long-Haul Flights are from Hubs,
and carry mostly connecting traffic
100%
90%
Point-to-Point Markets
80%
Local % of Onboard Load

70%
60%
50%
40% Trend
30%
20%
10%
0%
100 150 200 250 300 350 400 450 500
Markets over 5000km Seats per Departure
 Hub Concepts
• Hub city should be a major regional center
– Connect-only hubs have not succeeded
– Early hubs are centers of regional commerce
• Early Gateway Hubs get Bypassed
– Early International hubs form at coastlines
– Interior hubs have regional cities on 2 sides
• Later hubs duplicate and compete with early hubs
– Many of the same cities served
– Which medium cities become hubs is arbitrary
– Often better-run airport or airline determines success
– Also the hub that starts first stays ahead
 Regional and Gateway Hubs in US

JFK
ORD
SFO
DEN

LAX ATL
DFW

MIA
 Three Kinds of Hubs
• International hubs driven by long-haul
– Gateway cities
– Many European hubs: CDG, LHR, AMS, FRA
– Some evolving interior hubs, such as Chicago
– Typically one bank of connections per day
• Regional hubs connecting smaller cities
– Most US hubs, with at least 3 banks per day
– Some European hubs, with 1 or 2 banks per day
• High-Density hubs without banking
– Continuous connections from continuous arrivals and departures
– American Airlines at Chicago and Dallas
– Southwest at many of its focus cities
 Secondary Hubs in US
SEA

MSP
DTW PIT JFK
SLC ORD
SFO EWR
DEN STL CVG

LAX PHX ATL

DFW

IAH
MIA
 Value Created by Hubs

The idea in business is to Create Value

Do things people want at a cost they will pay
Hubs make valuable travel options
Feeder city gets “anywhere” with one
connection
Feeder city can participate in trade and
commerce
Hubs are cost-effective
Most destinations attract less than 10 pax/day
Connecting loads use cost-effective airplanes
 Hubs Build Loads First, then Frequency
$600
Too Expensive
$500
Trip Cost Per Seat

$400

$300

$200
Good Balance
$100
Add Frequency
$-
0 50 100 150 200 250
Seats
Hubs Give Competitive Advantages
• Less peaking of demands, as variations in
different markets average out
• Dominate feeder legs
– Connect loads allow dominant frequency
– Connect loads avoid small, expensive airplanes
– Feeder cities can be “owned”
• Dominant airline will get 15% market share advantage
• Dominant airline can control sales channels
• Control of feeder cities makes airline attractive to alliances
Hubs Compete with Other Hubs
• Compete on quality of connection
– Does the airport “work?”
• Short connecting times
• Reasonable walking distances
• Reliable baggage handling
• Few delayed flights
• Recovery from weather disruptions
• Later flights for when something goes wrong
 Hubs Develop Pricing Mixes
• Higher fares in captive feeder markets
• Low discount fares in selected connecting
markets to fill up empty seats
– Low connecting fares compete against
nonstops
– Select low fare markets against competition
– It pays to discount and fill
• Unless you discount your own high-fare markets