Hubs, Spokes Offer Service

<B> Hubs, Spokes Offer Service</B>
<I>Part One: The Bright Side</I>

By Jay Campbell

Service levels for travelers originating in a hub city in terms of frequency and city pair coverage are unprecedented, but corporate negotiating leverage and fare levels have taken a turn for the worse in many areas where one airline now dominates the market.

That service/price equation is the seesaw on which corporate travel managers rest their airline programs. The concern for which way it tips varies by company. For many, the grass is greener elsewhere.

Seen in a positive light, the hub and spoke system provides travel buyers lucky enough to have business in hub cities with a wide range of flight times and destinations.

Said one Salt Lake City-based travel manager with a $7 million air account, "I get a lot more complaints about the absence of frequency than I do about the economies of savings. I'd much rather defend myself to my upper management on frequency than on fares. Those are the forces I have to deal with."

Another travel manager referring to the Delta hub in Salt Lake, Huntsman Chemical's Jim Kimball, said his company enjoys the schedule convenience. "We still use some of the competitors, but it's all a balancing act. We have people who get a phone call and they literally have to get to Chicago right now."

"For us, the hub means extremely good non-stop service which I don't know would be duplicated if we were in a situation with more competition," said Stephen Wuller, director, meetings and travel for St. Louis-based Ralston-Purina. "Some believe you end up paying the price for that, and it's probably true. As a travel manager, I might trade it away for better fares, but as a traveler I wouldn't."

Salt Lake City and St. Louis, TWA's hub, are about in the middle of the pack of hub airports in terms of the level of competition, according to a 1997 Salomon Brothers study, "Airline Competition at the 50 Largest Airport Update." Fortress hubs, such as Charlotte, Cincinnati and Minneapolis, tend to offer similar levels of service at far steeper prices.

Dawn Of The Hub

Deregulation of the U.S. airline industry 20 years ago led to major changes in airline operations, marketing, pricing and innumerable other areas. The corporate travel management profession itself would not have existed without it.

One of the key changes was a new way in which airlines collected and distributed passengers. Taking the cue from Delta Air Lines in Atlanta and Piedmont Airlines in Charlotte, American, United and other carriers by about 1983 created hubs--central locations in which passengers flying from cities throughout the nation and the world (spokes) would connect to other flights. Hubs enabled carriers to offer a regional transfer point, as well as service between long-distance city pairs that lacked enough demand for point-to-point service.

According to a 1994 Congressional Research Service paper, in 1978 only 8 percent of American Airlines' passengers needed connecting service. By 1983, that number had grown to 24 percent. By the second quarter of 1996, it surpassed 30 percent, according to Lehman Brothers.

The emergence of spoke service also increased the total number of destinations each airline served, if only on a one-stop basis for many starting points. As such, competition at the route level increased. Steven Morrison, professor of economics at Northeastern University in Boston, said last year the average number of effective competitors per route increased from 1.7 in 1977 to 2.5 in 1986, before dropping a bit to 2.2 in 1993.

A similar General Accounting Office study in 1996 determined that between 1978 and 1993, the average number of competing airlines at small airports increased from 1.8 to 2.8; at medium airports from 2.8 to 4.3; and at large airports from 9.0 to 11.2. Clearly, competition for connecting passengers remains extremely dynamic as passengers in spoke cities often have a number of hubs to choose from.

As a result of competition for the four-segment passenger, the fare savings attributable to deregulation between 1978 and 1993 amounted to, in Morrison's study, $12.4 billion annually in 1993 dollars. The GAO said that between 1978-94 (in 1994 dollars) average cents per mile dropped by 8.5 percent at small airports, 10.9 percent at midsized airports and 8.3 percent at larger ones. Since 1988, there was a slight increase at smaller and medium airports, with a slight decrease at large airports. Since 1993, of course, business fares have risen dramatically, so these numbers are not entirely reflective of the latest pricing trends.

Hubs also were strategically located to provide direct and nonstop service for the nation's largest corporate centers, capitalizing on their higher levels of origin and destination demand. The positive effects of such moves were tremendous, for airlines, passengers and corporations. Companies could begin to consolidate their travel with fewer preferred airline suppliers, negotiating volume discount deals along the way. Airlines could take advantage of more efficient aircraft and dominate a market, and business passengers enjoyed more frequent flights.

Pablo Spiller, a professor in the University Of California's Walter A. Haas School of Business, found in a 1996 study that the average median "hubsize," which takes into account the number of destinations served as well as the size of the endpoints, increased by 344 percent between 1985 and 1993. Spiller also determined that in those same years the average minimum frequency of flights bought by business passengers increased by 19 percent.

The Best Of Both Worlds

Kansas City, Mo., is one of few large cities under deregulation that have managed to get the best of both worlds in the hub and spoke phenomenon. One of the largest cities in the nation that is not currently a hub for a major carrier, KC enjoys high levels of service at low prices.

Corporate travel departments there are pleased with the results. "I think the hub and spoke system is great," said Dana Pair, flight/travel manager for Bernstein-Rein Advertising in KC. "For example, to New York we have Vanguard, Midwest Express and US Airways. In some of the other cities around, like Oklahoma City, Little Rock or Des Moines, you have to go to the closest hub city and, depending on the destination, it might be a triple-connect."

The history of airline services at Kansas City provides an interesting case study for what's good about airline deregulation. While maintaining a high level of direct and non-stop services to important U.S. destinations from 1978 to 1998, the airport also has seen its mix of new entrant, low-cost carriers increase dramatically.

In many cases, a low-cost airline (most often Southwest) came into the market to serve city pairs other carriers had dropped, particularly as TWA and Eastern Airlines set up but then dismantled hubs there. Over the years, new city pair markets the majors had shunned were served by new entrants (see chart, this page). Just this month, in fact, Delta Express and Southwest announced new flights to Orlando, a market previously unserved on a direct basis.

Between 1979 and 1994, KCI's departures increased by 24 percent, and seats increased by 32.7 percent, according to a 1996 GAO report. The airport also has more non-stop, one-stop and jet departures. Meanwhile, said GAO, fares in cents per mile decreased from 22.0 in 1979 to 18.3 in 1991 to 16.5 in 1994--an overall 24.1 percent drop.

KCI is not a hub, but it does have relatively high levels of connectivity, said GAO. Also, it has non-stop jet service to 33 of the top 50 U.S. airports via 250 non-stop flights each day. In 1997, Southwest had the highest share of enplanements at Kansas City, with 20 percent, followed in nice balance by American (12 percent), Delta (11 percent), United and Vanguard (10 percent each), Northwest and USAir (8 percent each), TWA (7 percent), Continental (5 percent) and others.

"We eclipsed our previous passenger high in 1997 with 11 million passengers, and a lot of that is attributable to low-cost airlines," said Joe McBride, manager of marketing and communications for the Kansas City Aviation Department.

Look for "Hub and Spoke, Part II, The Down Side" and "Part III, The Future" in the next two issues of BTN.