American’s New Flights Do Not Bode Well for the Phoenix Hub (The Pessimistic View)

Shortly after US Airways and American announced their merger in 2013, I made some predictions about what I thought would happen to the various hubs.  So far, those have held up fairly well with a couple exceptions.  I thought Dallas/Ft Worth would remain strong but possibly see a small haircut.  I also thought LA would shrink down to serve just the local population on key routes.  I was at least partially wrong on both counts, and that is generally bad news for Phoenix, the hub in between.

 only puts further pressure on Phoenix.  I don’t worry about American leaving Phoenix entirely, because it’s a big local market where American does and will continue to do well, but I do worry about its ability to remain a hub.  American had me talk to Vasu Raja, American’s Vice President of Planning, to understand why I shouldn’t be concerned, and that prompted me to do something different.  I’m writing two posts on this with opposing viewpoints.

Yes, I’m aware you’re supposed to have different people write opposing views, but that’s no fun.  I’m going to play both parts here.  Let’s start with my initial reaction to American’s announcement this week, the pessimistic view.

To understand the dynamic for American in Phoenix, we have to look at what has happened in the two hubs on either side.

Squeezed From the Left

Step one in the “bad news for Phoenix department” happened right away after the merger.  American decided to double down in Los Angeles and build up a massive operation to its Asian gateway.  I couldn’t understand the rationale at the time, and I still don’t.  But that doesn’t matter.  It’s reality.

What matters for Phoenix is two-fold.  First, there’s the issue that all this build-up in LA hurt secondary airports in the LA Basin.  I’m a perfect example.  Before the merger, I used to fly US Airways out of Long Beach via Phoenix to see the in-laws in Indiana.  After the merger, I opted to drive to LAX and fly nonstop instead.  (Yes, having children impacted this as well, but you get the point.)

All this growth in LA allowed people to overfly the Phoenix hub more frequently.  It hurt in Long Beach where service was cut from 5 to 3 daily flights.  And it likely hurt in Burbank, Ontario, Orange County, and Palm Springs as well.  That may seem minor in the scheme of an entire hub, but it still has an impact.  Every time you take out a flight from Long Beach, that’s 76 seats that are gone which could have connected to flights beyond Phoenix.

Second, this also creates connecting opportunities in LA that duplicate what exists in Phoenix (say, El Paso to Reno). That’s not a huge issue since LA’s schedule is built more for the local market, and in general, people hate connecting in LA.  But it still is a piece of the puzzle.

Squeezed From the Right

What’s happening at Dallas/Ft Worth, however, is a bigger threat.  At DFW, American did remain strong as expected, but then it put the pedal to the metal and started growing its way toward 900 flights a day.  In particular, it has focused on boosting service to smaller cities with less competition using its newly-acquired regional gates over in Terminal E.

In this, DFW gained a lot of flying to small cities in the west.

  • Bakersfield (1 daily CRJ-900)
  • Burbank (2 daily 737-800)
  • Flagstaff (2 daily CRJ-700)
  • Monterey (1 daily summer only EMB-175)
  • Yuma (1 daily CRJ-900)

These are all markets that American flies exclusively from Phoenix 3 or 4 times a day now.  (I’m excluding the miniscule yet apparently highly successful experiment this past summer to fly weekly from Flagstaff to DFW as well as LA). 

Historically, the Phoenix hub has relied on markets like these to keep the hub going.  All together, they flow a lot of traffic into Phoenix to connect beyond the hub, and those beyond flights will be hurt if traffic starts connecting at DFW instead.

Of course, these flights to DFW are only once or twice a day, but that’s still plenty to start doing damage in Phoenix.  Here’s a basic example of how a hub can start to unravel.  Keep in mind that this is just a random example and not based on actual numbers.

  • American flies twice a day from Phoenix to, say, Memphis, and it brings people in from all over the western US to fill those flights.
  • Now that smaller cities west of Phoenix have flights to DFW, some travelers will naturally start picking those connecting options to get to Memphis, bypassing Phoenix.
  • The Phoenix to Memphis flight suffers because there are fewer connections filling that flight, so it becomes unprofitable.
  • American cuts the Phoenix to Memphis flight, and the death spiral begins.
  • Now all the people who still connected from the western US to Memphis will stop flying via Phoenix since the Memphis flight is gone. The flights from the western US to Phoenix start to suffer and end up being canceled.
  • On and on it goes until everything fails and the hub implodes.  

This is a worst-case scenario, and I should be very clear in saying that I don’t expect this is what will happen in Phoenix.  Most importantly, Phoenix has a lot of local traffic and the costs of operating there are low.  But this dynamic is real and is something to keep in mind.

Going back to that hub post I wrote in 2013, here’s what I said about Phoenix.

The last of the original America West hubs has also been rumored to be on the chopping block, but I don’t see that. Sure, higher costs will make some flights unprofitable, so capacity should shrink. But there is real opportunity in Phoenix as well.

Look at all the cities in the West that can be served by US Airways but not American. You have Long Beach, Burbank, Bakersfield, Oakland, etc. You also have some cities that are better served from Phoenix than LA. I think of places like Reno. With even more coming from the power of the combined airline, you have the chance to beef up service in these smaller cities and possibly add more. Places like Carlsbad may come back on the radar. And that can help with the rest of the operation. Sure, Southwest is good-sized, but its costs keep rising and this team knows how to compete with that airline. And Phoenix is the best option American will have to reach the smaller cities in the West.

I imagine Phoenix will initially contract, especially with frequencies in bigger markets, but I still see a good future.

Now that future appears cloudier.   I’m not suggesting that the end is coming shortly, or that there will be a true end to the hub at all, but building up both DFW and LAX is going to have consequences for Phoenix. 

Next week, I’ll flip sides and go with the optimistic vision for American in Phoenix.

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