Airline Consolidation & Dehubbing Trigger Rightsizing Projects

Author: 
Paul Nolan
Published in: 
April
2018

There is a lot of buzz about the “customer experience” these days. Sometimes referred to as simply “CX,” it has become the focal point of business plans and marketing strategies across a wide swath of industries. Everyone from chief executives to frontline foot soldiers is charged with making customer interactions exceptional, memorable and worth repeating. 

Airlines began touting their customer experience long before it became de rigueur; but for decades, most airports did not pay as much attention to emotional connections with travelers. Airports were more utilitarian—like highways—and few focused on goals such as “sense of place” and “customer delight.”

That was then. This is now.

facts&figures

Project: Rightsizing Terminals 

Common Impetus: Airline consolidation & dehubbing

Location: Cincinnati/Northern Kentucky International Airport

Catalyst: Dramatic service decrease by Delta Air Lines beginning in 2005

Facility Changes: Consolidated all operations into 1 terminal in 2012; tore down 2 other terminals in 2016. Decreased from 69 multi-carrier & regional carrier gates to 50 mainline aircraft gates

Other Adjustments: Increased investment in cargo operations & commercial development

Change in Customer Profile: Traffic used to be 90% connection passengers; now locals account for up 94% 

Impact on Airfares: Airport used to be 1 of top 3 most expensive U.S. airports; it now ranks 83rd 

 

Location: Memphis (TN) Int’l Airport

Catalyst: 2013 dehubbing by Delta Air Lines 

Impact on Service: Delta dropped from peak of 245 flights per day to about 20 

Facility Changes: Project currently in progress to decrease gates from 83 to 23 & practically eliminate 2 concourses

Impact on Airfares: Avg. price has dropped an average of $181

 

Location: Pittsburgh Int’l Airport

Catalyst: 2004 dehubbing by US Airways 

Impact on Service: At peak, airport had non-stop flights to 110 markets; that number dipped to 37 in 2014. Today, it has non-stop service to 74 destinations

Facility Changes: Building new facility for landside terminal functions; number of gates will decrease from 75 to 51 

Sweeping and dramatic changes in the industry have left airport executives hustling to modernize their facilities and market them more effectively—not only to airlines, but also to the communities they serve.

Industry consultants and designers preach the importance of making an airport a destination in and of itself, rather than a generic conduit that travelers pass through on their way from Point A to Point B. One area of particular change is the explosion of concessions—retail, food/beverage and services—and their post-9/11 migration behind TSA checkpoints. 

The Fallout of Dehubbing

The transformation of many U.S. airports coincides with a decade and a half of historic change within the aviation industry. The number of airlines serving the United States has shrunk from 24 in 1980 to just nine today; the number of U.S. major carriers dropped from nine to four between 2005 and 2015 alone.

Consolidation has concentrated traffic at the largest airports. According to the Bureau of Transportation, passenger traffic at large hub airports has increased 15% since 2005, while volume at medium and small hubs dropped 4% and 2%, respectively. With consolidation came the concentration of hubs and the “dehubbing” of once-bustling regional airports.

Scott Brockman, president and chief executive officer of Memphis International Airport (MEM), has watched the changes unfurl and adapted accordingly. Brockman spent more than three decades in various management roles at airports in Florida, Iowa and Arizona before landing at MEM in 2003. 

This year, Brockman and other officials are kicking off a $114 million modernization/rightsizing project that will take the airport from 83 gates to 23 and all but eliminate two concourses.

“Two things have rewritten aviation history more than anything in my 32 years,” Brockman reflects. “9/11 changed this business overnight in more ways than I can describe. The other one is consolidation.”

A Return To Serving the Community

The impact of industry-wide airline consolidation has been dramatic at MEM. For decades, the Tennessee airport served as one of three primary hubs for Northwest Airlines (along with Detroit Metropolitan and Minneapolis-St. Paul International). When Delta and Northwest announced a merger in 2008, Brockman knew big changes were afoot. The airlines insisted that the merger would allow for expansion, not contraction, but the reduction of flights through MEM began in 2010. By June 2013, Delta had effectively announced that MEM was no longer a hub. Currently, Delta operates about 20 daily flights out of MEM, down from a peak of 245. 

“When we were dehubbed, we obviously had to look at a different business model to manage and maintain the airport going forward,” says Brockman. “We started what I call the ‘reinvention of Memphis International Airport’ in the middle to the end of 2013, although preparations began much before that. We started planning when Delta and Northwest both filed for bankruptcy on the same day in the same courthouse in New York City [in 2005].”

At that point, MEM officials began contingency planning for a wide variety of scenarios, including what would occur if the airport were no longer a hub.

As early as 2007, Brockman and his colleagues met with counterparts at Pittsburgh International Airport (PIT), which had been dehubbed by US Airways in 2004. “We talked with them about what they found was effective and what was not effective in trying to reshuffle the deck chairs to get their business back in line,” he recalls. “We built in a contingency plan that was actually more draconian than we ended up having to use. We did a nice job putting us in a place to know how to act and react.”

The silver lining to Delta’s dehubbing is that Brockman and his team began focusing on serving the Memphis community. When MEM was a hub, more than 80% of its customers were transfer passengers. The tradeoff for having 91 nonstop destinations was high ticket prices. MEM ranked in the top five for average airfare prices in the country for most, if not all, of its time as a hub, laments Brockman. As with other hub airports, local passengers paid a premium to offset the discount given to transfer passengers.

“It actually disincentivizes local travelers from using their own airport,” Brockman explains. “I had passengers who drove to Little Rock and flew through Memphis because they got a lower air fare than if they had taken a direct flight out of Memphis.”

Airfares out of MEM have dropped an average of $181 since 2012, and MEM has steadily gained more local passengers. In fact, it plans to hire a customer service manager this year to help employees provide a “positively MEMorable travel experience,”
just as the airport’s marketing slogan indicates. 

Same Story, Different Market

While Brockman was leading the transformation at MEM, Candace McGraw was tackling similar challenges at Cincinnati/Northern Kentucky International Airport (CVG). McGraw started at CVG in 2009 as chief administrative officer and accepted the position as chief executive officer in 2011. 

Like MEM, CVG was also once a dominant Delta hub. More than 90% of its passenger traffic was via Delta, and most were connecting passengers. At its apex in 2006, CVG served 600 flights per day. It is now at 180.

“When I arrived in 2009, there had already been considerable downsizing,” recalls McGraw. “The No. 1 thing was to stop the bleeding. When I took over as CEO, we tried to build a strong case with Delta that they cut too deep into the bone, and we put some mechanisms in place to bring in new carriers.”

In 2011, the airport reclaimed Concourse A from Delta, moved it into Concourse B, and spent a full year renovating Concourse A before moving in other airlines. In 2012, CVG consolidated all operations into one terminal and tore down its other two in 2016. Delta was already operating out of Concourse B at the time. All other airlines operate out of Concourse A.

After the reshuffling, United and America Airlines increased their service into the airport, and Frontier initiated service. Since then, the airport has recruited Allegiant, Southwest, WOW air, and OneJet, and expanded operations of Sunwing/Vacation Express. Every carrier experienced passenger growth in 2016 and 2017, McGraw reports.

Throughout the process, CVG’s passenger profile was flipped on its head. While transfer passengers used to comprise 90% of the airport’s traffic, locals now account for up to 94%. The airport grew local passenger volume by more than 21% in 2017, and in December set a new record in its 70-year history. In 2017, CVG achieved its fifth year of year-over-year local passenger growth. And McGraw expects that trend to continue. 

The airport used to be one of the top three most expensive U.S. airports. It now ranks number 83, according to the Department of Transportation. 

“We’re keeping our costs low, we’ve gotten into the land development business to diversify our revenue streams, and cargo is growing tremendously,” McGraw explains. The airport is breaking its own records for cargo volume, which helps lower the cost of operations for passenger carriers. In January 2017, Amazon announced it will build its first and largest air cargo hub on 210 acres at CVG. The airport already serves as the North American hub for shipping giant DHL.

“Now that we’ve reached a point of stability, how we grow is the next step,” says McGraw. In 2016, her team released a five-pronged strategic plan that combines continued passenger and cargo growth with a focus on building its brand and establishing more business partnerships. It could be easy to bask in the success of the past several years, but McGraw says that this is no time to put the airport on autopilot.

“We all have aging infrastructures,” she comments. “This year, we are updating our master plan and will take a deep dive into exploring whether we have the proper facilities and compare costs of demolishing and building new versus rehabbing what we currently have. We also need to look at what airfield work is necessary, especially with the Amazon facility coming. The question becomes, ‘How do you pay for all of this while trying to keep costs down?’”

The master plan update is scheduled to be complete this fall. 

Pittsburgh Demands Airport Revival

Building a new terminal wasn’t on the radar of the Alleghany County Airport Authority a few years ago when it recruited Christina Cassotis to serve as chief executive officer of Pittsburgh International Airport (PIT). But a new terminal is currently in the works, and it’s just one part of the resurgence that Cassotis is leading. 

For better or worse, PIT was a pioneer in coping with the fallout of dehubbing. US Airways, which was central in the decision to build a $1 billion terminal in 1992, closed its hub there in 2004. “When I got here in 2015, the airport was connected to 37 markets non-stop, which was down from a peak of a 110 during the US Airways hub days,” explains Cassotis. “We had a whole community in Pittsburgh that was used to having a level of service that one could argue we didn’t deserve because it couldn’t support itself. The community was frustrated beyond belief with the airport’s inability to match a turnaround that the city itself had worked hard to achieve after the steel industry collapsed in the 1980s.”

Instead of cutting flights sharply after dehubbing, US Airways methodically trimmed its service at PIT. In retrospect, Cassotis says that it would have been better for the airport if the carrier had ripped off the Band-Aid quickly. Total air service bottomed out in 2014, a year before she arrived. Today, the airport has non-stop flights to 74 destinations. Last year, it served close to 9 million travelers—its highest passenger total since 2007. 

Cassotis’ three-step strategy to help the airport recover involved assessing opportunities to bring in additional airlines, partnering with community leaders to help define what kind of airport the city needed, and reinvigorating PIT employees. “I could go out and recruit airlines, but I had to have 475 people buy into this vision and participate,” she says of the crucial third component. “It was vital that everybody understand what we were doing and why. The job was always about bringing in more flights and it still is; but to do that, I need everyone helping.”

The airport authority was in the planning stage for a major terminal modernization project when Cassotis arrived. Officials were focused on reconfiguring the existing terminal, but she stressed that building a new terminal had to be included in the options being considered.

“We quickly realized that combining the landside and airside terminals made sense, because we are no longer a large connecting hub,” she explains. “We don’t need the 75 gates we have. We don’t have enough space landside, and we have too much airside.”

After a 30-month master planning process, the authority approved a $1.1 billion project that will relocate landside terminal functions and related ground operations to a new facility that will be built adjacent to the existing airside terminal. The number of gates will drop from 75 to 51. Eventually, the airport will demolish the existing landside terminal or renovate it for commercial use. The plan also includes the addition of a new 4,500-space parking garage.

The airport authority emphasizes that it will pay for the improvements at no cost to taxpayers and without increasing fees to the airlines. In fact, it estimates that PIT’s cost per enplaned passenger will actually fall from a current average of $12.76 to $9.73 (in today’s dollars) in 2023, when the construction work is scheduled to be finished.

The plan allows for additional industry changes that are sure to come, notes Cassotis. “It’s the pace of change that we are planning for,” she explains. “We don’t want to build a big building with huge spaces that can’t be repurposed. This will lower the cost to airlines and make us more operationally efficient.”

Like her counterparts at CVG and MEM, Cassotis has focused on developing an airport that reflects the surrounding area and provides a sense of place. “Airports are becoming much more emblematic of their communities—the front door, the beginning and end of a local brand,” she remarks. “We need to make sure that this airport reflects a very tech-forward, diversified, energetic and vibrant community, which it doesn’t do today.”

Looking ahead, Brockman notes that continued airline consolidation will have differing impacts on different cities and airports. “Some will be positive and some will be tremendously negative,” he predicts. 

“I have never been more optimistic about where Memphis International Airport is going and what we are poised to accomplish,” he adds. “We have worked hard to put ourselves in a position to not only sustain all of this, but to come out of it in a tremendously positive way for this community. I’m proud of the team and my board and everyone that is involved.”

McGraw and Cassotis express similar sentiments about their respective markets. And all three foresee more major shifts for the overall industry.

“I think there is tremendous volatility still coming,” says Brockman. “But that’s a different discussion.” 
 

Challenge Junkies

It is often said that leadership is about managing change. It’s also about having the humility to lean on others. The airport executives profiled emphasize the importance of exchanging insights with peers while navigating the dramatic changes that have occurred in the industry over the past two decades.

“One thing you will find about airport directors is they are challenge junkies,” says Scott Brockman, president and chief executive officer of Memphis International Airport (MEM). “We are all part of one big family. We do a good job of communicating, sharing and plagiarizing with permission.”

Brockman says he regularly fields calls from other airport executives who want to know how he handled specific challenges, and he has placed similar calls on several occasions. Even before Delta officially closed its hub at MEM in 2013, Brockman had met with the director, chief financial officer and legal counsel at Pittsburgh International Airport (PIT), which had navigated the process almost 10 years earlier.

“We talked about bankruptcy issues they had not thought of and how they were modeling their operations to reduce costs so they could still offer reasonable charges,” he recalls. “They gave me a CD with all of their data on it, which I brought back to validate all of my projections.”

Candace McGraw, chief executive officer of Cincinnati/Northern Kentucky Airport (CVG), is also a big believer in industry collaboration. “There are a lot of good, smart people to bounce some ideas off of,” McGraw says. “We are all focused forward. There is no looking back at what we used to be. We are focused on moving forward and how to position ourselves to provide the best airports and be economic drivers for our community.”

True to their collaborative nature, McGraw and Brockman both head industry organizations that hold conferences and other events that encourage airport executives to meet and share ideas. Brockman is chair of the American Association of Airport Executives; McGraw is chair of Airports Council International-North America. 

Brockman encourages airport directors who gather information and ideas at conferences to view them in context. One-size-fits-all solutions are extremely rare.  

“There is a phrase we use: ‘If you’ve seen one airport, you’ve seen one airport.’ We all manage with the same kinds of things going on, but we manage them in different ways,” he says. “There are as many different models of rates and charges across the system as you can imagine. You really have to be careful when you start comparing airports and you start taking raw numbers without delving deep into what they mean, because they could be misleading.”  

 

Subcategory: 
Terminals

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