Low-cost invaders lay siege to airline industry's hub model

Major carriers fall prey to more nimble rivals

August 17, 2004|By THE DENVER POST

Before the U.S. airline industry was deregulated in 1978, Denver travelers couldn't catch a nonstop flight from Stapleton International Airport to Atlanta or Miami.

They had to fly TWA and change planes in St. Louis. The other way to go was through Chicago, Dallas or Kansas City, Mo., with a connection to a flight on another airline.

On the other hand, flying was less stressful than it is today. Travel agents made all the arrangements and handled any problems.

A passenger could expect few delays, an in-flight meal and some pleasant chatter with the flight attendant. The fares were high by today's standards, but not exorbitant.

Beginning in 1978, everything changed. As competition swept across the industry, airlines were forced to confront glaring gaps in their service fostered by five decades of government control.

Haphazard route maps fell away as airlines consolidated their operations in a few large cities. Flights radiated from these hubs in every direction to destinations large and small.

The resulting "hub-and-spoke" network allowed airlines to offer travelers far more flight options with the same number of planes.

Stapleton, and later Denver International Airport, became a key airline hub. Its mid-continental location made it an ideal place to connect passengers flying coast to coast.

Today, DIA is the nation's fifth-busiest airport with 38 million passengers a year. Nearly half are simply passing through on connecting flights.

Indeed, the major carriers grew so strong in cities like Denver during the late 1990s that they looked unassailable.

But now the hub model is under siege as the major carriers struggle with entrenched cost structures and nimble competition. Low-cost rivals, once content to skirt the big hubs or operate on their fringes, have invaded these strongholds.

In the early years of deregulation, competition raged. Fares fell, and new airlines entered the industry for the first time in decades.

Airlines developed frequent-flier plans to promote loyalty and complicated fare structures that put different prices on virtually every seat.

The industry saw its first big wave of low-cost competition as Southwest Airlines grew beyond its Texas roots and others such as PSA Airlines and People Express sprouted.

In the late 1980s and early 1990s, a tough economy and the Persian Gulf war forced the industry to consolidate. Pan Am and Eastern shut down. Continental, TWA and America West went bankrupt but survived.

Still, the benefits of competition were evident. According to Alfred Kahn, who spearheaded deregulation for the government in the 1970s, average fares fell 30 percent in real, inflation-adjusted terms between 1976 and 1990. He estimates the annual savings to travelers at $5 billion to $10 billion.

Air travel, once a luxury experience, was changed forever.

"The type of people who travel by air has changed in the last 30 years," said David Cox, a retired United flight attendant from Highlands Ranch, Colo. "It went from being the preferred mode of transport for the affluent to being the travel of the masses."

Consolidation put the nation's hub airports in the hands of fewer carriers. In Denver, for example, the rivalry between Continental and United grew increasingly one-sided as Continental slid further into financial distress during the early 1990s.

In 1994, spooked by the high operating costs of the city's new airport, Continental closed its Denver hub, ending a close association with the city that had lasted six decades.

When DIA opened in February 1995, United flew two-thirds of its passengers. That number would soon grow to three-quarters.

Like a growing number of big-city airports, DIA had become a "fortress hub." American had Dallas. Northwest had Minneapolis. Delta had Atlanta.

The hubs are anything but fortresses today.

United Airlines is in bankruptcy and is trying to reduce costs at its hubs. Struggling US Airways is dropping its Pittsburgh hub, and American Airlines slashed its St. Louis operation last year after acquiring TWA. Other hubs look vulnerable.

Many experts say the hub system will bend rather than break. Some hubs will go, but others will survive as the beleaguered major carriers find ways to operate more like their discount competitors.

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