Fuel Costs, Market Shifts Challenge Hub Paradigm

By Jens Flottau
Source: Aviation Week & Space Technology

Reducing the number of spokes at hubs is also problematic because hundreds of possible city pairs go with a spoke in large hubs, and “big hubs work better than small hubs,” Levine points out.

One of the most important lessons is that a hub is not a hub. British Airways' operation at London Heathrow Airport offers lots of connections simply because it is so big, but capacity constraints prevent the airline from building meaningful traffic flows between certain arrivals and departures; they just happen by coincidence. Delta Air Lines has so many banks at its Atlanta operation that there are hardly any valleys between the peaks left, and the sheer number of flights brings a lot of connectivity quality. There are hubs with sophisticated planning such as Frankfurt, Amsterdam or Paris, where the dominant carriers are trying to learn from past mistakes. And there are the big Asian bases like Singapore or Tokyo that rely on a relatively small number of high-density routes and are therefore essentially big airports with some hub elements.

There are the lucky ones, like the Persian Gulf area's Dubai or Doha, geographically placed to offer almost exclusively long-haul-to-long-haul connections, avoiding the malaise of high unit costs on short-haul feeders.

While hubs are great for achieving broad market reach, they are also a very expensive way of operating. It is much cheaper to serve a market with one aircraft that makes just one high-fuel-burn takeoff and landing, requires a single payment of navigation and airport fees, and keeps flight distances as short as possible without a detour to make a connection.

LCCs have long taken advantage of this structural weakness by building point-to-point services with sufficient untouched demand. Many hub-and-spoke carriers have opted out of these markets because their overall unit costs were too high to even consider going head to head in the direct-services business.

“Low-cost carriers make feed from some destinations more difficult,” says Markus Franke, who runs Franke Aviation & Transportation Consulting. “Serving secondary markets over hubs becomes all the more unattractive for the legacy carriers and can affect long-haul feed. In a worst-case scenario, the entire traffic structure of a small or mid-sized hub without differentiation could collapse.”

So far, that is mainly a problem for secondary hubs such as Vienna or Copenhagen that have a large share of short-haul traffic. Whether because of high fuel prices or competition, some airports, have been “de-hubbed” (such as Memphis by Delta), and Levine expects more to follow.

Bigger hub-and-spoke operations are still better protected against LCCs. “If I have 40 short-haul destinations, that gives me 1,600 itineraries,” says a major airline CEO. “If a low-cost carrier moves into 100 of these markets with nonstop flights, I still have 1,500 left. And don't forget the long-haul destinations on top.” But the fuel-cost challenge eating into the regional feed affects all of them.

Fundamental hub economics still work, nevertheless. It is the implementation that causes trouble and needs changing. Some hub carriers have come close to failure because their networks were too big for what the local and connecting market required. “The hub concept is by no means dead,” says George Hamlin of Hamlin Transportation Consulting. “It just has to be managed properly.”

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