Fuel Costs, Market Shifts Challenge Hub Paradigm

By Jens Flottau
Source: Aviation Week & Space Technology

Hubs and aircraft choices are interconnected and so are airline business models and aircraft development. “As much of the long-haul market out of Europe can only be served by the hub-and-spoke model, there will always be demand for bigger aircraft,” says Alexis von Hoensbroech, Lufthansa's head of network planning.

From an equipment perspective, what needs to happen for the concept to be threatened? “As the long-haul point-to-point demand out of Europe is usually below what you need to fill a 250-seat aircraft, you could only get around the hub-and-spoke system if you had, for example, a 100-seater at the unit-cost level of a 250-seater,” says von Hoensbroech. “The stimulation potential for long-haul demand is much lower than for short-haul.” Such an aircraft would also be a great tool to address the high seasonality that is typical for direct routes, argues Strickland.

“Hubs could be threatened if there were aircraft that were incredibly more efficient than what's in use and on the horizon today,” says Franke.

Levine says some of these things might happen soon. “The [Boeing] 787-8, flying 200 people efficiently over 8,000 nautical miles, will be the first real test case for hubs that are heavily dependent on long-haul,” he asserts.

There are arguably two airlines that are reinvigorating the hub concept again. Emirates flies almost exclusively long-haul to long-haul, has no night curfew and sits in the middle of the world's fastest growth markets. Because it is already so big, opening just one more route means it can offer literally hundreds more city pairs at additional costs that become ever more marginal. And the hub has by now developed such momentum, creating enough growth, cash generation and profits that financing further growth is relatively easy.

However, there are constraints that even Emirates has to be concerned about. Airbus and Boeing cannot deliver quickly enough aircraft that are large enough for what the airline has planned, and the Dubai airport is approaching its capacity limits, even taking into account various multibillion-dollar expansion projects that will be completed in 3-4 years. The success of the new hubs will therefore not be limitless. And Levine points out the region's relatively small home market and political instability.

“The rise of Turkey and the Turkish airline industry creates an alternative hub for access to the Middle East and India with much stronger fundamentals,” he says, adding that “any development of aviation infrastructure in India would significantly reduce [Persian] Gulf hub demand.” Levine is concerned that huge widebody overcapacity could become an issue, with major consequences for manufacturers and aircraft market values.

Some effects of Emirates' hub limitations are becoming apparent: the airline recently revealed plans to open so-called fifth-freedom routes from Thailand, Singapore or Japan to the U.S., taking advantage of open-skies arrangements that would allow it to fly some two-stop connections.

The Turkish Airlines concept is distinctly different from Emirates', as Turkish operates predominantly narrowbodies on 3-4-hr. flights into Europe, Africa and Central Asia. That approach drives down unit and overall trip costs and allows the airline to serve markets that are either too small (for Emirates) or too distant to be served directly from Europe using narrowbodies (for European carriers). Turkish has a sizable long-haul fleet and will most likely add many more aircraft soon.

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