Closing Hubs May Limit Flying Contracts

As Delta Air Lines [DAL] and US Airways [UAIR] edge closer to bankruptcy, new survival business plans are taking shape. Some analysts reading the tea leaves see some additional flying for the regional carriers.

Front and center in both carriers' plans appear to be efforts to realign airport hubs.

As it has already announced, US Airways will be downsizing its Pittsburgh hub. However, it announced last week it would create a focus city in Fort Lauderdale, Fla., to act as a hub for its growing number of Caribbean routes.

At the same time, Delta is reportedly considering dropping its hubs in Dallas and Salt Lake City. Closing or downsizing the Salt Lake City hub would have a major impact on the operations of Utah-based SkyWest Airlines [SKYW]. Regional carriers - both wholly owned and code-share partners - dominate the Delta hub in Dallas.

As a sign of its growing doubts in either network carrier, the rating service Standard & Poors dropped both carriers' debt rating deeper into the junk bond realm with "CCC" ratings.

Even as the chairman of US Airways called upon employees to accept $800 million in wage concessions within the next 30 days to avoid a liquidation in bankruptcy, the carrier announced plans to add 10 Caribbean and Latin American destinations flying from Fort Lauderdale. The new service will start in February. As part of the announcement, US Airways cut its fares to Fort Lauderdale Hollywood-International Airport from Pittsburgh, Charlotte, Baltimore, Hartford and New York.

While mainline aircraft will serve most of the new Caribbean and Latin American destinations, regional jets will serve five new markets. PSA, a wholly owned regional carrier, will fly 50-seat Bombardier [BBD] CRJ 200s to the Florida cities of Orlando, Tampa and Key West and to Nassau in the Bahamas. Another subsidiary, MidAtlantic Airlines, will fly Embraer [ERJ] 170s to Providenciales in the Turks and Caicos.

"The addition of a Caribbean and Latin American gateway in South Florida allows us to continue our expansion in the region by reaching beyond the leisure markets, which have become a strength for US Airways," said B. Baldanza, a senior vice president for planning. "We are committed to bringing low, simple fares and easy access for all customers to South Florida. With this expansion, we are pleased to offer a value-added alternative to larger, congested airports."

US Airways currently leases six gates at the Fort Lauderdale airport, said airport spokesman Jim Reynolds. The carrier will lease two additional gates as well as gain the use of three other gates on a per-use basis. The airport expects the US Airways lease payments to be an additional $5 million per year.

The airport will be expanding its U.S. Customs inspections area in order to handle the increase in international traffic. Reynolds said the airport had plans to expand the area, but they are accelerating the project so the space can be ready for the February launch of the new flights. The airport, not the airline, will pay for this project. Reynolds noted that US Airways would not have a ticket counter or waiting area in the international terminal.

A spokesperson for the carrier characterized the airline's investment in Florida gateway as "minimal."

"I have my doubts that US Airways will survive to execute any of this," said Stuart Klaskin, of Miami-based KKC Aviation Consulting. "It is a huge reach for an airline that has substantial issues to deal with before they open a new focus city anywhere. I think there is a fairly high likelihood that they will run out of time before they can implement this."

However, airport spokesman Reynolds said the carrier has "expressed a deep commitment to promote these routes. They see this as a way to restructure and reinvent the airline. There is not a great deal of concern [on the airport's part] about the viability of the airline."

"This is another example that makes you wonder what is going on at US Airways," said Richard Butler, a Trinity University economics professor in San Antonio who is an expert on airline hub operations. "What they seem to be saying is that Pittsburgh is not going to make money for them any longer. I can't imagine that Philadelphia will be a long- term winner so they need to find something that makes money. Apparently their Caribbean traffic makes money and it could make more money if they had better connecting flights. Could they make money there? Yeah, probably more than they will in Philadelphia."

Last week Southwest Airlines [LUV] announced that it was cutting 88 routes around the country to better utilize its aircraft. It will be shifting planes so that it can fly 41 routes out of Philadelphia - far more than it originally planned.

While the concept of creating a Latin American hub in Fort Lauderdale has merits, Klaskin said it is "nonsensical" for US Airways. "A lot of these routes are not served by anyone from Fort Lauderdale. US Airways is jumping into markets that are not very well saturated, but they are dominated by low-cost carriers that are indeed low-cost carriers. What they are trying to be is the spoiler by getting out there ahead of the low-cost carrier that may grow these locations slower. You think they would want routes that are not dependent upon beating a low-cost carrier in a market."

Klaskin noted that Fort Lauderdale-based Spirit Airlines already serves some of the same Caribbean cities from Fort Lauderdale. In addition, JetBlue Airways [JBLU] already has non-stop service from New York to Puerto Rico and the Dominican Republic. JetBlue also has applied to begin service in November to Nassau.

One day after US Airways' announcement, Spirit said it would begin flying to Santo Domingo in the Dominican Republic in November.

Spirit's one-way fare to Santo Domingo will be $59 compared to the $124 that US Airways plans to charge. However, US Airways' fare to San Juan from Fort Lauderdale will be $104 compared to $124 on Spirit.

US Airways will offer connecting flights from New York to San Juan via Fort Lauderdale for as low as $325 round-trip. JetBlue offers non-stop service for $136 one-way.

Klaskin noted that in this new market the US Airways brand is unknown. "They don't have any cache in the region. No one has heard of U.S. Airways or JetBlue. They are on an equal playing field."

Butler added that Spirit and JetBlue would be in some of these markets months before US Airways. "It will be very difficult for [US Airways] to then capture these markets. However, their dense U.S. market can feed more traffic onto these new routes."

The US Airways costs are still "awfully high and unless they can shave those costs significantly, they may end up proving to JetBlue and Spirit that there is really a market down there. Then someone will come in and clean [US Airways] out," Butler said.

Already faced with Sept. 30 deadlines to meet covenants in loan agreements from the U.S. Air Transportation Stabilization Board and General Electric Credit, the carrier earlier this month asked for permission to stretch out a $67.5 million pension fund payment over the next five years.

In the end, Klaskin said the true purpose of the Florida announcement was an attempt by US Airways to demonstrate "to the market that they are vibrant, alive and growing. A large segment of the industry has already written them off."

Struggling to stay afloat, Delta has already asked its 7,500 pilots to cut their paychecks by $1 billion and now it says an undisclosed number of employees will be cut to transform Delta into a "leaner, simplified and more productive airline" according to CEO Gerald Grinstein.

Late last week Delta's creditors refused to give the carrier flexibility to restructure more than $1.4 billion in debt. Delta wanted the ability to swap equity for debt as one avenue to avoid Chapter 11. A group that consisted of 34 financial institutions rejected the idea claiming Delta did not provide enough information or time to explore the proposal.

Among the elements of a new strategic business plan that the Delta board has reportedly considered are plans to dump short-haul routes and focus on transcontinental and international routes on which it could charge premium fares for premium service. The carrier may cut back hub services at either or both Dallas and Salt Lake City.

If the board acted on the plan, no announcements were made. Instead, announcements will be forthcoming in the next couple of weeks, said Tanya Wagner, a Delta Connection spokeswoman. The only statement forthcoming has been the roll out of a simplified fare structure for all flights originating at the Cincinnati hub. With its SimpliFares there are now two first class and six economy class fares. The fares will be capped at $499 for a one-way walk-up, coach ticket.

Klaskin believes that the reducing the number of short haul flights this will be a boon to the regional carriers - both the wholly owned and the code-share partners. Klaskin believes Delta will turn over all of its short-haul flights to the regional carriers and then devote all its mainline aircraft to long-range flights.

"Delta has a very dense regional network. It is a huge domestic airline on its own even if you took away the network feed. I think a big chunk of the short- and medium-range flying will be flown by regional aircraft. They will redeploy their mainline aircraft to focus on medium- to long-distance domestic, hub-based flying, some international routes and some domestic point-to-point flying.

"If they reconfigure their regional network not simply to be hub supportive, but point-to-point flying bypassing hubs. I think they will do very well. They have a huge investment in regional flying equipment and in the network.

"The plan will have a substantial effect - either good or bad, but there isn't any doubt that it will have a substantial impact," Klaskin said

However, Delta's need for regional flying could decrease with the elimination of one or two hubs.

"I think Dallas will be eliminated before Salt Lake City. If it is their intent to eliminate Dallas or Salt Lake City as hubs, it will be an opportunity to do more hub flying out of Atlanta and Cincinnati and to bring more regional equipment to those cities," Klaskin said.

If Salt Lake City is no longer a hub, then Delta may need to develop a West Coast airport as a focus city to anchor its operations.

Delta will need to keep at least one of the two hub cities to continue as hubs unless they plan to retrench drastically and become a niche airline serving only the East Coast, Butler said. "To have a dense service in the Southwest they need a hub. Salt Lake City is all theirs, while in Dallas they are the second banana to American [AMR].

"Dallas, which is essentially a hub for their regional airlines, has always been hard for them because American is so much bigger. It makes more sense to keep Salt Lake because it is both further away from their other hubs and they don't play second banana there.

SkyWest may have to find a new base of operations if Delta downsized at Salt Lake. "There could be potential growth opportunities elsewhere for SkyWest," said Susan Donofrio, an analyst with Fulcrum Global Partners. "They have always been the top operator for Delta."

There is a possibility that SkyWest could continue to fly the Delta routes on its own, Donofrio said.

With a cash balance of nearly $500 million, SkyWest has long been touted as the regional most likely to venture into flying some routes without the safety net of a code-share contract.

"They could buy a few bigger planes and make a go of it," said Butler, ala "Independence West," referring to Independence Air, the low-cost airline created by the former Atlantic Coast Airlines, now FLYi.

A spokesperson for SkyWest declined to talk about any contingency plans the regional carrier may be making if Delta falters.

>>Contracts: Jim Reynolds, Broward County Aviation Dept., (954) 359-6116; Stuart Klaskin, KKC, (305) 445-7600, Richard Butler, Trinity University, (210) 999-7256; Susan Donofrio, Fulcrum Global Partners, (212) 803-9000.<<

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The new routes will link Pensacola; Birmingham, Ala.; Charleston, S.C.; Dayton, Ohio; Greensboro, N.C.; Norfolk, Va.; Louisville, Ky.; and Richmond, Va, to Fort Lauderdale.