USA: Air Travel Market War Is In Dallas

The Dallas-Fort Worth air travel market has now surpassed that of Denver (DIA) as the most heated battleground for U.S. airlines. For nearly a decade, DIA was home to the most brutal airline competitive landscape in the country.

Hometown low-cost carrier Frontier Airlines (now transformed into an ultra low cost carrier) and full service network carrier United Airlines had been battling for dominant market share in Denver.

Those were the only contenders surviving in Denver after Continental shuttered its hub at Denver’s old Stapleton airport right after the move to DIA.

In 2006, Southwest Airlines decided to add service in Denver after pulling its service at Denver Stapleton back in 1985, and it quickly built up a massive hub there (now its fourth largest).

There are certainly parallels in the Dallas market, as once again a legacy carrier (American), an LCC (Southwest) and an ultra-low cost carrier (ULCC – Spirit) are duking it out for supremacy in a highly competitive market with a massive origin and destination (O&D) traffic base.

The script obviously has a few differing notes—in this case, both Southwest and American are the hometown carriers, one being low-cost while the other is the world’s largest airline, and Spirit is the newest entrant.

Additionally, the market consists of two airports: Dallas Fort Worth International (DFW), with five terminals and seven runways, and Dallas Love Field (DAL), gate-restricted to 20 jetways in a singular terminal.

The biggest shift in the Dallas market in the last three decades occurred in October 2014, when a 2006 deal to sunset the famed Wright Amendment took effect, allowing Southwest to instantaneously build a massive hub at Love Field nearly overnight.

Flights at Love Field had been restricted to destinations within Texas and to certain neighboring states for decades following the opening of DFW airport in 1974. But two years of lobbying efforts culminated in a 2006 deal that would eliminate Wright’s restrictions while capping Love Field’s capacity at 20 gates.

The restrictions were lifted in October 2014, and Southwest immediately capitalized, as it controlled 18 out of the 20 gates at DAL (16 of its own and 2 leased from United).

Southwest surged to 180 daily departures, redistributing capacity to new destinations outside the previous limits, while Delta Air Lines also grew its capacity on its flights to Atlanta, up-gauging from regional jets to mainline aircraft.

The third new entrant into the DAL market was low cost carrier (LCC) Virgin America, who quickly built up a focus city at DAL. That focus city initially included high-frequency nonstop service to nearby Austin, but today has retrenched to focus on point to point (p2p) flights nationwide, encompassing 16 daily departures to Las Vegas (2), San Francisco (3), Los Angeles (4), New York La Guardia (4), and Washington Reagan (3).

Both Virgin’s gates and the slots to serve LaGuardia and Reagan are the result of the American – U.S. Airways merger and the required divestitures.

Even as capacity exploded at Love Field thanks to the new legal structure, the macro-economy also contributed to traffic growth in the Metroplex.

Starting in late 2014 and continuing into the present, the price of oil plummeted from over $100/barrel to its present level of $40/barrel, dipping as low as $25/barrel during the course of 2015.

Predictably, this has helped to drive down fares and stimulate O&D traffic growth. In fact American CEO Doug Parker has noted that between the added competition (from both Southwest and Spirit) and the drop in fuel prices, American expects no meaningful changes in pricing or capacity for the Dallas market in 2016.

DFW captured a slice of that growth, with 2015 traffic increasing 1.0% year-over-year (YOY) to 64,174,163 from 63,523,489 in 2014.

But the real winner was DAL, which saw passenger traffic explode from 9,413,636 in 2014 to 14,497,498 in 2015, spectacular growth of 54.0% YOY. That growth came on the heels of 11.1% growth between 2013 and 2014, driven entirely by the fourth quarter of that year (when Southwest added its first tranche of service post Wright Amendment expiration).

When considered on an overall market basis, 2015 passenger traffic was up 14.2% from 68.91 million to 78.67 million, nestling Dallas comfortably inside the Top 15 city airport systems in the world (behind #12 Bangkok at 83.21 million and ahead of #14 Miami at 77.56 million).

In order to get a sense of how Southwest’s growth (and lowered fuel prices) have affected the Dallas/Ft. Worth pricing environment city market, we used US Department of Transportation (DOT) data to assess how air fares and O&D traffic changed between Q3 2014 and Q3 2015. The analysis was conducted for 32 city pairs (offered via 35 airports served by Southwest) that Southwest flew nonstop from DAL in Q3 2015 but did not serve in Q3 2014 during the pre-Wright Amendment era. The study also excludes markets that Southwest served at DAL prior to 2014 (in-state and neighboring state markets such as Austin, St. Louis, and Houston Hobby). The results of this analysis are summarized in the table above.

As the table indicates, Southwest’s entrance into these markets has had a substantial impact, both in terms of stimulating O&D traffic growth and in terms of bringing down average fares. Among the 32 US city pairs evaluated from Dallas, average fares are down approximately 15.8%. Average O&D traffic overall is up in the 32 markets by 22.6%.

The specific outlier markets are interesting to consider. Among the positive gains, Atlanta, Miami (Fort Lauderdale), Nashville, and Milwaukee are Southwest strongholds (creating market power for Southwest on both sides to boost demand). Washington D.C. (Reagan), New York City (La Guardia), and Charlotte were previously dominated by American (and in the case of the first two markets, are slot restricted) yet accordingly saw major gains thanks to Southwest.

The negative outliers are also interesting. San Francisco’s numbers are probably driven by the strength of the local economy there and the relative pricing power enjoyed by airlines in that market. Boston is a similar story in terms of the economic and demographic fundamentals with the added note that much of the stimulation had already been captured by Spirit.

Philadelphia is the oddest case—the market itself is mostly stagnant and Southwest’s influence there has been declining for years. At the same time, with lower fuel prices and added competition you would expect prices to go down, not up (the only market in the sample where this occurred.) Philadelphia is a outlier to the broader trend.

As a ULCC, Spirit predictably does not operate any true hubs (Fort Lauderdale comes closest thanks to flight connections to its Latin American network at the airport). But DFW is one of its largest stations, , with 24 peak day departures to 20 different destinations, as per the March 14, 2016 timetable. Spirit’s schedule at DFW basically mirrors its focus cities at the other major US airports (such as Las Vegas, Chicago O’Hare, and Houston Bush), with more or less daily nonstop service to several large O&D markets.

Despite the strength of the operation, Spirit has struggled to sustain more than daily service in most of its DFW markets (a common theme across its network) despite bottom of the barrel fares and little LCC competition.

Today it faces head to head competition from a revitalized Southwest and pricing power thanks to fuel prices. More worryingly, it will have to contend from pricing innovation by American, who has unveiled a new fare class to compete head to head with Spirit and has immediately found success.

American’s management team (by way of US Airways) has had success fending off attacks from ULCCs and LCCs in the past, and it would not be surprising to see them find similar success against Spirit in DFW.

Spirit’s focus city isn’t in danger of collapsing (it doesn’t quite have Frontier’s record for pulling out of markets), but there are some chinks in the armor.