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VOL. 126 | NO. 246 | Monday, December 19, 2011

Touch and Go

High fares, fewer flights, lost business undermine airport’s changing facade

By Bill Dries

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In the aviation industry, Memphis International Airport is considered a fortress hub, an airport where a single airline – in Memphis’ case, Delta Air Lines Inc. – handles 70 percent or more of the passenger flights.

The designation comes at a price, and it’s proven to be a steep one for Memphis travelers.

In October, Atlanta-based Delta’s mainline unit accounted for 34 of the 44 scheduled flights among the four carriers (Delta, AirTran Airways, American Airlines and US Airways) that fly into and out of Memphis International.

And Delta’s affiliated regional/commuter carriers, including Memphis-based Pinnacle Airlines Corp., accounted for 133 of the 158 regional flights at Memphis International.

Even before Delta’s 2008 merger with Northwest Airlines Inc. – but after Northwest’s acquisition of Republic Airlines in 1986 – the benefits of being a hub relative to the price of airfare was an issue in Memphis.

Former Northwest chairman Alfred Checchi made several memorable appearances in Memphis in the early 1990s including one at the Memphis Rotary Club where several Memphis frequent flyers confronted him about higher fares. Checchi denied they were that much higher even after Memphians told him about businesses that shuttled travelers in search of cheaper airfare to airports in Little Rock and Nashville.

The most recent quarterly rankings of average fares at U.S airports by the U.S. Bureau of Transportation Statistics proved what locals have complained about for years – Memphis International Airport is the nation’s highest-priced airport with an average fare of $476.22.

The report termed the average fare at Memphis International, whose three-letter world airport code is MEM, “extremely expensive.”

The bureau’s 2010 rankings put Memphis at No. 5 on the highest average fare list at $437.07.

Although most of the top 10 airports with the highest average fares are fortress hubs, MEM is not just any fortress.

The airport has the unique status of being both a passenger hub and a cargo hub – the North American super hub of Memphis-based FedEx Corp. – the second busiest cargo airport in the world and the busiest in North America.

The passenger and cargo hub distinction is what Memphis-Shelby County Airport Authority board chairman Arnold Perl cites frequently whenever he touts the airport.

The distinction has had another effect. It has blurred what is a stark line in other markets between airlines and airports.

In April, those attending the Airport Cities World Conference & Exhibition at The Peabody hotel got a look at just how bright the line can be just before Delta CEO Richard Anderson and FedEx founder Fred Smith spoke.

The dissent came from Greg Principato, president of the Airports Council International.

“The airlines want to control airports and limit competition. They believe the purpose of the system is not to move people and goods but to move airline stock prices and balance sheets.”

– Greg Principato
President, Airports Council International

“The airlines want to control airports and limit competition,” he told a crowd of several hundred. “They believe the purpose of the system is not to move people and goods but to move airline stock prices and balance sheets.”

Among those listening was Anderson, who responded later.

“Rents and landing fees have a tremendous effect on our cost structure,” he said. “We’re always looking to find the most efficient providers of high quality services. We have other places in the country that are eight to 10 times more expensive and the quality may not be better. Airports are monopolists. You can’t decide to not go to that airport if you want to go to Hartford. They’re municipal monopolies.”

But airports are not regional monopolies in an age when transportation in general is evolving into a journey with multiple modes of transportation.

John Kasarda is the University of North Carolina business professor who coined the term “aerotropolis,” which depicts a city whose economy is driven by its airport. Kasarda, who called Memphis a model for the American aerotropolis, said airline travel has “moved from elite travel to mass transit.”

But as that has happened, national and regional bus carriers are moving to an express service model on buses that include amenities previously found only on jets, like Wi-Fi and more comfortable seats with more legroom.

The Memphis market now includes Megabus.com regional service as well as Greyhound.

Last month, within site of the new airport control tower, the Memphis Area Transit Authority opened its new Airways Transit Center, which is also a place to catch new Greyhound Express bus service in the region.

Memphis Mayor A C Wharton Jr. referred to the high air fares at Memphis International on his way to repeating his frequently made point that he dislikes the congestion at Atlanta’s Jackson-Hartsfield International Airport, the world’s busiest passenger airport. “Every time I have to leave and fly to Atlanta – that is cruel and unusual punishment, having to go into that airport down there,” he said.

Wharton also acknowledged the dichotomy of the role Delta plays in the growth of the airport and the consumer criticism that has come over the high prices from that.

“We know that for Memphis to prosper, Delta has to prosper,” Wharton said. “We know that for Delta to prosper, Memphis has to prosper.”

But Delta executives have been clear and direct about what they see as the role of Memphis, which serves as more of a connecting than origin-and-destination hub.

Delta president Ed Bastian told a JPMorgan Chase & Co. conference in March the Memphis hub will become more dependent on Atlanta “as we turn Memphis more into a complementary flow hub relative to Atlanta.”

Meanwhile, Delta has embarked on a somewhat controversial course that is beyond a reaction to the rapid rise in gas prices.

Anderson has been vocal in insisting Delta’s cuts in capacity are more than a response. The system, he has told analysts, had too much capacity and the capacity cuts are permanent.

“That capacity will exit permanently,” he told analysts in a dismal July earnings conference call in which earnings were down 58 percent compared to a year ago. “We’re going to act unilaterally at Delta to do what we have to do to be successful.”

That includes 20 percent of Delta’s flights at Memphis International starting in late August that account for 8-10 percent of the passenger traffic.

The decline here has been severe. Memphis International flew 714,229 passengers in October (the most recent stats available by press time), down 18.2 percent from 872,739 the same month a year ago. The year-to-date total of 7.4 million marked an 11.6 percent decrease from 8.4 million for the same period of 2010.

Fewer passengers means fewer customers in the terminal, which has resulted in empty gates in one of the concourses and the closing of some of the airport’s restaurants and other concession businesses dependent on a certain volume of passenger traffic.

But longtime airport authority president and CEO Larry Cox said that doesn’t mean a drop in rental revenue for the airport. MEM uses what’s called a “zero sum” agreement used by other airports, including Nashville, to bolster the bottom line.

“Our lease agreement with the airlines is that we have a break-even point,” Cox said. “So, the more flights, the more passengers and the more gates that the airlines lease, their rental rates go down. But their total rent remains the same. They guarantee us sufficient revenues to cover all our expenses, both our debt service and operation and management expenses to run the airport.”

Delta’s cuts at Memphis International were focused on smaller regional flights as the airline pursues the philosophy of getting more passengers on fewer and larger jets. But Delta’s decision to remove high-profile flights between Memphis and large West Coast and East Coast cities like Seattle and Baltimore speaks volumes about its view of Memphis as an origin or destination for cross-country flights to major metropolitan areas.

While the monthly passenger counts are down because of the Delta cuts, this year the passenger counts are also measured against another marker – the projections of where the passenger count should be based on the Delta cuts. Those numbers are on target.

“It’s a tough business,” Cox said the day last month that American Airlines became the latest of the major carriers to file for bankruptcy reorganization – a move he said it should have made 10 years ago. “The soft economy and high fuel prices, which are probably not going to go away, have really changed the landscape. Unfortunately small airplanes no longer are economically viable. So, (in) small markets like Memphis – it’s had an impact.”

Anderson has faced questions from analysts on earnings calls about whether sticking to his strategy has created opportunities for Delta’s competitors to cherry pick selected markets where Delta’s capacity cuts and dual strategy of rapidly passing on the airline’s higher costs have left opportunities.

Airport authority board members make a regular point of asking about other airlines that might be tenants for Delta’s now-vacant gates as the capacity cuts began taking effect here in late August.

Any mention of competition for Delta at Memphis International leads to Southwest Airlines, the Dallas-based airline that recently bought AirTran Holdings Inc. – a carrier with a presence in Memphis.

Southwest chairman, CEO and president Gary Kelly said in March that Southwest probably wouldn’t expand beyond three markets in South Carolina this year.

“Those cities are underserved and overpriced,” he said of Charleston, Greenville and Spartanburg, S.C., as he outlined a cautious transition.

Cox is equally circumspect when he answers the same question about Southwest retaining and perhaps even adding flights to Memphis once its acquisition of AirTran is complete.

“It’s in progress,” Cox said. “I’m very optimistic that we are going to see Southwest Airlines here. We’ll just have to wait and see when and where.”

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