Frontier Airlines announced massive expansion plans yesterday, with Southwest Airlines and United Airlines squarely in the crosshairs. Denver is a major player in this battle. United and Southwest already use the airport as a hub and Frontier now plans to do the same. Some 20ish new destinations will be added to Frontier’s route map at Denver and, naturally, that increased competition was part of the conversation during United’s Q2 ’17 earnings call this morning.
United President Scott Kirby sounded excited when the query came in and his response was not at all what I was expecting.
In the near to medium term any time you have capacity growth, but particularly from a LCC, it is going to lead to pricing pressure.
Okay….this is normal enough. Concerns about pricing pressures as capacity spikes makes sense. But here’s where it gets fun.
Over the longer term, however, I view this – having watched the ULLC growth over the past decade – as the best news I’ve heard in the past 10 years. What they’ve said is they’re going to run a connecting hub-and-spoke network in Denver. The model that they used to have where they wound up in bankruptcy.
Nice dig there about the bankruptcy, though perhaps maybe not call that out when your prior companies haven’t been immune to such challenges??
But they’re pivoting from what has the most successful model, point-to-point ULCC, to going back to try to copy what the network carriers do and run a connecting business model. The reason I view that as the best thing that has happened in the past decade is I have believed for many years that the ULCC business model can’t work when a network carrier decides to compete on price, and particularly once we roll out basic economy. And while I have believed that for a long time this is the first public validation that one of the ULCCs is throwing in the towel on the point-to-point business model and switching to a network model.
There is still a ton of point-to-point traffic in the Frontier network. Just offering connecting flights doesn’t immediately change the way passengers book travel. Kirby continues, highlighting the expected challenges he sees for Frontier.
It is a lot more complicated. It is one thing to run a point-to-point network but when you’re trying to run connecting traffic you have to slow down the aircraft utilization because you have to wait for passengers and employees to connect and airplanes to be timed correctly. You have to staff up because you have peaks and valleys. You have to connect bags which is one of the most operationally difficult things we do. Today if Frontier has a flight from Orlando to Denver that is delayed 2 hours all they have to do is run the flight 2 hours late but the customers still get there. It is not a good experience but it is not the end of the world. Tomorrow, when half the people on that plane are connecting if that flight is 2 hours delayed and they only have one flight per day to all those markets the choice is:
- Do we delay everything else for the rest of the by 2 hours?
- Do we have half the people on that airplane go to a hotel and spend the night?
- Do we buy half the people tickets on United to get them to their destination that day?
And Kirby is absolutely correct. Those aspects of the operation are more complicated and more expensive. But Frontier already does it today. Yes, a massive portion of traffic is point-to-point, but Denver already serves as a connection point. That means things like baggage transfer and staffing are mostly addressed already today. The carrier may have to scale up but that’s not the same as learning the processes from scratch.
Kirby finishes with another dig, particularly around the timing of the move, and a promise to win the “battle” for Denver:
It is exponentially more complex to run a connecting model. And for Frontier to publicly acknowledge that the old business model has run out of growth potential in the middle of an IPO process I view as a phenomenal validation that everything we’ve done has worked. I can promise you, they’re now competing on our turf as a network carrier in Denver. That is a battle I guarantee United will win.
This was not the only part of the call where Kirby sounded aggressive. He’s optimistic in a lot of areas, though he also avoided questions about changes to the way Basic Economy is being sold because other airlines are not “fully deployed” the way United is. And the company still has plenty of issues in its own house to get in order before worrying about competitors. Denver will see a rebanking of the hub structure in 2018 to improve connections and up-gauging of domestic flights continues, a move that undoubtedly helps a hub that runs so much domestic traffic. And maybe United really is up to the challenge of taking on a carrier with generally lower costs and lower passenger expectations at its most profitable hub. But I cannot help but be reminded of the old adage, “Be careful what you wish for.” And Kirby definitely was wishing this moment to come along for a decade now.
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