During an earnings call last week, American Airlines’ CEO Doug Parker intimated that bad hubs rather than poor management are to blame for widening profit gaps between industry-leader Delta and American or United.
When asked about the widening profit gap, Parker stated–
Margins by region come and go, margins by hub come and go, but what I can tell you right now is Delta has an airline that flies over 40% of their flights in and out of Atlanta, which is a really, really good hub. And if American flew 40% of its flights in and out of Charlotte, we would have a margin advantage there in the business because Charlotte’s a really, really good hub.
It’s not about mismanagement or anything close to it. It’s about the networks that are currently in place at the airlines. They have that advantage, by the way, in valuation.
Of course there is truth to his statement: hubs matter. Weather-prone hubs sacrifice operational performance, creating a ripple effect that causes millions of dollars to be lost during inevitable winter weather.
Here’s an example. During a United earnings call in January, Chief Financial Officer Andrew Levy was asked why United’s first quarter guidance lagged behind others. His response–
We have less exposure to Florida and the Caribbean. And so the first quarter is always the lowest quarter for United compared to Delta and America. It’s just about where our hubs are. We don’t have a hub in Atlanta or Charlotte.
And Southeast hubs also have another advantage: lowers costs. Taxes/fees tend to be lower, wages are lower, and all of that create more profitability. Bottom line, both Atlanta and Charlotte produce high unit revenue and high margins.
Management Matters Greatly
But I am not sure if I fully agree with Mr. Parker. It often IS about mismanagement: strategic blunders and other unforced errors that makes some hubs less profitable. Delta has done far more be blessed with a great hub in Atlanta. Since it emerged from bankruptcy, it has proven itself year after year operationally and offers an in-flight soft product that rivals its top-tier Asian competitors.
Meanwhile, can you blame United’s trouble in Houston in Chicago on its weather or labor costs…or on its antiquated systems?
Just like so much of life is determined by the country you are born in, much of an airline’s fortune is determined by hub locations. But the hubs do not run themselves. It always takes good management to successfully run an airline.