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John W. Schoen
Updated
When an airline decides where and when to fly its planes, there's often a lot more at stake than just the bottom line.
The final choice of routes can be controversial, as United Continental (NYSE: UAL)'s recently ousted CEO discovered after allegations surfaced that the company initiated money-losing, nonstop service as a personal favor to a New York-area airport official.
But as the airline industry has sharply consolidated over the last decade, the battle for air service has become the subject of intense political and legal pressures from cities, local airports, politicians and businesses.
"Airlines play much broader, legal games that aren't so different. This stuff goes on all the time," said Seth Kaplan, managing partner at Airline Weekly. "There's a whole profession called air service development. People go out and hire consultants and do studies to make their case."
The haggling over air routes has intensified as the airline industry has consolidated, removed excess capacity and boosted profits. In the decade ended last year, the total number of seats available for domestic flights fell 6 percent. That boosted the average load factor—the percentage of full seats—from 76 percent to 84 percent, raising the revenue per passenger mile by 36 percent, according to the MIT Airline Data Project.
But as overall capacity shrank, cities were left to play musical chairs to see who would lose service when the music stopped. Much of the contraction reduced the number of short-haul flights—those under 500 miles—which hit many smaller airports harder than larger cities.
Cutting half-empty flights and closing down costly hubs have helped boost airline industry profits. Since posting an industrywide loss of $4.6 billion in 2008, airlines turned in a net profit of $16.4 billion last year and are expected to post a $29.3 billion profit this year, according to the International Air Transport Association.
But the industry's drive to dump money-losing routes hasn't come without a fight.
Two years ago, the Justice Department sued to block the proposed merger of American and US Airways (NASDAQ: AAL), an action joined by attorneys general in states that faced service cuts. To settle the suit, the combined airline agreeed to keep operating hubs for three years at Kennedy International in New York; in Charlotte, North Carolina; Chicago; Los Angeles; Miami; Philadelphia and Phoenix. The airlines also agreed to keep their schedule of flights to small and midsize communities from Reagan National.
Beyond legal pressure, local officials, airport authorities and business groups are quick to look for other incentives to keep airlines interested in their favorite routes.
Syracuse recently completed a $60 million airport expansion and restructured its security-service contracts to lower costs for airlines serving the city. Those efforts—along with a little help from Sen. Chuck Schumer, D-N.Y.—helped persuade Delta Air Lines (NYSE: DAL) to add two new daily flights to New York and expand service to Minneapolis and Atlanta next year.
In return, airlines aren't shy about asking for—and getting—considerations to maintain service. Earlier this year, American Airlines made it clear to North Carolina legislators that a state tax break on jet fuel—one of the industry's biggest costs—was a major factor as it weighed the profitability of service in and out of Charlotte airport.
"There are some flights that are very profitable, some flights are barely profitable and some flights that we operate that are unprofitable," Mike Minerva, American Airlines' vice president of airport affairs, told The Charlotte Observer in April. "Every time you move that line, more flights slide down to the barely and from the barely into the unprofitable."
A bill to extend the state's cap on jet fuel taxes, which has been approved by both houses of the legislature, was recently referred to a conference committee.
The case involving United's ill-fated service from Newark Airport to Columbia, South Carolina, involves allegations that go beyond the typical haggling over local air service.
In February, United disclosed in its annual report that it had launched an internal investigation into its relationship with the former chairman of the Port Authority of New York and New Jersey, after learning of a government probe into the matter.
According to published reports, the government is looking into whether United (NYSE: UAL) added direct flights from its Newark hub to Columbia, South Carolina, near a home of former Port Authority of New York and New Jersey Chairman David Samson, as the airline was negotiating with the Port Authority over airport projects.
Neither Samson nor any United executive has been charged with any criminal wrongdoing related to the matter.
Regardless of the reason for initiating service, United fared poorly against its competitors. While both Delta and US Airways have generated relatively consistent revenue flying between New York and Columbia, Continental struggled to fill seats between 2006 and 2009, when it discontinued service, according to Department of Transportation data. United, which continued to maintain service following its merger with Continental in October 2010, generated a fraction of the revenues of its New York area rivals.
No matter how much money a route makes or loses, airline executives aren't immune to appeals from political pressure to maintain or initiate them.
In July, Schumer urged JetBlue Airlines (NASDAQ: JBLU) to revive nonstop service from Syracuse to Fort Lauderdale, Florida, a route the airline discontinued six years ago.
"There is clear need for more flights from Syracuse to Florida and I urge JetBlue to examine this option and to once again offer this route for area residents; Schumer said in a letter to JetBlue CEO Robin Hayes. "I think it would clearly benefit both JetBlue and the residents and businesses of the Central New York Region."
A spokesman for Jet Blue said that Schumer's proposal was under consideration but no announcement has been made about resuming that route.
