You’ll Never Guess American’s Most Profitable Hub

With the merger between American and US Airways now complete, you can’t help but notice that they have a lot of hubs. When mergers happen, it also typically leads to some hubs losing quite a few flights. For example, Minneapolis has shrunk quite a bit following the Delta/Northwest merger, while Cleveland has shrunk considerably following the Continental/United merger.

Admittedly the American merger isn’t quite as far along as the other two mergers, though as of now all hubs still seem to be going strong. However, you might be surprised to hear that Charlotte is actually American’s most profitable hub. How they’re defining “profitable” we’re not sure of, but it’s one of the many interesting tidbits in a Charlotte Observer article about American renewing their lease at Charlotte Airport:

American, like other airlines that fly from Charlotte, wants to keep its costs as low as possible. The airline has a good deal at Charlotte Douglas, which it has told analysts is its most profitable hub.

Charlotte-Airport

There are two things which make Charlotte Airport especially interesting for American (neither comes as a surprise, but I hadn’t directly thought about these points either):

  • On a per passenger basis, Charlotte is American’s lowest cost hub
  • Of all major airline hubs in the US, on a percentage basis Charlotte is the one with the most connecting passengers and the fewest passengers originating/terminating in the city

How much cheaper is Charlotte’s Airport than American’s other hubs? According to a 2013 study, apparently the cost per passenger at Charlotte Airport is $2.28, while it’s $6.86 in Dallas and $19.13 in Miami. Those are huge differences.

So what makes Charlotte so profitable for American? Presumably it has to do with the extent to which American dominates the market — they operate more than 90% of the flights out of Charlotte:

Charlotte Douglas International Airport is the lowest-cost major airport for American, making it economical to keep Charlotte as one of the biggest airline hubs in the nation, with nearly 700 flights a day.

As a “fortress hub,” Charlotte Douglas is unusually reliant on one carrier: American Airlines operates more than 90 percent of its daily flights. And about 80 percent of the airport’s passengers are connecting between planes rather than starting or ending their trips in Charlotte.

When you combine the low costs of transit passengers with them basically dominating the hub, and therefore having quite a bit of pricing power for passengers originating/terminating in Charlotte, that might begin to explain the hub’s profitability. Meanwhile some of American’s other hubs, like Chicago, Los Angeles, and New York, are highly competitive.

It’s interesting to note that American also makes quite a bit of money on concessions at Charlotte Airport:

Charlotte Douglas’ revenue-sharing provisions are another key part of keeping the airlines happy. Under the current lease, Charlotte Douglas gives the airlines 40 percent of its profits from parking and concession sales. Last fiscal year, Charlotte Douglas gave airlines $14.8 million, according to financial statements. The payments are split up based on how much space the airlines lease, meaning most go to American.

I suspect this is quite common, but I had no clue the airlines actually share in profits from airport parking and concessions. It almost makes me wonder why they discourage bringing outside food & drinks into the airline clubs. 😉

The new American lease deal in Charlotte is expected to only be 5-10 years, while the previous deal was for 30 years. Why does American want a shorter lease at the airport?

He said airlines aren’t willing to sign very long agreements as easily as they would in decades past, when the aviation business was less turbulent.

Mann, the aviation analyst, said shorter leases can allow airlines to exert more influence over an airport’s major expansion plans.

“They want to have periodic control over what the airport is spending and how that translates into a cost factor for carriers,” Mann said.

Charlotte-Airport-1

Bottom line

I’m pretty clueless about the arrangements between airports and airlines, so this was an interesting article to read on many levels. While we don’t have details as to which metrics make Charlotte American’s most profitable hub, I guess they do have a perfect combination of circumstances.

The airport handles the highest percentage of connecting passengers, and has the lowest costs per passenger by far. Add in the fact that passengers originating in Charlotte are paying high fares due to the lack of competition, and it’s a recipe for a pretty successful hub.

I never realized just how much merit Charlotte had as a hub for American, and I’m guessing we’ll only see its importance continue to grow.

Would you have guessed that Charlotte is American’s most profitable hub?

Comments

  1. “Minneapolis has shrunk quite a bit following the Delta/Northwest merger”. How are you defining this? Are you sure you didn’t mean Memphis or Cincinnati? There’s been less emphasis on MSP versus some other hubs I guess but Delta still does 25M passengers through MSP a year.

  2. There is no quote whatsoever from American stating that Charlotte is the airlines’ most profitable hub – this is just one sentence in a Charlotte Observer article and it appears as if the journalist got this info from an airport analyst so not even directly from American

  3. I’m not sure that you can really compare MSP to Cleveland. While destinations declined slightly from MSP after the merger, those declines took place during the recession, and traffic actually has held fairly steady since 2009. MSP is still a very strong hub for delta. Cleveland has always been much smaller and United has cut back there far more than delta did at MSP.

  4. Charlotte is great All other factors aside (like aircraft type), I would rather route through Charlotte than any other US airport.

  5. CLT might be my least favorite AA hub. If you are coming on or off of a RJ, you have a 5 mile walk to/from E concourse, there is no good food, and most hours of the day you can’t even walk down B or C because it is so crowded.

  6. Makes me wonder where AA is going to cut back, if not CLT. On the East Coast now, with MIA, CLT, DCA, PHL, and NYC, something’s gotta give. My guess is there will be a scaling-back in Philly at least. To me, CLT and DCA were US Airways’ most pleasant hubs. I wouldn’t shed a tear if I never had to connect through PHL or PHX again.

  7. While I like Charlotte as a hub the profit sharing sure explains why food and snacks at Charlotte seem so much higher than at other comparable airports.

  8. Don’t you mean Memphis, not Minneapolis? Cleveland was completely eliminated, but Delta still has a lot of pax through MSP every year. MEM was completely de-hubbed and CVG has seen huge reductions.

  9. Parking is one of the most profitable income of airport.
    When you look at the financial report, it may make up 1/3 of total revenue

  10. @lukas this is what journalism is these days. No one ever checks the facts, one line in an article not even written by someone who would actually know the true facts is enough to be quoted. I won’t be surprised if comments from this blog are quoted as fact too

  11. @Andrew B – I’m curious as well to where AA is going to cut. I recall hearing that AA is still planning to have a significant transatlantic presence from PHL. The big difference though between AA and past mergers is that AA’s hubs have significant demand. DCA and PHL generate far more O&D demand than CLE or MEM ever would. And with such a grasp on CLT, I think AA will be sticking around.

    I’m no expert but by guess is that PHX will be the first loser of the AA hubs post-merger.

  12. @BenjaminJ84: you ask a great question. Cranky had a fun post speculating about this: http://crankyflier.com/2013/02/18/my-best-guess-on-what-will-happen-to-americans-hubs-post-merger/

    There seems to be some consensus that PHX has to take a hit, but the complicating factor here is that AA has much more gate space at PHX than LAX, and unlike UA and DL, has no other West Coast hubs. PHX is also operationally one of the best airports in the nation, with little weather. So… it’s not at all clear to me it’ll be decimated, although one expects that a few routes would be cut.

    From a cost structure, MIA is by far the worst, but AA’s key international market is Latin America, and they absolutely need Miami to continue that market position.

    NYC and LAX are the “weakest” American hubs, but I’m not sure how much they can cut, there’s too much money there too. AA has been expanding at LAX, so it looks like that’s not going to change… but I would not be surprised if NYC stagnates while DL and UA really continue to focus there.

  13. I would not be sorry to see PHX go away as a hub, but having 7 hubs in the eastern/central time zones and only PHX and LAX in the Mountain/Pacific seems totally imbalanced in the long term. Not sure they can cut PHX unless they want to concede the western US to DL and United…or make a stronger commitment to Alaska.

  14. As much as I’ve hated US Airways integrating into American, CLT has made flying down the east coast a lot easier. Without it, I wouldn’t be flying AA for a lot of trips.

  15. PHX has surprisingly sustained crowds and flights so far. It’s easy to forget that Phoenix is the 12th largest metro area by population in the US, and everything larger is a hub except for BOS which is more of a focus city and a growing international city due to close proximity to Europe.

    PHX had a pretty major upgrade in the past two years with regards to much better restaurants, and obviously Terminal 4 is much better than AA’s pre-merger T3. Even the AA lounges have been getting a nice remodel. The hallways in the terminal are definitely feeling the crunch during peak hours, but what airport isn’t at the moment.

    A stronger economy and lower than expected fuel prices has led AA to expand capacity everywhere they can so far. I’m sure if they could get more gates at LAX they would expand more aggressively there instead.

  16. While Charlotte may have the highest percentage of connecting passengers, some of these come from stations where the flight to CLT is the only game in town, for example Florence SC (FLO), Greenville NC (PGV), or Hilton Head SC (HXD). So even though these passengers are connecting, American has the same pricing power as if they were originating in CLT.

  17. Just returned from Minneapolis few days ago from visiting family for the holiday, my observation is that the airport is getting busier and busier and more and more crowded each year. Flights starts earlier than years ago, and continue into late hours. They have 4 flights boarding simultaneous all next to each other, each gate is scheduled for as many plane it possibly for on the board. MSP definitely is growing and not shrinking. Back when I was a teen and it was just Northwest hub, MSP was almost desolate. I won’t be surprise if they have plan for a third terminal to separate the internal flights in the future.

  18. While aircraft movements are down slightly at MSP, passenger numbers are pretty constant since 2004–long before the Delta/Northwest merger–and even up in 2014. If the intent of the first paragraph is to make a comparison to United’s post-merger downsizing in Cleveland, then the Delta equivalent would be Memphis, which–unlike MSP–has seen a precipitous reduction in traffic as a result of de-hubbing by Delta.

  19. I question the methodology used in CLT being designated the most profitable hub in the AA system. As a former US manager we heard MANY times from Doug how CLT would never be on par with ATL, for example, because it’s a far smaller city. That means less high-yielding O&D pax and fewer Fortune 500 corporate contracts. (That was part of his argument why pm-US needed to keep costs low). But if you’re looking at each airport as its own profit center then CLT may be the most ‘successful’ due to the low airport operating costs. Successful may be a better word in a business sense.

  20. Profitable can mean anything, depending on how the numbers are manipulated. Remember, UA said CLE was profitable and likewise DL said the same about MEM; we all know what happened. That said, I don’t see CLT hub going away – sure some routes may be cut or rightsized but CLT should remain a major hub. NYC/JFK is clearly AA’s weakest hub, plus it is close to PHL, and I think JFK will be the first to be eliminated.

  21. Correction to Dylan’s comment. Phoenix is the nation’s 6th largest city by population, not 12th.Size rank

    1 New York, N.Y. 8,491,079
    2 Los Angeles, Calif. 3,928,864
    3 Chicago, Ill. 2,722,389
    4 Houston, Tex. 2,239,558
    5 Philadelphia, Pa.1,560,297
    6 Phoenix, Ariz. 1,537,058

  22. No wonder CLT makes a profit…..the place is a dump. Old stinky carpet, broken escalators, poor selection of restaurants and shopping, air conditioning that frequently doesn’t work. I avoid CLT. Let the cheap tourist looking for a bargain connect there.

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