Rising in the west

North American West Coast hubs have seen a lot of development in the last few years as airlines build back their networks. Beyond merely recovering from the Great Recession, carriers are emerging as profitable companies with healthy balance sheets and eyes solidly locked on the future of the trans-Pacific markets.

But the hows and whys of these West Coast hubs also contribute to a greater understanding of the changes in the industry wrought by the growth of the Asian economic tigers. These changes inform the debate on industry competitiveness, the impact on other US hubs such as Dallas Fort Worth and Chicago, and especially the importance of fifth freedom rights (the ability to carry passengers from Asian points to interior destinations) in tomorrow’s trans-Pacific market.

“Given that Asia is where the growth is, there is plenty to go around,” notes Bill Swelbar, executive vice president of transportation industry analysts InterVISTAS. “It makes good sense that the transoceanic carriers are building/augmenting those gateways with points behind to ensure success not only to the primary Asian markets but also the secondary and tertiary market opportunities that will present themselves as aircraft designed to begin nonstop service to those points are delivered.”

But there is another factor. The emergence of mega carriers from the Middle East, compounded by industry restructuring and the recession, has eroded the competitive fundamentals for US carriers just as it has for the dominant European players.

“The carriers from the Middle East in particular are aggressive in winning traffic to Southeast Asia and Singapore and other important points away from the US carriers,” says Swelbar, adding that building the West Coast gateways “will enable better service to important traffic points and thwart the loss of Southeast Asia traffic over time.”

Building Fortress Hubs

Nowhere is Asia’s importance more evident than in North American network developments by American at Los Angeles (LAX), United at San Francisco (SFO), Delta at Seattle (SEA) and Air Canada at Vancouver (YVR). In developing the West Coast, these airlines have shifted the center of gravity away from the uncertain European and Latin American economies to the roaring Asian markets that have become the industry’s bread basket –

the economic powerhouse of China, Southeast Asia and South Korea.

“If you do not have a trans-Pacific strategy, you will not be relevant in tomorrow’s re-work of the economic map,” Swelbar says. “Therefore it only makes sense to build these critical gateways today to be relevant and competitive tomorrow.”

It is, however, the emergence of China that has made the biggest difference. The dominance of China has also shifted the center of gravity – this time in Asia – from Japan to China and made gateways such as Tokyo, Hong Kong and Taiwan less significant simply because, as Swelbar suggests, it’s re-drawn the economic map. Thus those fifth freedom rights that were so critical in Delta’s acquisition of Northwest and United’s long-ago acquisition of Pan American have similarly declined in importance.

“The future is China, period,” says Boyd Group International president Mike Boyd. “Tokyo and Hong Kong were built up based on geopolitical factors in the 1950s and 1960s. Back then, China wasn’t open and they would shoot us down. Today, they furnish our kitchen appliances. So, Tokyo and Hong Kong are less important. For United and Delta, the advantages of a fifth-freedom hub in Tokyo are now gone. So, today, the name of the game for US West Coast Hubs to remain competitive is non-stops to major Asian points.”

Swelbar agrees. “Japan will remain a very important point on the global trading map, but aircraft technology does not require a stop in Japan any longer to connect to points in China and throughout Asia. Now those points can be served nonstop from US gateways.”

The case study for this development is United’s consolidation of its position at SFO, using the advanced technology of the Boeing 787 to drive deeper into China, cutting the time between SFO and destinations such as Xi’an and Hangzhou by as much as four hours. United serves six markets in China, the most of any US carrier, and includes Beijing, Shanghai, Chengdu and Hong Kong.

“United’s strategy will be powerful,” says Boyd. “In addition, Houston (IAH) remains in the wings for Latin America-Asia flow opportunities when the LatAm economy improves.” In fact, it is so powerful that Boyd thinks San Francisco shines above all West Coast gateways.

Swelbar agrees. “If I were to pick a winner today, it would be San Francisco,” he says. “The market is replete with not only strong business ties to Asia but a population that has a high propensity to travel to, and/or host visiting friends and relatives. Not that the other West Coast gateways don’t have similar attributes but United’s San Francisco gateway has longevity and is the model for serving not only established markets but also fledgling and developing markets for strategic reasons.”

United benefits from the fact that San Francisco is one of the top destinations for Chinese travelers, according to the US Commerce Department. Their numbers jumped from nearly 400,000 in 2007 to 2.1 million in 2014. Forty six percent of Chinese trips are destined for California with trips to San Francisco rising 19 percent between 2014 and 2015.

As for suggestions that United is reacting to increasing service by Chinese carriers, Swelbar thinks it might be the other way around. “United has been a market leader between the US and China,” he says. “It takes considerable time for China markets to fully develop and United certainly has gained a first mover advantage partly because of the San Francisco gateway it operates.”

Filling In the Map

If United’s moves at San Francisco are about consolidating its trans-Pacific dominance, the reason behind Delta’s and American’s moves at Seattle and LAX, respectively, is about filling big white spots in their route maps in Asia.

Most saw Delta’s move to establish SEA as its West Coast hub as going after its one-time partner Alaska Airlines, a strategy that didn’t work, as Boyd notes that the competitive battle there only served to spike traffic for both carriers. Indeed, little has been written about the fact that Seattle was all about strengthening Delta’s trans-Pacific and Asian footprints.

“Delta had a void in its Asian footprint with its strategy to move away from Narita to Haneda,” Boyd says.

Swelbar notes that Delta and Korean appear to be closer to a more compatible working relationship. “I believe this to be a formidable strategic partnership,” he says. “Arguably, Incheon is the best and most developed gateway to points in Asia and China. Combine that with Delta’s extensive North American operation and the potential is strong.” However, Delta’s moves will also have an impact on American, which has a similar void in its Asia map. “Delta affects American and oneworld to further develop an Asian footprint,” he explains.

Boyd agrees, but sees another problem with American’s strategy of trying to wrestle the highly fragmented LAX market into submission. “LAX is a strong market, but for Asian flows from the Deep South – where there is significant Chinese investment – it is not well located because it has about 12 to 15 percent more distance than say, Detroit or SEA,” he notes. “For AA, the geographic location is a challenge for wider US connect traffic.”

Finally, Air Canada is building YVR which has meaning for US carriers because of the United State government’s insistence on requiring a visa for passengers transiting hubs on their way from Asia and South America to Europe and vice versa. Analysts see this as a huge boon for Air Canada, as well as for Copa Airlines with its growing hub in Panama.

“Air Canada at YVR puts it in a key position to capitalize on the dim-bulb US visa requirements for connecting passengers including flow-through traffic to Latin America,” says Boyd.

Whither Competition?

Another airport almost lost in all this activity on the West Coast is San Jose, the closest airport to Silicon Valley. It remains a secondary airport, according to Boyd, who notes it has no significant feed to airlines at either end of a trans-Pacific trip.

But Swelbar disagrees. “The Bay Area is a white hot economy today and secondary gateways have begun to attract international services,” he explains. “Gateways like Raleigh-Durham, Austin and San Diego are examples. Given the ethnic makeup of the Bay Area market, there will be sufficient traffic to sustain service to the larger points in Asia from San Jose.”

While government officials and consumer advocates may bemoan the consolidation of the last decade, network development on the West Coast and elsewhere illustrate just how competitive the airline market is. In fact, Swelbar called the West Coast a case study on the continued competitiveness of the industry.

“What is happening on the West Coast should go a long way to calming fears of the regulators that competition has been lost as a result of consolidation,” he says. “The fact that the consumer has four distinct gateways to choose from is a clear win for the North America-Asia traveler.”

Interestingly, the West Coast build up has had little impact on interior US hubs, according to Swelbar. “Not only is American adding new long-haul international services at LAX, it is also adding service from its Dallas/Ft. Worth gateway,” he notes. “Not only is United continuing to add to San Francisco, it is also offering Asian services from both Chicago and Denver. In the end, it was Delta that rightfully recognized that it too needed a West Coast gateway and that a gateway could not be built on a code-share relationship alone. Even so, it is certainly not shying away from growing its Salt Lake City presence.”

But he also points to the West Coast business boom. “It also should not be lost that the local economies, particularly in the Bay Area and Seattle, are hot right now and that only helps to build local traffic that is vital to the success of those transoceanic journeys.”  

By Kathryn Creedy