American Strategy Flies Against the Flock

With 'depeaking,' airline aims for seasonless approach.
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Four years ago, American Airlines (AMR) began an effort to "depeak" its Chicago hub, spreading flights throughout the day instead of congregating them in narrow windows.

It worked so well that American is now depeaking its entire operation.

Contravening decades of industry wisdom, American is gradually abandoning the practice of offering more seats in the summer and fewer in the winter. Its premise is that, as an industry, "We carry costs all year to chase summer revenue," said Don Casey, who oversaw the 2002 Chicago makeover and is now managing director for international planning.

Essentially, flattening out demand -- whether during the day or during the year -- means an airline also can reduce costs because it doesn't have to operate full time with assets that are used only part of the time.

To an extent, the change reflects American's position as the only legacy airline never to have sought bankruptcy protection. In bankruptcy, its competitors have been given an easy shot at reducing costs, primarily labor costs. "Other carriers leverage marketplace failure," Casey says. "We've done far more to reduce costs by changing the way we run the business."

The Depeaking Effect

Historically, airline capacity -- as measured by available seat miles (ASMs) -- reaches its lowest point in the first quarter. In 2006, the capacity offered by the 10 largest carriers other than American rose 6.8% from the first quarter to the second, and 10.6% from the first quarter to the third, according to statistics compiled by Eclat Consulting in Reston, Va.

But for American, 2006 capacity rose just 4.3% from the first quarter to the second, and just 4.2% from the first quarter to the third. American continued to flatten its capacity over 2005 levels, when its ASMs rose 5% in the second quarter and 6.4% in the third.

American began to depeak at Chicago's O'Hare International Airport in 2002, responding to the severe economic pressures that arose after the 2001 terrorist attacks. Hub-depeaking involves spreading out arrivals and departures throughout the day. Airlines trade off rapid connections and accept longer passenger travel times. Normally, at a hub airport, flights arrive, exchange passengers and depart in narrow windows of about an hour and a half.

The practice was extended to the Dallas-Fort Worth hub in 2003. Casey said the combined annual savings at Chicago and Dallas is about $100 million. In 2004, depeaking came to Miami, but the impact is less because Miami scheduling is dictated primarily by the need to connect with international flights.

Walter Aue, vice president of capacity planning, says depeaking involved adjustments like boosting "gate separation," or the time that separates flights at gates. It is counterintuitive, but reducing the number of flights on a gate saves money, reducing the time airplanes sit on the tarmac -- burning fuel and crew time -- while waiting for the gate to clear. "Most carriers currently have shorter gate separation standards than American does," Aue says.

Depeaking also impacts "spoke" airports served by the hubs. In the past, spoke schedules were dictated by the need to connect in the hubs' tight windows. "It was not unusual to have a station with (simultaneous) departures to both Dallas and Chicago," Aue says. "We looked at this and said 'What if we took depeaking and applied it to the spokes, and one leaves at 7 and one leaves at 8?' Then you could improve the efficiency of the resource."

Over time, the concept expanded into depeaking the entire schedule, although Aue says there was no seminal moment when one led directly to the other. Seasonal depeaking began in 2005. "We started to do it more consciously in 2006 and there is more planned for 2007," he says.

A New Template

The 2007 changes will include elimination of a Chicago-Anchorage Boeing 757 flight and a Chicago-Glasgow 767 flight, as well as various adjustments in domestic schedules. Some seasonal scheduling remains, such as moving capacity from summer Europe service to winter Caribbean service. But "instead of flying (an airplane) to Europe during the summer and having no good use for it in the winter, we will only do the summer part if we can fly an equal use in the marginal season," Aue says.

Savings from the new models are widespread. Aircraft utilization increases, of course; Hub depeaking means that turn times have fallen from about 75 minutes to about 45 minutes, while seasonal depeaking eliminates the need to cut utilization in slow seasons. Partially as a result, American will not renew leases on 19 Boeing 757s formerly operated by TWA. The leases begin to expire in January.

The changes have not brought any layoffs, but they have reduced the need for hiring, particularly seasonal hiring. Hub depeaking means that fuel costs have fallen due to reduced taxi time from distant runways and reduced wait time at gates. Facility costs have fallen as American has turned back gates in about a dozen airports. It expects to turn back more as leases expire.

American's new template has not been widely recognized, although CEO Gerard Arpey discussed it during an October conference call when he was asked about rapid international expansion by

Delta Air Lines

. He noted that "the airline business would be a great business if you just operated in June, July and August" and said American is taking a different tack than Delta.

"You're going to find over time that our schedule, if you look at it, has become and will increasingly become flatter and flatter, so the summer doesn't look a whole lot different than the winter," Arpey said. "We think that's a better annual profit result than trying to do a lot of flying during the peak season."