While the U.S. has three global airlines, the Southeast -- a region of about 90 million people -- has just two hubs.
That problem was highlighted last week on the earnings call of American Airlines Group Inc. (AAL) , when CEO Doug Parker was asked why the margin gap with Delta Air Lines Inc. (DAL - Get Report) was widening.
"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," Parker responded. "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," Parker said. "[And] they have that advantage, by the way, in valuation."
Parker was off in the percentage of Delta flights at Atlanta -- at summer peak, about 1,100 of Delta's consolidated daily 5,500 flights departed Atlanta -- but his point remains: The two Southeast hubs produce high margins and high unit revenue. They are relatively even more productive in winter.
On Delta's earnings call on Oct. 11, President Glen Hauenstein cited the importance of the Southeast as he spoke of the impact of Hurricanes Irma and Maria.
"Great teamwork across our commercial and operations groups limited the revenue impact from the storms, as roughly 20% of our domestic revenue touches Florida and 45% touches the Southeastern United States," Hauenstein said.
Atlanta is the world's biggest single airline hub with about 1,000 daily departures; Charlotte is third with 677 daily departures.
On United's earnings call in January, Chief Financial Officer Andrew Levy was asked why the carrier had relatively low first-quarter margin guidance. He responded: "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.}"
In the current quarter, Delta foresees a unit revenue gain between 2% and 4% with margin between 11% and 13%. American sees unit revenue rising 2.5% to 4.5%, with margin between 4.5% and 6.5%. United sees a unit revenue decline between minus 1% and minus 3%, with margin between 3% and 5%.
Charlotte became a major hub for three reasons. Piedmont Airlines was founded 100 miles away in Winston-Salem, N.C., and built its first hub in Charlotte in the early 1980s. Secondly, the Southeast always offered the opportunity for a second hub besides Atlanta. Third, former airport director Jerry Orr established a model of keeping costs low, and successor Brent Cagle followed.
"By U.S. hub standards, Charlotte is the absolute bargain of hub locations -- all that infrastructure and about $2 per passenger, charge to airlines, said aviation consultant Bob Mann.
Mann said United has always had the option to create a Southeast hub. "It's a free market,' he said, "but I can't think of another place to put one that has enough of a business market to justify it."
United had two well-known opportunities to add Charlotte by merging with US Airways. In 2000, US Airways and United announced an $11.6 billion merger plan, but in 2001 the Justice Department rejected the plan. A key reason was that United lost interest in the merger, didn't lobby for it and tried to pull out, largely because US Airways set a way-too-high price.
A second chance came later in the decade. Between 2008 and 2010, Parker, then CEO of US Airways, negotiated repeatedly with United CEO Glen Tilton, who kept United in bankruptcy for three years while he chased a merger. Tilton preferred Continental to US Airways and finally made a deal in 2010.
Had United merged with US Airways, it would have gotten hubs at Charlotte, Philadelphia and Washington National (likely requiring some divestiture given its Dulles hub) rather than hubs at Newark and Houston. It also would have gotten the US Airways management team, including Parker and Scott Kirby, instead of a Continental team that performed badly, leading to the ouster of CEO Jeff Smisek in 2016.
Later that year, United hired Kirby as president.
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