MIAMI — Ultra-low cost carrier Frontier Airlines announced the launch of its latest focus city, at Washington Dulles International Airport, yesterday. Between August 19th and September 9th, Frontier will launch new service with 60 weekly departures to 14 destinations (mostly concentrated on the East Coast of the US). The route map for the new gateway is as follows:

Maps generated by the Great Circle Mapper - copyright © Karl L. Swartz.
Maps generated by the Great Circle Mapper (Credits: Karl L. Swartz)

There are several different dynamics at play with Frontier’s launch into Washington Dulles, even more than were present when Frontier quickly announced a focus city at Cleveland in the wake of United’s de-hubbing. It all starts with Frontier’s shift to a ULCC business model after being purchased by Indigo Partners. We will provide a more in-depth analysis of Frontier and its machinations at a later date, but suffice to say that given Frontier’s competitive position at Denver, it was likely the right move financially.
In terms of network strategy, Frontier’s flying program for its 57-aircraft strong fleet is a hodgepodge. It still has the vestiges of the legacy hub at Denver (mostly in that West Coast destinations at Denver are still served with multiple daily flights, even as the East Coast destinations that feed them have been rapidly converted to daily or less). There’s the Apple Vacations flying to Mexico and Central America/Caribbean that was taken on as a stopgap measure when Republic first announced the conversion to ULCC and attempted to find a buyer. Then there’s Trenton and Wilmington, which were the first real manifestations of Frontier’s ULCC strategies. Taking a page out of Ryanair’s books, Frontier uses these two airports to bracket the Philadelphia metro area, win customers away from the Philadelphia suburbs, (in the case of Trenton) target the wealthy Central Jersey travel market, all while avoiding head to head competition with US Airways at Philadelphia. And then there’s the new Cleveland focus city, which is a primary airport (they could have gone into Akron/Canton) where Frontier aims to fill the void left by the departing legacy carriers.

While it may seem discombobulated, Frontier’s network strategy actually makes a lot of sense. The best analogy for the current environment for ULCCs in the US airline market today is probably the Wild West. Years of consolidation amongst legacy carriers and moves upmarket by Southwest and JetBlue have created enormous market opportunities for Frontier, Spirit, and Allegiant to take advantage of. Every time one of these opportunities is identified or emerges (whether its at secondary airports or primary ones), it makes sense for the ULCCs to take advantage. And if that creates somewhat inconsistent network dynamics, it’s still a worthwhile trade-off.

That brings us to the new focus city. Dulles has always been a bit of a low cost carrier graveyard. Older iterations of JetBlue and Southwest tried and failed to build sustainable operations at the DC-area airport (JetBlue even had a short lived focus city), and of course who could forget Independence Air? Traffic at Washington Dulles has been declining for nearly seven years now (independent of the Independence Air [pun intended] boost in 2005, which was the equivalent of a one-time HGH injection briefly turning Matt Bonner into LeBron James for a game before he returns to form). Passenger traffic down to just under 22 million as the following graph neatly illustrates.

But even with declining traffic figures, Washington Dulles certainly presents an opportunity for Frontier to prosper. The reason lies in the evolving priorities of Dulles’ largest tenant carrier, United. Over the past four to five years, the combination of United’s rising costs post-merger and the emergence of the American née US Airways hub at Reagan have all but eliminated United’s domestic profitability at Dulles. Dulles has always suffered from lower fares (it has a 15-20% discount to Washington Reagan on most routes), and it is unquestionably not the preferred airport for Washington D.C. travelers as a whole, and even many travelers in Northern Virginia. The two historical advantages that Dulles did have were beyond-perimeter flights and the fact that market fragmentation meant that small city service at Reagan was sometimes lacking. United built these small cities into its Dulles hub and served them profitably for a time. But once Delta and US Airways executed their slot swap, one half of that advantage went away. So the United Airlines of 2014 cannot make much of a profit on domestic flying at Washington Dulles.

Where it does rake in the cash is on international flying. Thanks to a nearly continuous fifteen-year, bi-partisan shot of whatever the economic equivalent of HGH is, the Washington Metro area is booming economically, and Washington Dulles is the airport best positioned to serve this booming international travel demand. Thus sustaining the lucrative international routes with volume is the key focus of United’s Dulles hub moving forward. And to that extent, over the past year and a half, United has quietly restructured its domestic flying at Dulles to focus more exclusively on feeding and providing connectivity for international services.

Frontier now has the opportunity to swoop in and provide nonstop competition in a lot of markets where United has pulled back available origin and destination (O&D) capacity or withdrawn entirely (such as Fort Lauderdale). At the same time, Frontier will likely face a tough slog in converting these routes into profitable ventures. The reason is embedded in the table below, which presents a summary of a few key statistics about Frontier’s new destinations.

Destination Total WAS Demand (PDEW) Total IAD Demand (PDEW) % of Demand on IAD — Competitive Capacity from United % of Total Demand Serviced by United Capacity
Atlanta 1928.5 276.3 14.3% 232 83.98%
Charlotte 634.5 74.1 11.7% 186 250.91%
Chicago O’Hare 2429.5 297.1 12.2% 948 319.12%
Cincinnati 191 18.2 9.5% 50 275.03%
Detroit 842 77.7 9.2% 150 193.01%
Fort Lauderdale 2238 83.6 3.7% 0 0.00%
Fort Myers 279 21.0 7.5% 0 0.00%
Las Vegas 1195 136.3 11.4% 300 220.09%
Memphis 235 9.5 4.0% 0 0.00%
Minneapolis St. Paul 902 132.7 14.7% 140 105.49%
Orlando 1871 246.3 13.2% 450 182.70%
St. Augustine (Jacksonville) 411.5 42.1 10.2% 198 470.70%
St. Louis 629 61.9 9.8% 200 323.36%
Tampa 1092.5 190.0 17.4% 450 236.84%

The first column is O&D market size data for metro areas combined (e.g. Washington – Chicago is the sum of demand between Dulles/Reagan/Baltimore and O’Hare/Midway). The second column is the specific size of the O&D market that is found on the airport pair that Frontier will be flying (i.e. the Dulles – Tampa O&D market consists of 190 passengers per day each way). The third column shows the percentage of the total metro O&D market represented by the Dulles airport pair to be flown by Frontier. The fourth column is the competitive capacity in the market that is offered by United. And the fifth column is that competitive capacity as a percentage of the size of the Dulles specific O&D market.

As the second and third columns clearly show, Dulles is most certainly not the preferred airport for much of the domestic travel within the perimeter, and it is almost stunning how small some of the markets from Dulles are (partly a symptom of United’s increasing fares at Dulles). That’s a challenge for Frontier who has to fill an average of 9,000 departing seats per week in markets that have O&D demand of just 11,667 per week in each direction and against 23,128 departing seats per week from United competing for the same traffic. Market stimulation thanks to Frontier’s low fares could help boost the market size to some degree. But Dulles is already cheaper than Reagan and about on par with Baltimore Washington, implying that there is not necessarily boundless potential for market stimulation.

Even with an optimistic projection of say 100% market stimulation, Frontier will still have to steal market share from United to sustain these markets long term. It certainly has the cost structure to be able to do so, and even though United’s Dulles focus is international, this battle will have some effect on United (not to mention Delta, American, and Southwest who also compete on some of those routes), driving down domestic yields. That will have a tangible (I’d estimate $4-7 million conservatively) effect on United’s financial performance. For a carrier struggling against the weight of high expectations and frustratingly high costs, the aggressive move by Frontier into one of United’s core hubs is certainly not welcome news.

On the flip side, Frontier has a great opportunity to spread its new ULCC brand nationwide and test out yet another network model that it can use in future expansion.