MIAMI — The Dallas-Fort Worth air travel market has now surpassed that of Denver (DIA) as the most heated battleground for U.S. airlines. For nearly a decade, DIA was home to the most brutal airline competitive landscape in the country. Hometown low-cost carrier Frontier Airlines (now transformed into an ultra-low-cost carrier) and full service network carrier United Airlines had been battling for dominant market share in Denver.

Those were the only contenders surviving in Denver after Continental shuttered its hub at Denver’s old Stapleton airport right after the move to DIA. In 2006, Southwest Airlines decided to add service in Denver after pulling its service at Denver Stapleton back in 1985, and it quickly built up a massive hub there (its fourth largest to date).

There are certainly parallels in the Dallas market, as once again American Airlines, a legacy carrier, Southwest Airlines, a low-cost carrier and Spirit, an ultra-low cost carrier, are duking it out for supremacy in a highly competitive market with a massive origin and destination (O&D) traffic base. The script obviously has a few differing notes—in this case, both Southwest and American are the hometown carriers, one being low-cost while the other is the world’s largest airline, and Spirit is the newest entrant. Additionally, the market consists of two airports: Dallas Fort Worth International (DFW), with five terminals and seven runways, and Dallas Love Field (DAL), gate-restricted to 20 jetways in a singular terminal.

Wright Amendment expiration and low oil prices create a boom

The biggest shift in the Dallas market in the last three decades occurred in October 2014, when a 2006 deal to sunset the famed Wright Amendment took effect, allowing Southwest to instantaneously build a massive hub at Love Field nearly overnight. Flights at Love Field had been restricted to destinations within Texas and to certain neighboring states for decades following the opening of DFW airport in 1974. But two years of lobbying efforts culminated in a 2006 deal that eliminated Wright’s restrictions while capping Love Field’s capacity at 20 gates.

The restrictions were lifted in October 2014, and Southwest immediately capitalized, as it controlled 18 out of the 20 gates at DAL (16 of its own and 2 leased from United). Southwest surged to 180 daily departures, redistributing capacity to new destinations outside the previous limits, while Delta Air Lines also grew its capacity on its flights to Atlanta, up-gauging from regional jets to mainline aircraft.

Southwest Airlines headquarters employees celebrate the end of the Wright Amendment at Dallas Love Field. The Wright Amendment ended on Monday, Oct. 13 2014, allowing non-stop flights to anywhere in the U.S. from Dallas Love Field.
Southwest Airlines headquarters employees celebrate the end of the Wright Amendment at Dallas Love Field. The Wright Amendment ended on Monday, Oct. 13 2014, allowing non-stop flights to anywhere in the U.S. from Dallas Love Field. (Credits: Southwest Airlines)

The third new entrant into the DAL market was low-cost carrier Virgin America, who quickly built up a focus city at DAL. That focus city initially included high-frequency nonstop service to nearby Austin, but today has retrenched to focus on point to point (p2p) flights nationwide, encompassing 16 daily departures to Las Vegas (2), San Francisco (3), Los Angeles (4), New York LaGuardia (4), and Washington Reagan (3). Both Virgin’s gates and the slots to serve LaGuardia and Reagan are the result of the American – U.S. Airways merger and the required divestitures.

Even as capacity exploded at Love Field thanks to the new legal structure, the macro-economy also contributed to traffic growth in the Metroplex. Starting in late 2014 and continuing into the present, the price of oil plummeted from over $100/barrel to its present level of $40/barrel, dipping as low as $25/barrel during the course of 2015.

Predictably, this has helped to drive down fares and stimulate O&D traffic growth. In fact American CEO Doug Parker has noted that between the added competition (from both Southwest and Spirit) and the drop in fuel prices, American expects no meaningful changes in pricing or capacity for the Dallas market in 2016.

DFW captured a slice of that growth, with 2015 traffic increasing 1.0% year-over-year (YOY) to 64,174,163 from 63,523,489 in 2014.

Dallas / Ft. Worth Terminal A. (Credits: Chris Sloan)
Dallas / Ft. Worth Terminal A. (Credits: Chris Sloan)

But the real winner was DAL, which saw passenger traffic explode from 9,413,636 in 2014 to 14,497,498 in 2015, spectacular growth of 54.0% YOY. That growth came on the heels of 11.1% growth between 2013 and 2014, driven entirely by the fourth quarter of that year (when Southwest added its first tranche of service post Wright Amendment expiration).

Dallas Love Field curbside. (Credits: Chris Sloan)
Dallas Love Field curbside. (Credits: Chris Sloan)

When considered on an overall market basis, 2015 passenger traffic was up 14.2% from 68.91 million to 78.67 million, nestling Dallas comfortably inside the Top 15 city airport systems in the world (behind #12 Bangkok at 83.21 million and ahead of #14 Miami at 77.56 million).

How has Southwest’s entry affected fares?

In order to get a sense of how Southwest’s growth (and lowered fuel prices) have affected the Dallas/Ft. Worth pricing environment city market, we used US Department of Transportation (DOT) data to assess how air fares and O&D traffic changed between Q3 2014 and Q3 2015. The analysis was conducted for 32 city pairs (offered via 35 airports served by Southwest) that Southwest flew nonstop from DAL in Q3 2015 but did not serve in Q3 2014 during the pre-Wright Amendment era. The study also excludes markets that Southwest served at DAL prior to 2014 (in-state and neighboring state markets such as Austin, St. Louis, and Houston Hobby). The results of this analysis are summarized in the table below.

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As the table indicates, Southwest’s entrance into these markets has had a substantial impact, both in terms of stimulating O&D traffic growth and in terms of bringing down average fares. Among the 32 US city pairs evaluated from Dallas, average fares are down approximately 15.8%. Average O&D traffic overall is up in the 32 markets by 22.6%.

The specific outlier markets are interesting to consider. Among the positive gains, Atlanta, Miami (Fort Lauderdale), Nashville, and Milwaukee are Southwest strongholds (creating market power for Southwest on both sides to boost demand). Washington D.C. (Reagan), New York City (La Guardia), and Charlotte were previously dominated by American (and in the case of the first two markets, are slot restricted) yet accordingly saw major gains thanks to Southwest.

The negative outliers are also interesting. San Francisco’s numbers are probably driven by the strength of the local economy there and the relative pricing power enjoyed by airlines in that market. Boston is a similar story in terms of the economic and demographic fundamentals with the added note that much of the stimulation had already been captured by Spirit. Philadelphia is the oddest case—the market itself is mostly stagnant and Southwest’s influence there has been declining for years. At the same time, with lower fuel prices and added competition you would expect prices to go down, not up (the only market in the sample where this occurred.) Philadelphia is a outlier to the broader trend.

Dallas/Ft. Worth is a major focus city for Spirit

As a ULCC, Spirit predictably does not operate any true hubs (Fort Lauderdale comes closest thanks to flight connections to its Latin American network at the airport). But DFW is one of its largest stations, with 24 peak day departures to 20 different destinations, per the March 14, 2016 timetable. Spirit’s schedule at DFW basically mirrors its focus cities at the other major US airports (such as Las Vegas, Chicago O’Hare, and Houston Bush), with more or less daily nonstop service to several large O&D markets.

Despite the strength of the operation, Spirit has struggled to sustain more than daily service in most of its DFW markets (a common theme across its network) despite bottom of the barrel fares and little LCC competition. Today it faces head to head competition from a revitalized Southwest and pricing power thanks to fuel prices. More worryingly, it will have to contend from pricing innovation by American, who has unveiled a new fare class to compete head to head with Spirit and has immediately found success. American’s management team (by way of US Airways) has had success fending off attacks from ULCCs and LCCs in the past, and it would not be surprising to see them find similar success against Spirit in DFW. Spirit’s focus city isn’t in danger of collapsing (it doesn’t quite have Frontier’s record for pulling out of markets), but there are some chinks in the armor.

A Re-banked DFW is still American’s largest hub

Despite Southwest’s growth, American is still leading the Dallas market, with +/- 800 daily departures to just under 200 destinations. American at DFW is essentially the second most powerful airline hub in the United States behind Delta at Atlanta, and the hub has only been strengthened by the addition of the former US Airways management team, who bring seasoned experience in defending stronghold hubs against low-cost carrier competition.

Southwest, in particular, challenged US Airways at its hubs in Philadelphia and Phoenix, the former ending rather unfavorably. Southwest won’t be brushed off its DAL hub quite as easily as it ceded its Philadelphia focus city, but if any management team were positioned to co-exist with Southwest (US Airways also pulled the feat off in Phoenix though it ceded its hub in Las Vegas) it is this one.

The most recent major development for American’s DFW hub is of course its re-banking, which was rolled out last August after similar initiatives were implemented at Chicago O’Hare and Miami. Like other U.S. airlines, American had moved away from a banked hub (in which a “bank” or large number of flights arrive and depart from the hub in incremental waves) to a rolling hub, in which arrivals and departures are more balanced and spread throughout the day.

Rolling hubs have the advantage of increasing utilization of gates and aircraft, thereby driving down costs (empty time or time spent waiting on the ground are the biggest variable cost for gates and planes respectively). The downside with a rolling bank is that airlines ultimately offer fewer optimized connections for passengers, which adversely affects revenue.  Moreover, initial signs for American are showing that the re-banking has paid off exactly as planned, with overall hub revenues remaining robust despite the local market competition growth from Southwest.

Southwest has built a protected powerhouse at Love Field

Speaking of Southwest, the hub now numbers just over 181 daily departures to 54 nonstop destinations from just 18 gates, a sparkling 10.1 departures/gate metric. Southwest’s operation at Love is indeed tightly wound, and has driven a surge in growth for both airport and airline in 2015. The legacy operation to Texas and other nearby destinations (like Albuquerque, New Orleans, and Kansas City) still exists, but it has been reduced in daily frequency (as many of these flights were actually planned one-stop flights offering indirect service from beyond-perimeter markets to DAL anyway, such as Las Vegas to Dallas over Albuquerque) and represent about a third of overall capacity.

In its stead, Southwest has built a massive hub and connecting complex, with decently high frequency service to a bevy of destinations across the United States. Southwest’s primary focus at DAL is of course serving the local O&D market, which has always had a strong preference for Southwest’s low fares and sterling in flight service. But incidentally, as it does in many other markets, Southwest now uses DAL to process a ton of connecting passenger (we estimate more than 3 million annually) – a natural result of the market’s setup.

The best part for Southwest is that like the restricted airports at New York LaGuardia and Washington Reagan that it so decries, DAL is something of a protected fortress hub for Southwest thanks to the gate cap. There are certainly some tradeoffs associated with the cap (Southwest may well wish to grow its DAL operation) but it ensures profitability for Southwest in all but the worst macroeconomic and market conditions.

DFW’s international surge has come from airlines beyond American

The metroplex’s air travel growth in recent years is mostly driven by its based airlines and the domestic market, but international travel has also played a role. DFW is a huge market for international travel, particularly to Asia thanks to the 500,000 strong community of Asian Americans and Asian immigrants in the metroplex as well as strong business ties. The most prominent beneficiaries of this demand are of course the Middle East Big 3 airlines (Etihad, Emirates and Qatar Airways), all of whom serve DFW with nonstop flights to their hubs, but a bevy of foreign airlines have added flights and routes to the DFW market.

My colleague Rohan Anand wrote the definitive analysis on the international market at DFW, and you should definitely check out his piece on the subject. As Rohan notes, between international carriers growing and American adding Asian flights at a breakneck pace, the DFW metroplex is on an international route hot streak that mirrors its domestic one. And now that American has hit the big five Asian routes (Tokyo Narita, Shanghai, Beijing, Seoul, and Hong Kong), it would appear that foreign carriers (perhaps a couple of the Chinese airlines) will add the next set of international flights at DFW.

Dallas/Fort Worth will be fine in the long run – thanks to the home market

So the metroplex market is now set up as a competition between American and Southwest, with Southwest’s development of DAL throwing a wrench into what had previously been an American Airlines fortress. At first glance this would appear to be very bad news for American. But some context is necessary here. First and foremost, the DFW metroplex has historically been able to sustain two major airline hubs at a time, as Delta operated a longstanding hub at DFW (peaking at 353 daily departures in 1993) alongside Southwest’s large intra-Texas operation. Delta shuttered its hub in 2005, so there was really only a ten year period where American had exclusive dominion.

More importantly, the DFW metroplex is one of the fastest growing economies in the country with population growth to match. DFW is a massive metro area housing nearly 7 million people and $450 billion of economic activity – it can absolutely sustain two airline hubs of their current size. The economic and demographic fundamentals (including long run population shift from the coasts to Texas and from North to South) point to DFW’s growth only continuing in coming years. With this as the backdrop, there’s no reason why the metroplex’s air traffic will not just continue to grow and grow. American is better positioned to capture that growth, as thanks to the gate cap at DAL, Southwest can only run so many flights through the airport. Up gauging all of the flights to 737-800s and (eventually we predict) 737 MAX 9s will help matters some, but American will be in a better position to soak up the growth in traffic.

If anything, the question may shift to whether DFW has enough gate space for all of the projected growth. The airport is already talking with airlines about a potential Terminal F, which would be built either near or across from the current Terminal E. Thanks to American’s re-banking efforts, the airport is already bursting at the seams during peak waves, and a new Terminal E would unlock growth for American and DFW’s other airlines alike (the planned terminal would add 30 gates to the airport’s total). Furthermore, the overarching takeaway is that despite Southwest’s recent rise, American is the better positioned airline to take advantage of furious growth in the Metroplex.