MIAMI — The Dallas metroplex has long been a hotbed for aviation. The area houses the headquarters for both the world’s largest airline and the nation’s largest domestic airline.  It is home to the third largest airport in the world in terms of daily operations (tenth in terms of passenger traffic), and represents a major (and growing) international gateway.

Already one of the most active aviation markets in the world, Dallas has been growing aggressively in terms of passenger traffic. If we treat both Dallas/Ft. Worth (DFW) and Dallas Love Field (DAL) as one singular market, Dallas experienced a 22.79% passenger growth from 2011 to 2015, according to data from the Department of Transportation (DOT).

Indeed, Dallas takes a center stage spot in the global aviation sphere. It has also become one of the most competitive markets for airlines to serve. In addition to supporting major hubs for both American Airlines and Southwest Airlines, at DFW and DAL respectively, Spirit Airlines also maintains a focus city at DFW.

Dallas is one of the only markets to support serious competition from all three rings of airline types in the United States: traditional legacy carriers, low-cost carriers, and ultra-low-cost carriers (ULCC’s). This makes it one of the most unique markets, rivaled only by a few others like Chicago and Los Angeles.

Several factors are driving the passenger traffic growth in Dallas. The Wright Amendment previously restricted commercial flights from Love Field on aircraft with over fifty-six seats to within Texas and its four neighboring states. Its repeal in 2014 was followed by rampant capacity growth by Southwest Airlines at its home base.

Spirit Airlines also entered the market in 2011, and has subsequently built DFW into one of its key focus cities. Finally, incentives by DFW Airport to increase the amount of international service have brought many foreign carriers to the area, as well as new flights abroad by its primary tenant, American Airlines.

The past five years have delivered huge victories for consumers in the Dallas area. But what about the next five? What is the future of air service in the Dallas area, and what are the consequences of the growth?

Strong Capacity Growth Delivers Lower Fares for Dallas-Area Consumers


One primary effect of the heated competition unfolding in Dallas is lower fares for consumers. Despite some of the rhetoric thrown against the airlines, air travel is in fact a bargain for local travelers, relatively speaking.

Average fare data from the DOT highlights this quite clearly. From Q12011 to Q12016 (the most recent data available at this time), the average fare in the Dallas market fell from $421.27 to $325.96 – a decline of a whopping 22.6%. Consumers benefited from an especially strong drop in fares from 2014 to 2015, when Southwest Airlines added service to a plethora of cities formerly prohibited by the Wright Amendment. It launched flights to fifteen new cities on the first day of operations post-Wright, and now operates flights to fifty-two unique destinations from Love Field.

An Analysis by my colleague, Vinay Bhaskara, covers the effects quite well, so I won’t dive into them very deeply here (although I highly recommend you read his piece if you haven’t already done so). In brief, however, the data reveals fares fell drastically at DFW in response to Southwest’s additions, while fares declined slightly at Love Field. This is explained by the fact that Southwest was flying longer flights (which on a general level are more expensive), so consumers still enjoyed a very large benefit on a distance basis.

Spirit’s increased presence has also played a large role in forcing fares downward in Dallas. The ULCC is built on the business model of offering the lowest possible base fare, and unbundling all extras (including a checked bag, in-flight snacks, and even the service of printing a boarding pass) from the ticket price. The airline operates on an extremely low cost-per-available-seat-mile (CASM), and it is often the fare leader on the routes it flies.

American Airlines, which operates over 900 daily departures from its DFW mega-hub, has been especially aggressive in matching Spirit’s fares on the routes in which they compete directly. Therefore, the fare effect of Spirit’s presence is not limited to Spirit’s passengers exclusively. Sometimes, American will discount its fare on only similarly-timed flights to Spirit’s departures, and other times it will take an axe to all flights along the same route throughout the day.

It’s a tale tested time and time again: consumers benefit from increased competition in the form of lower prices. This has been proven true nowhere more so than in the Dallas air travel market. However, while a positive for fliers, the competitive landscape in Dallas has been imposing unit revenue headwinds for the airlines. In the long-term, this is cause for concern for the airlines, which may find Dallas a less attractive place to add service with weak yields.

Airlines Grapple with Downward-Trending PRASM; What’s the Next Shoe to Drop?


Locals in Dallas are flying high these days, lifted by lower fares. But the airlines bear the other side of the same token, as they face pressures stemming from lower unit revenue. It’s important to recognize that the interests of the airlines and their passengers do not necessarily move in opposite directions, but in the case of fares clearly the two groups have differing motives.

All three of American, Southwest, and Spirit have turned in lower numbers for a commonly used industry metric, passenger-revenue-per-available-seat-mile (PRASM). While this is an industry-wide phenomenon, the airlines are facing particularly strong headwinds in the Dallas market.

It begs the question: how sustainable is the current competitive landscape in Dallas?

With the airlines currently unable to extract the same fare for itineraries originating or terminating in Dallas, the amount of economic surplus captured by the airlines decreases. This makes future investment in the Dallas market relatively unattractive, and current routes more open to question.

Falling unit revenues have been somewhat offset by higher load factors, as selling more seats on the plane makes up for the average passenger paying less to some extent. But this is only a temporary bandage – load factors are already at historical highs, and only have so far to climb before reasonably peaking.

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Something has to give. This is not a sustainable formula for the airlines in Dallas.

Make no mistake, there is another shoe to drop in Dallas. Historically, low oil prices make most routes profitable in the current conditions, meaning the airlines are not facing quite the pressure they could be. American, Southwest, and Spirit are all undoubtedly still making money on their Dallas flying in the present conditions. The market may not be positioned for a huge surge in oil prices. But nonetheless, a modest uptick in fuel prices could change the landscape very quickly.

It might be less of a concern if the airlines could cut costs such that non-fuel CASM fell at the same pace as the PRASM declines. However, labor costs (the largest single cost of a flight) are actually on the rise, as both American and Southwest have signed some long-term contracts giving big raises to many frontline employees.

The Dallas market certainly has significant strategic importance for both American and Southwest, both of which have their corporate headquarters in the area. That may be part of the glue holding the current outlook constant, in addition to low oil. It is true that both of Dallas’ home airlines would be very hesitant to cut capacity in any sizable way, given the amount they’ve invested in the market.

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This leaves the spotlight shining brightly on Spirit Airlines. One benefit of the ULCC’s business model is that it is able to be very agile and flexible regarding where it deploys its capacity. Should a market not be performing as expected, it has shown no hesitancy in moving its planes elsewhere. This could mean Spirit is most likely to introduce cuts in Dallas over the long-term – particularly with American matching its fares aggressively.

There could be some hints of this already. Spirit Airlines made the call to cut its New Orleans, Oakland, and San Diego routes from Dallas, effective November 9. Moreover, Spirit’s capacity has been essentially flat in Dallas for the past year and a half now while American fought back aggressively.

The ULCC may try to spin the recent moves as simply a seasonal adjustment. In reality, there could be more writing on the wall than they are willing to admit. All three of those routes are served by both American and Southwest, and if Spirit really tries to dig in its heels against Dallas’ airline titans, it is probably bound to lose.

Rising oil prices would also impact Spirit disproportionately. With Spirit doing a great job keeping a lid on its non-fuel related costs, fuel composes a larger share of the total costs of each flight for the ULCC. Therefore, Spirit is in a worse off position to absorb any sizable uptick in oil prices.

Furthermore, Spirit executives have been vocal about the interest in flying to some smaller markets where the carrier does not face quite the same level of competition. Although CEO Bob Fornaro claims that it’s important to “fly to large cities because that’s where the people are,” he admits it has made the airline “very predictable” and that it intends to shift its strategy to adding service to smaller markets.

We may not see any effects until a few years down the road when fuel prices inevitably gain some altitude. My prediction is that in 2018, Spirit Airlines will offer fewer DFW departures than it does today. Even if Spirit maintains the same level of operations at DFW, that alone will be an admission that Dallas is a relatively unattractive market in which to expand, since its fleet is due to grow dramatically in the near future.

Future of Integrated Alaska Airlines at Love Field Remains an Open Question


Another question that still demands an answer for Dallas locals is the future of Alaska Airlines at Dallas Love Field. The Eskimo shocked the world earlier this year when it agreed to purchase much-loved Virgin America for a high price of $57 per share.

Virgin America moved its operations from DFW to Love Field in 2014 with much fanfare. The airline began flying from the smaller airport when the Wright Amendment restrictions were lifted back in October 2014. Dallas Love Field is often considered the more attractive airport in the area, due to its more central location and proximity to Highland Park, an affluent neighborhood in Dallas.

Despite the lavish celebrations at the launch of its Love Field service, which the airline ushered in with a party flight from DFW to DAL, Virgin America has struggled at the new facility. The airline certainly admitted as much when it cut its Dallas-Austin service last November only shortly after launching it, instead opting to add Las Vegas service. John Macleod, the airline’s vice president of planning and sales, claimed at the time that the route “did not meet our expectations.”

The merger with Alaska Airlines raises further questions about the airline’s future at the airport. For one, Alaska is the incumbent in this merger. While it may be branded as an equal merger, Alaska is clearly in the driver’s seat, so it is natural to think the status quo is more likely than not to remain with Alaska’s operation, on a very simple level.

In addition, Alaska’s relationship with American may seal the deal. Although Alaska is not formally a member of any alliance, instead of opting to pursue a Swiss neutrality approach, it codeshares heavily with American Airlines, which maintains its largest hub down the street at DFW. If Alaska intends to flow traffic via American to any extent, it would be better positioned to do so by shifting Virgin’s current flights back to DFW.

It’s extremely unlikely the combined airlines would choose to maintain operations at both Love Field and DFW. The whole point of a merger is to gain cost synergies, and continuing separate operations at two facilities would defeat the purpose.

Virgin CEO David Cush may believe it was the “right decision” to come to Dallas Love Field. However, the network planners at Alaska may ultimately believe otherwise. At the end of the day, the airline will make the decision which is most network positive, and that may just not involve Dallas Love Field.

This is another issue that may not see resolution for a few years. Certainly, Dallas Love Field is no stranger to tangled, drawn-out court battles. But my prediction is that Alaska/Virgin ultimately vacates Dallas Love Field.

The Next Five Will Bring More Changes in Dallas


What we have witnessed over the past five years is something of a renaissance period of air travel in Dallas. Strong capacity growth has been injected into the market by Southwest and Spirit, and the market is now intensely competitive. Local consumers are reaping the benefit.

However, what we need to keep asking ourselves is: how sustainable is this? Over the long-term, the potential of oil to regain altitude is concerning.

The next five years are likely to bring a bit more discipline into the Dallas market as the airlines are forced to regain pricing traction. Fares simply cannot continue this free-fall in Dallas. Fares can never be too low for the consumer – but they can definitely be too low for the airlines.

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Combined with the continuation of the Dallas Love Field saga, we are in store for some more change deep in the heart of Texas. Stay tuned.

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