MIAMI — Los Angeles International Airport (LAX) has seized the mantle from Denver International Airport (DEN) as the site of the hottest competition between legacy and network carriers in the United States. Thanks to the intersecting competition between American Airlines, Delta Air Lines, Virgin America, and Southwest Airlines, as well as the historically seeded operations of United Airlines and Alaska Airlines, LAX has erupted into a four, sometimes six-way battle for passengers and revenue in several key markets. And with American and Delta in particular ratcheting up the competition at Los Angeles, we decided to conduct an in-depth analysis of the LAX market and how things will shake out amongst the six key players over the next couple of years. Part one of this analysis will look at the broader market and the four smaller players, while part two will focus in on the key battle between Delta and American.
Terminal machinations are the backdrop
At LAX, the messed up terminal situation underlies pretty much everything that happens in the market. Thanks to nakedly self-serving and blatantly anti-progress court activity, residents in Los Angeles with a not in my backyard (NIMBY) stance on airport expansion, have managed to create a hard gate cap of 153 gates and an annual passenger traffic cap of 78.9 million passengers. Luckily, both the gate and passenger cap expire in 2020, but passenger traffic hit 74.9 million in 2015 with 6.0% growth year-over-year. Another year of similar growth (feasible given capacity additions) could push LAX right up against that cap, embroiling the airport in heretofore unknown legal challenges.
As it stands right now, LAX is largely constrained by its current terminal setup, with 153 gates spread across 10 gate complexes, including the Tom Bradley International Terminal and the nine-gate American Eagle Satellite. Southwest has controlled Terminal 1 outright since 2013, when US Airways moved to Terminal 3 and eventually Terminal 6 in advance of its merger with American Airlines. Southwest is now in the middle of a $508 million renovation to the 15-gate terminal which will be completed in spring of 2018. The combined 24 gates at terminals 2 and 3 host a potpourri of airlines, with Terminal 2 housing international carriers that don’t fly out of TBIT as well as a few international flights from Southwest, and Terminal 3 hosting a variety of domestic carriers anchored by Virgin America.
TBIT houses most of the international airlines that operate at LAX, though American Airlines has preferred access to four swing gates at TBIT. American’s primary operation at LAX is split between the nine gate Eagle satellite to the east of United’s Terminals 7 and 8 (requiring passengers to be bused to and from Terminal 4) and 16 gates at Terminal 4. When combined with the four swing gates at TBIT and four gates at Terminal 6 plus further rights to one inactive gate at LAX, American will eventually have access to up to 34 gates (and 30 around the clock) at LAX, most if not all of which will be capable of handling mainline aircraft.
Terminal 5 is the primary Delta terminal, with 15 gates that recently underwent a $229 million renovation. Delta also has partial access to 8 gates at Terminal 6 on a common use basis out of 14 total, which also houses Alaska and four gates for American. Terminals 7 and 8 are exclusively used by United, who controls 20 gates between the two terminals. Finally, the newly reconfigured TBIT has 18 gates thanks to a $2 billion modernization program, with 11 further gates scheduled to open in 2020 once the new midfield concourse is built. In all, this will leave the airport with 141 gates by 2020, substantially under the cap.
Of course all of this is going to change substantially thanks to the recent LOI signed by Delta to move its entire operation over to Terminals 2 and 3. This move, if it went through, would allow LAX to finally rationalize operations once and for all. Under the new alignment, Delta would be able to rebuild the complex that currently houses Terminals 2 and 3 (perhaps increasing to 28 gates with better spacing of gates on the current Terminal 2 site) enabling a substantial increase in its LAX operations. The airport could also consolidate American’s Eagle Terminal and Terminal 6 gates into Terminal 5’s 15 gates, which along with the four TBIT gates would satisfy it’s obligation to American for gate access. This would free up a net 5 gates under the gap (by eliminating the Eagle remote terminal) and allow LAX to expand the midfield concourse to 27 gates in all.
The airport would then have its four key hub carriers with full control of various terminals: Southwest in Terminal 1, Delta in Terminals 2 and 3, American in Terminals 4 and 5 (with behind security connection to TBIT), and United in Terminals 7 and 8. The international carriers displaced from Terminal 2 and some of the domestic carriers in Terminal 3 would move to the expanded midfield concourse while the remainder would join Alaska in the vacated Terminal 6. So in the long run, LAX probably has a workable plan for its airfield constraints. But in the near-term, the airfield configuration creates some interesting issues and incentives for the various hubbed carriers.
The current marketplace – each airline’s hub
The following table(s) outline the LAX operation for each of the six most important carriers at the airport: Alaska Airlines, American Airlines, Delta Air Lines, Southwest Airlines, United Airlines, and Virgin America. The date in question is a peak summer day for air travel, July 14, 2016, which encompasses every announced route by the six carriers, including American’s most recent announcement. The table displays frequency for every route (airport pair not city pair) operated by one of the six carriers at the airport on this date. Additional destinations by the airline that are not served on this peak day are marked with an “X”, as are seasonal services that may not operate during the IATA Northern Summer season.
Alaska has an oddball operation focused on the West Coast and Mexico
As indicated by the table, Alaska is the smallest of the six “hubbed” carriers at LAX (using that term loosely), clustered with Virgin America at a substantial distance behind the other four major carriers. Alaska has had a focus city in Los Angeles for more than a decade, beginning in the early 1990s by adding a cadre of leisure routes to Mexico. Throughout the late 90s and early 2000s, Alaska continued to build out the LAX hublet with more service to Mexico and point-to-point routes up and down the West Coast via subsidiary Horizon Air.
The frequency and destinations peaked prior to the recession in 2007 (when operations for Delta and American were at a historical trough), at which point Alaska began to pivot into its current orientation with powerful hubs at Seattle and Portland and a massive network between the West Coast and Hawaii. At the peak, LAX was nearly as big as Anchorage for Alaska, but today it has settled comfortably into a distant fourth place focus city with service to 17 destinations. Outside of the oddball flight to Baltimore-Washington and a beyond perimeter flight to Reagan, the remaining flights are concentrated to Mexico/Central America and the Western US.
Virgin America has shifted focus to Dallas and San Francisco
Los Angeles is nominally Virgin America’s second hub and in the past was a more robust operation for Virgin with several daily flights to destinations that today only see 1-3 flights per day like Washington Dulles, Newark, and Boston. Several factors have played into LAX’s decline at Virgin, but the primary reason is the further buildup at San Francisco and the new focus city at Dallas Love. Combined with an effective cap on capacity growth leading up to and after the carrier’s initial public offering (IPO), the ~16 new flights per day at Dallas and the maintenance of frequency at San Francisco meant that growth had to be funded from somewhere. The LAX operation was a natural victim.
And looking forward over the next several months, there are a few additional flights that are likely to be pruned before growth restarts with the first of Virgin America’s A320neos. In particular, the four daily flights to Las Vegas, and the three daily flights to Seattle represent token presence in markets that are absolute bloodbaths right now. Relative to the lucrative origin and destination (O&D) travel up for grabs at San Francisco, this type of low yield leisure route is something that Virgin America should continue to minimize.
Southwest is still a domestic powerhouse at LAX
Fresh off a deal to expand its access to LAX, Southwest has retained its position as a domestic O&D powerhouse in the LAX market. As recently as 2011, Southwest was the second most important airline in the LAX market in terms of domestic traffic carried with an overall network that rivaled those of Delta and American at the airport. But the last five years have seen Southwest mostly stay pat at the airport with the only real new service coming on the international front, and Southwest has declined to fourth place despite maintaining service and in fact up gauging several routes to the Boeing 737-800 and adding capacity thanks to increases across the fleet.
Southwest is still a major player in its core markets at LAX, punching above its weight in attracting O&D and centered on a slew of high frequency services to California destinations (including 35 daily flights to the Bay Area alone). Moving forward, the exclusive control of Terminal 1 should enable Southwest to push up towards 140 or even 150 daily flights if utilization is highly streamlined but the reality of facilities constraints create a natural cap on Southwest’s growth. The major shift over time may well be that some of the intra-California and Western US flying is up-gauged, freeing up frquencies to fly to Hawaii and internationally to Mexico and Central America.
United has a narrower replica of its San Francisco hub
For a long time, United was the dominant carrier in the Los Angeles market, an artifact of its historical west coast roots centered on a dual hub strategy for both Los Angeles and San Francisco complemented by a western gateway in Denver. And for a long time, United’s San Francisco and Los Angeles operations grew in tandem, and were similarly sized. By the early 2000s, San Francisco was the larger Trans-Pacific gateway but Los Angeles sustained similar overall frequency and capacity thanks to a high volume of domestic O&D.
But over the past decade, the path of the two California hubs has steadily diverged, with San Francisco growing into a true behemoth as the absolute best hub on the West Coast (akin to Newark in the Northeast) bar none for United and the Bay Area market as a whole booming thanks to the rise of Silicon Valley and the tech economy. Meanwhile’s LA’s more muted economic performance has been exacerbated by the rise in competition from Southwest, American, and Delta, leaving United with an easy decision to shift resources and growth towards San Francisco on both a relative and absolute basis.
From being the largest airline at LAX by far, United has shrunk down into third place by frequency and capacity, a marked decline. The absolute scale of the cuts is probably overblown, given that a lot of what went away was low-capacity turboprop flying in California and regional jets (RJs) flying in the Western US. But it is undeniable that LAX simply isn’t a priority for United anymore thanks to the rise of San Francisco.