Take offs & Land­ings

Ris­ing in the West: The growth of Pa­cific Coast gate­ways

Business Traveler (USA) - - CONTENT - By Kathryn B. Creedy

North Amer­i­can West Coast hubs have seen a lot of de­vel­op­ment in the last few years as airlines build back their net­works. Be­yond merely re­cov­er­ing from the Great Re­ces­sion, car­ri­ers are emerg­ing as prof­itable com­pa­nies with healthy bal­ance sheets and eyes solidly locked on the fu­ture of the trans-Pa­cific mar­kets.

But the hows and whys of th­ese West Coast hubs also con­trib­ute to a greater un­der­stand­ing of the changes in the in­dus­try wrought by the growth of the Asian eco­nomic tigers. Th­ese changes in­form the de­bate on in­dus­try com­pet­i­tive­ness, the im­pact on other US hubs such as Dal­las Fort Worth and Chicago, and es­pe­cially the im­por­tance of fifth free­dom rights (the abil­ity to carry pas­sen­gers from Asian points to in­te­rior des­ti­na­tions) in to­mor­row’s trans-Pa­cific mar­ket.

“Given that Asia is where the growth is, there is plenty to go around,”notes Bill Swel­bar, ex­ec­u­tive vice pres­i­dent

of trans­porta­tion in­dus­try an­a­lysts In­terVISTAS.“It makes good sense that the transoceanic car­ri­ers are building/ aug­ment­ing those gate­ways with points be­hind to en­sure suc­cess not only to the pri­mary Asian mar­kets but also the sec­ondary and ter­tiary mar­ket op­por­tu­ni­ties that will present them­selves as air­craft de­signed to be­gin non­stop ser­vice to those points are de­liv­ered.”

But there is an­other fac­tor. The emer­gence of mega car­ri­ers from the Mid­dle East, com­pounded by in­dus­try re­struc­tur­ing and the re­ces­sion, has eroded the com­pet­i­tive fun­da­men­tals for US car­ri­ers just as it has for the dom­i­nant Euro­pean play­ers.

“The car­ri­ers from the Mid­dle East in par­tic­u­lar are ag­gres­sive in win­ning traf­fic to South­east Asia and Sin­ga­pore and other im­por­tant points away from the US car­ri­ers,”says Swel­bar, adding that building the West Coast gate­ways“will en­able bet­ter ser­vice to im­por­tant traf­fic points and thwart the loss of South­east Asia traf­fic over time.”

Building Fortress Hubs

Nowhere is Asia’s im­por­tance more ev­i­dent than in North Amer­i­can net­work de­vel­op­ments by Amer­i­can at Los An­ge­les (LAX), United at San Fran­cisco (SFO), Delta at Seat­tle (SEA) and Air Canada at Van­cou­ver (YVR). In de­vel­op­ing the West Coast, th­ese airlines have shifted the cen­ter of grav­ity away from the un­cer­tain Euro­pean and Latin Amer­i­can economies to the roar­ing Asian mar­kets that have be­come the in­dus­try’s bread bas­ket – the eco­nomic pow­er­house of China, South­east Asia and South Korea.

“If you do not have a trans-Pa­cific strat­egy, you will not be rel­e­vant in to­mor­row’s re-work of the eco­nomic map,” Swel­bar says.“There­fore it only makes sense to build th­ese crit­i­cal gate­ways to­day to be rel­e­vant and com­pet­i­tive to­mor­row.”

It is, how­ever, the emer­gence of China that has made the big­gest dif­fer­ence. The dom­i­nance of China has also shifted the cen­ter of grav­ity – this time in Asia – from Ja­pan to China and made gate­ways such as Tokyo, Hong Kong and Tai­wan less sig­nif­i­cant sim­ply be­cause, as Swel­bar sug­gests, it’s re-drawn the eco­nomic map. Thus those fifth free­dom rights that were so crit­i­cal in Delta’s ac­qui­si­tion of North­west and United’s long-ago ac­qui­si­tion of Pan Amer­i­can have sim­i­larly de­clined in im­por­tance.

“The fu­ture is China, pe­riod,”says Boyd Group In­ter­na­tional pres­i­dent Mike Boyd. “Tokyo and Hong Kong were built up based on geopo­lit­i­cal fac­tors in the 1950s and 1960s. Back then, China wasn’t open and they would shoot us down. To­day, they fur­nish our kitchen ap­pli­ances. So, Tokyo and Hong Kong are less im­por­tant. For United and Delta, the ad­van­tages of a fifth­free­dom hub in Tokyo are now gone. So, to­day, the name of the game for US West Coast Hubs to re­main com­pet­i­tive is non­stops to ma­jor Asian points.”

Swel­bar agrees.“Ja­pan will re­main a very im­por­tant point on the global trad­ing map, but air­craft tech­nol­ogy does not re­quire a stop in Ja­pan any longer to con­nect to points in China and through­out Asia. Now those points can be served non­stop from US gate­ways.”

The case study for this de­vel­op­ment is United’s con­sol­i­da­tion of its po­si­tion at SFO, us­ing the ad­vanced tech­nol­ogy of the Boe­ing 787 to drive deeper into China, cutting the time be­tween SFO and des­ti­na­tions such as Xi’an and Hangzhou by as much as four hours. United serves six mar­kets in China, the most of any US car­rier, and in­cludes Bei­jing, Shang­hai, Chengdu and Hong Kong.

“United’s strat­egy will be pow­er­ful,”says Boyd.“In ad­di­tion, Hous­ton (IAH) re­mains in the wings for Latin Amer­ica-Asia flow op­por­tu­ni­ties when the LatAm econ­omy im­proves.”In fact, it is so pow­er­ful that Boyd thinks San Fran­cisco shines above all West Coast gate­ways.

Swel­bar agrees.“If I were to pick a win­ner to­day, it would be San Fran­cisco,” he says.“The mar­ket is re­plete with not only strong busi­ness ties to Asia but a pop­u­la­tion that has a high propen­sity to travel to, and/or host vis­it­ing friends and rel­a­tives. Not that the other West Coast gate­ways don’t have sim­i­lar at­tributes but United’s San Fran­cisco gate­way has longevity and is the model for serv­ing not only es­tab­lished mar­kets but also fledg­ling and de­vel­op­ing mar­kets for strate­gic rea­sons.”

United ben­e­fits from the fact that San Fran­cisco is one of the top des­ti­na­tions for Chi­nese trav­el­ers, ac­cord­ing to the US Com­merce Depart­ment. Their num­bers jumped from nearly 400,000 in 2007 to 2.1 mil­lion in 2014. Forty six per­cent of

Chi­nese trips are des­tined for Cal­i­for­nia with trips to San Fran­cisco ris­ing 19 per­cent be­tween 2014 and 2015.

As for sugges­tions that United is re­act­ing to in­creas­ing ser­vice by Chi­nese car­ri­ers, Swel­bar thinks it might be the other way around.“United has been a mar­ket leader be­tween the US and China,”he says.“It takes con­sid­er­able time for China mar­kets to fully de­velop and United cer­tainly has gained a first mover ad­van­tage partly be­cause of the San Fran­cisco gate­way it op­er­ates.”

Fill­ing in the Map

If United’s moves at San Fran­cisco are about con­sol­i­dat­ing its trans-Pa­cific dom­i­nance, the rea­son be­hind Delta’s and Amer­i­can’s moves at Seat­tle and LAX, re­spec­tively, is about fill­ing big white spots in their route maps in Asia.

Most saw Delta’s move to es­tab­lish SEA as its West Coast hub as go­ing af­ter its one-time part­ner Alaska Airlines, a strat­egy that didn’t work, as Boyd notes that the com­pet­i­tive bat­tle there only served to spike traf­fic for both car­ri­ers. In­deed, lit­tle has been writ­ten about the fact that Seat­tle was all about strength­en­ing Delta’s tran­sPa­cific and Asian foot­prints.

“Delta had a void in its Asian foot­print with its strat­egy to move away from Narita to Haneda,”Boyd says.

Swel­bar notes that Delta and Korean ap­pear to be closer to a more com­pat­i­ble work­ing re­la­tion­ship.“I be­lieve this to be a for­mi­da­ble strate­gic part­ner­ship,”he says.“Ar­guably, In­cheon is the best and most de­vel­oped gate­way to points in Asia and China. Com­bine that with Delta’s ex­ten­sive North Amer­i­can op­er­a­tion and the po­ten­tial is strong.”How­ever, Delta’s moves will also have an im­pact on Amer­i­can, which has a sim­i­lar void in its Asia map.“Delta af­fects Amer­i­can and oneworld to fur­ther de­velop an Asian foot­print,”he ex­plains.

Boyd agrees, but sees an­other prob­lem with Amer­i­can’s strat­egy of try­ing to wres­tle the highly frag­mented LAX mar­ket into sub­mis­sion.“LAX is a strong mar­ket, but for Asian flows from the Deep South – where there is sig­nif­i­cant Chi­nese in­vest­ment – it is not well lo­cated be­cause it has about 12 to 15 per­cent more dis­tance than say, Detroit or SEA,” he notes.“For AA, the geo­graphic lo­ca­tion is a chal­lenge for wider US con­nect traf­fic.”

Fi­nally, Air Canada is build­ingYVR which has mean­ing for US car­ri­ers be­cause of the United State govern­ment’s in­sis­tence on re­quir­ing a visa for pas­sen­gers tran­sit­ing hubs on their way from Asia and South Amer­ica to Europe and vice versa. An­a­lysts see this as a huge boon for Air Canada, as well as for Copa Airlines with its grow­ing hub in Panama.

“Air Canada atYVR puts it in a key po­si­tion to cap­i­tal­ize on the dim-bulb US visa re­quire­ments for con­nect­ing pas­sen­gers in­clud­ing flow-through traf­fic to Latin Amer­ica,”says Boyd.

Whither Com­pe­ti­tion?

An­other air­port al­most lost in all this ac­tiv­ity on the West Coast is San Jose, the clos­est air­port to Sil­i­con Val­ley. It re­mains a sec­ondary air­port, ac­cord­ing to Boyd, who notes it has no sig­nif­i­cant feed to airlines at ei­ther end of a trans-Pa­cific trip.

But Swel­bar dis­agrees.“The Bay Area is a white hot econ­omy to­day and sec­ondary gate­ways have be­gun to at­tract in­ter­na­tional ser­vices,”he ex­plains. “Gate­ways like Raleigh-Durham, Austin and San Diego are ex­am­ples. Given the eth­nic makeup of the Bay Area mar­ket, there will be suf­fi­cient traf­fic to sus­tain ser­vice to the larger points in Asia from San Jose.”

While govern­ment of­fi­cials and con­sumer ad­vo­cates may be­moan the con­sol­i­da­tion of the last decade, net­work de­vel­op­ment on the West Coast and else­where il­lus­trate just how com­pet­i­tive the air­line mar­ket is. In fact, Swel­bar called the West Coast a case study on the con­tin­ued com­pet­i­tive­ness of the in­dus­try.

“What is hap­pen­ing on the West Coast should go a long way to calm­ing fears of the reg­u­la­tors that com­pe­ti­tion has been lost as a re­sult of con­sol­i­da­tion,”he says. “The fact that the con­sumer has four dis­tinct gate­ways to choose from is a clear win for the North Amer­ica-Asia trav­eler.”

In­ter­est­ingly, the West Coast build up has had lit­tle im­pact on in­te­rior US hubs, ac­cord­ing to Swel­bar.“Not only is Amer­i­can adding new long-haul in­ter­na­tional ser­vices at LAX, it is also adding ser­vice from its Dal­las/Ft. Worth gate­way,”he notes.“Not only is United con­tin­u­ing to add to San Fran­cisco, it is also of­fer­ing Asian ser­vices from both Chicago and Den­ver. In the end, it was Delta that right­fully rec­og­nized that it too needed a West Coast gate­way and that a gate­way could not be built on a code-share re­la­tion­ship alone. Even so, it is cer­tainly not shy­ing away from grow­ing its Salt Lake City pres­ence.”

But he also points to the West Coast busi­ness boom.“It also should not be lost that the lo­cal economies, par­tic­u­larly in the Bay Area and Seat­tle, are hot right now and that only helps to build lo­cal traf­fic that is vi­tal to the suc­cess of those transoceanic jour­neys.” BT


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