The Evolution of Operating Practices

The air carrier industry has passed through a series of changes or “waves” since deregulation in 1978.5 The initial wave was the creation of the hub and spoke system. The second wave was the inauguration of low-fare, point-to-point ser­vice, pioneered by Southwest Airlines. The third wave was the entry into the airline fleet of the regional jet. The fourth wave, now in process, is the abandonment of the financial and operational model of the legacy carriers from the period of

CAB regulation, and a process of convergence of practices of legacy carriers and low-cost car­riers (LCCs). This process of convergence has been driven by the reality of all five of the largest legacy carriers having entered Chapter 11 bank­ruptcy as of the end of 2011. The relative success of the low-cost carriers during the same period underscores the bottom-line effects of the differ­ences in the business practices of the two groups. Also underscoring the success of the LCC group is their increase of domestic passenger market share—from 13 percent in 1997 to 28 percent in 2009.

■ Hub and Spoke

Before deregulation, it was said that if you trav­eled in the southeastern part of the United States and you wanted to get to heaven, you would have to go through Atlanta and change planes. Delta Airlines is credited with creation of the hub and spoke concept that it centered in Atlanta, and, as discussed earlier, Delta began this service dur­ing the 1940s at the behest of the CAB in order to bring service to small outlying communities in the Southeast. The other trunk airlines that
operated during regulation, however, were all point-to-point carriers.

After deregulation, the opportunities to serve when and where the airlines wanted, coupled with the economic necessity to fill their airplanes with as many passengers as possible, caused the adoption of the hub and spoke system nation­wide. This system had two main advantages to the traveler:

• The passenger who lived in the hub city gained access to a greatly increased number of destinations directly from the hub airport.

• The passenger who lived in one of the smaller communities at the end of a spoke, who may not have had any service under regula­tion, was offered access to the same greatly increased number of destinations after one stop at the hub airport.

Hub and spoke brought to the airlines a much more efficient use of aircraft by allowing many more destinations to be served using far fewer airplanes. By way of example, if a car­rier had 20 airplanes engaged in point-to-point service between city pairs, as was the case before deregulation, the number of origin and destination operations (O&D) would be limited to 20. In the hub and spoke system, the O&D number would suddenly jump to 400 (20 x 20). The truth is that there will never be nonstop service between most cities. Recognizing this fact, the hub and spoke system should be rec­ognized as a major, positive development of deregulation.

The hub and spoke system has also drawn complaints.

• First, passengers were said to be traveling “around their elbow,” being required to stop at hub aiiports that were considerably distant from a direct line of travel, and losing the main advantage of jet aircraft, which is speed and the efficient use of time. According to this view, these passengers were traveling at the convenience of the airline, not themselves.

• Second, the system produced the natural result that the dominant airline gained tre­mendous market share at the hub city, a potential anticompetitive development. Dom­inated hubs include Atlanta (Delta), Denver (United), Detroit (Northwest), and Chicago (American and United).

• Third, the system required that all aircraft returning to the hub do so at or about the same time in order to make connections with aircraft departing from the hub to new destinations. This confluence of activity placed a huge strain on air traffic control and airport operations.

The introduction of these relatively short – haul operations altered the airlines’ needs as to types of aircraft. Boeing, it is said, was in the process in the late 1970s of phasing out produc­tion of the 737. This decision was reversed after deregulation due to the adoption of the hub and spoke system, and production of 737 aircraft soared. The hub and spoke system also gave rise to an entirely new line of short-range air­craft, like the MD-80, shorter Airbus planes, and regional jets (RJs). Suddenly there was less need for the larger, fuel-hungry 747s, and a general downsizing of aircraft began.