Memphis Fliers Should Have Seen This One Coming

On Tuesday, in a memo to employees, Delta Air Lines (NYSE: DAL  ) announced that it would undertake another round of capacity cuts at Memphis International Airport, its smallest hub. After the cuts go into effect, Delta will offer only 60 departures per day from Memphis, and the airport will lose its "hub" status.

The recently announced cuts are just the latest in a long string of setbacks for fliers in Memphis. Delta has repeatedly cut back service from Memphis since early 2011, when the airline offered more than 200 daily departures. However, Delta's latest capacity cuts will ultimately be good for the city as well as for Delta. The impending entry of Southwest Airlines (NYSE: LUV  ) into the Memphis market will increase competition, and Southwest is likely to expand its operation there quickly, now that Delta is cutting back. Over time, this will lead to lower fares in Memphis, while benefiting both Southwest and Delta.

Demise of the 50-seat jet
The primary downfall of Delta's Memphis hub has been its reliance on inefficient 50-seat regional jets. Memphis is a fairly small city as airline hubs go, so there is not enough demand to fill larger planes on most routes. Unfortunately, the high fuel consumption per seat of 50-seat regional jets makes it difficult to turn a profit, which explains why Delta's Memphis operations have continued to lose money even as Delta has posted big increases in company-wide profitability.

Delta is in the midst of a major "upgauging" campaign that will vastly reduce the company's usage of 50-seat jets. Delta is replacing most of its 50-seat jets with a smaller number of 76-seat regional jets and 110-seat Boeing 717 mainline aircraft, which offer lower fuel and maintenance costs per seat.

In fact, at a December investor conference, Glen Hauerstein -- Delta's executive vice president of network planning and revenue management -- pointed specifically to Memphis as a big opportunity to reduce 50-seat regional jet flying. He noted that Delta was flying 50-seat regional jets from Birmingham, Ala., to both Memphis and Atlanta (Delta's largest hub). Since most passengers on the Birmingham-Memphis flights were connecting to other destinations, Hauerstein suggested that Delta would save money by routing all passengers through Atlanta on larger planes.

After all, the cost per seat was much lower for flights on larger planes, and Atlanta offers far more connecting flights than Memphis ever could. Based on these comments from December, the writing was on the wall for Delta's Memphis hub.

It's not all bad news
Fortunately for Memphis residents, Southwest may be coming to the rescue shortly. Southwest acquired its first Memphis route when it bought AirTran several years ago. The carrier recently announced plans to move Memphis service to the Southwest brand beginning in November, with flights to five cities.

Southwest reportedly expects to be the largest carrier in Memphis eventually, which is good news for Memphians hoping for cheap flights. In the past, low-cost carriers have been deterred from competing with Delta in Memphis due to the fear that Delta would add flights and drop fares to drive out the competition. Now that Delta has drastically reduced its footprint in Memphis, Southwest can plan to expand its Memphis service over time without worrying about Delta trying to sabotage it.

Foolish roundup
Ultimately, Memphis is probably better off with Southwest as its top carrier rather than Delta. Delta's cost structure in Memphis meant that the company was losing money even though customers were paying very high fares. Southwest has provided plenty of flight options in other "de-hubbed" cities like St. Louis and Kansas City, and can carry passengers to a wide variety of U.S. destinations at a lower cost than Delta.

As a result, while I view this week's announcement as a positive for Delta -- it shows that the company is still on track to quickly reduce its 50-seat regional jet operations -- it is also a positive for Memphis. There may be some pain for the first few years of the transition as Southwest gradually builds a point-to-point operation in Memphis, but in the long run fliers will be compensated for the loss of their hub with lower fares.

What macro trend was Warren Buffett referring to when he said "this is the tapeworm that's eating at American competitiveness"? Find out in our free report: "What's Really Eating At America's Competitiveness." You'll also discover an idea to profit as companies work to eradicate this efficiency-sucking tapeworm. Just click here for free, immediate access.


Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 05, 2013, at 2:25 PM, Tyeward wrote:

    As much as I hate to say this, Memphis just isn´t needed by Delta. It really isn´t a big O&D city and what Memphis was able to handle for Northwest, Atlanta can absorb. I really feel for the people of Memphis and Cincinnati. Those were pretty good hubs for both Delta and Northwest.

  • Report this Comment On June 05, 2013, at 5:14 PM, TMFGemHunter wrote:

    I agree. Unfortunately, with the realities of the current fuel price environment, it's not economic to maintain hubs that don't have a large O&D component. Memphis was the smallest city in the country to maintain an airline hub, so it was really just a matter of time...

    Adam

  • Report this Comment On June 14, 2013, at 8:19 AM, xytgr wrote:

    The reason Memphis origination and destination traffic is so low is because of the ultra-high air fare situation. For instance, a recent fare quote to DFW from MEM was over $1000!! The same destination from Nashville on Southwest was @250! To Chicago, the fare was $1100...from Nashville it was $210. Well guess which city will have the most o&d traffic...it won't be MEM..If Delta had offered reasonable air fares, then the hub would have been successful...The hub operated profitably for over 30 years in Memphis...Delta enters and can't make a go of it....it drove o&d traffic to neighboring cities!

Add your comment.

DocumentId: 2473504, ~/Articles/ArticleHandler.aspx, 4/20/2014 12:39:57 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement