D/FW, American Agree on Wright, But Fight is Costly for Both

Feb. 28, 2006
On Thursday, American will launch 16 daily flights from Love Field, its first North Texas service away from D/FW in more than four years.

Feb. 26--With a market share of nearly 85 percent, American Airlines Inc. is such a dominant force at Dallas/Fort Worth International Airport that the interests of the carrier and the sprawling facility are often inseparable.

The two are in lockstep when it comes to the issue of maintaining Wright amendment flight restrictions at Dallas Love Field, but the issue has caused some fissures in the relationship.

On Thursday, American will launch 16 daily flights from Love Field, its first North Texas service away from D/FW in more than four years, in response to a change in the Wright law last year allowing service to Missouri.

American says the move is necessary to hold on to its best customers, as Southwest Airlines Co. offers new service to St. Louis and Kansas City from Love.

The Fort Worth-based airline says it won't be profitable at Love, but it isn't just hurting its own bottom line. The move will also harm D/FW, home of 786 daily American flights. D/FW is scrambling to patch a $35 million hole in its budget created by the loss of flights to Love, as well as other flights that American is canceling because it can't support them as it shifts traffic to the city airport.

American knows the shift to Love isn't a popular move with officials at D/FW.

"Do they like what we're doing? No," said Dan Garton, American's executive vice president for marketing. "Are they surprised by it? No."

Harming D/FW will cost American financially, too. Because the airport's costs are ultimately picked up by the airlines, American will foot a bigger bill at its largest hub.

"We do our best," said Jeff Fegan, D/FW's chief executive, "but at the end of the day, if an airline decides to pull service, you have no choice but to charge the airlines more money."

American's role at D/FW has only grown since January 2005, when struggling Delta Air Lines Inc. pulled its North Texas hub in a cost-cutting move. Delta is still American's biggest rival at D/FW, but now it carries only 3 percent of the airport's passengers.

D/FW's finances are highly dependent on connecting passengers, and American fills the facility with people every day; seven out of 10 American fliers at D/FW are there just to switch planes. The airport benefits from a $4.50 passenger facility charge from each traveler, as well as revenue from concessions for the sales of sandwiches, soft drinks, T-shirts and other items.

That combination of fees and concession revenue keeps D/FW's operating costs competitive with those of other major hub airports.

American, in turn, is the primary beneficiary of a $2.7 billion capital improvement program financed by the airport, which enjoys a sterling credit rating that allowed the bonds to be sold at low interest rates.

Had American been forced to finance the project with its below-investment-grade credit rating, the cost would have been much higher. Big airlines generally lean on airport authorities to finance big projects because their better credit means lower costs.

Last year, D/FW launched its SkyLink train, which helps connecting passengers zip between five widely spaced terminals, fixing a design flaw for an airport that wasn't designed to be a hub.

The airport also opened a spacious international terminal with top-flight quarters for American's most profitable flights.

'A blessing and a curse'

Airport debt analyst Peter Stettler of Fitch Ratings Co. said that "having a hub airline is both a blessing and a curse for airports."

The blessings first: North Texas travelers get nonstop flights to 165 cities on American, most of those accessible only because of the connecting traffic through American's hub.

Top companies treasure the flexibility American provides at D/FW, and indeed some firms such as Fluor Corp. say they're relocating here primarily because of the frequent and far-reaching air service. D/FW says it supports 268,000 regional jobs.

The tough part for D/FW, according to Mr. Stettler and others, is that American's might at D/FW repels other carriers in an industry in which airline finances remain fragile and carriers want passengers without a fight.

Southwest wants to fly nationwide from Dallas but won't serve D/FW, primarily because of American's girth there. Southwest also says its home airport, the smaller Love Field, has a vastly superior design for its quick-turn operations.

Delta said that it lost money at D/FW in nine of the last 12 years it operated a Dallas hub, and that it couldn't compete with American.

Low-cost carriers such as AirTran Airways Inc. arrived at D/FW with much fanfare. But AirTran flies less today than it did two years ago. It will add service to Chicago's Midway Airport this spring but doesn't have big expansion plans for D/FW.

Since Delta left, D/FW has offered incentives to any carrier to fill the empty 22 gates. Spirit Airlines added one daily flight to Fort Lauderdale, but there have been no other takers, in part because of the uncertainty about the Wright law, which limits most commercial service from Love Field to nine states.

"It's a bit of a vicious cycle," said Stuart Klaskin of Klaskin Kushner & Co. in Miami.

"American and D/FW are victims of their own success. D/FW's biggest hope is just to get new service in dribs and drabs because no one is going to step in against American."

Many differences

American, the world's largest carrier, makes no apologies. "Any businessman who tries to say to you that they 'welcome competition' is trying to pull a fast one," said Mr. Garton, who expects D/FW's empty gates to get filled over the next few years. "We accept competition, but we are very competitive ourselves."

American understands that D/FW has to sell itself to other carriers, even if it doesn't really want more foes at the airport, Mr. Garton said.

Despite appearances, Mr. Garton said, American and D/FW have had plenty of differences over issues large and small.

"I guarantee you right now we're in debates with D/FW about any number of things, and that I have many times in my life gone to swords with them" over everything from fees to how many de-icing stations American gets for its planes, Mr. Garton said.

He described a "knock-down, drag-out fight" with D/FW over the lease at the new international facility, Terminal D, as an example of how American doesn't have sway with D/FW.

American came close to not signing the lease at some points, but was careful to keep it quiet. "We didn't want the public to see the dirty laundry we were washing," Mr. Garton said.

"It happens at every airport," Mr. Fegan said. "We try to do what's best for the long term, and sometimes that collides with American's short-term interest."

Max Wells, who stepped down from the D/FW board last July after seven years, said the board has a duty to listen to American. "If you had a 100-floor office building and one guy had 85 floors and they wanted something, you'd pay attention," he said. But "our interests were not always what American's were."

When D/FW decided to give four gates on Terminal B to AirTran, American "wasn't happy about that, and I was one unpopular chairman, that's for sure," Mr. Wells said, recalling having to sit at a table of American executives shortly after the decision was made.

Same dilemma

Other airports that host big hub carriers face the same dilemma D/FW does.

At Cincinnati/Northern Kentucky International Airport, finding new service to offset Delta's 92 percent market share has been nearly impossible.

"When you have a carrier with something like 500 flights a day, its going to be hard for someone else to get a niche, " said Ted Bushelman, a spokesman for the Cincinnati airport.

As with American at D/FW, Delta brings Cincinnati dozens of nonstop flights it couldn't otherwise support. But both airports are consistently atop the Department of Transportation's quarterly fare report that outlines a "fare premium" for business travelers who buy tickets on short notice. American executives bristle at the fare data, saying they offer lower advance-purchase fares in some cases than Southwest does at Houston's Hobby Airport.

Mr. Bushelman said many Cincinnati residents drive to Dayton, Ohio, or Louisville, Ky., to catch cheaper flights on AirTran or Southwest. At the same time, others who live in the region drive to Cincinnati for the plentiful nonstops.

"We don't have any low-cost carriers out here, but we do have service that this community probably wouldn't have seen," he said.

As it restructures through federal bankruptcy, Delta has decreased its flights from Cincinnati, though the Atlanta-based carrier owns the terminals it flies from there and therefore cuts the financial impact to the airport itself.

Look for more airline/airport conflicts ahead as the industry restructures and airlines look to downsize or even close hubs, said Mr. Stettler.

"There's always going to be that tension" between airports and airlines, Mr. Stettler said. "It's definitely popping up more these days."

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