Philadelphia International Airport’s future as a Transatlantic Gateway

There’s been a lot of anxiety in Philadelphia ever since the announcement of the US Airways/American Airlines merger.  Can the new American Airlines find a place in its network and its business strategy for a hub 90 miles away from New York, where it also has substantial operations?  The answer, so far, has been yes, at least so far as to maintain the status quo.  But with few signs that AA is even paying much attention, the anxiety –in a city where an inferiority complex is part of the cultural identity — remains.

Even for someone who dislikes flying like I do, there are good reasons to want a better selection of destinations from PHL.  As much as flying today is an inconvenient nuisance of modern life, it is still the best option for transcontinental travel, and is the only option for crossing oceans.  Businesses decide where to locate offices based in part on the availability of convenient flights.  A good airport with a broad range of destinations is an important regional asset.  Which makes it all the more frustrating that America’s #5 city has to make do with America’s #19 airport.  It’s mostly due to geographic circumstances and not our fault.  Our domestic air market is missing two of the most lucrative markets, New York and Washington, because you can get most of the way to either city, either on the train or driving, in the time it takes to get to the airport and clear security.  International airlines are slow to add us to their route networks, because serving a different part of the country (like Chicago, or Florida, or Texas), has a greater potential profit than doubling (or tripling) down on the Northeast.  And it wasn’t that long ago that our hometown airline, US Airways, was the seventh-largest of seven legacy airlines in the United States.

Revenge of the small markets

But the airline industry is changing.  While previous airline practice for long-haul trips was to use massive hub-and-spoke operations, to agglomerate as much demand as possible onto the largest possible planes, this business model is falling out of favor.  Low-cost carriers in North America and Europe have cut a massive swathe through the air travel market through the aggressive use of narrowbody short-haul airliners, especially the Boeing 737 and Airbus A320 families.  These airplanes have enough range to serve any domestic market, and are the most fuel-efficient aircraft (by passenger-mile per gallon) yet invented.  Narrowbody jets can be unloaded, cleaned up, and turned around faster than their widebody counterparts, which economizes on aircraft capital costs (keeping the planes in the air and making money) and airport gate leases.  Operating routes by spamming narrowbodies at them also allows the airlines to capture more passengers, both through frequency of flights and wide selection of nonstop destinations.  Running more, smaller planes also helps airlines maintain a network that maintains its resilience at high load factors, that can still get people to where they’re going when things go wrong.

 

Both of these companies fly only Boeing 737s.  That’s not by chance.

International flights have long seemed immune to this sort of optimization, since it requires a bigger airplane to have the range to get over the ocean in one hop. The main exception has been the Boeing 757, which is slightly bigger and slightly longer-ranged than the 737.  Ever since the 757 was given FAA approval to fly farther away from the nearest diversion airport in the late 1990s, 757s became the airplane of choice for secondary markets between the Northeastern United States and Western Europe.  Icelandair and Aer Lingus took advantage of their geographic positioning to get the maximum benefit out of their 757 fleets.  Among US carriers, the pioneers were Continental Airlines, which developed a large number of routes out of its Newark hub before being acquired by United Airlines.  Delta and American followed suit with 757-operated routes to Europe from JFK, and US Airways had a few from Philadelphia before the merger.  The term of art in the airline industry is “long and thin”: intercontinental range, but not enough demand to fly a larger airplane like the 777.

The problem with the 757 was that it found this niche just as Boeing discontinued production in 2004, after years of low sales.  Since then, airlines have been without a replacement option in the 4,000 nautical mile (nmi) range segment.  Boeing’s answer has been to encourage airlines to upgrade to the widebody 787, which admittedly has the best fuel economy of any widebody jet, by passenger-miles per gallon.  But the 787-8 is a lot more aircraft than the 757-200: 242 seats in two-class configuration, versus 200 for the older airplane, and a range over 7,000nmi. The main competing aircraft from Airbus, the A330, which is the aircraft of choice today for American Airlines out of PHL, has a similar baseline two-class capacity of 246 for the -200 variant.  Filling those additional seats is a bigger challenge than the airlines have been willing to take on for thinner routes. Boeing’s product has the additional hurdle of recovering from the production problems that delayed its launch; at least the A330 is a mature design.  Better to use the 787 or A330 on a surer bet, like a route to a European hub, or to Asia or the Middle East, than to risk making a profitable transatlantic route uneconomic. The problem of filling seats gets much worse if the question is how to fly more than one round-trip per day on a route, to give travelers a better selection of schedule options; most European destinations that aren’t London Heathrow are forced make do with a single daily flight from each North American origin.

Meanwhile, flying a 757 for one round-trip across the Atlantic per day, instead of one and a half or two from coast to coast, is a good way to extend the life of those airframes, but they’re not getting any younger.  All three legacy US carriers are still flying 757s, but all three are also cannibalizing older used 757 to keep their fleets flying.  Something has to give.

Enter Sandman

Suddenly, there’s a new product aiming for the middle of the market.  Airbus are in the process of launching a new upgrade to the A320 family, and are forking the largest model, the A321, into two variants: the A321neo, which is just the A321 with a set of fuel economy upgrades and a 3,500nmi range, and the A321LR, with a few extra buffs to hold extra fuel tanks for the 4,000nmi range the airlines want for their 757 replacement.  Moreover, having a 4,000nmi aircraft with strong parts commonality with the A320 family is a strong economic inducement to A320-based LCCs on both sides of the pond to enter the transatlantic market.  So far, Jetblue and Norwegian are the first to signal that they will be pursuing that strategy, out of their hubs in Boston and Edinburgh and Oslo.

American Airlines has ordered 100 A321neos, and the order is convertible to the A321LR.  Philadelphia isn’t quite as good of a base for them as Boston or New York, but the distance penalty isn’t prohibitive.  And the existing hub at Philadelphia means that the ability to serve secondary European destinations leverages a lot more than AA can bring to bear in New York, where its international routes out of JFK are physically severed from its domestic hub at Laguardia.  AA indicated during the merger that it wants to move connecting traffic to Philadelphia, where they are significantly less expensive for AA than in New York.

Boeing has yet to provide any answer to the demand for a 4,000nmi narrowbody. Its next generation narrowbody airliner, the 737 MAX, only has a range just above 3,500nmi (with the exception of the shrunk 737 MAX 7 variant, which still can only fly 3,825nmi). That’s more than adequate for Icelandair, running a scissors-hub from Keflavík Airport near Reykjavík, so it has 737s on order to replace its 757 fleet. But it’s not quite enough legs to consistently cross from Continental Europe to America in one hop.  British Airways famously squares this circle with a 3,100nmi-range Airbus A318 on its Club World London City flights by using an all-business-class configuration to minimize weight, and making a technical stop at Shannon Airport in western Ireland to refuel going westbound.  So the technical stop option exists for 737 operators, as well as for operators of more conventional Airbus A320 variants, although convincing large numbers of passengers to make an extra stop is an exercise left to the marketing experts.

Our friends Down East

The downside to the 4,000nmi-range airliner strategy is one that will fill the pages of aviation and travel news sites in the coming weeks: in the winter, the winds blow harder.  That’s great for eastbound passengers, who get a faster ride to Europe, but for westbound passengers, it can tax the capabilities of the aircraft beyond the point of safe nonstop operation. 757 flights from Europe to North America typically spend a few days to a few weeks every winter subject to refueling stops at Bangor International Airport in Maine, and Gander and Goose Bay Airports in Newfoundland and Labrador. That adds costs and delays passengers, which makes 757-operated flights unpopular with frequent flyers. There are ways to mitigate this inconvenience. Some airlines are better than others at preventing diversions altogether through proper planning, and by “some are better than others”, I mostly mean, “everyone is better than United“. In the last two very windy winters, 2015 and 2012, United had massive numbers of 757 diversions for flights into its Newark hub.

If a flight must be diverted, total passenger delay can be minimized by going to Bangor, and using the time the airplane is sitting on the ground to pass the passengers through US Customs and Border Protection. Going through CBP at Bangor saves the passengers that particular hassle at PHL, especially those who have onward connecting flights. While US CBP preclearance stations are relatively common at Canadian airports, neither Gander nor Goose Bay can offer that service. Again, not every flight that has to divert after contending with strong headwinds is guaranteed to be able to make it to Bangor, but proper planning on the part of the airline can make it much more likely. The extra 90 miles between Newark and Philadelphia actually helps on that score, at the expense of span of European destinations.

Getting there from here

It’s important to recognize the ways in which PHL’s interests and AA’s interests partially, but not completely, coincide.

AA’s strategy, should it choose to pursue it, involves some amount of co-ordination with its Oneworld alliance partners. AA’s existing year-round transatlantic flights go to Amsterdam, Dublin, London Heathrow, Madrid, Manchester, Munich, Paris Charles De Gaulle, and Rome Fiumicino. Seasonal flights that might be upgraded to year-round with a smaller airplane available include Barcelona, Frankfurt, Glasgow, Lisbon, and Shannon. Additional possible destinations, whether seasonal or year-round, include Belfast (which just lost its one transatlantic flight; a United 757 to Newark), Brussels, Berlin, Cardiff, Copenhagen, Edinburgh, Geneva, London Gatwick, Lyon, Marseille, Nice, Oslo, and Zurich. The strategy’s variants may differ from each other depending on whether AA/Oneworld wants to concentrate on building high-frequency core routes to primary airports, double down on its own home turf (but at secondary airports) in Great Britain, Ireland, and Spain, or take the fight to the home turf of the competition in France, Switzerland, Germany, and Scandinavia.

Concentrating on core routes, and thus spreading passengers more evenly in time, across several banks of flights, makes better use of PHL’s existing Customs and Immigration infrastructure in Terminal A, but it’s also possible to get better throughput out of that infrastructure, for instance by increasing the market penetration of the Global Entry program. Right now, AA offers holders of its top-tier branded credit card a rebate for the Global Entry application fee, but with 1 hour lines at Customs not uncommon at PHL’s peak time already, AA may have a financial interest in offering stronger incentives to its passengers, so that it can continue to advertise reasonable connection times at PHL. The other main alternative, of course, is paying for the physical expansion of the CBP facility to cope with increased demand.  A third alternative is to concentrate on service to airports that offer US Border Preclearance facilities, currently only available from Dublin and Shannon, although many other airports in Western Europe are under consideration for adding similar facilities, subject to approval by the host nation.  Using Shannon as a combined customs and fuel stop is how British Airways successfully markets its London City-New York JFK service, but it remains to be seen how many passengers will accept a planned technical stop, as opposed to one that is only done at need (i.e. Bangor/Gander/Goose Bay).

PHL will have many other potential dance partners beyond AA. Icelandair has already announced seasonal service between PHL and Reykjavík Keflavík, starting May 30th. Other European carriers, both of the legacy and low-cost variety, might give Philadelphia a second look with a lighter, cheaper airplane. I already mentioned Norwegian, but other LCCs from across the pond include WOW Air, based in Iceland, and easyJet and Ryanair, from bases in Britain and Ireland. Any European LCC that follows Norwegian across the pond will be looking for cheap slots in the Northeast, and PHL might be attractive as a flagship route to America, for an airline scared off by the high landing fees and gate charges at JFK and Newark. Even a ULCC going for the full Ryanair strategy of only flying to bargain-basement airports, might settle in the area at Trenton, New Castle, or Atlantic City, which wouldn’t be as convenient for Philadelphia-based travelers, but might exert competitive pressure on fares.  However, some European ULCCs (especially Ryanair) disbelieve in connecting passengers so strongly that they won’t even sell a ticket that includes a connection.  Since Ryanair’s 737s can only reach Philadelphia from its home city of Dublin, that’s strong incentive to not try to enter a thin, crowded market.

European legacy carriers will also be looking to broaden their North American offerings. Aer Lingus (which unlike its co-nationalists, does believe in connecting passengers through its Dublin hub) may seek a co-operative joint venture with AA from Dublin, after it completes rejoining Oneworld in 2017. TAP Portugal can reach us easily from Lisbon. Air France discontinued its Philadelphia-Paris flight in 2009, ceding the flight to its Skyteam alliance partner Delta, which downgraded it to a seasonal 757 route. A smaller plane may be what it takes to re-establish year-round Skyteam vs. Oneworld competition on the Paris route, and perhaps also to create it, through either KLM or Delta, going to Amsterdam. Skyteam’s only current year-round transatlantic flight out of PHL is a solitary Delta 757 to London Heathrow, and Delta will want to replace that aging airframe someday.

Lastly, AA’s US-based competitors have less incentive to make plans directly involving PHL and Europe, but their strategies elsewhere still might have secondary effects at PHL. Both JetBlue (as previously mentioned) and Delta have been building up their presence in Boston. If JetBlue follows through on flying to Europe from Boston, or if Delta increases its number of transatlantic flights from Boston, either might try to feed more passengers in to those flights, and Philadelphia is the nearest major city to Boston that isn’t New York, i.e. also a Delta and JetBlue hub in its own right. JetBlue flies PHL-BOS five times daily, but Delta does not have a direct PHL-BOS flight on the schedule. PHL-BOS is a very crowded market, but Delta has been aggressive about head-to-head competition of late, so maybe they won’t be intimidated out of being the fourth entrant, after Amtrak, American, and JetBlue. Not terribly likely, but possible.