Rethinking The Airline Hub

The Corona pandemic continues to wreak havoc across the aviation industry. Demand has evaporated overnight and is expected halve, entire countries have closed their skies, and governments are considering a host of measures when the skies are reopened. The situation is grave and the aviation industry is bracing for impact. There are tectonic shifts that will become the new normal post the pandemic. Chief amongst these is the obsolescence of the airline hub concept.
An airline hub is an airport that serves as a connecting point. Think London Heathrow, Singapore’s Changi, Bangkoks Survanabhumi or even Delhi’s Indira Gandhi International Airport. The use of a hub airport enables airlines to consolidate large volumes of traffic at a single location in turn enables airlines to significantly expand their networks. Global airline traffic continues to be dependent on hubs and of the 4.9 billion passenger trips that were flown in 2019, more than 70% of international traffic connected via hubs. These hubs are spread out across the globe and leverage their geo-strategic locations to their advantage. Dominant hubs till recently remained strong and grew from strength to strength. Newer airports like those in India and Dublin aspired to be hubs and worked towards that goal. There was no looking back.

From the first hub in the late 1970s started by Delta Airlines, airlines, airports and investors have used the hub concept to their advantage. Effectively airlines figured out that rather than flying routes on a point-to-point basis it was beneficial to fly to a central airport and then connect it to several cities. This enabled economies of scale, improved connectivity, the ability to consolidate passengers and cargo, cost advantages by amortizing costs over concentrated flight volumes and employment & output multipliers for the cities where the hubs were located. For investors, hubs offered higher returns due to higher traffic volumes, lower costs due to strategic locations where often the labour force was cheaper and monopoly positions in key markets where higher returns could be realized. Thus it is no surprise that hubs continued to be preferred by airlines, investors and governments alike.  

And hubs continued to grow. Traffic volumes rose, cash-flows that are intrinsically linked to traffic volumes were strong and there was a challenge of capacity keeping up with demand. This was true across the globe. Particularly important was the fact that airports could handle traffic volumes that were far in excess of their own cities’ population base. For city states like Singapore and Dubai the hubs became strategic assets and indeed the success of these cities can often be traced back to the success of their airline hubs coupled with a strong anchor airline. India also worked towards leveraging its ideal location and aspired to be a hub (while missing the element of a strong anchor carrier which continues to haunt the market till date).

Hubs were on the ascent path but in late 2000s some challenges had started to emerge. This included the advent of low-cost airlines (LCCs) where the business models were built on shorter point to point flights. Effectively the airlines would bypass hubs or use them to source traffic. The LCCs were a runway success especially in Asian markets and led to passenger volumes showing exponential growth. Flying was no longer a luxury rather as prices dipped more travellers took to the skies. In India a term that was earlier unfathomable became reality. Namely “rail-air parity” where airline tickets were priced at or below rail tickets in the higher end rail segments. And passengers took to the skies. For instance, India saw travel volumes more than double from 111 million passengers in 2008 to 255 million in 2016. From there it rose to 349 million in 2019.

Yet the truth was that this growth was across segments. And airports do not value all segments equally because of varying spending habits. These segments included the leisure traveller, the business traveller, the weekend traveller, labour flows, first-time fliers (who were taking to air because of ticket prices), traders, SMEs and students who could now visit home more than once given the price and convenience of air-travel. There was also a demand mismatch. For instance labour traffic will not go and spend at an Armani store, a student visiting home will not shop for retail at prices that are 3X that of Main Street, and not everyone took to the exorbitantly priced food offerings. As such revenue challenges were emerging but were made up by ever increasing non-aero revenues such as food outlets, retail shops and hotels. Lounges, large floor areas, artwork, expensive parking and the rupee 150 cup of tea were permanent fixtures. Indeed, the apt description for hub airports became “a 5-star mall with a runway attached.”

Concurrently new trends started to emerge. Chief amongst these was that of sustainability. And airlines were identified as main culprits. Movements such as flyskgam (literally meaning flight shaming – an environmental movement that encouraged folks not to take flights) and tagskryt (literally meaning train bragging – a movement that encouraged folks to take trains over flights) gained traction in Europe. And it was only a matter of time before these made their way to India. Governments too were looking at additional tax measures towards sustainability and to ensure that the aviation carbon footprint was minimized. If that wasn’t challenging enough aircraft manufacturers started to produce smaller aircraft that were capable of flying greater distances. Overall the hub concept was facing several challenges. But for the most part these were manageable. That was until the corona impact. In one fell swoop, a contagion spread via a 120 nanometer particle (SARS-CoV-2 virus) that is not even alive in the first place, brought forward all these changes. Along with a total evaporation of demand which is expected to fall by 50% in optimistic case scenarios. Those who fly will want to fly direct rather than connect via hubs. As such the pandemic is forcing a rethink of the entire hub concept.

The corona impact for hub airports is best summarized in two words: health risk. Ironically, this adds to the most stressful part of the airport experience. For any airport, especially hub airports, the greatest risk has always been the security risk. And post the corona pandemic, health risks are likely to come under the security risk umbrella making the security process even more cumbersome. Health security is the new buzzword. And social distancing, masks and quarantines are the new normal.

As far as airports go, governments the world over are revisiting policies on health security. These may include new stringent health checks (a health tax or a virus tax is not out of the question), VISA caps, limitations on market access, rolling restrictions (including seasonal restrictions), mandated pre-travel test and even submission of health histories. The “green-corridors” that business travellers are used to for the most part are over. For hubs the impact is disproportionate and significant. Airports are well aware of this fact, and on March 31, the industry body Airports Council International sent a letter to the prime minister asking for a range of measures. Examined closely, the proposal indicates that airport revenues should not be impacted in any way, while there should be maximum relaxation on costs and funding. Much of these revenues stem from passenger flows.

As far as travel is concerned there is likely to be segmentation into essential travel and non-essential travel. Considering all the risks, the safest mode of transport may change from air-travel to rail to one’s own vehicle. In the leisure segment one is likely to see road trips as opposed to mileage runs (a mileage run is a popular term where frequent travellers use their miles for leisure travel especially as the miles are about to lapse). Overall, the perception of air-travel is undergoing a change: from one of convenience to one of risk. Traffic volumes may take years to rebound.

For airlines this means revisiting entire network and fleet plans and adapting to the new reality. Above all, the hub concept will need to be adapted.