Why CVG lost half of all flights
BY JAMES PILCHER • jpilcher@enquirer.com • May 24, 2010
This article first appeared in The Sunday Enquirer on May 23, 2010.
Delta Air Lines executives huddled almost daily in their mahogany-lined offices in Atlanta to unravel what had become "the Cincinnati problem."
Costs were up. Profits were down. And passengers were taking their business elsewhere.
But these meetings didn't occur last month or even last year. The year was 2002 - years before a rosy public spin turned sour, at a time when Delta appeared to be successful and growing at Cincinnati/Northern Kentucky International Airport.
Once a proud and profitable operation, Delta's main Midwest presence had become a major hassle with no easy fix.
"Cincinnati was a very, very complex and tough problem that we could not see an easy solution for," says Subodh Karnik, who ran Delta's network and was responsible for revenue between 2001 and 2003. "We spent a lot of time thinking about it.
"It had been superbly profitable and worked wonderfully for 10 years, but was in decline by 2001, and (9/11) just accelerated everything. After that, we needed a different model, and we were trying hard to come up with one."
Eight years later, Delta's answer is painfully clear: Cut and cut and cut some more, matching the size of Delta's hub not to unlimited optimism of growth and prosperity, but to the relatively small Cincinnati market.
The reasons for the drastic downsizing include business decisions, geographic factors and economic conditions beyond anyone's control, according to dozens of interviews with current and former Delta officials, industry experts and airport representatives.
Even though Cincinnati fliers paid the nation's highest fares, ticket revenues were insufficient to sustain the heavy flight schedules usually found in much larger cities.
The modern regional jet that Comair pioneered to replace noisy, slow turboprops gave CVG an early competitive edge for business travel. But other airlines soon caught up, lowering fares at the same time that rising fuel costs were making the inefficient, small jets unprofitable.
The airport also faced a unique problem among major U.S. airports: It's ringed by five other airports within easy driving distance. They were building successful schedules with low-cost carriers that Delta kept out of CVG with aggressive, temporary price cuts.
The overall downturn in aviation after 9/11 just made the Cincinnati problem worse. The final blow came with Delta's merger with Northwest Airlines in 2007. It included a massive Midwest hub in Detroit that's far stronger than CVG's.
"When you add it up, it doesn't matter which factor was the biggest or smallest - the final number you have to come down to is whether you are profitable there or not and by how much," says Fred Reid, Delta's president and chief operating officer from 1998 to 2004. "And given what was going on, there was just no way to make it work there."
Delta spokesman Kent Landers confirms that the airline conceived a long-term downsizing strategy well before it made the first cuts in late 2005. The airline announced it would cut 30 percent of its CVG flying that fall, shortly before it filed for bankruptcy protection and long before it entered into merger discussions with Northwest.
"The transformation plan that we undertook at the time was part of the plan to resize the hub so it could be profitable and operate at a level more appropriate with the local travel base," says Landers, who declines to offer financial specifics.
"And we are staying with that strategy as we move forward."
Now, the repercussions of those decisions are playing out at CVG and throughout the region.
Since 2003, the airport has lost more than two-thirds of its flights. Since 2005, a third of 16,000 jobs and half the passengers have left.
Businesses that located in Greater Cincinnati and Northern Kentucky because of the connectivity of the hub can no longer reach many destinations in one flight. Regional economic development officials lost a major corporate recruitment tool. The airport now offers direct flights to just half the U.S. cities it once did. Only one of its four European flights, to Paris, remains.
This month, Delta shut all 22 gates at the airport's Concourse A and laid off more than 800 former Comair ground workers. The airport now sits half empty.
"The halls are eerily empty," says Connie Slayback, president of Comair's flight attendant union, whose crew lounge will remain in Concourse A until next month. "The TV in the child's play area remains on for nobody to watch. The moving walkways are not moving, yet the announcements requesting people to stand to the right to let others pass on the left ... play continuously," she says.
"It feels like you are entering a Stephen King novel."
Why CVG gained hub
Delta was just beginning to spread its wings in the late 1970s, when deregulation allowed airlines to go where they wanted. The once conservative company had primarily served the South, but was on the hunt to expand into the Midwest.
United Airlines and American Airlines both had bases in Chicago. Continental Airlines already had a strong presence in Cleveland, and struggling Northwest was building a hub in Detroit, having run out of room in Minneapolis.
That left Cincinnati, which offered many benefits to Delta: CVG was well situated to serve a small but vibrant business community that included an abundance of Fortune 500 companies. Delta was one of the first airlines to serve Cincinnati in the 1930s and so had strong historical ties to the market. The weather was decent, there was plenty of runway space and airport officials were eager to please.
Over the next 15 years, Delta built a hub-and-spoke system that used CVG as a major connecting point for passengers from smaller cities in the Midwest and East Coast traveling west.
The airline sunk more than $500 million into a new terminal, the renovation of Concourse A and construction of Concourse B, a new fuel facility and repair hangar. The airline paid for the buildings itself, a scenario now almost unheard of. The airport reciprocated by building a $50 million Concourse C for Comair in 1994. The airport also spent nearly $350 million on two new runways over the next 15 years, financed through federal grants, bonds and ticket fees.
Delta advertised its new hub to business travelers as a more efficient alternative to crowded O'Hare. And when Delta partnered with Comair early in the 1990s and then bought the carrier in 2000, CVG exploded in terms of flights and profitability thanks to the regional, small jet.
The small, wonder jet
The 50-seat jet allowed Delta to fly to smaller cities than it could afford to serve with big planes that carried 130 or more fliers. The flights also featured lower labor costs since they were operated by a regional carrier that had cheaper wages than mainline parent Delta.
Eventually, regional jets operated more than 450 flights here daily, compared to about 200 mainline flights. As the small jets served a growing share of passengers, the larger jets were reserved mainly for flying to big cities on the coasts.
"Regional jets were very desirable, especially for business travelers," says Dan Petree, dean of the business college at Embry-Riddle Aeronautical University in Daytona Beach, Fla. "Delta and Comair could charge even more because of that."
But there was a price for local travelers. For at least eight years, they paid the highest fares in the nation to subsidize Delta's hub and its heavy schedule of flights.
"And to be honest, that's why the model of having such a large hub in a small city is unsustainable over the long run," Delta's Landers says.
The downfall
When times were good, they were very good.
As new parent of Comair, Delta earned $1 billion in profit in 2000. By comparison, the airline lost $1.2 billion in 2009.
Oil also cost about $10 a barrel compared to $70 to $80 today, and fuel prices didn't have to be passed on to passengers. Labor was relatively inexpensive, before a long and costly Comair pilot strike in the spring of 2001 pushed costs higher.
Karnik says that "a dirty little secret was that the airline industry had already started to tank six months before 9/11."
Nowhere was that more apparent than at CVG.
Delta's once-dominant edge with the regional jet market had disappeared, and the business model of the 50-seat plane that had made so much money was shattered.
The airline controlled 80 percent of the nation's regional jets as late as 1998. But the number had dwindled to less than 50 percent by 2004 as other carriers purchased small jets from Canada and Brazil to catch up. That put more regional jets into more markets, eliminating Delta's pricing power.
Across the country, low-cost carriers were taking passengers from traditional airlines. A low-cost carrier never got traction at CVG, largely because Delta aggressively matched prices when a competitor moved in, then raised fares as soon as it left.
The low-cost explosion meant that fewer Delta passengers were flying through CVG, and more local fliers were heading to Dayton and Indianapolis to catch cheaper flights. Everywhere but seemingly in Cincinnati, fares dropped as passengers had more choices.
Yet even those factors paled in comparison to skyrocketing fuel costs. Expensive fuel made it impossible to cover the cost of flying the smaller regional jets, given what customers were willing to pay.
The first generation of small jets "weren't designed with high operating costs in mind and were very fuel-inefficient," Petree says. "When the margins disappeared, those planes stopped making money. But no one was in a position to buy new equipment, given what had happened between 9/11 and oil prices."
The aftermath
At Delta, an abrupt turnover at the top didn't help. Long-time Delta board member Gerald Grinstein took over for embattled top executive Leo Mullin in April 2004. Grinstein later that fall unveiled a plan that included eliminating the hub in Dallas-Fort Worth and cutting elsewhere, while adding flights locally.
Even that didn't turn things around, and in September 2005, the airline announced a 30 percent flight reduction at CVG effective that December. It's now known as the largest in a series of "right-sizing" cuts that would become routine over the next 4½ years.
But it wasn't until merger talks with Northwest got serious in 2006-07 that locals understood: The hub that had created such economic activity was in jeopardy.
There were good reasons for concern. Northwest already had two major Midwest hubs, in Detroit and Minneapolis, and a smaller Southern hub in Memphis. The airline was required to keep jobs in Minnesota because of a loan agreement with that state's legislature, and Northwest was just settling into a new $1.2 billion terminal it had designed in Detroit.
Also, the man chosen to lead the combined airline, current Delta chief executive Richard Anderson, ran Northwest during the time that the Detroit terminal was being built. That connection worries Cincinnati locals, who fear the hub here will lose out altogether to the airport to the north.
"What has happened to CVG and all the other hubs is clearly because of industry consolidation," CVG's chief executive officer John Mok says. "And we have lost out in this situation because Delta's current management team doesn't really know what Cincinnati can do for them since they came over from Northwest.
"It's chilling that we in Cincinnati have the only non-stop flight to Europe in all of Ohio, Indiana and Kentucky. That just shows the sign of global consolidation."
Delta spokesman Landers disagrees, saying the local hub was on the downturn well before merger talks began.
CVG's future
Current and former CVG managers say they based decisions on the best information they had.
The airport opened a new north-south runway and extended its east-west runway in 2005 based on pledges from Delta and other carriers that the longer runway would be used for flights to Asia.
An airport master plan in 2005 called for yet another runway, a new concourse and terminal and more underground trains. It hasn't been updated since.
New executives have taken over the top three spots in the past 12 months, as a veteran staff retired following the death of long-time chief Bob Holscher. Mok says the attitude today emphasizes serving the local traveler instead of Delta.
"Clearly, this is the community's airport," Mok says. "Regardless of whether Delta retains its current level of service here or not, this community has to understand that CVG serves the community - it doesn't serve Delta. We are in a bit of an image makeover and trying to get that word out."
Delta officials won't guarantee that an airline hub will be here in 12 months.
"I can't comment on future schedules that may be influenced by the economic environment and the profitability of the hub itself, but I can say that everything we've done in Cincinnati ... is to ensure that it is profitable," Landers says. "And it's fair to say the work we have done in Cincinnati over the last five years has made good progress toward that goal.
"Today Cincinnati operates at level that is much better aligned with the local market demand."
