Thu March 7, 2013
The Philosophy Behind Charlotte Airport's Success
One claim keeps coming up in the debate over transferring control of the Charlotte airport to a regional authority and the speculation over what a merger between American and US Airways will mean for Charlotte. That claim is that Charlotte is the cheapest place for airlines to do business. WFAE wondered whether that's true and why it matters.
It is true, and it's not by accident. Being cheap is actually in the airport's mission statement to provide "the highest quality product for the lowest possible cost." Not a competitive cost. Not a reasonable cost. The lowest cost. Like Wal-Mart, quips Charlotte Aviation Director Jerry Orr: "Our everyday low prices."
And like Wal-Mart, Charlotte's low prices have a lot to do with volume.
"We run a lot of people through this little building," says Orr.
More people per square foot than any of the nation's largest airports, according to a 2012 study by the Air Transport Research Society.
But the industry measures airport efficiency with a different metric – something called "cost per enplanement." Rating agencies like Fitch put Charlotte's cost per enplanement in the $1 range – the lowest among large hubs, where the median is $9 or $10. Some airports like Miami are closer to $18 per enplanement.
Keep in mind this is the cost to the airlines of putting someone on a plane in Charlotte. You and I both know Charlotte is not the cheapest place to fly out of – ticket prices here run $30 to $50 above the national average, according to the U.S. Bureau of Transportation Statistics.
I'll explain that disconnect in a few minutes, but here's a hint:
Charlotte is known as "a fortress hub" for US Airways. That single airline is responsible for nearly 90 percent of all flights through Charlotte-Douglas Airport. None of the nation's 20 largest airports is more dominated by a single airline than Charlotte, according to Fitch.
And one result of that is that Charlotte has lots of transfer passengers – two-thirds of people coming through the airport daily are just changing planes. That turns out to be very good for Charlotte's "cost per enplanement," because transfer passengers don't leave the terminal. No need for curb space, ticketing or security screening. Transfer passengers are cheap, says Orr.
"On the other hand they don't generate as much revenue, because they don't park and they don't spend a lot of money here other than in the concessions," says Orr. "So that's an impact."
An important impact because parking and concessions together are the airport's largest source of operating revenues - even more than the rent and landing fees airlines pay the airport. And to keep those revenues up, the Charlotte airport's gotten creative.
With parking, the airport's focus is low prices and enough options to prevent private companies from coming in and stealing away business. Five bucks a day is cheaper than you'll find for long-term parking at most major airports. And few offer Charlotte's curbside and business valet options that will detail your car while you're away.
Inside the terminal, Orr has crafted a fairly unusual contract with shops and food vendors that requires his sign-off on expenses and product prices.
Yeah, it's micro-managing, he admits. "I would characterize it more as micro-suggesting. And, uh, and it's in their best interest if it's a good suggestion."
And the vendors play along because, "they like being here, because our growth for 35 years has been like that."
As he says "like that," Orr makes what seems to be his favorite gesture. He doesn't talk much with his hands – or words, for that matter. But he has this one motion where his arm shoots up on a diagonal, like he's tracking a plane in take-off. Up, up, up, to describe the airport's steady growth, or the savings he delivers to the airlines.
US Airways Vice President of Airport and Government Affairs Michael Minerva's seen it.
"Very often," he says, with a chuckle. "Yeah, I mean, Jerry has really a unique vision for how the airport should run and that vision is also a very large factor in Charlotte's growth over the years."
And that's been a large factor in US Airways' growth in Charlotte, says Minerva. The airline says it expanded flights in Charlotte by about 15 percent in just the last five years.
Orr does what he can to keep his biggest customer happy, but federal law prohibits him from giving sweetheart rates or preferential treatment to any airline. What makes US Airways most happy with Charlotte, says Minerva, is the way Orr waits to build new terminals or runways or parking garages until it's absolutely necessary.
"The facility has never gotten out ahead of the operations. Nor have we been behind where we're trying to put more flights in and he doesn't have the facilities to handle it."
Unnecessary construction only drives up that "cost per enplanement" figure. And there's another reason the airlines like Orr's penny-pinching ways. . . they get a 40-percent cut of all parking and concession profits. This is a fairly common arrangement at U.S. airports, but it's not common for an airport to deliver profit-sharing checks as hefty as Charlotte's.
Take last year: US Airways paid $17.6 million in fees to the airport, but got $10.4 million back in profit sharing revenue.
So yeah, says Minerva, US Airways really likes operating in Charlotte.
"There can be tension between airports and airlines in terms of what priorities are, but we haven't had that in Charlotte."
Okay so why don't the Charlotte airport's "everyday low prices" for the airlines translate to "everyday low airfares"?
Simple, says Infrastructure Management Group analyst Lou Wolinetz: "The airfares are higher than the national average because US Airways is so dominant in Charlotte."
Less competition means higher prices. And keep in mind air fares – much like theater popcorn prices - are based on what we're willing to pay, not what it costs to operate the flight.
So what if it's really cheap for an airline to fly you out of Charlotte? They're gonna charge you as much as you're willing to pay. Direct flights command higher prices. US Airways has the most direct flights out of Charlotte, hence its pricing power, says Wolinetz.
But before you stomp off steaming about how we the local travelers are getting shafted, consider this:
"At Charlotte you have I think a couple hundred destinations you can fly to nonstop including Europe," says Wolinetz. "Just people who want to go to and from Charlotte would not be enough to make those flights profitable. So you have a lot of more flights and a lot more destinations than you otherwise would."
So being a super-low-cost airport with "fortress hub" status is a trade-off. We pay higher ticket prices, but have more flight options than we deserve.
The airlines, meanwhile, get a great deal, and the airport's bottom line keeps heading in the direction of Jerry Orr's favorite hand motion . . . up, up and up.