Gene J. Puskar
Travelers check in at the US Airways ticket counter at the Pittsburgh International Airport.
As the U.S. airline industry continues to shrink, dozens of small and midsized cities are scrambling to try to maintain their economic lifelines.
Take Syracuse, N.Y. The city has been struggling to bounce back from the Great Recession by promoting high-tech business to replace factory jobs that have melted away. Some of the most promising growth has come from emerging radar technologies that have drawn interest from the Defense Department, according to Mayor Stephanie Miner.
But with limited service from Syracuse to the nation's capital — and fares of roughly $1,000 roundtrip — air travel has become a major hurdle for local companies trying to pitch new products to Pentagon officials, she said.
"We've been talking to airlines about getting to Washington because we recognize that's one of the key places that our growth industries need to get to," said Miner. "But we have not been able to expand our routes down there because the airline industry has been shrinking."
Like the expansion of railroads of the 19th century or interstate highways five decades ago, an ongoing restructuring of U.S. airlines is reshaping the economic fortunes of modern American cities.
The industry overhaul follows decades of overcapacity that produced tens of billions of dollars in red ink. In 2005, a surge in fuel costs grounded that money-losing business model and forced widespread cuts in service to dozens of U.S. airports. That's left travelers in those cities with fewer flights to choose from and higher fares, according to a CNBC.com analysis of traffic data for more than 300 airports.
Among the biggest losers have been cities that were "de-hubbed" as airlines consolidated their core operations in fewer locations.
Pittsburgh's ongoing transformation from a fading, Rust Belt economy to a center for high-tech innovation was dealt a major setback when US Airways wound down its local hub in late 2004, shifting service to Philadelphia and Charlotte, N.C. Since 2005, there are now 40 percent fewer seats per day, less than half as many destinations and 15 percent fewer nonstop seats.
"We're not alone: Cincinnati, Memphis, St. Louis — you can go down the list of cities that have lost hubs," said Allegheny County Executive Rich Fitzgerald. "Unless our businesses are able to access the markets they need to grow — both nationally and internationally, it will have a chilling effect on growth over the years if it's not corrected."
But restoring service to pre-2005 levels is a tough slog for local officials trying to convince airlines they can make money by adding more flights.
"You have a group of executives and labor groups who have been to hell and back," said John Heimlich, chief economist of Airlines for America, a trade group. "They know they have to achieve a return. We have seen the results of overcapacity."
A glut of unsold capacity sapped airline industry profits for three decades after the industry's deregulation in the 1970s, as a succession of upstart airlines added millions of new seats and sparked fierce fare wares to win new business. Cheap flights, plenty of empty seats and half-full overhead bins became the norm.
But the business model changed abruptly in 2005 when jet fuel prices began a steep upward climb. With fuel representing as much as a third of the cost of a given flight, those empty seats suddenly got much more costly, according to Massachusetts Institute of Technology professor William Swelbar, who specializes in airline economics.
Graphic: Shrinking skies
"This in an industry that managed to lose $62 billion over a decade, so they simply needed to remove the marginal flying that was contributing to those losses," he said. "They had no choice but to make some drastic decisions as to how they operate their business or go away."
Those drastic decisions included regular flights to bankruptcy court as both upstarts and established carriers ran out of cash. Carriers that survived had to retire the money-losing business model. That meant flying fewer flights to fewer destinations with fewer empty seats.
For the industry, consolidation has been a huge success. Since 2005, total capacity has shrunk by about 20 percent, according to Swelbar. Since then, industrywide revenues are up 40 percent after flatlining for the previous decade.
But as overall capacity shrank, cities were left to play musical chairs to see who would lose service when the music stopped.
A handful of cities have benefited with increased service. Since 2005, travelers to and from San Francisco have seen capacity expand by a third; Denver and Charlotte, N.C., have seen a boost of roughly 18 percent capacity. But travelers to a vast majority of destinations have fewer seats to choose from.
Smaller airports have been hit harder that larger cities. And short-haul flights — those under 500 miles — have been cut roughly in half over the last five years. That's produced fierce competition among cities within an hour's drive of another airport as airlines sought to eliminate redundant service.
"If you draw a 100-mile circle around Cincinnati, all of a sudden I'm competing with Columbus, I'm competing with Dayton, I'm competing with Louisville, I'm competing with Lexington," said Swelbar. "Within that region, how much service do you need? So there's a resetting of the table."
The latest reshuffling of air service comes with the merger of American and US Airways, finalized last month. To settle a Justice Department lawsuit — which was joined by Virginia, Michigan, Florida, Arizona, Pennsylvania and Tennessee — the carriers agreed to give up some landing slots in New York and Washington and to maintain current hubs for at least three years.
Beyond legal and political pressure, local officials are looking for other ways to boost flights to their city. Syracuse recently completed a $60 million airport expansion and restructured its security service contracts to lower costs for airlines serving the city. Those efforts — along with a little help from Sen. Chuck Schumer, D-N.Y. — helped convince Delta Air Lines to add two new daily flights to New York and expand service to Minneapolis and Atlanta next year.
Graphic: Consolidation impact
In Pittsburgh, airport officials recently signed a long-term contract with a natural gas producer to drill on airport property, generating as much as a half billion dollars over 20 years, according to Fitzgerald, the county executive.
"We will be able to use some of that money to enhance the airport and provide an incentive to carriers to provide service to the cities that our businesses need to reach."
It remains to be seen just how far local officials get in their drive to restore abandoned flights. Over the long term, airlines' reluctance to open new routes could hurt the industry's long-term growth, according to Dawne Hickton, CEO of Pittsburgh-based RTI International Metals.
Faced with a dearth of direct flights from company headquarters to the aerospace supplier's 21 manufacturing sites worldwide, Hickton says she's often forced to use ground transportation for trips as far as Washington, D.C., or Montreal. A recent trip to an airline industry conference in Hamburg, Germany, took three flights and a full day of travel, she said.
Those multi-leg flights have prompted the company to shift a chunk of its travel budget to investment in teleconferencing technology to conduct global meetings.
"That (lack of air service) is changing the way we do business that is not beneficial to the airline industry," she said.
Follow CNBC's John Schoen on Twitter @johnwschoen.
First published December 19 2013, 11:13 AM