Last week, American Airlines (NASDAQ: AAL) began new routes from its hub at Dallas-Fort Worth International Airport (DFW) to four small cities: Monterey, Burbank, and San Luis Obispo, California; and Flagstaff, Arizona. These new routes are particularly significant because they mark one of the first steps in a major expansion by American Airlines at its two largest hubs: DFW and Charlotte.
Indeed, American Airlines plans to operate 905 peak-day departures at DFW by July -- up from 809 a year earlier -- as it gains access to 15 additional gates. A smaller increase in departures is coming in Charlotte later this year. Management expects growth at the carrier's two largest and most profitable hubs to drive a much-needed turnaround at American Airlines.
Large network carriers like American Airlines have higher costs than discount airlines. Their main competitive advantage is the ability to fly to small cities (where competition is limited and fares are high) and offer connecting service to destinations around the world. By clustering as many flights as possible in a single "bank" at a hub, network carriers can maximize the number of potential connecting itineraries, driving high unit revenue.